Background
Due to a number of factors shoppers in Australia (and other nations) are struggling with ‘cost of living’ pressures. Generally speaking, shoppers are trading down to EDLP (everyday low price) P/L (private label) ranges. Also, supermarkets, such as Coles and Woolworths, are offering on-going (sometimes 3 months) EDLP promotions on brands. In theory EDLP increases volume sold and maximises $ sold and $ margin for manufacturers and supermarkets …
EDLP or inflation driving sales?
Source: NielsenIQ Homescan 52 w/e 25/03/23
As highlighted by Nielsen research top line $ sales growth in Australia is currently being driven by inflation. Volume is generally in decline as shoppers struggle with cost of living pressures. Importantly during the last year sales of EDLP (private label and branded) have increased but overall volume has decreased. This has occurred as shoppers have had other costs of living (e.g. rent, mortgage, electricity) increases limiting the volume bought in supermarkets. So, does EDLP actually increase volume sold? Looking forward, with anticipated lower rates of inflation, will EDLP devalue categories?
UK Example of EDLP
Hard Discounters
There has been a great deal of research highlighting the sales growth of hard discounters, in many markets, over the last 20 years. Steenkamp and Sloot suggest hard discounters ‘have irrevocably changed the face of retail in Europe and Australia, and are making steady inroads into the US.’ (Retail Disruptors: The Spectacular Rise and Impact of the Hard Discounters 2019). Research has highlighted their EDLP strategy on P/L ranges has been a key factor in their sales growth. Other factors such as increased SKU count and improved product quality are also factors in the sales growth.
Source: Kantar UK Supermarket share / sales, 12 w/e 19/03/23
Many will argue due to the increasing cost of living pressures hard discounters have enjoyed strong sales growth recently. For example, in the UK Aldi is now a top 4 supermarket. The table above highlights the strong sales growth of Aldi and Lidl in the UK market. Shoppers have switched to hard discounters, such as Aldi, as they are perceived to offer cheaper prices. The on-going sales success of hard discounters, with their EDLP strategy, should (in theory) maximise their financial returns.
Aldi UK
‘Preserving our price discount and rewarding our people will always be more important to us than short-term profit’
Aldi GB CEO Giles Hurley
Reuters, Aldi UK’s trading accelerates as shoppers seek savings, Sept 22
As reported by Reuters (Aldi UK’s trading accelerates as shoppers seek savings, Sept 22) Aldi UK’s operating profit dropped to £60.2M in FY21 vs £287.7M in FY20. The profit decline was due to maintaining low prices, higher CODB and COVID-19 related expenses. This profit was achieved on sales £13.645B (0.4% margin).
Lidl GB
For the year ending February 22, Lidl GB sales rose 1.5% to £7.8B to generate £41.1M profit (0.5% margin). This was a 319% increase in profit vs the previous year. The low profit % was partly due to continued expansion, £653M spent on 50 new stores and 3 DCs. (The Gaurdian, Lidl profits quadruple as cash-strapped British shoppers look for bargains, Nov 22.)
TESCO UK
‘By sucking in shoppers and, as former Aldi UK CEO Paul Foley puts it, “sucking the profitability out of the industry” – profit margins of 2-3% are now the norm – the two German-owned companies have forced the “big four” supermarkets to take drastic measures’
The Guardian The Aldi effect: how one discount supermarket transformed the way Britain shops, Mar 19
Due to cost of living pressures for shoppers and strong sales growth of hard discounters TESCO UK & ROI has increased the number of SKUs on EDLP. Also, TESCO increased the number of SKUs matching Aldi retail prices (Aldi Price Match) during the last year. So, during the last year sales on EDLP, both branded and P/L, increased. TESCO Preliminary Results 2022/23 highlight operating profit for UK & ROI declined 7.0%, margin 3.8% (-57bps YOY). Overall volume declined. A positive for TESCO was maintaining share during the year.
Other supermarkets in the UK have also increased their sales on EDLP recently. Sainsbury’s Preliminary Results 2022/23 highlight underlying profit before tax decreased from £730M (FY21/22) to £690M (FY22/23). As reported by Reuters (Profit at UK supermarket ASDA slumps on inflation hit, Mar 23) ASDA EBITDA decreased from £1.1B in FY21 to £886M in FY22.
Does EDLP actually increase profit?
The financial results of Aldi and Lidl in the UK (low margin %) are in part due to the UK being a competitive market and these businesses being in a growth stage and funding expansion (new DCs, stores etc). Also, generally speaking, hard discounters are privately owned and the shareholders have different margin aspirations. The businesses are growing sales / share and shareholders generally support aggressive pricing / low margins to generate sales growth. However their results highlight EDLP does not always generate strong margins.
Interestingly as major supermarket chains, such as TESCO, match Aldi prices for P/L and have increasing EDLP sales for branded ranges, their margins are also decreasing. So, does EDLP, including P/L, improve financial results?
IMHO (in my humble opinion) hard discounters have a lower CODB (cost of doing business) vs supermarkets. For example, many full-service supermarkets have additional costs due to larger stores with more SKUs, in store services such in store bakeries and a digital offer – click and collect / home delivery. So hard discounters can work on a lower % margin and cover their CODB vs full-service supermarkets.
The challenge for full-service supermarkets copying hard discounters EDLP pricing strategy, including price matching their P/L pricing, is that the % margin may not be sufficient to cover their additional costs. Secondly, the current challenge is inflation in CODB. For example, Sainsbury’s UK gave store staff 3 pay rises last financial year. This meant the lowest paid workers received a 10% pay rise. It is obviously challenging to increase profits when operating on lower % margins and having increasing CODB. Another way of viewing this situation is EDLP leads to lower $ margin per unit but $ CODB per unit is currently increasing. Finally, the market is experiencing volume decline, so EDLP is not generating additional volume to cover increasing CODB.
Will EDLP improve Coles and Woolworths sales / share in Australia?
Whilst no 2 markets are identical the growth of hard discounters, including Aldi, in the UK highlights a threat to Coles and Woolworths sales / share in Australia. If shoppers switch to other supermarkets, that they perceive to offer better value, then Coles and Woolworths could lose long-term sales / share in Australia. To maintain sales / share Coles (dropped and locked) and Woolworths (prices dropped) are increasingly offering EDLP. They have also increased the number of P/L SKUs ranged, with EDLP pricing, for many years.
Please note it took Aldi and Lidl decades to achieve their current share in the UK market. Their growth is not only due to the current cost of living crisis. It would be questionable to suggest that Aldi will dramatically increase sales / share in Australia due to the current cost of living pressures. A more plausible situation (like the UK) is Aldi continue to grow sales / share in the long-term. In the short term it is realistic to suggest Aldi will achieve higher % sales growth (off a smaller base) as shoppers switch due to cost of living pressures.
‘Aldi is poised to (re)gain market share, with Coles & now Woolworths expected to be market share donors, while the share gains for independent supermarkets appear more resilient.’
UBS, Australian Supermarkets UBS Supermarket Supplier Survey: 33rd ED. Feb 23
The other challenge in the Australian market for Coles and Woolworths is the continuing growth of Costco. As reported by the new daily, (Costco woos cash-strapped shoppers as it expands across Australia, Jul 22) Costco Australia plans to increase the number of its’ warehouses in Australia to 20 in the next 5 years. From conversations I have had Costco is very happy with the $ sales per warehouse in Australia. This is a major reason why they plan to continue to open more warehouses in Australia.
In the short term, it is unlikely that EDLP in isolation will increase Coles and Woolworths sales / share. Over many years Aldi and Costco have positioned themselves as having a competitive offer in the market. For example, Canstar Blue research highlight Australian shoppers perceive Aldi offers better value for money (5 stars) vs Coles and Woolworths (4 stars). So, if price is of increasing importance to shoppers’, it is logical shoppers will switch to Aldi (similar to UK market). Retail World (Aldi doubles down on Price Promise, Apr 23) states that Aldi did increase share in the last quarter of 2022. During this period 73% of Aldi growth was from shoppers switching some or all of their spend to Aldi from other retailers.
Will EDLP drive shopper loyalty?
The following Nielsen research highlights that the battle is not only Aldi vs Coles and Woolworths (the big 3). Approx 15% of the market is ‘others’ (bigger than discounters) and possibly the big 3 could increase their sales and share by switching shoppers from ‘others’. During the last year supermarkets and discounters channels increased their share of overall sales.
Source: NielsenIQ Homescan 52 w/e 25/03/23
Very importantly the following Nielsen research highlights that Australian shoppers are not loyal. 90% + of shoppers shop at 2 or more outlets during the period. This is not a new behaviour for Australian shoppers. Australian Retailers Association (Supermarket loyalty non-existent, Sept 15) explained that 7% of shoppers shopped at all 4 supermarkets (Aldi, Coles, IGA, Woolworths), 28% shoppers shopped at 3 supermarkets and 37% shoppers shopped at 2 supermarkets during a 4 week period in 2015.
Source: NielsenIQ Homescan™ | 13 weeks (QTR) to 01/01/2023 vs Year Ago (YA)
In the short term, it is unlikely that EDLP in isolation will increase shopper loyalty. It is normal for Australian shoppers to shop in a variety of channels and stores. Due to the current increasing cost of living pressures, it is likely Australian shopper will be less loyal as they search for the best offer in various retailers.
Will EDLP improve Coles and Woolworths financial results in Australia?
The following tables highlight that Coles and Woolworths have a strong % EBIT vs hard discounters and major supermarkets in the UK. (Please note different countries will have different accounting standards). This is a normal situation as the UK market is renowned for being competitive and having aggressive pricing. IMHO this is in part due to Coles and Woolworths having less % sales on EDLP, including P/L. Nielsen IQ research (How inflation is impacting private label sales trends globally, Sept 22) highlights in the UK 44% of FMCG sales are P/L vs Australia 22%. IMHO P/L, with EDLP pricing, is a major factor for UK retailers having lower margins.
Source: Coles Group , Supermarket half yearly results H23,
Woolworths Group , Australian Food half yearly results H23
‘Our profit margins are significantly lower and actually below industry standard and last year we had even lower profits’
Oliver Bongardt, MD of national buying, Aldi Australia
AFR, Aldi says it’s 17pc cheaper and shoppers think it’s worth the trip, Mar 23
Aldi is privately owned so comparison is difficult. As per above statement Aldi Australia officially works off lower margins than Coles and Woolworths. This is logical as their offer to shoppers is focused on price. From conversations I have had Aldi Australia has a target EBIT % of 2 – 3%. This is a similar figure to what was quoted by The Guardian for the UK market.
Costco 2022 annual report highlights that globally Costco EBIT % was 3.4% (operating income / total revenue).
The challenge for Coles and Woolworths (like TESCO in the UK) is maintaining sales / share in a challenging market when shoppers may perceive other stores, such as Aldi and Costco, as being cheaper. Unfortunately, increasing use of EDLP for brands and P/L may not increase volume. This could lead to a situation of declining profits (like UK supermarkets) due to lower $ margin per unit with increasing $ CODB per unit and no volume increase.
From stores visits to Coles and Woolworths I have noticed they don’t always price match their P/L to Aldi. The difference may be small (+5 / 10%) but this difference helps to ensure their P/L offer can be profitable. From conversations I have had Coles and Woolworths P/L % margin is generally in decline at the moment. Simply put they have not been able to increase their sell prices to cover increases in cost prices during the last few years. If Coles and Woolworths were to price match Aldi for their entire P/L range this would probably again decrease their profit (like UK supermarkets) without increasing volume sold.
Summation
Disruption is the new normal in the retail industry. Retailers in Australia and overseas have to continually review their offer to ensure it is competitive in the marketplace and meets shopper demands.
Due to cost of living pressures many supermarkets are increasingly using EDLP to try to maximise sales / share / profit. Historically EDLP may have driven sales / share / profit in markets such as the UK and Australia. Today market conditions are different due to high inflation and decreasing volume. It is questionable whether this approach has delivered improved business performance to supermarkets, such as TESCO, in the UK. Similarly, it is questionable whether it will drive improved business performance for Australian supermarkets such as Coles and Woolworths.
My blog, How can manufacturers and supermarkets grow sales volume in a declining market? , offers some suggestions on how to increase business performance in this very challenging market.
The information provided in this blog post was general in nature. If you require more information I offer a free initial consultation. Contact Details .
