Australian supermarkets’ changing fortunes

0

Strong price competition between the major players caused total revenue in the supermarkets and grocery-stores industry to decline slightly in 2016-17, according to IBISWorld’s latest Checkout Update report for Q4 2017.

The report, based on the latest financial data released by the major players, details how the $101 billion industry, which employs more than 360,000 people across the nation, is performing.

IBISWorld says it expects the industry to recover and grow by one per cent in 2017-18, to total $101.1 billion, with intense competition continuing to define the industry.

Retailer performance

Since the sale and closure of its underperforming hardware businesses in 2016, Woolworths has refocused on its food division. The company has invested significantly in reducing prices to better compete with Coles and ALDI, with Woolworths’ average prices declining by 2.1 per cent in 2016-17.

“As a result of the resurgence of Woolworths’ supermarket business, the company gained market share for the first time in several years in 2016-17,” IBISWorld Senior Industry Analyst Nathan Cloutman said. “This trend is expected to continue in 2017-18, with the company projected to grow to account for 36.8 per cent of the industry.”

Coles’ performance in 2016-17 was one of its weakest in several years. Wesfarmers’ supermarket chain experienced the pressure of a more buoyant Woolworths and an expanding ALDI over the period. The company’s market share declined in 2016-17 for the first time in several years to 30.9 per cent

“The nation’s second largest grocer is likely to invest strongly in prices in 2017-18, which should see its market share remain relatively stable,” Mr Cloutman said.

ALDI is continuing to expand its store network in Western Australia and South Australia, while upgrading its stores along the eastern seaboard to include a larger range of fresh food items. ALDI’s expansion is expected to boost the company’s market share to 8.6 per cent in 2017, ensuring the company retains its position as the industry’s third largest operator.

Individual operators in the Metcash network of stores, such as IGA, have collectively suffered declining revenue in 2016-17. Mr Cloutman attributes this to the “price war between Woolworths and Coles and the expansion of ALDI putting pressure on smaller retailers”.

Metcash’s struggles are expected to continue in 2017-18, with the company’s market share declining to 7.5 per cent of the supermarkets and grocery stores industry.

Private label shift

Intense price competition has reduced the bottom line of many players across the industry. According to IBISWorld, both Woolworths and Coles are expected to have suffered falling profitability because of their strong investment in lowering prices.

“The two supermarket giants are increasingly looking towards low-cost private-label products to drive consumers in-store without affecting their profit margins as severely,” Mr Cloutman said.

The move towards private-label products has been highlighted by Woolworths’ July 2017 decision not to stock Coca-Cola Amatil’s new product, Coke No Sugar, and to remove some of the beverage company’s Mount Franklin brands from its shelves.

“The major supermarkets are expected to increasingly replace branded products with private-label alternatives as a way of driving demand and minimising the effect on profitability,” Mr Cloutman said.

Private-label products account for about 25 per cent of total sales in the supermarkets and grocery-stores industry.

Online threats and opportunities

According to IBISWorld, the imminent entry of AmazonFresh is making online sales increasingly important in the industry. IBISWorld anticipates revenue in online grocery sales will grow at an annualised 12.4 per cent over the next five years.

“Woolworths and Coles are constantly improving their online sales channels by expanding their click-and-collect options and investing in consumer-data analytics,” Mr Cloutman said. “Despite this, Australians spend significantly less time and money on online grocery shopping than [shoppers]  in comparable countries, such as the UK and the US.”

Costco is also accelerating its move towards online sales, with the company currently trialling an online delivery service for businesses based in Melbourne. IBISWorld found that despite growing strongly, online grocery sales were expected to still represent a small share of total grocery sales, at two per cent, in 2017-18.