German discount giant Aldi is giving its east coast store network a billion-dollar facelift and will chase a bigger share of the lucrative fresh food market as the heat comes out of the sales growth from its mature stores.
It’s a strategy that’s likely to increase pressure on the supermarket majors Coles and Woolworths as Aldi sharpens pricing of top-selling fresh food products, expands its range and works harder to get shoppers stopping in more often.
Morgan Stanley Analyst Tom Kierath said Coles and Woolworths would have to look beyond pricing to win the war with Aldi, especially in the fresh category.
“They (Aldi) will come in with good quality product at sharp prices and probably make people think twice about where they buy their fresh food from,” Mr Kierath said.
“It will be on lines that turn quickly that are purchased frequently, so I think it is a risk for Coles and Woolworths.”
Aldi also had the advantage of strong relationships with suppliers, who Mr Kierath said “loved” the German discounter’s no-rebate approach to supply agreements and its long-term contracts.
“The major supermarkets need to do the cheese counters and the delis and the in-store bakeries to provide customers with a bigger range and better services,” Mr Kierath said.
Prices slashed in meat wars
Coles has launched a fresh assault on meat pricing this week – one of the most hotly contested parts of fresh produce – cutting the price of the family favourite lamb roast by as much as 28 per cent and carving 17 per cent off the cost of lamb cutlets.
However, Aldi already sells legs of lamb for $9.49/kilo, just under Coles lowest price of $10/kilo for a whole lamb leg.
Aldi will spend in excess of $1 billion to upgrade its entire east cost store network by 2020 as well as expand its floorspace to reflect the success of a new format it’s already tested in the new frontier markets of South Australia and Western Australia.
The chain claims its expansion into those markets has netted 3.2 per cent of the market in South Australia as well as 2.3 per cent in WA, supporting analysts claims these new markets are the engine room of its sales growth.
Aldi’s sales jumped by about 11 per cent to $6.7 billion in 2015 and they’re expected to surge by a similar rate this year to punch through the $7 billion mark.
Despite these big sales numbers, retail analysts report Aldi’s sales growth rate is under pressure in its mature market as new stores cannibalise sales from established stores.
The heat has also come out of the brand, according to one analyst, who said the new focus on fresh was a way to get shoppers visiting Aldi more frequently as well as buying more.
“With Aldi, some of the hype has come out… they’ve done a very good job of increasing their penetration with Australian shoppers and they’re cycling through that now so it’s getting a bit tougher,” he said.
“Cannibalisation from some of the store openings is also a factor.”
Aldi’s focus on fresh food is not just a chase for the bigger profit margins associated with this category, it’s also about bolstering its profile as a one-stop grocery destination, according to market watchers. The aim is to convert shoppers who are splitting their grocery shop between Aldi and one of the majors to then just shop at Aldi.
“From a shopper perspective, it really does enhance the credibility of the stores when you’ve got a good quality fresh offering,” one analyst said.