Why Kaufland’s shock exit is bad news for shoppers
Kaufland’s shock exit from Australia may have delivered a sigh of relief to Aldi, Coles and Woolies but experts warn it will be regular families who will be hurt substantially by the failed venture.
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The shock exit of Kaufland will keep grocery prices higher than they otherwise would have been, boosting the profits of Woolworths and Coles, retail analysts have forecast.
And the decision by the German discount titan to call time on its Australian venture would make other international retailers think twice before entering the nation’s $110 billion grocery sector, they said.
Kaufland, which has stores described as a cross between Aldi’s and Costco’s, stunned the retail industry on Wednesday by announcing it was pulling out of Australia without opening a single store.
The decision to leave comes despite the supermarket challenger tipping $500 million into its Australian venture, seeking approval for 23 stores and breaking ground on a major distribution centre in Melbourne.
Citi retail analyst Bryan Raymond said Kaufland’s entry would have disrupted “what is currently a very rational grocery industry”.
The past year, both Coles and Woolworths have stepped back from a long period of price cutting as they invest in warehouse automation, their online offers and a greater range of convenience items.
“Kaufland’s departure has removed a key risk to this stable market,” Mr Raymond said. “We now see no near-term impediment to the constructive pricing environment remaining in place over the medium term.”
Kaufland’s exit would help lift Coles’ profit margin from 3.8 per cent this financial year to 4.1 per cent by the year to June 2025, he said. He did not provide an estimate on the impact for Woolworths.
“The Australian grocery industry will remain highly consolidated for longer, as barriers to entry are high,” he said in a research report for investors.
Key issues were securing a high-quality, consistent supply of fresh food and finding well-located sites, Mr Raymond said. Grocery supply chains were “complex in a low-density country”, he said.
JP Morgan retail analyst Shaun Cousins said Kaufland’s withdrawal added to the list of hypermarket experiments that had failed to win over Australian shoppers.
Coles Myer launched the Super Kmart hypermarket chain in 1982 but killed it off in 1989 after a tepid response.
South Africa’s Pick ’n Pay also entered Australia in the 1980s with a hypermarket venture but eventually sold it off.
“The (Kaufland) offer would need to win customers over yet the need for such a format, especially given the challenges facing discount department stores, was not obvious,” Mr Cousins said in a research report for clients.
The gap in the market Kaufland planned to fill was “never obvious” given Aldi had moved into the discounter space left by the exit of Bi-Lo, Franklins and Dairy Farm, he said.
“Costco created a club market yet its store growth has been slower than initially expected due to property challenges — food retail in often industrial-zoned locations — and its focus on profitability,” he said.
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Mr Cousins added his voice to those who have noted Kaufland’s exit would keep grocery prices higher than they otherwise would have been.
“Food inflation (is) more likely to persist,” he said.
“Food inflation, especially the end to dry grocery (products) deflation, is a key positive — alongside lower interest rates — for the strong share price performance of the industry in 2019.”
The Victorian government said it provided Kaufland with facilitation support but had not extended any grants or other financial support.