Move over Aldi, more discount supermarkets could be on the way

Discount grocer Aldi may soon be facing competition from cut-price European rivals if trends in the $88 billion Australian grocery market mirror those in the UK.

UK retailer Sainsbury’s controversial decision to back the relaunch of Danish discounter Netto has underscored the popularity of budget grocers Aldi and Lidl, which have almost doubled their share of the UK  market to more than 8 per cent in the last few years.

Aldi has been even more successful in Australia, garnering 10 per cent of the eastern seaboard market in just over 10 years as consumers become increasingly frugal and seek to reduce the cost of their weekly grocery shop.

In a report released this week, Commonwealth Bank analyst Andrew McLennan says there is room in Australia for a second discount grocery chain.

Mr McLennan sees scope for Netto, Lidl or other discount operators to open stores in Australia, either under their own steam or in partnership with incumbents such as Woolworths, Coles or Metcash.

Lidl, owned by Germany’s Schwarz Group, was reported to have been scouting for sites in Australia and speaking to potential suppliers earlier this year with a view to opening its first stores in 2015.

“Based on the trends from international markets and the apparent willingness of Australian consumers to embrace the format, we see potential for another discount retailer to enter the Australian market,” Mr McLennan said.

“While Lidl has previously been mentioned as a candidate to enter the Australian market, there is also the potential for Netto or a local alternative,” he said.

The arrival of a new discount player would have significant implications for Woolworths, Coles and Metcash, which have been forced to respond to Aldi’s growth by reducing prices and expanding their range of private label groceries.

Mr McLennan said market leader Woolworths, which has the highest profit margins in the world, had the ‘most to lose’, but was also in a strong position against other incumbents because of its low cost of doing business.

“Like Tesco, we see potential for Woolworths’ food and liquor margins to come under pressure, but we recognise Woolworths does not have the same exposure to superstore formats and is well positioned online in Australia,” he said.

Metcash was the most exposed to the arrival of new players, Mr McLennan said, because of its relatively high cost of doing business and high retail prices.

However, there was scope for Metcash to enter the discount market directly or in conjunction with an international partner.

“While a low probability outcome, this could be an avenue for growth to a company that otherwise appears to be lacking options,” Mr McLennan said.

In the UK, Aldi and Lidl have been growing at a faster rate than the four major players - Tesco, Sainsbury’s, ASDA and Morrison’s - as middle class consumers battling rising living costs embrace their low price private label offer.

The major chains have retaliated by slashing prices, but the price cuts have come at a cost to sales and margins.

Last month market leader Tesco reported a 3.8 per cent drop in first quarter same-store sales and chief executive Philip Clarke said he could not remember a worse trading period in more than 30 years.

Mr McLennan said the traditional full-service supermarket channel was fractionalising as consumers shopped in discount, convenience and online channels.

“The loss of market share and sales is putting these formats under pressure,” he said.

Sainsbury’s is one of the few major UK chains that has grown market share in recent years, but is nevertheless taking a 50 per cent stake in Netto’s relaunch into the UK, effectively backing the future of the discount business model.

Netto previously had 193 stores in the UK but they were sold to Walmart’s ASDA in 2010 and rebranded.

smh.com.au

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