International analysis: Aldi forces Australia’s big two into lowering prices

This is now changing with the expansion of Aldi and Costco. Both Coles and Woolworths have had to invest significant sums – hundreds of millions of Australian dollars – into lowering prices.

Nothing demonstrates this more than recent announcements by both that they plan to price-match Aldi on key essential food lines. This is all part of a new everyday low price approach to food pricing first imported to Australia by German discount expert Aldi.

Market dominance

For decades, Woolworths and Coles have enjoyed market dominance, giving them a de facto duopoly over Australian retail. Their combined 2014 market share was 70.6% (Woolworths 41.1%; Coles 29.6%).

The most recently available data has Aldi taking a 5.1% chunk of Australian food retail. So why should the big two be so worried?

The simple answer is a subtle shift in the retail paradigm. Aldi’s steady growth appears to confirm shopper approval of its model.

The discounter has established itself and, more importantly, established the discount concept.

The arrival of Aldi has opened consumers’ eyes to everyday low pricing, prompting some tough decisions for Woolworths and Coles shareholders.

The 5% market share of 2014 looks far more dramatic when one considers that, in 2001 – the year of market entry – Aldi’s share totalled a trifling 0.28%.

Tough times for establised players

With a chain of almost 400 Aldi stores predominantly in west and south Australia and plans for more, the situation can only get tougher for the incumbents. Even if this is a fraction of the stores of Coles and Woolworths with more than 3,000 outlets each – it is sufficient to disrupt the market.

“The arrival of Aldi has opened consumers’ eyes to everyday low pricing, prompting some tough decisions for Woolworths and Coles shareholders”

David Gray, Planet Retail

As a result, disposals of struggling DIY and variety store arms could be on the cards as Coles and Woolworths seek to raise cash to invest in the core supermarket business.

Another growing issue is that Aldi is rapidly becoming more like a mainstream supermarket. In fact, the Aldi concept is arguably more mainstream in Australia than in any European market, and this is proving a direct challenge to the duopoly.

Aldi aside, what Coles and Woolworths perhaps truly fear is a potential entry of Aldi’s compatriot discounter Lidl. Although it has stated it had no current plans, with its steady drift away from discount towards a more conventional supermarket approach, chances are that the banner may be more akin to Woolworths and Coles than Aldi.

• David Gray, Retail Analyst, Planet Retail