G4111- IBISworld report PDF

Preview

Summary

Helpful in Assignment 1...

Description

Stacking the shelves: Industry revenue grows despite intense competition and price cutting

IBISWorld Industry Report G4111

Supermarkets and Grocery Stores in Australia February 2016

Brooke Tonkin

2

About this Industry

12 Products & Services

25 ALDI Stores Supermarkets Pty Ltd

2

Industry Definition

14 Demand Determinants

26 Metcash Limited

2

Main Activities

15 Major Markets

2

Similar Industries

16 International Trade

28 Operating Conditions

2

Additional Resources

17 Business Locations

28 Capital Intensity

3

Industry at a Glance

19 Competitive Landscape

30 Revenue Volatility

19 Market Share Concentration

30 Regulation & Policy

4

Industry Performance

19 Key Success Factors

31 Industry Assistance

4

Executive Summary

19 Cost Structure Benchmarks

4

Key External Drivers

21 Basis of Competition

33 Key Statistics

5

Current Performance

22 Barriers to Entry

33 Industry Data

7

Industry Outlook

22 Industry Globalisation

33 Annual Change

29 Technology & Systems

33 Key Ratios

10 Industry Life Cycle

23 Major Companies 12 Products & Markets

23 Woolworths Ltd

12 Supply Chains

24 Wesfarmers Limited

34 Jargon & Glossary

www ibisworld com au | (03) 9655 3881 | info@ibisworld com

About this Industry Industry Definition

Players in the industry are primarily engaged in grocery retailing. Supermarkets and grocery stores retail a range of groceries and food products, including fruit and vegetables, bread,

Main Activities

The primary activities of this industry are

cigarettes, canned goods, toiletries, dairy goods, delicatessen items and cleaning goods. Specialist retailers, niche retailers and convenience stores are excluded from the industry.

Operating supermarkets Operating grocery stores The major products and services in this industry are Beverages Bread and bakery products Cigarettes and other general merchandise Dry and packaged foods Fresh fruit and vegetables Meat products Milk and other dairy products Toiletries and health products

Similar Industries

G4121 Fresh Meat, Fish and Poultry Retailing in Australia Operators in this industry specialise in retailing fresh meat, fish and poultry goods. G4122 Fruit and Vegetable Retailing in Australia Businesses in this industry primarily sell fruit and vegetable produce. G4123 Liquor Retailing in Australia Firms in this industry largely sell liquor goods. G4129 Bread and Cake Retailing in Australia Companies in this industry primarily retail bread and cake goods. G4279a Tobacconists and Specialised Grocery Retailing in Australia Establishments in this industry retail tobacco along with other specialised grocery items such as confectionery and small goods. G4112 Convenience Stores in Australia Stores in this industry have a narrower product range than supermarkets, but a wider range than milk bars.

Additional Resources

For additional information on this industry www.ausfoodnews.com.au Australian Food News www.mga.asn.au MGA Independent Retailers www.retailbiz.com.au Retail Biz

Industry Performance

Executive Summary | Key External Drivers | Current Performance Industry Outlook | Life Cycle Stage

Executive Summary

The Supermarkets and Grocery Stores industry is one of the most fiercely competitive in Australia. The rapid growth of German-owned ALDI over the past five years has significantly altered the industry. ALDI has grown in popularity over the past five years, partly due to its discount private-label products. This has forced the two established industry giants, Woolworths and Coles, to cut prices and expand their own range of private-label products. Changing consumer sentiment and shopping preferences have also influenced the industry’s trading conditions. Industry revenue is projected to grow by 3.8% annualised over the five years through 2015-16, to reach $88.1 billion. This includes forecast growth of 2.5% in 2015-16. The challenging retail environment has caused the industry’s heavyweights to cut prices across a range of branded and private-label items over the past five years. Coles and Woolworths have pressured suppliers to lower their prices, continuing their price war. Supermarkets have also used weekly specials and other marketing initiatives, such as fuel dockets, to compete for customers. These practices have faced scrutiny over the period, prompting both the Senate and the ACCC to launch investigations into the conduct of Woolworths and Coles.

Growing demand for cheaper privatelabel products has increased their share of shelf space over the past five years. Consumers increasingly view privatelabel products as acceptable alternatives to more-expensive branded products. This is largely due to ALDI’s growing presence in the industry. In response, Woolworths and Coles have also expanded their own ranges to secure their place in the market. This increasing shift towards private-label products, which attract higher margins for retailers, has boosted industry profitability over the past five years. Industry revenue is forecast to grow at an annualised 2.2% over the five years through 2020-21, to reach $98.1 billion. Fierce competition, subdued consumer sentiment and the continued expansion of private-label products are expected to contribute to price deflation, constraining revenue growth. The continued development of sophisticated online sales platforms is expected to influence shopping patterns. Convenient online shopping options such as pick-up and home-delivery will help industry firms boost their business. The growth of discount companies such as ALDI and Costco will continue to influence consumer shopping trends over the next five years.

Key External Drivers

Real household disposable income The level of real household disposable income affects the industry. In periods of low disposable income, consumers are more likely to focus on household necessities and do without luxury products such as gourmet foods and deli items. However, the greater range of private-label products, which are often cheaper than branded merchandise, has enabled consumers to enjoy gourmet and discretionary items without paying significantly more. Disposable income is forecast to rise in 2015-16, which could provide an opportunity to boost industry revenue.

Population Population growth affects the number and location of supermarkets and grocery stores. The age distribution of the population also influences the type of products stocked. The development of new residential developments increases the amount of consumer traffic at existing supermarket locations and can raise demand for new stores. The population is forecast to increase over 2015-16, leading to a rise in customer numbers and growth in the volume of items purchased from supermarkets.

Industry Performance

Key External Drivers continued

Consumer sentiment index Trends in consumer sentiment have a significant effect on consumer spending at supermarkets and grocery stores. A decline in consumer sentiment can reduce demand for more-expensive goods such as gourmet items, branded merchandise or organic produce. Fluctuations in the index also affect the volume of pantry-stocking items purchased by consumers, or their inclination to take advantage of weekly specials and other instore offers. Consumer sentiment is forecast to strengthen in 2015-16.

Demand from cafes, restaurants and takeaway food services Cafes, restaurants and takeaway food providers compete with supermarkets and grocery stores for consumer dollars. Over the past decade, the number of Australians eating out has increased and households now spend a greater percentage of their income on meals outside the home. Expenditure on cafes and restaurants is forecast to increase in 2015-16, which may pose a threat to industry revenue. Population

8

2.2

6

2.0

% change

% change

Real household disposable income

4 2 0

1.6 1.4

-2

Year

1.8

1.2 10

12

14

16

18

20

22

Year

10

12

14

16

18

20

22

SOURCE: WWW.IBISWORLD.COM.AU

Current Performance

The industry landscape has changed immensely over the past five years. The rapid growth of ALDI and the increasing popularity of private-label products have altered the playing field. These changing dynamics have sparked a price war between the industry’s two largest companies, Woolworths and Coles. Both have chased market share by slashing the prices of goods such as household basics. Despite lower product prices, industry revenue has remained strong, and is projected to post annualised growth of 3.8% over the five years through 2015-16. This includes forecast growth of 2.5% in 2015-16, to reach $88.1 billion.

Woolworths and Coles have opted to reduce prices as a competitive strategy, going against the trend of overseas supermarkets to compete through product differentiation. Consequently, both players have focused less on profit margins and more on market share. This strategy has hurt Woolworths’ profitability. However, increasing private-label sales have enabled Coles to post profit growth over most of the past five-year period. ALDI has also enjoyed profit growth over the period. This has lifted the industry’s average profit margin over the past five years.

Industry Performance

Competition controversy

The latest price war between the two industry giants has resulted in prices being slashed across a range of everyday goods, including milk, bread, meat, fruit and vegetables. Concerns have been raised that the price war will harm agricultural industries and force farmers off the land, prompting a Senate committee to investigate these claims over 2011-2012. After more than a year of such discounting, the committee found no evidence that farmer and other primary producer prices had been squeezed. Dairy farmgate prices were found to have actually increased over the past five years. Alleged uncompetitive behaviour by Woolworths and Coles has attracted the attention of the Australian Competition and Consumer Commission (ACCC). The ACCC took Woolworths and Coles to Federal Court in February 2014, alleging

that the supermarkets had breached a deal with the ACCC regarding fuel dockets. In April 2014, the court found that Woolworths had breached the agreement, while Coles had not. In May 2014, the ACCC launched legal action against Coles, following an 18-month investigation into unconscionable conduct and application of undue influence on suppliers. The ACCC launched further action against Coles in October 2014, alleging the company was forcing suppliers to pay fees for ‘markdowns’ and ‘waste’ to protect its profitability. The two parties reached an agreement, which included a $10.0 million fine, in December 2014. Woolworths attracted the attention of the ACCC in December 2015 for unconscionable conduct with suppliers, with the matter in its early stages with the courts at the time of writing.

Product preferences

Trends in private-label merchandise have played a pivotal role in the industry’s performance over the past five years. Historically, consumers shunned privatelabel merchandise due to its questionable quality, limited range and bland packaging. Changing consumer shopping trends and the increasing popularity of private-label goods in ALDI stores have led Coles and Woolworths to improve their range of private-label merchandise. The private-label segment has grown phenomenally over the past five years, now accounting for approximately one-quarter of all supermarket sales. Private-label goods are now offered across all product segments, from basic household goods to high-end and organic product ranges. Volatile consumer sentiment over the past five years has contributed to growth in private-label products. Turbulent economic conditions have hurt consumer optimism about future income, employment prospects and buying

conditions for essential household items, such as groceries. The improving quality of private-label products have made them increasingly appealing to customers, particularly low income families. Growing satisfaction with private-label products has also prevented many consumers from switching back to branded products during times of positive consumer sentiment over the period. The organic products market has been a growing area for the industry since the early 2000s. While retailers have traditionally charged a premium for organics, increasingly widespread consumer acceptance has lowered prices. All major supermarkets now stock a larger range of organic products than they did five years ago, with some sections in supermarkets dedicated to organic products. Furthermore, the two major supermarkets have released their own private-label organic ranges: Coles Organic and Woolworths’ Macro Organic and Baby Macro Organic.

Industry Performance

Wholesale bypass

Growth in private-label products has contributed to increasing instances of wholesale bypass. Supermarkets have entered into contracts with food manufacturers to produce privatelabel goods for them. This has encouraged supermarkets to make direct purchase agreements for branded products as well, which has reduced the need for wholesalers. Furthermore, supermarkets and grocery stores have increasingly dealt directly with primary producers. Coles

and Woolworths have been sourcing fresh fruit, vegetables and meats directly from farmers and growers over the past five years, making many wholesalers redundant across much of the industry. When supermarkets still need to use wholesale services, they typically deal with firms that fall under the General Line Grocery Wholesaling industry, which sells a diverse range of products. This has come at the expense of specialised wholesalers.

Store operations

Strong industry competition has resulted in almost stable enterprise numbers over the past five years. Potential players are likely hesitant to enter the industry, due to the dominance of Coles and Woolworths. The most recent major player to enter the industry was Costco, opening its first Australian store in Melbourne in August 2009. Costco operates like a wholesaler, with customers purchasing products in bulk in a warehouse-style set-up. Costco stores are on average over 13,000 square metres, more than triple the size of a typical Coles or Woolworths store. Furthermore, Costco’s range of products

is vast. Aside from groceries, the company offers appliances, hardware, toys, sporting goods, jewellery, books and furniture. Total industry employment is forecast to grow at an annualised 1.5% over the five years through 2015-16, outperforming the projected growth in store numbers. This is due to the shift towards larger stores, particularly by Coles and Woolworths. Larger stores cater to the needs of a wider range of consumers, making them attractive to a greater portion of the market. This trend towards larger stores has increased the need for staff, particularly shelf stackers.

Industry Outlook

Supermarket shelf wars are expected to intensify over the next five years. The increasing prevalence of private-label merchandise and changing consumer shopping patterns will create a difficult operating landscape for smaller operators with less purchasing power. The low-price environment will likely continue, putting profit margins under pressure. Price deflation arising from fierce price competition and the growing popularity of private-label products is anticipated to constrain revenue growth over the next five years. Industry revenue is forecast to rise at an annualised 2.2% over the five years through 2020-21, to reach $98.1 billion. Given the industry’s mature nature,

Industry revenue 8

% change

6 4 2 0 -2 -4

Year 08

10

12

14

16

18

20

22

SOURCE: WWW.IBISWORLD.COM.AU

players will need to fight even harder for market share over the next five years.

Industry Performance

ALDI’s growing presence and an increasing number of Costco stores will only increase price competition. Woolworths and Coles, which have dominated the industry for over 25 years, are expected to be forced to keep prices low to maintain market share. As suppliers have already accepted price decreases over the past five years, there is little room left to move on supply chain prices. Thus, Woolworths and Coles will be forced to accept lower profit margins on branded items over the next five years if they continue lowering prices. As a result, they are expected to rely on growth in privatelabel product sales, where margins are higher, to preserve profitability.

However, the industry’s average profit margin is anticipated to decrease slightly over the next five years. Smaller operators will be hit the hardest by the ongoing price war, due to their limited buying power. This is likely to contribute to smaller independent supermarkets joining chains such as IGA to capitalise on brand-owner Metcash’s buying power.

Demand drivers

Factors such as consumer sentiment and household disposable income will drive consumer purchase decisions over the next five years. Despite projected small increases in household disposable income, the anticipated negative consumer sentiment over much of the period means that consumers will likely be price conscious and attempt to reduce their weekly expenditure on groceries. Consequently, sales of private-label products are expected to grow. The share of total sales for private labels is expected to approach 35% by 2020-21. The types of

private-label products available will likely continue to diversify, expanding into specialty products such as ethnic foods. By 2020-21, it is unlikely there will be a branded product range completely safe from private-label competition. Industry demand will be influenced by changing demographics, specifically the shrinking size of households, the time-poor nature of consumers and more complex consumer preferences. The industry will also need to adapt to the segment of consumers that shop more frequently and demand more convenient dining options.

Investing in technology

The ability of major supermarkets to innovate and use new technologies to attract customers will be crucial in the battle for market share. Investment in store systems, mobile applications, tablets and online platforms will be a major factor in expanding consumer reach. Furthermore, players that are able to tap into consumer preferences and shopping habits will be at a distinct advantage. The use of data will be essential to future planning and development. This has been highlighted by Woolworths’ 2013 investment into a data analytics firm, aimed at improving

knowledge of consumer product preferences and spending habits. The ability of supermarkets to tap into personalised consumer marketing can give them a competitive advantage in attracting new c...