Aldi’s expansion could pressure rivals’ credit ratings: Moody’s

Aldi’s expansion will shrink supermarket rivals’ market share and could pressure their credit ratings, warns Moody’s.

Another Aldi store opens in Western Australia.

Ratings agency Moody’s has warned the expansion of German discount grocery chain Aldi across Australia will shrink the market share of the incumbents and crimp margins to the point it could pressure credit ratings.

The ratings agency said it expected Aldi’s market share to grow significantly from current estimates of around 10 per cent, amid projections it will lift its store base by around 16 per cent in the next two years as it gains a foothold in South Australia and Western Australia.

This compares favourably to predicted growth of less than 3 per cent in the store base of sector heavyweights Coles and Woolworths.

“We believe that Aldi’s market share will increase further, driven by more rapid store expansion, more investment in advertising and marketing, and higher customers spend per visit,” Moody’s vice president Ian Chitterer said.

“This is credit negative for Woolworths, Wesfarmers’ Coles supermarket chain, Metcash Limited’s IGA chain and small independent supermarkets.”

The most at-risk group is the independents, with the likes of IGA, Foodland and Foodworks maintaining market shares of upwards of 25 per cent in SA and WA, as against around 9.7 per cent nationally.

It leaves them particularly vulnerable to Aldi’s western push.

The majors will be hurt by margin pressure, however, as the prospect of the price wars ending anytime soon appears slim, with Moody’s believing Aldi had reached a “critical mass” that would allow it to ramp up marketing spend.

“We expect the significant rollout of new Aldi stores, combined with the increase in marketing spend, to result in continued competition and price deflation, negatively impacting the comparable same-store sales of its competitors over the next two years,” Mr Chitterer said.

“With fixed costs such as store leases and labour rising annually, we expect the continued deflationary pressure on shelf prices to negatively affect margins as the structural changes in the industry continue to play out.”

The commentary follows Woolworths’ update on its turnaround strategy yesterday, with talk it had seen signs of traction from June helping drive the best rally in its shares for almost 20 years despite the announcement of a further $959 million in impairment charges.

The move lifts Woolworths’ total impairments for the year to June 30 over $4 billion, although Moody’s said the latest writedowns would not have any immediate effect on the group’s credit rating.

The last time Woolworths announced impairments in February — worth over $3bn — Moody’s was quick to follow with a ratings downgrade.

“Such cash costs and the lower expected (pre-tax earnings) are credit negative, but the strategy and actions announced are supportive to the company’s credit profile and the removal of capitalised leases from the company’s balance sheet will have a positive impact on Moody’s adjusted debt/EBITDA metric,” Mr Chitterer said.

“Consequently, we do not view the update to impact Woolworths’ rating or outlook.”

Moody’s retains a Baa2 rating on Woolworths with a negative outlook. It said it could revise this view after Woolworths’ full-year results are declared on August 25.

At 12.10pm (AEST), Metcash shares traded down 0.23 per cent at $2.135, Coles owner Wesfarmers inched up 0.17 per cent to $42.32 and Woolworths was off 2.6 per cent at $23.66.