Friday 6 March 2015

Supermarkets' brave new world

Derided as a haven for duopolies, Australia is in fact the scene of a price war in the crucial $88 billion food and grocery industry.
"There is now a more competitive environment for supermarkets than I've seen since my years in the regulatory environment,"  says Graeme Samuel, who chaired the Australian Competition and Consumer Commission for eight years to 2011.





The nation's No. 1 retailer Woolworths has been cutting prices for years as it seeks to ward off the resurgent supermarket chain Coles. Both giants reported price deflation at their most recent half-year resultsin February.
People really took notice though when Woolworths recently slashed its full-year profit growth guidance to as low as 1.8 per cent.
It did so in favour of investing at least half a billion dollars on improving its supermarkets. The move came with a declaration it "won't be beaten on price".  
Even after years of price crunching this is a seismic moment.
Investment bank UBS analysts responded that the Australian food and liquor market was "entering a period of structural change".
Some note there is room to move – Woolworths is among the highest-margin publicly listed supermarkets worldwide.
Deutsche Bank predicts the "relatively favourable dynamics" in food and liquor – from a supermarket's point of view – might be coming to an end.
Coles and German discounter Aldi will likely retaliate as Woolworths cut its prices, it says in a note to clients.
That could lead to a period of sharp deflation, low sales growth and declining profitability for the industry.
Samuel says the bullets have already been flying for some time in a price war over certain products.
"In the areas of bread, milk, some of the staple products, the price war started with the Coles [advertising] campaign of 'Down Down'," he said.

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Coles' decision to slash unbranded milk prices to $1 a litre in early 2011 led to Woolworths, Aldi and the discount supermarket Franklins – now owned by Metcash – heavily discounting their home-brand milk and other dairy products.
Samuel himself was involved in the Australian Competition and Consumer Commission's 2008 inquiry into grocery prices, which found the market was "workably competitive" but not as competitive as it could be.
The report said this was due to struggles at Coles, constraints on the expansion of the then new player Aldi, and a lack of price competition from IGA supermarkets, which are supplied by the wholesaler Metcash.
Six years later, Samuel says competition is healthier.
For a start Coles has got its mojo back, so much so that Woolworths has been lashed for increasing margins over the past few years and pouring money into its struggling hardware chain Masters rather than squeezing Coles when it was vulnerable.
Metcash says it is "making a significant investment to match competitors' prices on thousands of everyday products".
Samuel said to his knowledge IGA stores were still not price competitive but do offer competition in the form of convenience.
At last count, Aldi has 366 stores and says it could reach 15 per cent market share nationwide as it opens in Western Australia and South Australia and adds 20 stores a year in eastern Australia.
And then there is the new entrant in the market – membership-only warehouse company Costco. Its US parent has invested almost half a billion dollars into the local operations, and racking up accumulated losses of more than $44.5 million since the first store opened in 2009.
On Citigroup's analysis, Coles and Woolworths have lost market share recently, with Aldi and Costco's market-share gains "accelerating". Macquarie said Aldi "remains a headwind to Coles and Woolworths, gradually taking share".
Costco Wholesale Australia's last accounts show total revenue surged in 2014 to $878.5 million, but it swung to a loss because of the costs of opening three new warehouses and accounting changes.
Costco Australia managing director Patrick Noone tells Fairfax Media that Australia has "been competitive ever since we opened but we haven't seen anything extraordinary yet on grocery prices".
"I'm sure that now that sales are down, retailers will be out there trying get more sales, and more sales often means that you get better prices to the consumer," he says.
Noone said Australians paid more for imported items due to overheads such as GST, foreign exchange, duties and logistics, but Costco was bringing products to the market as efficiently as possible and was "certainly within its worldwide criteria for margins".
Noone says some products were becoming more expensive even as others were falling in price.
"Petrol certainly is deflationary right now ... [and] if you look at the beef sector, that's been inflationary because of the worldwide demand for more beef and protein products," he says.
And Samuel says it is complex comparing Australian grocery prices with prices charged overseas.
"People look at a tin of coffee and say, 'Is this more expensive or cheaper than the US or wherever it might be?' " he says.
"And I think that's when you've got to start applying the Big Mac Index [which seeks to measure the relative value of currencies]."
It's politic in many ways for Woolworths and Coles to talk up competition in the grocery industry given the power the duopoly has wielded for so  long.
If Aldi, Costco or others gain critical mass there could be more price cutting, earnings and share-price falls for the incumbents. That is certainly the experience overseas.
It could be a brave new world for the big chains.

Read more: http://www.smh.com.au/business/retail/supermarkets-brave-new-world-20150306-13u48v.html#ixzz3TgTzjIph


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