Supermkt war continues to hot up. Will IGA make it through?
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US retailer Costco is expected to drive increased competition in Australia’s $125 billion supermarket and fuel retailing sector as it pushes down prices and gains further share in a market dominated by Coles and Woolworths.
Costco, which operates a discount warehouse model, has already grown its share of the $88bn domestic supermarket and grocery revenue to a 1.2 per cent slice, despite only operating seven stores in Australia, according to IBISWorld research.
The traditional Woolworths and Wesfarmers-owned Coles duopoly, which controls more than 70 per cent of Australian supermarket and grocery stores across Australia, and more than 40 per cent of fuel retailing industry, is facing stiff competition from new entrants such as German retailer Aldi and Costco, while grocery sales volumes have remained largely flat.
IBISWorld industry analyst Brooke Tonkin said competition will become more fierce, as Costco’s aggressive pricing strategy puts it on strong footing to win more market share away in the heavily concentrated supermarket sector.
“While supermarkets continue to compete on the basis of price, other factors such as convenience, product variety and quality have emerged as driving forces in securing customer loyalty,” Ms Tonkin said.
“This helps explain the growth of Costco, which has steadily gained market share over the past five years,” she said.
IBISWorld said convenience had become a major factor in attracting customers, while Costco was attempting to increase its market share through the opening of new stores, and the sale of a diverse range of products in bulk.
The research house said Aldi’s growth was driven by an aggressive expansion, and forecast similar success for Costco, with the number of stores a key competitive factor in the battle for market share.
IBISWorld said Costco was able to compete with the traditional supermarkets with its much wider range of products, including clothing, televisions and other appliances.
“Costco’s bulk-buying power allows it to offer very low prices. The wholesaler is able to offer such large discounts on its products and remain profitable due to its annual membership fee of $60,” IBISWorld said.
The annual membership fee is the source of the majority of Costo’s profitability, IBISWorld said, which allows it to pursue aggressive pricing behaviour.
Woolworth’s has seen its supermarkets division flatline recently, with chief executive Grant O’Brien set to exit the company after a five-year stint in the job following less-than-ideal performance. The supermarket chain is planning to invest $65m in store improvements and staffing in a bid to reset sales. Meanwhile, Coles has been upgrading its larger stores into a new market-style format.
Customers have little brand loyalty in terms of fuel, and Costco’s expansion was likely to increase competition in the $37 billion fuel retailing sector, with the company offering fuel at consistently lower prices and forcing other surrounding petrol stations to cut prices, IBISWorld said.
“(Costco) plans to become a convenient one-stop-shop where customers can buy all their groceries and fill up on petrol in the one location,” Ms Tonkin said.
“Most consumers see petrol as an undifferentiated product and therefore purchase on price — there is effectively no brand loyalty.”
IBISWorld forecasts the supermarket, grocery and fuel retail sector will generated an estimate $134.5 billion in revenues by 2020-21.
Business Spectator
http://www.theaustralian.com.au/bus...-supermarket-war/story-fn91v9q3-1227574056389
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