Supermarket Wars – How Are Suppliers Doing?

Woolworths Store

                        The Australian Supermarket landscape is a battleground to retain market share

Price Gouging and Squeezing Suppliers

Since 2007, Coles and Woolworths with 75% market share (described by the ACCC as a “Cosy Oligopoly”), were able to exploit price increases, while pressuring suppliers for more promotions funding. The Independents, Metcash/IGA (9% share) simply tagged along with this.
Price gouging allowed Aldi to gain a foothold, with its Everyday Low Price model and range of only 1350 own brand products, cleverly marketed as “Like Brands, Only Cheaper”.

Disenchanted Coles and Woolworths customers quickly discovered, they could save 20% to 25% shopping at Aldi and its market share grew from 5.5% in 2007 to 12.5% in 2016.
Loyalty Lost and Shopping Habits Changed
Customer loyalty is low, with 75% of Coles and Woollies customers now doing multiple shops at competing retailer banners. Habits were changed through loss of trust and the price creep premium outweighed the convenience of a “one stop shop”. Price creep often takes place at the end of a promotion, the rationale being few customers will notice and the supplier will always pay for the next promo deep discount, to condition shoppers.

Price is First Response

Woolworths weekly catalogue
Weekly catalogues-both 40 pages!! – 1/2 Price Deals on 15 pages  for Coles and 12 pages for Woolworths

Up until 2015, Woolworths profit margin was the highest in the world, around 7.4%, compared to Coles at 4.6%, which started its “Down Down” prices campaign in 2010, to take market share and create some strife for Woolworths and Metcash/IGA. Since 2015, Woolworths has responded with price cuts, worth $1Billion. For the first time since June 2008 Woolworths sales growth is now superior to Coles and its profit margin is now closer to Coles at 5.4%. What’s very interesting is Aldi’s reported profit margin is now higher than both Coles and Woolworths at 6%, due to its simpler and more efficient operations.
Coles has pledged to defend its share, and the battle is expanding in higher margin fresh categories. Woolworths continues to advertise weekly price cuts and 1/2 price promotions show no sign of reducing.

Fresh food section

                                                     Battlefront expanded to Fresh Food Categories

Range Rationalization

In a belated response to Aldi, Coles is cutting its range and keeping house brand simple with its Coles brand, while shifting 2500 branded lines to Every Day Low Price, with prices locked in for 6 months.

                                                                          Coles ELDP 

Woolworths, has had a confusing 3 tier, price and quality based house brand strategy for some time. That doesn’t seem to be getting any simpler, despite recent changes.
The plan to replace Homebrand with Essentials is incomplete and after 12 months, it looks unlikely Homebrand will disappear. Woolworths phantom brands such as Baxters, Smitten and Apollo (petfood), and Hillview (cheese) have also been introduced. Woolworths says it is committed to promoting brands and for now is not trying Everyday Low Pricing.

Suppliers Lose, Retailers Gain

Supplier share of Total Sector profit declined from 69% to 60%, between 2009 to 2015. Over the same period, Retailer share increased from 31% to 40%, easing in 2016. Trade Spend shows a similar pattern, increasing by 2.5% of Sales from 2010 to 2015 and easing in 2016, with no increase likely in 2017.

How Can Suppliers Respond ?

Brand strength, product portfolio and innovative new products are big advantages, in a trading landscape of price deflation. In our view, Suppliers have little option but to review promotion mix, frequency and discounts, to stem the profit leak to retailers, not receptive to price increases.
As a supplier, how have you responded and what are your priorities in dealing with the retail chains?
These are challenging times for suppliers, looking to balance Sales and Profit, in a retail environment where branded product ranging is decreasing. Good Systems and Processes for Sales and Promotion Management are essential, to optimize Sales and Profit while avoiding the risk of product deletion.

If you are stuck trying to achieve this objective, using disjointed spreadsheets, take a look at our affordable, user friendly, cloud based solution, that can be implemented in 4 to 6 weeks, at www.tpm360.com.au or to arrange a discussion and demo, to see how easy it can be to manage the complete Sales and Promotions process, contact us at www.tpm360.com.au