The Supermarket Cyclone”

Glen Darroch | Student ID 900067683

cyclone

The changing landscape of the supermarket sector has had exhaustive media coverage over the last 1-2 years, and has also been the topic of many a conversation at weekend BBQ’s across the country. The ongoing battle for the grocery spend of Australian consumers also provides a fascinating study into the approach to pricing and the potential impacts of the pricing strategy selected by retailers.

For years two grocery retailers dominated the Australian market, with Coles and Woolworths over 70% of supermarket revenue.

Revenue Share

Woolworths in particular enjoyed a long running purple patch, generating attractive returns for shareholders and building a reputation as a blue chip stock on the back of consistently outperforming the market.

However in recent times the market has become considerably more competitive, with Woolworths’ dominance eroded by the entrance of foreign giant Aldi and the revitalisation of direct competitor Coles. The pricing strategies implemented by both Aldi and Coles, and the reactions of Woolworths provide an interesting example of the various approaches to, and impacts of, pricing.

Aldi, the  “supermarket cyclone” is a global supermarket retailer with a low cost model of operation, which is unique in Australia and provides a sustainable competitive advantage in the market place.  Their price objective is largely profit based, although they have clearly pursued market share in the relatively early stages of their foray into Australia.  They capitalise on the fact that a significant portion of supermarket customers are very sensitive to price, particularly when economic conditions are reasonably tough as they have been in recent times.  Aldi has a clear understanding of its cost base and the returns required by shareholders, and this forms the basis for its pricing strategy.  Their low prices have caused angst in the local market, with the established majors losing market share, and average grocery prices declining by 2.4% at Woolworths for the March 2016 quarter and 2.4% at Coles for the June 2016 quarter

Aldi

Coles has had an impressive four or five years, regaining market share from Woolworths through a combination of improved customer offerings, revitalised store layouts and improved management.   Their pricing over recent years has been largely based on Everyday Low Prices (EDLP), promising consumers low prices every day, rather than having to wait until the next sale or discount.  Management has been clear about its objective to deliver sustainable low prices to customers through lowering costs.  Their pricing strategy is driven by a combination of customer value, maintaining a competitive position with Woolworths and others and generating acceptable returns for Wesfarmers shareholders.    However in more recent times the strategy seems to have become even more focused on the battle with its competitors, with prices across private label products further evidence of the ongoing “price war” between the two incumbents.

Woolies

Woolworths meanwhile, have been under increasing pressure as sales, and ultimately the share price, have declined from their once heady heights. In 2015, following a leadership change, the retailer decided to pursue an aggressive price cutting strategy aimed at regaining market share from Coles.  However a very important step in any pricing setting is to evaluate the response of competitors and to ensure that the bottom line impact on profitability is understood.  Woolworths’ heavy investment in price cutting triggered predictable aggressive responses from Coles and Aldi, which had ultimately reduced the profitability of all market participants and further eroded the value of the Woolworths business.

Cheap Cheap

So what can be learned from the battle being warred by Australian supermarkets? The key points for me include:

Companies need a clear pricing objective & strategy – as evidenced by the success of Aldi and the increase in market share for Coles

It is important to understand the likely response from competitors to changes in your prices and include that in your evaluation of a potential pricing strategy – which I suggest is an issue for Woolworths’ attempts to price cut in 2015/16

Retailers need to maintain a balance between shareholders and customers – shareholders expect a return and customers pay the bills!

At the end of the day companies exist to make a profit – so carefully consider the impact that your pricing decisions will have on demand and profit.

In the meantime, we customers should enjoy it while it lasts !

References:

Iacobucci, D, 2014, Marketing Management (MM4), South-Western, Cengage Learning, Mason.

Low, C, 13 July 2016, SMH, “Coles sharpens private label pricing to ‘squeeze’ Woolworths”.  http://www.smh.com.au/business/retail/coles-sharpens-private-label-pricing-to-squeeze-woolworths-20160712-gq3xz0.html

Greenblat, E, 24 August 2016, The Australian “Coles squeezed by food price fall”. http://www.theaustralian.com.au/business/companies/coles-squeezed-by-food-price-fall/news-story/4e4b8142cf60991c5b99e5bae63f92ea

Knight, E, 20 June 2016, SMH,”The Aldi effect: Why your grocery bill is shrinking.” http://www.smh.com.au/business/retail/the-aldi-effect-why-your-grocery-bill-is-shrinking-20160620-gpn157.html

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