‘No stopping it’: Aldi supermarket chain reaches ‘critical mass’
November 19, 2014
NEWS.com.au
Aldi has reached the critical mass it needs to achieve private label scale.
IT’S good news for consumers, but bad news for the supermarket duopoly. German discount chain Aldi has just reached “critical mass” in Australia, a new report says.
According to global banking giant Morgan Stanley, the point of critical mass is 350 stores and $A4.03 billion in sales. “This is the point when private label scale is achieved, which is critical for discounters’ buying terms,” the authors write.
The report quotes senior Aldi executives who argue that while discounters initially struggle as country-by-country tastes differ and building scale takes time, “once the discounter reaches critical mass there is no stopping it”.
Much like Australia is now seeing, the UK supermarket industry had a golden run dominated by the likes of Tesco and Sainsbury’s. Australia is a “golden opportunity as there are no hard discounters”, the executive says.
“The Aldi format works best when there is a 20 per cent-plus differential in pricing to national brands at the full-line supermarkets. At this point consumers are prepared to trade off choice for price,” write the report’s authors.
“Given the high fixed cost nature of supermarkets, if [Woolworths, Wesfarmers and Metcash] volumes decline, margins would decline rapidly too.”
It adds that Aldi’s cost-to-sales ratio is two thirds that of the major supermarkets and works better in countries with high labour cost like Australia.
The Morgan Stanley report also highlights the opportunity in WA and South Australia. “All supermarket margins are higher in SA / WA, since price points tend to be 6-7 per cent higher and the cost of transportation to these markets is ~2.5 per cent,” it says.
“Consumers are typically more value-focused in WA/SA compared to the East Coast, so the opportunity for Aldi is significant.”
The discount chain is targeting 70 to 75 stores in WA, and aims to have 20 stores operating within the first six to eight months following the completion of the distribution centre in mid-2016.
The report also notes that suppliers are standing on firmer ground following the Australian Competition and Consumer Commission’s recent crackdown on the big supermarkets, giving them better leverage to push back on negotiations.
“Suppliers are gradually passing on price rises — by contrast, a few years ago price rises were non-existent. The larger suppliers are also beginning to use data to better understand the impact of discounting and promotions which will influence their future trade spending.”
Tom Godfrey, spokesman for consumer group Choice, said it was great news for consumers. “I think it’s vital that Australia has a strong competitive third player in the supermarket sector,” he said.
“We’ve seen when Aldi enters other markets, the ‘Aldi effect’ occurs and prices come down across the board. It’s great for consumers and it highlights how good Coles and Woolies have had it for so long.”
Mr Godfrey said it consumers should question the need to be loyal to individual stores, regardless of what inducements they offer through reward programs. “It’s critical to look for the best deal on any given day. Don’t assume because you’re part of a loyalty program you’re getting the best price.”
Woolworths and Wesfarmers shares both took a battering today. Wesfarmers closed down 1.79 per cent at $42.89; Woolworths was down 2.24 per cent at $32.26.
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