Christopher Niesche: German giant puts squeeze on competitors

Aldi has inched its way to a 10 per cent share of Australia's A$88 billion ($90 billion) food and grocery market. Photo / Thinkstock

Shoppers gain but big supermarkets have a lot to lose from bargain operator Aldi.

German retailing giant Aldi has brought a new supermarket experience to Australian shoppers.

Unlike the neatly ordered Coles and Woolworths outlets, Aldi stores are higgledy-piggledy: goods are sometimes left on the forklift pallets they were delivered in or dumped in retail bins at seemingly random places around the store. You might find a DVD player next to the frozen meat or a set of secateurs across the aisle from the spaghetti.

Shoppers don't get much choice of brands either. They usually have just one type of everything, so instead of choosing between, say, Weet-Bix and VitaBrits, they might have to settle for a brand they've never heard of, often one of Alidi's home brands.

And once they've filled their trolley, they face longer queues than they would in the other supermarket chains and they have to pack their own shopping bags.

But it seems we Australians can't go past a bargain, especially if it's on something we don't need and didn't know we wanted: one week Aldi offers discount champagne flutes; the next it's an electronic piano; then an aluminium ladder the week after. And who could resist the "video night-vision device" they're selling for A$169 this week?

Aldi has inched its way to a 10 per cent share of Australia's A$88 billion ($90 billion) food and grocery market and is challenging what the competition regulator calls the "cosy duopoly" between Coles and Woolworths.

It's putting pressure on the incumbents to bring down their prices, which is great news for shoppers but not so good for the companies or their shareholders.

Ratings agency Moody's says that while Aldi's market share has mostly been taken from smaller independent retailers, it will start to challenge Coles and Woolworths as it continues its aggressive growth plans and is accepted by more consumers.

Moody's said that although the credit quality of the Big Two is unaffected, "we expect the market shares and margins of Woolworths and Coles to come under pressure over time".

Woolies has already decided to take action. As it revealed a set of dismal half-year earnings numbers last month, it announced it would cut costs by A$500 million and pass the savings back to the consumer.

It's trying to counter perceptions among many consumers that Coles is the cheaper of the big supermarkets as well as to halt the rise of Aldi.\n
It will be trying to avoid an all-out price war, by only offering discounts on select products, but it risks retaliation by Coles, which won't give up its reputation as the cheaper supermarket without a fight.

The big supermarkets have a lot to lose. Their profit margins are among the best in the world - more than 7 per cent for Woolworths and above 5 per cent for Coles, owned by West Australian conglomerate Wesfarmers.

The German chain has grown rapidly in Australia, and its plans will keep the pressure on the incumbents. From the single store it opened in 2001 it now has about 340 stores in the eastern states and will soon start expanding into Western Australia and South Australia.

Aldi isn't the only operator opening new stores. Coles and Woolies are also rolling out new supermarkets as they too chase market share.

Australia already has a very high penetration of supermarkets per capita and when retailers open new stores they'll mostly be cannibalising their own and their competitors' sales.

The food retailers have been good to investors over many years, with steady increasing profits, dividends and share prices.

But the days of milk and honey (at least at their present profitable margins) are coming to an end.

Hospital pass at Myer

New Myer chief executive Richard Umbers has been handed the ultimate hospital pass.

Just two weeks after taking the helm at the struggling department store chain, Umbers handed down a worse than expected 23 per cent fall in first-half profit.

He explained that the retailer had "lost relevance with some customers" and that previous management had allowed cost growth to outpace sales growth, eroding earnings.

The disappointing result took the market completely by surprise.

When Myer management fronted the media and investors only two weeks earlier to announce the departure of long-serving CEO Bernie Brooks, chairman Paul McClintock said he was comfortable with market forecasts for the retailer's profit.

There was no mention of the surprise plunge in first-half profit. Myer says its February sales numbers weren't in at the time, but that excuse has been met with raised eyebrows.

Now Umbers, who joined the company just five months ago as chief information and supply chain officer, has been left to fix up the mess.

Not only will he have to find a way of turning the retailer around in an environment of rising unemployment, a falling Aussie dollar making imported goods more expensive and weak consumer sentiment, he'll also have to win back the trust of investors.

He has his work cut out for him.

Christopher Niesche is a Sydney-based business journalist. He is a former editor of the Business Herald and a former deputy editor of the Australian Financial Review.