Does everyone hate Woollies?

I had a brief email exchange with a journalism student last week, and I thought I would share my views with you (my verrrrry patient readers).

The background is that market research had been recently released indicating 72% of Australians don’t trust Coles or Woolworths and these levels of distrust have gone up since last year.

Q. How do you think Woolworths are faring in the Retail sector/Stock market?

Me:  Woolworths had been a darling of the stockmarket until quite recently.  Their main rival, Coles Myer performed poorly for many years, and Woolworths was much quicker in adopting and adapting ‘best practice’ from offshore (most notably through a close alliance with Wal-Mart).  Much of these practices are on the warehousing/stock management side of things.  Woolworths grew faster than Coles Myer and had better margins.  It made some strong moves in the non-supermarket space – with alcohol sales being particularly strong.

The split up of Coles Myer and the acquisition of the non-Department business by Wesfarmers has negatively affected Woolworths. The revamp of both the Coles supermarket business and K-Mart variety stores have put pressure on Woolworths’ (and Big W’s) margins and curbed their growth.  At the same time, Woolworths has been burnt by the poor performance of the Dick Smith business, and the large investments in a rival to Wesfarmers’ Bunnings are a long way from paying off.

Q. What implications might these figures of the survey have for the company and it’s competitors?

Me: As for the distrust aspect, this is far from surprising.  The supermarket sector in Australia is one of the most concentrated in the world.  The attempts by both Coles and Woolworths to further squeeze suppliers (as part of the drive to improve margins) have coincided with a period of perceived price inflation (although I’m not convinced the latter is actually occurring).

Consumers have apparently resigned themselves to the idea that these two duopolists are not really competing too hard. Stories of struggling suppliers seem to have fuelled this animosity.

But like the big banks, I’m not sure customer dissatisfaction will genuinely translate into consumer action.  There is a strong tendency to ‘stick around’ while grumbling.  Any incursion by Aldi (or to a much lesser extent Costco) is unlikely to have a big impact given the sheer weight of numbers (in terms of stores and ease of accessibility).

What do you lot think?

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Making a case for Aldi

While I’ve been criminally quiet around here lately, two of my colleagues (one a coauthor, one my PhD Student) have been busy penning a mighty fine teaching case about the Aussie endeavours of German supermarket giant Aldi.

For a lengthy discussion of Tom Osegowitsch and Markus Goelz’s Aldi Australia case see here.

Of course, I’ve been blabbering on about said mob for ages (back when I used to blog!), although mainly in the US context (weirdly):

See here, here and here.

Why Not Blame the Parents?

I was very disappointed by the recent supposed exposé of the “secret world of Trader Joe’s” by Fortune magazine.

For those who’ve never wandered the aisles of this US supermarket chain, Trader Joe’s is a rather quirky purveyor of intriguingly packaged groceries that conjure up vague images of some exotic South Pacific trading post (see left) – if said trading post had access to goods and flavours from around the globe.

The chain has been spreading quickly across parts of the US in recent years, such that it now has 344 stores in 25 states. It is a very private business, with little to say to the finance press, or media in general. Fortune’s story makes much noise about the ‘secrets’ behind their success:

– a focus on private labelled offerings (i.e. about 80% of products are internally branded), that it turns out are often sourced from FMCG giants who are sworn to secrecy about these production arrangements
– tightly controlled costs
– small (often standalone) stores
– very limited variety within each product and narrow offerings generally (so around 4,000 SKUs per store vs 50,000 for typical supermarkets)
– a tiny head-office, and considerable autonomy for regional and store managers
– well paid staff at all levels in the very flat organisation
– low numbers of in-store staff who are expected to be very multi-skilled
– loyal customers who are not deterred much at all by the limited range…

Does that sound familiar to many of you? Bring to mind the Aldi model, perhaps?

That’s no surprise. German giant Aldi has owned Trader Joe’s since 1979 (Correction to initial version of post: it was Aldi Nord that acquired Trader Joe’s. Aldi Süd, the other half of the Albrecht brothers’ empire owns the Aldi stores in the US (and Australia) – See more in comments section below ).

While the article acknowledges this, the author implicitly dismisses any impactful level of involvement by the German hard-discount giant in Trader Joe’s practices.

This is very odd. While it may be the case that significant elements of the Trader Joe’s business model were the brainchild of the firm’s founder, to ignore the similarities in competitive advantage is to miss a big part of this story. It also ignores the exciting prospects for the future.

Surely Aldi bought these guys because they could see the crossover and scope to transfer knowledge and practices. The eventual expansion of the chain across the country reflects Aldi’s own experiences, as does the extent to which consumer behaviours have been transformed when these stores open.

The Fortune article asks some great questions – such as whether these quirky brands and perceptions of uniqueness and ‘small-ness’ can be retained as suppliers must service a bigger and bigger market, and as consumers become aware of the ubiquity (and perhaps the multinationality) of the stores. The answer may lie in Aldi’s sustained advantage in both supply relations and as a consistently well-regarded firm. But ignoring the parent makes such an answer unlikely.

The other unasked question (and lesson) is the transferability of this brand and model beyond the US grocery market. Would a higher-end, more gourmet-tinged supermarket chain, built around a relatively low cost private-label strategy, work in other markets (such as Australia)?

The power of Aussie retail giants

I blabber on here regularly about the strategic decisions of Australia’s two biggest retailers – Coles (now part of the Wesfarmers empire) & Woolworths. The sheer size and breadth of these two firms’ operations warrant considerable attention.

The folks at ABC TV’s Hungry Beast have done a great job of bringing together the relevant stats and information about strategic agenda (and outcomes) for these two giants in a very neat, short presentation:

As their graphics show (although not explicitly), there is a lot going on in terms of Porter’s Five Forces.  Coles/Wesfarmers and Woolies have affected the economic structure of their industry(s) substantially so as to:

– reduce Rivalry (by acquiring competitors, and by building strength across retail markets so as to reduce the likelihood of competitive attacks)

– increase their Bargaining Power vis-a-vis Suppliers

– reduce Buyer’s choices of store operators (and thus their Bargaining Power)

– build substantial Barriers to Entry (although I would argue the Hungry Beast folks have misused the term greenfield).

The result is two firms that a massively oversized for the relatively small economy in which they operate.  Australia accounts for roughly 1.1% of the global economy (in terms of GDP).  Adding NZ (where these firms have much smaller coverage) only raises that figure to 1.26%.

Nevertheless, these firms come in at #26 and #28 on the Deloitte rankings of Global retailers by revenue. They are larger than all but 3-4 of the US’s supermarket chains, and of the British chains only Tesco is larger. Other than the US’s Kroger, Safeway and Supervalu, and Germany’s Edeka, no other large grocery chains operate in anywhere near as few countries (the rest are in 8-36 countries).

Seems like more evidence why I should be shopping at Aldi, my local farmers’ market and independent liquor outlet…

And thanks to Sakshi for bringing this clip to my attention.

2009 in Review

Ooops, I’m a little later this year with my reflections on 2009 as a blogger (last year I managed to do it on New Years Day – oh well, better late than never).

I can tell you that I post exactly 100 times (but 42 of those were in the first 3 months), and that there were just over 14,300 visits to the site. January and December were the two busiest months, with about 2000 visits each. The busiest day was Dec 2 when this post got over 200 clicks.

The most popular posts from 2009 were:

#1 Can Aldi beat Wal-Mart?

#2 A juicy tale of international expansion (about Boost Juice)

and very strangely, one about toilets at #3 Toto, we’re not in Tokyo anymore…

The aforementioned Dec 2 post Why don’t more producers sell on-line? came in at #4 (and thus has the highest average visitors per day).

#5 confirms a retailing bias with Capabilities do matter (about Zara, Ikea & H&M)

And the post from 2008 asked is there Too much Wii in this Blue Ocean? still attracts loads of readers.

Thank you to all who have visited, commented, argued and critiqued. I relish the engagement and the challenge. Here’s to a great 2010…