The trading landscape for food retailing has changed over the past five years.
Intense competition between the major supermarkets, Coles and Woolworths, the expansion of ALDI, the threat of AmazonFresh, and changes relating to consumer preferences for convenience, health and other factors have altered the state of play for food retailing in Australia.
In an effort to boost price competitiveness, Coles and Woolworths are increasingly expanding their product ranges to include private-label products and phantom brands, such as Woolworth’s Hillview brand. Private-label products have lower pricepoints than branded products.
The major supermarkets are therefore trying to encourage consumers instore by offering low prices for a range of groceries, such as olive oil, bread and milk.
IBISWorld research indicates that private-label products account for approximately 25% of total sales in the supermarkets and grocery stores industry, which is expected to total $26 billion in 2017-18.
The major supermarkets’ move to expand and promote their private-label products is similar to what is occurring in the UK grocery market.
IBISWorld research suggests that private-label products in the United Kingdom are expected to account for 40% of total sales, totalling £66 billion in 2017-18.
Conversely, in New Zealand’s supermarkets, grocery stores and convenience stores industry, which generates revenue of NZD$18.7 billion, big brands are enjoying strong growth and continue to generate over 85% of total sales from private-label products.
Major supermarkets increasing their private-label product portfolios is pushing some brands off supermarket shelves. For example, in July 2017, Woolworths announced that it would not be stocking the recently launched Coca-Cola No Sugar product and several products under Coca-Cola Amatil’s Mount Franklin brand.
The major brands are expected to ramp up their investment in R&D and marketing to ensure that their products are stocked in supermarkets in the future.
The ongoing development of online grocery retailing is also affecting food retailing. IBISWorld research shows that online grocery sales generate over $3 billion in revenue in 2017-18, with total grocery sales via online channels expanding significantly over the past five years.
While the industry is moving towards a more digital marketplace, online grocery sales are only expected to represent 2.8% of total revenue in the supermarkets and grocery stores industry in 2017-18.
Online shopping penetration is much lower in Australia than in the United Kingdom and the United States, where online grocery sales account for approximately 6% of total sales.
Coles and Woolworths currently dominate the online grocery sales industry. However, their dominance will be challenged when Amazon enters the Australian food retailing sector, which is likely to occur in late 2018.
However, in terms of overtaking the top three players in the food retailing sector (Woolworths, Coles and ALDI), AmazonFresh will have more difficulties in the grocery sector than in other retailing sectors, such as electronics.
Amazon will have to overcome the established logistics and delivery networks operated by Wesfarmers and Woolworths, and the already low prices offered by ALDI, to significantly penetrate the Australian grocery market.
In addition, consumers often prefer to inspect fresh produce before making purchases, which benefits the major supermarkets.
Coles and Woolworths are also enhancing the shopping experience for consumers through add-ons such as instore tastings and cooking demonstrations.
Consumer preferences are also evolving. Consumers are becoming increasingly time-poor, with individuals spending more of their time on recreational activates, such as going to the gym or yoga.
As a result, consumers are finding less time to cook meals at home. This trend has encouraged the development of an increased range of convenient and snack foods offered instore.
Rising health consciousness is also changing the food retailing landscape, with more retailers stocking larger ranges of healthy food items that are low in fats, salts and sugars. Food retailing establishments often stock large ranges of healthy snacks foods, such as protein balls, near checkouts and cash registers to appeal to consumers looking to snack in a healthy manner.
Woolworths has undertaken refurbishment work on many of their stores over the past year, focusing on fresh food and convenience options.
This work has included overhauling ticketing systems and installing faster checkout machines. Coles has also recently updated stores to offer more convenience options to consumers, changing store layouts in response to consumers with increasingly time-poor lifestyles.
David Jones is also updating its grocery retailing layout, with the company undertaking a $100 million upgrade of its food business over the next three years. The company is encouraging consumers instore by offering a range of premium food options and changing offerings to appeal to consumers seeking new food experiences.
As competition remains intense in the Australian food retailing sector, more operators are expected to diversify and expand their product and service offerings as a point of difference.
* Nathan Cloutman is a Senior Industry Analyst at IBISWorld, the industry research business analysing more than 500 Australian industries, top 2,000 companies and its key business environment indicators.