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Australian Grocery Chains Geared up to Fight Cut-Price Rival Aldi

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Australian Grocery Chains Geared up to Fight Cut-Price Rival Aldi Grocery chains geared to fight cut-price rival Aldi Author: Jane Boyle Date: 22/01/2001 Words: 647 Publication: Australian Financial Review Section: Companies And Markets Page: 14 Source: AFR Australia's grocery retailers are gearing up for price skirmishes on staple products as the first line of attack against new entrant Aldi. The chief executive of Franklins, Mr Ian Cornell, said the retailer would launch local promotions where Aldi was situated as part of a normal letterbox drop this week. ``In local areas I expect there will be pretty heavy promotional activity on staple items," he said. ``We will defend our market share". The secretive cut-price German supermarket chain Aldi was believed to have secured at least 20 sites, with stores in Villawood, Nowra, Bankstown, Arndell Park, Fairfield, Campbelltown and Wallsend, and Cessnock in the Hunter region among those tipped to open soon. Aldi's launch comes as the grocery sector appears to be holding up well despite a slowdown in activity in the non-food retail business. Analysts expect Woolworths' first-half sales figures, out today, to show a slight slowing in the second quarter, but still robust growth of more than 9 per cent for the six months to December. Wholesaler Metcash, which supplies independents through IGA, is believed to have recorded more than 10 per cent growth in December, compared with the same month last year. The chief executive of Metcash, Mr Andrew Reitzer, said the group experienced an ``exceptional December and a very strong January". He said there was no sign of a softening in the market. ``Food and liquor did well everywhere." Woolworths and Coles Myer have downplayed the threat posed by Aldi, which would sell a limited range of the most popular groceries, chilled products, fresh fruit and vegetables, ready-to-eat meals and household items at prices discounted by an estimated 10 per cent to 20 per cent. A key concern for the incumbents was that Aldi which operates on a meagre 2 per cent net margin, according to New Zealand-based retail consultancy Coriolis Research will use its global size to try to extract lower prices from suppliers than its competitors pay. However, the big chains have vowed to work with suppliers to ensure they are on a similar footing. Aldi, which predominantly sells private labels, is expected to source mainly from second-, third-tier and regional suppliers, rather than large national suppliers. A spokesman for one large supplier said he believed the big national suppliers would be reluctant to supply Aldi and jeopardise relationships with the two main chains. He said manufacturers with strong brands were unlikely to be interested in Aldi's private-label strategy. ``You're not going to undercut your branded product," he said. He also doubted whether Aldi's model would work in Australia, pointing out that despite the destabilising effect it had had on the United States and United Kingdom markets, it had only snared 1 per cent to 2per cent market share. ``I don't think it's going to achieve much more than that here." One retail analyst said Aldi would hurt Franklins and independents most, but that the earnings impact on Woolworths and Coles Myer should be minimal. However, Mr Tim Morris, managing director of Coriolis, which has studied Aldi's global operations, believed the company would become a small but significant player in Australia. Mr Morris thought Aldi could open 200 stores along the eastern seaboard in the next five years. Mr Morris said the best strategies to combat Aldi were to launch a value line of private-label products, priced at true cost on key items; and to create a ``point of difference" by emphasising perishables and choice. Franklins is trialling its own discount, limited assortment format, Cheaper Choice, with a store at Guilford in Sydney's west. Mr Cornell said yesterday that the store was proving ``quite an effective low-cost operation" but the company had no immediate plans to roll out additional Cheaper Choice stores. THE AUSTRLIAN GROCERY MARKET: A SNAPSHOT COLES MYER Managing director: Dennis Eck Market share: 33.2% Coles and Bi-Lo supermarket and Liquorland operations make up about 55 per cent of Coles Myer's total business. Sales rose 7.4 per cent in the three months to October 29. WOOLWORTHS Managing director: Roger Corbett Market share: 37.1% Narrow focus on supermarkets and liquor the driver for a dramatic re-rating of its share price over past six months. First half sales figures expected to show robust growth of over 9 per cent for the six months. FRANKLINS Managing director: Ian Cornell Market share: 12% Hong Kong parent Dairy Farm reviewing options for the chain, Market share plunged from 13.2 per cent to 12 per cent in the 12 months to November. Macquarie Equities estimates it lost up to $116 million in the 12 months to December. OTHERS Market share: 17.7% Includes WA-based Foodland Group and IGA franchise holders. NEW ENTRANT - ALDI Looking to establish 100 discuont outlets. Carries a limited range of 500 to 700 items, compared to up to 30,000 in a typical supermarket. Market figures as at 26 November 2000. Source: ACNeilsen .
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