Hot competition is back in Australian supermarkets

Photo: Quinn Rooney/ Getty.

Woolworths has had a good year, nudging ahead of its key competitors in terms of market share.

But Coles appears to be discounting prices aggressively in response, and while it’s not looking quite like a full-blown price war of previous years, competition is clearly returning after something of a lull in early 2017.

This time, however, the dynamic is different as the major players position themselves to deal with the arrival of Amazon and with ALDI now well-established as a third force in the sector.

Industry analysts IBISWorld says Woolworths has invested significantly in reducing prices to compete with Coles and ALDI.

Average prices at Woolworths fell by 2.1% last financial year.

“Since the sale and closure of its underperforming hardware businesses in 2016, Woolworths has refocused on its Australian Food division,” says Nathan Cloutman, IBISWorld senior industry analyst.

“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. This trend is expected to continue in 2017-18, with the company projected to grow to account for 36.8% of the industry.”

This chart shows the market share by major players:

Source: IBISworld

UBS, in its inaugural Grocery Pricing Monitor, suggests Coles is repositioning prices lower.

Coles prices fell about 2% in the first quarter of the 2018 financial year, according to the UBS monitor. Prices were flat at Woolworths over the same three months.

However, UBS believes that Coles is just catching up with Woolworths.

“We continue to favour WOW (Woolworths),” UBS says.

However, UBS says the the market remains competitive with Aldi cutting prices across fresh and new competition coming innteh form of Germany’s Kaufland and the US_based giant Amazon.

IBISWorld says Coles’ performance last year was one of its weakest in several years, as the Wesfarmers supermarket chain experienced the pressure of a more buoyant Woolworths and an expanding ALDI.

The company’s market share fell for the first time in several years to 30.9%.

“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,” says Cloutman.

ALDI’s expansion in Western Australia and South Australia, while upgrading its stores along the eastern seaboard, is expected to boost the company’s market share to 8.6% in 2017.

According to IBISWorld, both Woolworths and Coles are expected to suffer 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 instore without affecting their profit margins as severely,” says Cloutman.

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.

According to IBISWorld, the imminent entry of Amazon Fresh is making online sales increasingly important in the supermarkets and grocery stores industry.

IBISWorld anticipates revenue in the online grocery sales industry will grow at an annualised 12.4% 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,” says Cloutman.

“Despite this, Australians spend significantly less time and money on online grocery shopping than in comparable countries, such as the United Kingdom and the United States.”

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