For years, two grocery chains have dominated the Australian grocery market: Woolworths and Coles. But can they remain dominant given the intensely competitive nature of the grocery market and the entry of a raft of new players such as discounters Aldi and Pick’nPay?
On the face of it they look unassailable. Between them they operate almost 1,500 supermarkets and account for a whopping 77% of grocery sales in Australia.
But while Sydney-based Woolworths posted impressive half-year sales last month, Melbourne-based Coles Myer, which operates the Myer department store chain as well as Coles and as such is Australia’s biggest retailer, this week reported a second-quarter increase in comparable sales of just 0.9% in its food and alcohol division, lower than the circa 3% forecast by analysts.
The news marked a dramatic reversal of fortunes on last year when group sales exceeded those of Woolworths by nearly 14%. The group blamed competition, a key factor in its decision last December to invite bids for Myer following chief executive John Fletcher’s admission in August that it needed to focus on fast-growing businesses such as groceries and alcohol if it wanted to take on competitors such as Woolworths.
But despite a strong year for Woolworths, both chains face mounting competition from Aldi, Pick’nPay and the independents, which are all steadily growing market share. Metcash, Australia’s largest independent distribution company, further boosted independent retail strength during the 2005 demerger of Foodland Associated (FAL) with purchase of its Western Australia franchising and distribution network plus 60 Action stores. It now plans to sell the stores to independent retailers.
Coles Myer may well get the focus it needs to fight off the competition once it offloads its department store chain.
However, at the moment it is Woolworths, the larger of the two in terms of supermarket presence, that is arguably better placed to meet the challenge.
With a turnover of AU$24bn (£10.2bn) against Coles’ AU$21bn (£8.9bn), it operates more than 500 Woolworths stores and nearly 200 Safeway stores among others, compared with Coles’s 500 supermarkets under the Coles fascia and 214 discount supermarkets in its Bi-Lo chain.
The problem is that while Australia is vast, its population is very much concentrated along the south eastern coastline and this means that there is always potential for competitors to gain a foothold.
New South Wales and Victoria represent about 80% of the market shares of Coles and Woolworths, with their hold on retail not as strong in the less populated parts of the continent.
Further north, the market share of independent retailers has risen from 15% to 25% in five years, according to ACNielsen, while in Western Australia independent grocery sales have risen to 40%.
Woolworths’ acquisition of 22 Foodland Associated stores in Western Australia last year improved its coverage in the region, but analysts are waiting to see what will happen when Aldi, which has so far concentrated on the east of the country, enters the state.
Meanwhile, neither Coles nor Woolworths are resting on their laurels. In the late 1990s, both recognised the need to tackle inefficiencies within their businesses, particularly with regard to their supply chains. Woolworths launched Project Refresh in 1999 in an attempt to cut costs. It ended direct-to-store deliveries and replaced its 31 distribution centres with nine regional and two national distribution centres.
Coles is not understood to be as far down the road in terms of restructuring its supply chain, but has recognised the need to streamline its category management and last year started to remove all but the top two market-leading brands from shelves in major grocery categories.
Both retailers are also increasing their focus on own label in an attempt to stay ahead of the competition. Australian shoppers have been wary of own label. But a May 2005 survey by ACNielsen indicated that a high percentage now felt supermarket brands were at least as good as big brands.
Coles has recently announced plans to grow own label sales from 12% to 30% by 2007. The chain unveiled three new own label ranges: Coles $mart Buy, offering quality at low prices; You’ll Love Coles, which is positioned alongside leading brands; and the George J Coles range offering “exceptional quality or innovation”.
Woolworths introduced a new premium range, Select, last year, alongside its existing low price Homebrand range, which it claims is
the biggest-selling brand in Australia. However, it has set strict parameters on how far it is prepared to take own label, arguing that 30% would be “immensely damaging” to its relationships with suppliers.
Another part of its rationale is likely to be that there are very few Australian food companies that are big in own label. So in the short term it would have to use overseas suppliers, which may not sit well with its commitment to source Australian products or consumer demand for such products.
However, there are other areas that it is happy to target more aggressively, fresh food for one. Fresh food currently accounts for 20% to 25% of total supermarket sales - less than 5% of which is accounted for by imported produce. But neither Coles nor Woolworths has the sort of market share in fresh food that they have in ambient grocery, so they both identify this as a potential area for growth.
Woolworths likens the situation to the UK high street in the 1970s and is heavily investing in and promoting its fresh produce in an effort to convince consumers that there is no need to travel to independent stores for meat and vegetables.
Other areas where the two believe that they can drive growth and keep a check on the competition are alcohol, petrol and forecourt retailing. Coles Myer opened 47 new liquor stores in 2005 including its new 1st Choice large format liquor store, for which aggressive expansion is planned.
With its purchase of the Australian Leisure and Hospitality Group in 2005, Woolworths became Australia’s largest alcohol retailer. It also operates Woolworths and Safeway liquor stores, Dan Murphy’s and a number of other chains.
Both companies have grown petrol and forecourt retail sales rapidly too, Coles in an alliance with Shell, Woolworths with Caltex.
In short, if Australia’s grocery number one and two fail to see off the competition, it won’t be through lack of effort. The irony is that Coles Myer may have to surrender its crown as Australia’s biggest retailer to Woolworths in order to do it.
Oz goes upmarket
>>foodies drive new grocery trends
Growth in speciality food retailing in Australia is being driven by international influences, innovation and health trends.
Simon Johnson, founder and owner of the eponymous leading national wholesaler of high-quality foods in Australia, has mapped out the country by its ‘foodieness’.
“Sydney is cosmopolitan,” he says. “It has a strong culture of eating and entertaining out of the home. Melbourne is the most sophisticated of the cities. It has some of Australia’s best food. Eating and entertaining at home is much more popular there and the local population are real food lovers. Perth is far more cost-conscious. It’s like a different country.”
Johnson’s company represents more than 50 international brands. It operates retail stores in the major cities and supplies 1,300 five-star hotels.
Its latest venture is Providores Market, a new store in the Sydney suburb of Alexandria that demonstrates the growing importance of speciality food retailing in Australia. The market has fruit, vegetable and fish concessions and temperature-controlled cheese rooms. An al fresco café is due to open soon.
Simon Johnson’s sales increased 23% last year on top of a strong year in 2004. But Johnson insists that good growth needs to be backed by great key accounts, which include the food halls operated by David Jones.
Sales at the David Jones food halls rose 38% last year and Johnson provides eight of the ten top-selling grocery lines.
Having split their food halls into three areas, To Make, To Stay and To Go, David Jones found that the foodservice To Stay offer experienced the strongest growth. Traditional favourites such as the Oyster Bar remain popular, but newer eateries such as the Noodle Bar, pizza restaurants and Grill Bar are showing sales growth of up to 30%.
Nevertheless, Johnson is keen to cater for the demands of Melbourne’s foodie generation, with a range of high-quality own label products. “The range supports the move we see towards scratch cooking from raw, high-quality products. We want to help our customers become heroes in the kitchen,” Johnson says.
Romana Roochi, national buyer for David Jones, echoes the view that Australians are looking for higher quality. “Customers are not afraid to pay for quality. Our food halls stock 14,700 high-quality food lines, many imported.
“Areas of growth include boxed chocolates, dietary confectionery and speciality artisan cheese. At present, our fastest seller is Roquefort cheese.”