Posts Tagged ‘supermarkets’

Does everyone hate Woollies?

May 16, 2012

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?

Making a case for Aldi

April 20, 2012

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.

Dueling Duopolists, or, who should we cheer for when bullies battle?

March 24, 2011

The Aussie news headlines have been buzzing in recent days with the competing cries of our embattled brewers and the ‘on the side of the consumer’ supermarket giants, over an alleged effort by the latter to sell the majors’ beers as ‘loss leaders’.  See here and here for a reasonable summary.

This is the latest staple product to get this sort of a run (after milk and petrol) as Woolworths and the revitalised Coles (as part of Wesfarmers) engage in some much-missed competition.  Of course, it isn’t competition via ‘across the board’ price cuts, but, rather, through trying to switch buying preferences from one chain to the other (utilising the grocer’s associated liquor chains).

And poor old Foster’s (and presumably the much quieter Lion Nathan) are worried that this (alleged) predatory pricing will hurt their margins, and those of independent liquor retailers.

The reality of all this is that we’re talking about two pairs of behemoths locking horns, and competition here is a very different beast to that envisaged in perfect markets.  Look at the numbers:

– Foster’s (48% market share) and Lion Nathan (44%) amount to 92 percent of the Aussie beer market

– Woolworths and Coles/Wesfarmers amount to roughly 50% of the Aussie liquor retailing market (with most other sales through small, independent retailers)

– Woolworths (around 40%) and Coles/Wesfarmers  (around 35%) amount to roughly 75% of the Aussie grocery market

Those are the sort of market shares we called oligopolistic, or indeed duopolistic, with competition often reaching a calm equilibrium through effective price signalling and/or maintenance of market share.

Foster’s are kicking and screaming, however, due to concerns about the buying power of the two retail giants. Now, if Foster’s had a significant retail arm it might be able to curb such a threat (and earn more of those nice rents from the duopoly power).

But back in 2003 the brewer sold off Australian Liquor and Hospitality Group (ALH), which operated 131 hotels and 109 bottle shops. ALH now runs 285 licensed venues and over 450 retail liquor outlets.  And guess who now owns 75% ALH… Woolworths.  It seems Foster’s handed Woolworths the stick it is now being beaten with.

There’s talk that this behaviour will all come under the scrutiny of some eagle-eyed politicians in Canberra in the coming weeks.  Now, we’d hope they know a lot about duopolies (i.e. systems with two powerful parties)…

Why Not Blame the Parents?

October 15, 2010

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)?

Another one bites the dust

July 2, 2010

The highly oligopolistic Australian supermarket industry just lost another multinational player.

South African grocer Pick’n’Pay (#143 on Deloitte’s list of global retailers by size) has sold off its Aussie holdings (the Franklins branded supermarkets) to our biggest grocery wholesaler Metcash.

Metcash (which was once South African-owned) supplies the very large network of 1000+ independently owned IGA stores. The 77 company-owned Franklin stores will soon be sold off to what are effectively franchisees locked into a supply arrangement with Metcash (now there’s a nice strategic play with respect to reduced bargaining power of buyers).

Franklins has proven a very tough company to run. It was sold off by Hong Kong’s Dairy Farm (#128) back in 2001 after they couldn’t turn a decent profit against the Woolworths and Coles behemoths.

Irrespective of the slow rise of Aldi and prospect of a Costco challenge, the rivalry in this market is mighty nasty for anyone without the big two’s economies of scale and reach.