These two photos taken 5 minutes apart show why Aldi is such big trouble for Woolworths

The problems for Woolworths are one of the biggest talking points in Australian business right now.

The company has been without a CEO for months and profits have been flat. It has put its dog of a hardware business, Masters, on the block and now it has emerged it is shutting down some of its high-end grocery Thomas Dux grocery stores.

There are all sorts of structural challenges for Woolworths as a corporate, but it also faces a fundamental problem in its core supermarket business, where margins are getting squeezed and competition is intensifying with the entry of low-cost competitors, most notably Aldi, but also Costco, the pile-em-high, sell-em-cheap American entrant.

Last weekend I was in shopping centre in Sydney that has a giant Woolworths and also a small Aldi below it.

The photos were taken about five minutes apart, at about 11am on the Saturday of the Australia Day weekend. There’s a lot of context – outlined below – but just look at these contrasting scenes.

Woolworths was surprisingly quiet…

But Aldi was a ZOO…

Now, of course thin-slicing like this can’t give you a representative picture of the health of a business.

Critically, Aldi is a much smaller store with only a few registers, so it doesn’t take a lot of people in one photo to make the place look really crowded.

And also my back was to the self-service checkout in Woolworths, which would have had customers trundling through it.

So it isn’t fair to compare the businesses on these two photos.

And yet.

It does provide a snapshot of the challenges facing Woolworths. Staff at Woolworths told me on the day that they thought it was unusually quiet.

This was a Saturday morning in a populous suburb – Leichhardt, in Sydney’s inner west, on a holiday weekend. The Woolworths store is vastly bigger than the nearby Aldi, and so more costly in terms of rent and staffing. The registers at Aldi were humming, while staff upstairs at Woolworths were standing around.

In terms of customer experience, the Aldi customers are clearly happy to endure the slow service and rough-and-ready store layout as a trade-off for the ridiculously cheap prices that Aldi offers.

It also points to the structural cost challenges within the Woolworths model that any new CEO is going to have to tackle. For example, Morgan Stanley estimates that Aldi employs 24 staff per store versus 110-120 at Woolworths and its key established competitor, Coles.

Morgan Stanley also believes Aldi simply works smarter. “We believe Aldi’s better labour utilisation is driven by multiple factors that can’t be replicated by the majors, which enables a ~6% labour cost to sales ratio vs Coles/WOW at ~10%,” wrote the bank’s retail sector analysts in a recent note.

Quality has also been an important selling point for the incumbent supermarkets. But Aldi, at least in Europe, is now upping its game on fresh produce.

Aldi is expanding its numbers of stores and ramping up its ad spend. Who’d be the Woolworths CEO?

It’s the question that the board seems to be repeatedly asking, to no positive responses as yet.

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