Aldi puts more pressure on supermarket majors

Competition in the supermarket sector is heating up, with Aldi putting more distance between itself and the major chains.

A sign hangs outside an Aldi store. (Scott Olson/Getty Image)

German discounter Aldi, which has won millions of loyal fans in Australia thanks to its bargain basement prices and eclectic mix of general merchandise, is putting even more distance between itself and the leading supermarket chains when it comes to price and is on the way to doubling its footprint to 800 stores to capture 15 per cent of the grocery market.

A review of Aldi from Morgan Stanley analyst Thomas Kierath has estimated that the price gap between Aldi and Coles/Woolworths now stands at around 18 per cent, up from 14 per cent two years ago.

“What’s interesting is that when the price gap reduced to 14 per cent, Aldi’s share gains slowed (and in some regions Aldi’s share fell), however, as the price gap expands, Aldi’s share gains are now accelerating,’’ Mr Kierath said in a report to clients this morning.

“To us it seems likely that Coles moves again on price to re-accelerate the top line,’’ he added in the wake of Coles once-surging sales growth slowing this year as it faces a resurgent Woolworths that has poured more than a billion dollars into lowering prices and improving its in-store experience.

The widening price gap could therefore trigger another outbreak of the ‘supermarket wars’ which have been raging across the supermarket aisles for years and seen the headline grabbing launch of $1 a litre milk and other deep cuts across staple grocery items.

Although Coles and Woolworths have been the chief players in the price battles that has engulfed the $90 billion grocery sector, privately owned German supermarket Aldi has helped intensify the battle with its deeply discounted groceries and rapid store expansion which recently included launching into South Australia and Western Australia.

It has already captured an estimated 10 per cent of the east coast Australian grocery sector and with 483 stores is generating huge sales and profit momentum.

Driving further sales is the rollout of new Aldi store formats that devote a greater amount of floor space to fresh food and which is forging higher traffic.

“We recently spoke with Paul Foley, industry expert, who provided the following takeaways,’’ Mr Kierath said.

“Aldi’s 2.0 stores that allocate significantly more space to fresh products (from 15 per cent to 25 per cent) are proving a game changer, especially scratch bakeries. To date it has completed just 50 full refurbishments, but plans to refurbish the entire fleet by 2020.

“The traffic uplift has been 7-8 per cent and basket size uplift 6-7 per cent which implies a 13-15 per cent sales uplift post refurb. Margins tend to be higher in fresh food products which means the success of the refurbishment gives Aldi more dollars to invest in price.

“Based on our analysis we believe the refurbishment impact gives Aldi 25-30 basis points of share gains a year to FY20 which when added to the new store rollout suggests share gains of 110 basis points. We think life gets more difficult for the supermarkets post the refurbs.”

Mr Kierath said 800 Aldi stores and 15 per cent market share now “looks a given”.

“On our numbers in FY17 Aldi generated $8.1 billion of sales from its 483 stores (as at August), this equates to 7.8 per cent market share. Based on our discussions, 800 stores in the next seven years should now be considered a given for Aldi.”

Australia has proved a goldmine for Aldi since coming here more than 16 years ago with recent Australian Taxation Office figures showing its sales jumped $1 billion to $5.8 billion for calendar year 2014 as pre-tax earnings hit $238.5 million. Six years ago, Aldi’s sales were only $3.14 billion.