The supermarket shelf wars

Supermarket shelves have been a source of constant change over the past five years. The introduction and growing popularity of private-label merchandise by retailers led to supermarket price wars and intense competition across the industry.

With sales rising by about 3.4% per annum, the industry effectively experienced a battle of the brands between Coles and Woolworths, with both retailers fighting for a greater share of consumer dollars. Trading conditions across the industry were also influenced by rising food costs, changing consumer preferences and variations in consumer shopping habits. Revenue streams for supermarket operators over the period were also affected by fluctuations in the level of real household disposable income, consumer sentiment, store trading hours and population levels.

The industry will continue to resemble a battle-field over 2011-12, with sales expected to post modest growth of 2.5% to $83.7 billion. Despite solid income growth, price-savvy shoppers and a contraction in consumer sentiment will led consumers to favour saving over spending due to the turmoil in global financial markets and a softer domestic economy. The challenging retail environment will see industry heavyweights Coles and Woolworths continue to implement price declines across a range of everyday household items. Despite the strong competition, sales growth will however be aided by consumer demand for private-label goods along with the rapid use of weekly specials and other marketing initiatives by industry retailers to retain consumer interest. However, consumers may increasingly demand bulk-packaged groceries owing to the popularity of bulk retailers such as Costco.

In terms of total market share, goods retailed by the industry may also be purchased from a range of other vendors, including convenience stores, fruit and vegetable stores, takeaway food stores, department stores and specialised food stores. IBISWorld estimates that this industry accounts for about 90% of supermarket and grocery items with the remaining 10% derived from sales by other retailers. Hence, IBISWorld estimates the total retail market for supermarket and grocery goods to average about $89 billion.

Supermarket sales will continue to dominate the retail sector over the next five years, with revenue forecast to rise from $85.9 billion in 2012-13 to $94 billion by 2016-17 or at the rate of 2.4% per annum. Sales growth over this period will be driven by growth in disposable income levels and the continued expansion of private-label merchandise. Growth will also be supported by an overall recovery across the domestic economy, which will create a more stable trading environment for retailers. However, competition across the industry is expected to remain intense, with the potential for further Costco stores set to sway consumer shopping trends again

Industry outlook

Supermarket shelf wars will intensify over the five years through 2016-17. Increasing levels of competition between branded and private-label merchandise and changing consumer shopping patterns will create a difficult landscape for operators. Sales are forecast to rise by 2.4% per annum over the next five years and will be affected by fluctuations in real household disposable income, consumer sentiment, changes to trading hour regulations and competition from convenience stores. In addition, the continued expansion of external operators such as Costco will play a major role in the future of supermarket retailing over the next five years.

Competition to intensify

Industry sales are set to increase from $85.9 billion in 2012-13 to about $94 billion by 2016-17. Supermarket sales in 2012-13 will be primarily driven by growth in disposable income levels of about 4.6% and the continued expansion of private-label merchandise. With more disposable income, consumers will demand a broader range of goods and possibly increase expenditure on gourmet or luxury items. As a result, it is anticipated that supermarkets will continue to introduce private-label merchandise, leading the private labels’ relative share of the total grocery market to trend towards 30%. Demand will be driven by the further promotion of private labels as healthy and cheaper alternatives to branded goods. Sales growth in 2012-13 will also be influenced by the possibility of further price-cuts to basic household items.

Growth in industry sales post 2012-13 will be supported by an overall recovery across the domestic economy, which will create a more stable trading environment for retailers. However, slower economic growth and rising interest rates to combat inflation will lead to a fall in consumer sentiment. Consumers will respond by demanding a greater share of private-label goods to fill their weekly shopping baskets. Demand for private labels will also be driven by changes to the Australian economic climate, which will force consumers to rethink their shopping habits and spending patterns at the checkout. As a result, private-labels will continue to pose as a real threat to the relative share of supermarket shelf-space devoted to big name branded merchandise. Industry sales in the remaining four years through 2016-17 will be governed by a return to growth in disposable income, rising wages and an increase in job numbers.

The expansion of store networks by ALDI and Costco and continued price-based competition between the two major players will also influence demand. While growth in store numbers will enable ALDI to service a broader range of consumers, the future expansion of Costco could have significant ramifications for the industry. To date, the entry of low-cost Costco, a bulk grocery supplier, has provided consumers with another avenue to purchase no-frills goods. However, with about 3,600 product lines housed within its 14,400 square metre warehouse, the entry of Costco into the Australian market place has intensified competition levels with the industry. Over the next three years, the number of Costco stores is expected to rise to six, however, this number is dependent on the company’s ability to find suitable sites.

Increasing levels of competition within the industry will also have ramifications for its major players, Coles and Woolworths. These two powerhouses will be under intense pressure to keep up with the shift in consumer shopping trends and the rise in demand for more private-label goods. As a result, it is expected that they will continue to review and possibly expand their private-label range, which will be at the detriment of branded merchandise.

Weathering fresh food costs

In addition, the price of fresh produce will remain an area of concern for consumers. As experienced over the past five years and particularly in 2010-11 due to flooding in Queensland and Victoria; the price of fresh fruit and vegetables will be subject to seasonal weather conditions. The possibility of future floods, drought or other factors such as the outbreak of disease within fresh fruit and vegetable produce will significantly affect the final price paid by consumers at supermarket registers. The possibility of seasonal events will also affect the type and quantity of fresh produce imported into Australia from foreign countries. While about 97% of fresh produce stocked by Woolworths and Coles comes from local suppliers, this share may decline in the future if Australian production levels are unable to meet domestic demand. Furthermore, drought conditions in Australia, coupled with export demand from India and China is expected to lead to further increases in the cost of food over the next five years.

Product prices may also be subject to increases as a result of government plans to introduce a fixed carbon price from 1 July 2012 until about 2015-16 when the regime will move to an emissions trading scheme. While the Australian Food and Grocery Council predicted that the rise in grocery prices will be about 7.0%, the National Association of Retail Grocers of Australia (NARGA) anticipated that the rise in prices will be much higher. Growth in costs will affect import and export competitiveness, and it is likely that Australian farm produce and manufactured goods will not be as price competitive, leading to a possible cut in employment across manufacturing and primary production.

This effect will be heightened by supermarket chains and their continued expansion of private-label merchandise (much of which is reported to be imported). In general, food prices are forecast to increase under the carbon tax scheme, with the industry’s major players expected to incur potential carbon bills worth millions of dollars. A reported 83% of food and grocery retailers have signalled their intention to pass on the cost of a carbon price via higher prices

Under the emissions trading scheme, users of electricity will be required to purchase a minimum of 20% of their electricity usage from a renewable source, at an additional cost. Hence, unlike the GST, all emission trading scheme (ETS) costs will be accumulated via the supply chain. Retailers are then expected to apply their usual retail margin to the increased product cost and a GST on top of this. Overall, consumers are expected to absorb the full effect on the ETS via higher prices. According to the NARGA, the ETS plan, if implemented, is set to be a costly exercise for families. Farmers, manufacturers, transporters and retail operators are also not immune from the flow-on effects.

Organic in a class of its own

Organic goods are set to experience strong growth over the next five years. Demand will be driven by the perceived health benefits associated with eating organic foods. Unlike, traditional fresh fruit and vegetables, it is unlikely that organic produce will be subject to strong levels of price competition among supermarkets or between supermarkets and fresh food retailers.

However, supermarkets will continue to expand the range of organic foods on offer to cater for growing consumer demand. A key growth area will be the children’s organic market. With increasing consumer concern about the additives and preservatives in children’s food, organic produce will continue to be marketed as a natural and chemical free alternative for health-conscious parents. However, the supply of organic fruit and vegetables, much like their traditionally grown counterparts, will depend on weather patterns across Australia, and the possibility of droughts, floods or other yield-affecting events.

Consumer demand for organic goods will also be driven by the publication of Australian standards governing organic and biodynamic products. Released in October 2009, the standards outline the minimum requirement for growers and manufacturers wishing to label their products as organic and biodynamic. Covering a set of procedures for the production, preparation, transportation, marketing and labelling of organic and bioorganic produce, the standard is expected to boost consumer confidence when making a decision to buy organic produce. The release of the Australian standard was viewed as a significant step forward for Australia’s burgeoning organic market.

Changing structural landscape

A key event that will shape the industry over the five years through 2016-17 will be the development of Coles, now that it is owned by Wesfarmers Ltd. As a result, any structural or strategic changes to Coles will alter the supermarket landscape, however, the extent of the effect will depend on the type of changes implemented. A key example of this will be consumer response and demand for a range of clothing lines to be introduced by Coles across some of its larger supermarket outlets. The ‘cheap chic’ range will target convenience and budget shoppers looking for affordable clothing items while out doing their weekly supermarket shopping. Along with the potential implications for future growth in supermarket sales, the new concept is expected to affect small-end clothing retailers that already cater for this level of the market.

Outside of Coles, it is envisaged that the larger chain stores in the industry will seek to dominate the market by competing on price in the dry grocery area and by providing a variety of other high-profit non-grocery goods (fresh foods) in an appealing environment to attract customers. As a result, the most successful operators will be those that can optimise the trade-offs between low costs and full service. The independent stores will continue to undergo change, with smaller players operating a number of supermarkets in confined geographic areas. These stores, particularly in the smaller regional areas, will be isolated somewhat from the fierce price competition occurring in the larger cities.

The success of Costco entering the Australian market partly depends on whether Australians will pay the fee required to shop at Costco stores. Costco’s main point of difference is that it aims to sell a limited number of items in each product segment. However, stores cover numerous categories from groceries to clothing, books and electronics. The likely success of Costco in the Australian market is supported by that of ALDI, which entered Australia in 2001. This tends to suggest that value shoppers are still under served in the Australian market.

In addition, major consumer and economic trends that will affect the domestic supermarket market over the five years through 2016-17 include: changing demographics (households getting smaller, working families and an ageing population) and more complex wants and desires (greater consciousness of wellness, greater need for time and individual control). The domestic market will also be affected by global economies (strong influence from large volume, low-cost Asian producers and manufacturers); Australian goods becoming less competitive (higher labour costs and smaller production scales); and advances in technology (growth in devices which support leisure and communications).

The industry will experience increasing demand for convenience. Changing demographics will lead to consumers shopping more frequently, eating out more often and a rise in demand for the casual-dining market. As a result, consumers are expected to spend a smaller share of their average weekly expenditure on food and non-alcoholic beverages from supermarkets. Despite the influx of merchandise from low-cost Asian producers and manufacturers, a growing number of consumers will demand more information of product ingredients.

What the doctor ordered

A prospective growth area for the industry is set to be the introduction of pharmacies into supermarket premises. While Coles and Woolworths have both acknowledged that pharmacies are an obvious opportunity for supermarkets, the Federal Government has intercepted this debate and announced that they will protect pharmacies from supermarket giants. Analysts estimate that supermarkets would benefit from the extra traffic generated by the proximity to a pharmacy.

The consensus is that the entry of supermarkets into the pharmacy market would lead to the eventual closure of stand-alone pharmacies, reduce the range of products available and affect access to advice and supervision of medication. Supermarkets lobbying for change to regulations argue that pharmacies operating from inside a supermarket could reduce the cost of some pharmaceutical products by 25%. Research suggests that consumers would use the convenience of shopping for pharmaceuticals within the supermarket environment.

Expansion and rationalisation

Enterprise numbers are set to increase by 1.0% per annum over the five years through 2016-17. The modest growth will be attributed to competitive pressures within the industry, which will lead to the continued rationalisation of smaller players. Total establishment numbers are expected to rise by 1.3% per annum over the next five years, driven largely by players such as ALDI. Despite this, the industry will undergo a period of restructuring, with operators refurbishing existing stores, closing down or selling unprofitable stores and opening large stores that sell an extended range of merchandise. Some independent operators will also expand into owning two or more stores. However, it is unlikely that the rise in store numbers will increase industry sales to the same extent. Hence, total sales will be spread over a larger number of stores.

Industry employment levels are forecast to rise by 1.4% per annum over the period through 2016-17. The anticipated growth in store number over the years is expected to increase the number of employment positions on offer. Overall, growth will be influenced by operators restructuring and closing underperforming stores. The implementation of self-scanning checkouts is also projected to influence the demand for staffing levels. However, some industry players such as Ritchies anticipated that the current price-wars across supermarket brands could actually lead to the loss of up to 40,000 jobs. It is envisaged that continued reductions in price by Coles and Woolworths in a bid to gain market share could threaten the livelihood of thousands of jobs across the industry. Rising by 1.2% per annum, growth in industry wages will stem from trends in shop trading hours and the continued demand for casual, rather than full-time employees, (particularly during peak periods) to reduce overall labour costs.

Key success factors

• Ability to control stock on hand: Due to the quantity of goods on offer, supermarkets require efficient stock management systems to record and re-order goods as required.
• Attractive product presentation: Store layout and design along with the presentation of products is important so shoppers to can easily locate goods. Store layout and design also enhances impulse purchases.
• Experienced work force: Supermarket staff need to be well trained and knowledgeable of product location to provide efficient service to customers.
• Proximity to key markets: Supermarkets benefit from being located in an area with high consumer traffic, as this bodes well for impulse purchases.
• Availability of car parking: Supermarkets car parking should follow a clear layout and sufficient spaces to cope with peak demand periods (such as the after work period between 5pm and 6pm).