Aiming for richer shoppers, Aldi to stay a pain for Coles and Woolies
20 April 2018
Sydney Morning Herald
Aldi will continue to lighten Woolworths and Coles’ coffers as it increases its appeal to wealthier customers and forces Australia’s two largest supermarkets to drop their prices to compete.
That's according to global rating agency Moody’s, which predicts that Aldi and fellow German discount chain Lidl will grow revenue faster than other food retailers around the world.
Moody's says Aldi will grow faster than other supermarkets and keep downward pressure on their earnings.
Moody’s said in a report that Aldi’s growth would be particularly strong in Australia, where the agency estimates it has a 12 per cent market share and is investing heavily.
Aldi launched in Australia in 2001 and has built up a network of more than 508 stores, mostly concentrated on the eastern seaboard, with plans to open 32 more this year as it expands further into the eastern states.
Woolworths and Coles both increased their own market share last year, but they would still have to cut prices to stop customers leaving them for Aldi, weighing on their profitability, Moody’s said.
Woolworths and Coles dropped prices by 2 per cent and 1.6 per cent respectively in the most recent half, according to their financial reports.
The Moody’s prediction comes as other market watchers expect continued pricing “rationality” between Woolworths and Coles, and see a return to the damaging price war that broke out in 2001 increasingly unlikely.
Aldi’s proposition to customers has traditionally been to offer the lowest prices, but Moody’s notes that much of its growth in developed markets like Australia will be driven by attracting more affluent shoppers.
The chain globally has been improving its customer experience and broadening its range to include more fresh and organic products, which would increase its appeal to “middle income customers in developed markets, where wage growth has been subdued or stagnant for the past decade”, Moody’s said.
Coles and Woolworths will be forced to keep cutting prices to compete with the German giant.
In Australia, the pitch to mid-market shoppers has also taken the form of a billion-dollar revamp of its existing stores to grow the amount of floor space dedicated to fresh food grow from 15 to 25 per cent.
Morgan Stanley has said these renovations were a “game changer”, and would boost its market share gains against Woolworths and Coles by 30 basis points a year.
Aldi has carried out 60 refurbishments to date, with 40 more due this year and its whole network expected to be operating in the new format by 2020.
Australia’s incumbent supermarket giants have likewise been putting a renewed focus on service and experience over price, with Coles even sidelining its “Down Down” campaign.
Aldi does not publish consolidated accounts, making it hard to accurately compare its performance to the listed supermarkets.
Morgan Stanley estimates Aldi’s local sales at $8.1 billion, representing about 8 per cent of market share - lower than Moody’s estimate of 12 per cent.
Moody’s predicts that price competition would send Woolworths’ debt to earnings ratio falling from 4 times in 2017 to 3.8 times in 2018.
Coles owner Wesfarmers’ credit rating was insulated by supermarket price cuts so far because Coles contributed only 38 per cent of the conglomerate’s earnings last year, with the rest made up from other arms including Bunnings, Kmart, Target, Officeworks and an industrial business.
Moody’s said it expected Wesfarmers’ debt to earnings leverage to remain steady at about 2.8 times, even as it spin out Coles into a separate company, which was a credit negative since it reduced Wesfarmers’ size and business diversification.
“Both Woolworths and Coles are working on their cost base and supply chain efficiency in order to offset the price reductions and ongoing cost pressure,” the agency said.
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