The disruption that global giant Aldi is causing in Australia’s supermarket industry has been apparent for some time on the east coast.
The established players – Woolworths in particular – have been enduring some bruising competition on pricing from the German-based giant as it has rolled out its network in NSW and Victoria. Aldi’s vastly different scale and more thrifty operating model mean it can offer lower prices which has introduced a deflationary dynamic to the the supermarket sector as companies scramble to drop prices, or at least keep a lid on them, in order to stay competitive. This makes it harder to grow sales in dollar terms.
Now the effect is spreading across the country, with supermarket sales growth starting to sag in South Australia, where Aldi just opened its first stores, and in WA, where it is yet to open its first store.
Morgan Stanley’s retail team highlighted this in a recent note to clients. This chart shows growth in the supermarket category in South Australia has taken a dive over recent months as Aldi prepared to launch in the state.
Then there’s WA, where Aldi plans to open its first stores in the middle of this year. Similar story:
Economic conditions in SA and WA have been weakening generally over the past year as mining activity has dropped away, and also amid challenging conditions for SA’s industrial base. But Morgan Stanley analysts Thomas Kierath and Monique Rooney also point out that aggressive discounting by incumbents is also a likely contributor to the headwinds for supermarkets in both states.
“Ahead of Aldi’s arrival in these markets growth remains weak within the supermarket category with SA +0.5% and WA +1.7% compared to the wider supermarket industry +2.6%,” they wrote in a recent note. “We think food price deflation is likely most pronounced in these states as retailers prepare for Aldi’s entry.”
Aldi plans to have around 16 stores in operation in SA by the end of this year. It reportedly has up to 50 stores in mind for the state. It has plans to open 70 stores in WA.