The Current State Of The Australian Supermarket Industry
The Australian grocery industry is very concentrated. This level of concentration has occurred over many years as the 2 major supermarket chains, Coles and Woolworths, have successfully grown their sales and market share. To maintain their sales and share they will both need to use big data to build better relationships with their customers.
Recent industry figures from IBISWorld’s ‘Supermarket and Grocery Stores in Australia’, January 2017, estimates the big 4 players have about 80% market share of the $105 billion market.
A major change that occurred in the Australian grocery market was an international retailer, Aldi, entered the market in 2001. Since opening their first store in NSW in 2001, Aldi has opened 470 stores throughout Australia including entering the SA and WA markets in 2016. Aldi offered Australian consumers another type of supermarket, a hard discounter. Another international retailer Costco also entered the market in 2009 and now has 8 warehouses in Australia. Costco again offers Australian consumers another type of supermarket – a big box or hypermarket.
In addition to Aldi and Costco other foreign retailers are planning on entering the market. In May 2017, UBS presented a supplier survey to the Australian Food and Grocery Council that suggested ‘Amazon Fresh/Grocery will enter Australia in the next three years’ and ‘Kaufland will have a physical presence by 2020’. Other evidence to support these foreign retailers entering the Australian grocery market shortly is that Amazon stated (April 2017) ‘The next step is to bring a retail offering to Australia, and we are making those plans now’. Kaufland is advertising for retail sites on their Australian website and the website states ‘Kaufland is coming to Australia’. Amazon Fresh is a subsidiary of Amazon.com and in addition to offering a dedicated grocery delivery service also operates retail stores in some states of the USA, London, Tokyo and Berlin. Kaufland is owned by Schwarz Group and operates hypermarkets in Europe.
So today the Australian grocery industry is evolving into an international market and the major Australian supermarkets must compete with international retailers to survive. What is interesting is the 2 major supermarkets, Coles and Woolworths, with the most sales / share in the Australian market are smaller operations vs the new entrants.
Deloitte report Global Powers of Retailing 2017
Schwarz Unternehmenstreuhand KG owns Kaufland
Wesfarmers owns Coles supermarkets
Due to increased competition from new entrants Coles and Woolworths have invested in aggressive price promotions to try to defend their sales / share.
Coles – The Current Landscape
Coles supermarkets was acquired by Wesfarmers in November 2007 and a new management team was brought in to revive the retailer’s performance. As part of the turnaround program Coles has invested heavily in lower prices and its ‘down, down’ pricing initiative. In the recent 2017 Third Quarter Retail Sales Results Coles Managing Director John Durkan reported that ‘The business has now recorded 24 consecutive quarters of price deflation.’ Coles Managing Director John Durkan also said that “It is necessary that we continue to proactively invest in the customer offer throughout this period of lower growth and increased competition to ensure we maintain our market leading customer offer”.
The issue for Coles is that the lower prices to try to maintain sales / share will not necessarily increase profit. In the latest Wesfarmers Half Year Report to 31 December 2016 it was noted that:
“Coles’ sales performance during the half built on the strong growth achieved in the prior corresponding period. Significant investment in value, particularly in the second quarter, led to lower earnings despite a reduction in costs”
“Earnings before interest and tax (earnings or EBIT) at Coles decreased 2.6 per cent to $920 million for the half, with revenue in line with the previous corresponding period. Excluding the gains on the sale of Coles’ interest in a number of joint venture properties to ISPT, earnings declined 6.8 per cent.”
Woolworths – The Current Landscape
The Woolworths group, owner of Woolworths supermarkets, has also invested heavily in price promotions particularly after closing the Masters hardware chain in December 2016. In the recent Half-Year Profit and Dividend Announcement For The 27 Weeks Ended 1 January 2017 Brad Banducci, Woolworths CEO, noted:
“During the second quarter, average prices declined by 2.6% relative to the same quarter in the prior year. Customer price perception is beginning to improve but still presents a major opportunity and reflects our efforts to improve customers’ trust in our prices through lowering shelf prices. All major categories other than meat and tobacco were in deflation in HY17.”
“Sales momentum improved over the half for Australian Food with comparable sales in December the strongest for the year driven by strong comparable transaction growth and an improvement in items per basket. EBIT declined 13.9% on last year primarily impacted by the reinstatement of team incentive payments, team training and higher depreciation from our renewal and IT investments.’
Metcash – The Current Landscape
Metcash, wholesaler that supplies IGA branded independent stores, has also faced increased competition. An excerpt from Metcash Limited – 2017 Fully Year Results and Financial Report:
‘‘Wholesale sales (excluding tobacco) declined 4.3% over the comparable 52 week period. Sales growth from strategic initiatives and new store openings were more than offset by the impact of store sales and closures, deflation, difficult economic conditions in Western Australia, and increased competition including the expansion of competitor footprint in South Australia and Western Australia.’’
IBISWorld’s ‘Supermarket and Grocery Stores in Australia’, January 2017, describe the current retail environment as ‘‘The rise of ALDI has forced the two established industry giants, Woolworths and Coles, to cut prices and expand their private-label product ranges. Smaller players, such as Foodworks, have struggled to compete in an increasingly price-intense industry. In addition, industry-wide profit margins have fallen over the past five years as players reduced prices and accepted lower margins to stay competitive.’’
What Chance Do The Local Supermarkets Have Against International Competition?
How can Australian retailers compete with the larger international retailers that are now active and planning to enter the Australian grocery market? Consumer Loyalty.
The major issue facing Australian retailers is that their consumers are prepared to trial and switch to new entrants in the market. This highlights a lack of consumer loyalty to the brand.
To entice the switchers back retailers can lower prices in the short term but that will not necessarily grow sales and profit in the long term. Some international retailers, such as Aldi, have a lower cost of doing business so full-service supermarkets such as Coles and Woolworths will struggle to match Aldi pricing whilst maintaining acceptable margins / profit for their shareholders. An obvious example of Aldis’ cheaper cost of doing business that is easily seen by consumers is the number of staff working in a store. It is usual for a full service supermarkets to have 30 plus team members working in store during peak trading hours whereas Aldi may only have 6. According to the Australian Government Productivity Commission Report (September 2014) Relative Costs of Doing Business in Australia: Retail Trade:
‘‘Labour costs are the single largest area of expense for most retail businesses, whether based in Australia or elsewhere. In 2012-13 labour costs represented 47 per cent of the cost of doing business in the retail sector.’’
So how can Australian retailers improve their level of consumer loyalty?
Big data can be defined as large or complex data sets.
In the grocery industry, there are 2 distinct types of big data that are currently widely utilised – scan data and panel data. Scan data or EPOS is the data that is collected in-store when items are sold or ‘scanned’ at the checkout. This data provides a great deal of numeric data such as units sold, price sold at, time of day sold etc. Panel data adds more depth to the data as consumers join the panel and normally will take their shopping home and then scan their purchases. Panel data will then include other data such as the age of the consumer, number of people in the household, income levels etc. In Australia, this data is normally provided by agencies such as IRI and Nielsen.
The third type of big data many supermarkets use is card data. This data is collected via consumers opting to use loyalty cards and/or credit cards when they purchase products. This data is not offered by all retailers but is normally offered by the larger supermarket chains that offer a full-service supermarket in a developed market. In Australia, Coles uses the Fly Buys program and Woolworths has its Woolworths rewards program.
The grocery industry is also stating to collect big data from social media platforms. For example, if Australian consumers are researching topics such as ‘paleo diet’ or ‘fidget spinners’ are trending then retailers can review their ranges to ensure they are meeting the ever-changing demands of consumers.
Big data in its different forms offer Australian retailers the opportunity to better understand their consumers and to tailor their offer to their needs / wants. The ultimate objective of analysing the different data sources is to increase consumer loyalty by personalising the offer. With improvements in IT it is now possible to start to use the different data sets (scan, panel, card, social media) in conjunction to get a greater understanding of consumers. A simple example is why would a retailer pay to print and deliver a catalogue to a consumer that is health conscious that highlights unhealthy products such as soft drink, chocolate, chips and biscuits are on special this week? That catalogue would probably have a negative impact on the relationship with the consumer so a smarter option would be a personalised email highlighting what health products are on special this week.
How Retailers Can Use Big Data To Improve Consumer Loyalty
As noted in the Australian Food and Grocery Council Supply Chain Survey Report 2016 ‘Of note has been the huge focus on shopper loyalty, with consumers increasingly shopping at multiple outlets and retailers having to work hard to attract retail customers.’
Coles and Woolworths are aware Australian consumers do shop at different retailers and the opportunity big data offers them to better understand their consumers and improve consumer loyalty. Over many years both have invested in big data to ensure they are able to make fact based decisions. For example, in 2013 Woolworths invested in a data analytics company Quantium. Woolworths CEO Grant O’Brien First Half Profit Report and Dividend Announcement For The 27 Weeks Ended 5 January 2014
“Data driven insights continue to assist with the transformation of our business. Through our investment in Quantium, we can better understand the needs of our customers and deliver a better shopping experience.”
The major change that has now occurred is retailers don’t just want lots of data but rather wish to use this data to better connect with their consumers and offer personalised experiences. Amazon is widely regarded as a leader in this field as their websites utilise recommendation engines that analyse consumers personal data such as a user’s purchase history, shopping cart items, items they have liked and what other customers have viewed and purchased. The website is then able to make a personalised recommendation of item/s they may wish to purchase.
McKinsey, in their 2013 article ‘How retailers can keep up with consumers’, suggested:
“Forward-thinking retailers are leveraging the vast amounts of data they possess and building analytical muscle to enable targeted marketing, tailored assortments, and effective pricing and promotions. Gathering and analysing data to understand the needs, preferences, and attitudes of growing consumer segments … will be especially important, as will understanding individual consumers and customizing offers on a one-on-one basis.”
With on-going IT developments in algorithms and artificial intelligence (AI) many more actionable insights will be able to be drawn from big data to improve consumer loyalty by creating a personalised offer.
In February 2017 at the Mumbrellas Marketing Retail Summit, Woolworths Director Loyalty, Data and Digital Media Ingrid Maes highlighted that ‘our core objective is to generate a genuine one-to-one relationship with every single member in a program.’
This change in thinking means Australian retailers that historically focused on short term sales and share being driven by promotions are now starting to focus on building long term relationships with their consumers that is based on a greater understanding of their needs due to more big data being available and analytical tools being developed to create actionable insights from the data. Retailers that are unable to improve their customer loyalty face the real risk of decreasing sales and profit as consumers switch to a better personalised offer from another retailer.
How Suppliers Can Use Big Data To Improve Trade Relationships and Consumer Loyalty
Traditionally the larger blue chip, tier 1, suppliers have invested in big data. Scan data, panel data and card data has been purchased and this data for internal business reviews and for category reviews with the retailers to support their business case.
Due to the current trading environment, especially retail price deflation, suppliers are going to have to use this data more to justify cost and retail pricing. For example, in June 2017 Coles managing director John Durkan argued ‘Australian consumers are getting ripped off’ due to high cost prices from branded suppliers. Suppliers are going to need to continue to use this data to present fact based arguments to justify their cost price increases to retailers.
Over many years major supermarkets have been sharing more data with suppliers to try to increase collaboration between suppliers and retailers to better meet or exceed consumer needs. Coles and Woolworths both have supplier portals to share information and in 2017 Woolworths launched their new Supplier Connect portal that allows suppliers to access more data. The objective of sharing this information is for the supplier and retailer to work together towards common goals, normally outlined in a scorecard. For suppliers to meet the demands of their retail clients it is expected that they also invest in data and support the retailers’ objectives in a collaborative partnership. The Australian Food and Grocery Council Supply Chain Survey Report 2016 noted ‘Some suppliers are already responding to the trading environment by striking a balance between price and promotional activity, developing shopper insights and driving supply chain efficiencies. Others have yet to make this shift and there is a clear mismatch between their trading priorities and those of their retail customers.’ The risk for the suppliers that do not adopt this collaborative approach is that the retailer may range less of their products and in some cases, may cease doing business with that supplier.
Suppliers may feel they are being ‘forced’ to invest in big data to maintain or grow their business with their retail clients however the current trading environment with new market entrants and price deflation is challenging and without investing in big data the relationship between the supplier and retailer could suffer. This data can also be used to change the relationship between the supplier and retailer so that the retailer trusts the supplier to the point where the suppliers’ recommendations are actioned by the retailer with a minimum of fuss.
On a positive note suppliers that do invest in big data can learn more about consumers in the category in which they operate. These suppliers can have a greater understanding of their current and the competitors’ consumers in both branded and private label ranges. This information can then be used to develop new products or ranges to increase sales. Breakthrough innovation is still limited in the grocery industry vs other industries such as telecommunications and IT hardware. For example the Nielsen Australia Breakthrough Innovation Report 2016 highlighted only 48 (0.4%) items were qualified as breakthrough innovation out of the 10,770 items launched in 2014. The report also noted:
‘’ Successful innovation can often be the key to delivering real incremental dollar growth to a mature category or manufacturer who is trying to compete in a low growth environment – it’s critical to get right and, it’s astounding how many get it wrong.’’
So for suppliers to be successful in the current trading environment they should invest in big data to develop mutually beneficial trading relationships with the major supermarkets and to drive their range / NPD / sales by a greater understanding of the consumer.
How Big Data Benefits Consumers
The increased level of competition in the Australian grocery industry has many benefits for Australian consumers.
Firstly, retail prices have already decreased as the 2 major supermarkets, Coles and Woolworths, fight to maintain their current sales and share. Aldi has forced Australian retailers to adjust their retail pricing to remain competitive in the market.
The new entrants are offering Australian consumers different shopping formats. Aldi as a hard discounter has a limited range with low prices and Costco with its big box concept offering a buy in bulk and save shopping to Australian consumers. With Amazon planning to enter the Australian market other shopping formats, including an improved online experience, could be available in Australia in the next few years. For example, Amazon opened a trial store in December 2016 in the USA, Amazon Go, which is automated so there are no checkouts.
The next benefit for consumers shall be a more personalised offer. By analysing big data retailers and suppliers will better understand what you want, when and how and they will develop their range, pricing and distribution models to meet those needs. The personalised offer will make your shopping experience more enjoyable by making the whole process faster, easier and simpler.
The information provided in this blog post was general in nature. If you require more information I offer a free initial consultation by completing a contact us form.