Low retail prices across the market have been a cause for concern at the offices of the Reserve Bank of Australia (RBA), with many of them having started wondering if there is reason for concern across Australia. As a result, the RBA launched an investigation into this which concluded in the penultimate week of June.
Their statement related to the investigation claimed that they had seen a large downward shift in the average rate of retail inflation that isn’t explained by labour costs or import costs. The RBA has concluded that the primary factors are due to technology / Internet and increased competition from overseas retailers (e.g. ALDI).
The RBA report has brought many issues to light. One recent marketplace highlight was from Bunnings who openly admitted that it was worried about competition from ALDI. The executives say they are aware that numerous customers will prefer to save money by shopping for tools and other DIY items at the discount supermarket. In response to this pressure, Bunnings has had to compete and price match with ALDI, for example if you are looking to buy a new drill this weekend (1st – 3rd July) both Bunnings and ALDI are selling a cordless power drill for $89.99. The only difference is that ALDI offer a 3-year warranty compared to 2 years with Bunnings and ALDI also provides a battery with their product while Bunnings do not. I’ll leave you to decide which is the better deal.
The great thing about this is that ALDI is leading the charge in the retail world by showing all its competitors just how badly Aussies want discounts. We have already seen ALDI cause a huge stir amongst the supermarket industry forcing the giants; Coles and Woolworths to fumble around over their pricing to prevent customers from leaving. Now it appears that ALDI is causing the same trouble for DIY store Bunnings, which isn't even a direct competitor. Coles, as a result of market pressure and discounts, have reduced their pricing by 1.4% this year - something market analysts have warned could be detrimental to Coles, Woolworths and IGA (a topic I've covered in more detail within this article).
The RBA is puzzled by the way the market has reacted as usually it likes to keep inflation between 2-3% per annum. However, retail inflation has been below that and the main reason is due to increased competition from ALDI. It is also very clear that the retailers have not been passing on the effect of the weaker Aussie dollar to customers.
The Australian dollar began to weaken during 2012 and when it did, everyone expected to see prices rise due to the cost of importing products being more expensive, but in the end we never witnessed this. The Internet and greater access to overseas products directly within the customer's control has made Australian retailers hesitant in terms of raising their prices. Many of Australia's largest retailers don’t want to cut their margins too much because they have been so accustomed to monopolising their respective markets, but now things are swinging out of their favour. In efforts to remain competitive, retailers are trying to reduce costs wherever possible.
The unfortunate thing about these cost cutting actions for large Aussie retailers, is that they're moving into ALDI’s territory and they're extremely good at it. The discounted supermarket cuts costs every which way it can by stacking products on the pallets that they arrive upon, not packing bags for customers and keeping stores looking minimalistic. The only thing other retailers have been able to achieve to reduce costs are automated checkouts. Even the RBA knows that low inflation cannot continue forever, but as long as the pricing battle continues we can only be thankful to ALDI for helping make products cheaper across the market. In a time before ALDI retailers wouldn’t have battered an eyelid at raising prices, however the budget supermarket has struck fear throughout the marketplace making all retailers particularly price conscious.
It will be a test of persistence and patience that will determine how long these current market conditions continue. Hopefully though we will begin to see our ‘Australia tax’ reduced to similar rates as the rest of the world whilst competition increases.