Join

Enter Details

Comment on stories, receive email newsletters & alerts.

@
This is your permanent identity for Business Insider Australia
Your email must be valid for account activation
Minimum of 8 standard keyboard characters

Subscribe

Email newsletters but will contain a brief summary of our top stories and news alerts.

Forgotten Password

Enter Details


Back to log in

MOODY'S: How Aldi is about to steal market share from Woolworths and Coles

Ian Waldie/Getty Images

The German chain Aldi has grown in Australia mostly at the expense of Metcash’s IGA chain and independent retailers but that’s about to change as the supermarket starts to chip away at the major players.

Moody’s Investors Service says Aldi poses a long-term challenge to Woolworths and Coles, the grocery subsidiary of Wesfarmers.

“Aldi’s increasing acceptance among Australian consumers since it established its presence here in 2001 and its aggressive expansion plans are a long-term threat to the duopoly structure existent in Australia’s grocery market,” says Ian Chitterer, a Moody’s senior analyst.

“In such an environment and based on international experience with the growth of discounters, we expect the market shares and margins of Woolworths and Coles to come under pressure over time.”

Woolworths hasn’t had a good start to the year, reporting subdued December sales continuing into January.

However, Coles and Woolworths account for 60% of Australia’s grocery market by value and both have strong margins, good cash flows and ongoing cost reductions.

However, Adi’s share of the market is growing, as this chart shows:

Since opening its first Australian store in January 2001, Aldi’s store base has grown to over 360.

Based on Nielsen estimates, Aldi now has an 8% share of Australia’s grocery market and an 11% share across the east coast, which includes New South Wales, Victoria and Queensland. Its gross annual sales reached more than $5 billion in 2014.

Moody’s expects Aldi’s store growth on the east coast to continue at 5% to 6% a year over the next five years. This is about double that expected for Woolworths and Coles.

Aldi has recently improved its product range to include more branded products expected in Australia such as Nescafe, Vegemite and Milo as well as a wider range of meat and organic products and a better selection of bread.

“We expect these improvements to increase Aldi’s attractiveness to customers and further boost its market share in Australia, especially among the key middle-class consumer,” says Chitterer.

Aldi has also been building its brand by advertising awards won for its fresh products at events, such as the Sydney Royal Cheese and Dairy Show, Royal Melbourne Fine Food Awards, and Sydney International Wine Competition, on its shelf displays.

Moody’s says these awards have added to its brand value of offering good quality at low prices.

Aldi’s “Special Buys” promotional strategy of offering heavily discounted general merchandise twice a week has also been very effective in attracting customers to its stores.

Over the medium term, Aldi’s market share gains will continue to come at the expense of Metcash and the independents as it expands into South Australia and Western Australia.

Coles and Woolworths have very good margins when compared to peers in the UK and Europe.

Woolworths’ 2014 earnings margin of around 8% is nearly double the average of its international peers at around 4.2%.

Coles’ margin of around 5.3% is also high by international standards.

This gives them flexibility to reduce prices and protect market share against competition but doing that will reduce profitability.

Follow Business Insider Australia on Facebook, Twitter, and LinkedIn