The first two supermarkets to be controlled by German retailer Aldi are due to open in Australia on Thursday (25 January) and market spectators are taking ringside seats for a price war between the discount chain and Australian heavyweights Woolworths and Coles Myers.

Battle for market share

Between them, Woolworths and Coles Myers control 70% of the grocery market in Australia, but it is questionable whether they can hold that share, given privately owned Aldi’s promise of steep discounts on 600 basic food and household products. Slower consumer spending has meant that the stakes are even higher.

Price war set to escalate

Cheaper ranges have already been stocked up in Woolworths and Coles Myers, ready ammunition for the anticipated price war. The cheap price of Woolworths’ own-brand light milk is attracting particular attention in relation to its increasing price tag on Canberra Milk brands, highlighting the strong need for supermarkets to associate their own corporate identity with low prices.

Opening shot through Woolworths’ confident results

Further opening shots could be heard through the confidence of Woolworths H1 report, released yesterday (22 January). A 9.3% growth in sales to A$11.25bn for the six months to 7 January suggests that the retailer is on form to achieve its full year earning forecast.

Woolworths CEO Roger Corbett warned: “Aldi is a very good foreign retailer but I don’t think they have encountered a market that is as competitive as Australia, I think the Germans may find it a very tight market.”

“We are interested in what they are doing but not concerned,” he added.

Gaps in the performance statistics defences?

Things are not going so well for Cole Myers, or Franklins however, who may well be right to express concern. Earlier this month, Cole Myers revealed that sluggish sales grew by only 5.1%, well below expectations. Struggling Franklins meanwhile controls a 12.5% market chare but posted losses of A$100m during the 1999/2000 calendar year, forcing a strategic review of operations by its Hong Kong proprietors, Dairy Farm.

A Dairy Farm spokesman issued a statement to reveal that it is “inappropriate to assume we are selling.” He added, however that action “may not be so dramatic as a complete sale.”

Territorial advances: takeover of Franklins stores?

From Sydney’s western suburbs, Aldi is expected to focus expansion on New South Wales before entering Victoria, opening up to 20 outlets within months. A process speeded up further if it successfully launches a buyout of some Franklins stores, presuming a partial sale of the company.

Of course, if Aldi is interested, bids are also expected from Coles Myer, Woolworths and fellow retailers Bi-Lo and Wal-Mart. The Australian Competition and Consumer Commission (ACCC) are anxious however to keep a third force in the supermarket sector, and will be anxious to prevent Cole Myers or Woolworths takeovers.

Head of ACCC, Alan Fels, commented: “If Franklins is selling, the commission will be highly interested because of the high degree of concentration in the retail industry already.”
Victory for the consumer

Aldi’s entrance heralds a new era for Australian supermarkets: a new style of shopping, a new emphasis on low-price persistence and a widening of the sector’s competition. If Cole Myers and Woolworths soon realise cannot compete on price, then they will no doubt carve out new roles based around quality items deserving premium tags or stress customer service. For the time being however, it is the consumers who cannot fail to loose: a price war, comprehensive discount ranges and a choice of store styles beckon.