Independent supermarkets in Australia live on borrowed time.
But, at first glance, it’s easy to think otherwise. IGA currently operate approximately 1,300 stores. Woolworths have a mere 861 stores and Coles 746. That said, Coles and Woolworths stores occupy much more space than the average IGA outlet. Still, IGA handle a large share of the grocery market.
Furthermore, the average weekly spend at an IGA store is $353 per square metre, versus $278 per square metre at Aldi, $260 per square metre at Coles and $241 per square metre at Woolworths.
So how could IGA be in danger?
The short answer – Aldi and Costo have been progressively inflicting significant damage to IGA. And, Coles needs to accept the blame for setting all this in motion.
When Coles bought the BiLo supermarket chain in 1987 they appeared to be serious about creating a strong footprint in the low cost supermarket space. But, over 20 years they managed to make BiLo so inefficient that they had to shut it down.
This left the door wide open for Aldi to enter Australia. The chain quickly snapped up a big chunk of the eastern seaboard market as consumers became increasingly frugal while still demanding more variety. Aldi delivered what Coles could not do with BiLo.
Curiously, the Coles and Woolworths strategy for keeping Aldi ‘in check’ was to imitate it. Instead of responding with differentiation, they cut costs to the bone, put massive pressure on their suppliers and eliminated many brands by relentlessly expanding their home brands.
They seemed to have missed the point that Aldi’s home brands were not just cheap, but also of high quality.
Then Costco entered the market offering goods that also were cheaper than Coles and Woolworths, with a wide merchandise offer. The result: people now drive long distances to shop at Costo, attracted by goods that are cheaper and different from the monotonous home brands being sold by the incumbents.
Aldi hit first, then Coles and Woolworths and finally Costco, slowly chipping away at the independents, which are struggling with higher costs structures due to their dependence on Metcash and the lack of coherence typical for corporate chains.
Additionally, some of the suppliers dropped by Coles and Woolworths in their home brand push went out of business altogether, as a consequence disappearing from the shelves of the independents as well.
The next blow comes now with Coles and Woolworths moving into online sales, a move that’s unlikely to ever produce any profits but will further erode the independents’ market share.
Evidence supporting the opening line of this article is compelling; the long-term trend is working against the independents.
They now compete against the growing number of private label offerings and lean supply chains of Aldi, Coles and Woolworths.
Being individually owned, they are struggling to provide contemporary store layouts, facilities and services. It’s also difficult for them to match the kind of investment needed in software to extract operational and supply chain efficiencies.
IGA is not helping either, having continually failed to offer a unified system platform for all their members.
Over the next decade, the collapse of IGA’s market share is imminent, forecast to shrink from a respectable 27 per cent to just 4 per cent.
Coles and Woolworths’ market share will likely slip from 68 per cent to around 60 per cent, while Aldi will take that ground from 7 to 14 per cent. Costco will increase its market share from one to six per cent.
Morgan Stanley analyst Thomas Keirath noted that industry consolidation is likely to annihilate the smaller scale independent retailer, confirming the above predictions.
What can the independents do to stay relevant?
They need excellent systems to accurately plan and manage inventory, streamlined supply chain and significantly better management practices.
Unfortunately, such a transition is unlikely to happen.
Over the years, Retail Directions has repetitively observed that such systems and business efficiencies are not something IGA and its members can achieve.
Independent supermarkets continue to use outdated and fragmented software, and they struggle to run these systems effectively. This limits their ability to manage stock and customer relationships.
But the independent sector’s greatest impediment is its dependence on Metcash.
Metcash is not in a position to match the kind of investment that the major retailers have made to strip out supply chain costs. It doesn’t seem to spend its money wisely either.
The Metcash Sustainable Supply Chain Management (SSCM) program is still under development and it has only six distribution centres carrying 18,000 product lines.
These logistical arrangements are sub-optimal because Metcash has to cater for considerable diversity, servicing 1360 IGA, 700 Food Works and 500 non-affiliated independent grocery stores. It’s much simpler for Coles and Woolworths to supply their outlets.
The prognosis for independent retailers is not looking good. Watch out for a big retail industry shakeout over the next decade.