German supermarket Aldi’s aggressive expansion in Australia will have a significant impact upon the viability of independent local grocers, including the struggling Metcash, analysts say.
Aldi has said that it will expand from its current 350 stores to 800 in the long term, but small stores are already being squeezed.
In Sydney’s north, for example, petitions have already started to prevent Aldi from opening a store on the site of a current independent grocer.
IGA Westleigh was notified by the centre management that its lease would not be renewed.
Supplied by wholesaler Metcash, IGA stores have unified branding and products across the country, but each store is run independently by a local owner.
A local resident suggested that at Westleigh, Aldi put in a bid for the lease that the IGA could not compete with at the small suburban mall.
But some locals are protesting the loss of what they believe has become a central part of their community via initiatives for local sporting clubs and rewards programs, said Steve Lean, who lives in the area.
The residents are also concerned that the Aldi’s specific product range may mean some older regulars are unable to find the products they need, said Mr Lean.
“I don’t think it fits the suburb’s dynamic,” he said.
“It wouldn’t take you a minute to find 10 people in the street who say, ‘no I don’t want it’.”
In a sign of Aldi’s determination to expand, the Westleigh store will open up five minutes drive from the Thornleigh store currently under construction.
Aldi has not responded to a request for comment.
The signs don’t bode well for Woolworths and Coles, either, but they are even worse for Metcash and independent grocers around the country, argue JP Morgan and Credit Suisse.
Aldi’s expansion will initially take some market share from Australia’s two biggest supermarkets, but as they work to claw that lost business back, it will come at the further expense of independent grocers around the country, JP Morgan analyst Shaun Cousins said.
While suburbs on the east coast may be becoming inundated now, the biggest impact of the Aldi expansion will be felt on the west coast, where the German-owned supermarket chain is yet to make its presence felt.
Independent Grocers Australia (IGA) is controlled by Metcash, and has a market share of 25 to 30 per cent in South Australia and Western Australia, while they only hold 15 per cent of the market nationally.
The impact of Aldi on competitors on the east coast took a number of years after it opened its first store in 2000 but “we expect that to happen quicker on the west coast” said Credit Suisse analyst Grant Saligari. “There are far fewer stores, mostly concentrated in Perth.”
Other analysts believe that Metcash’s spending commitments for the 2015 financial year will not be enough to offset the threat of the big chains and Aldi.
In a note to investors, Deutsche Bank analyst Michael Simotas said he was “wary that the $40 - $45 million operation expenditure budgeted will not be enough to stem the sales weakness”.
Metcash has not responded to requests for comment.
But it’s not all gloomy for the grocer, as Aldi’s expansion and the continued dominance of Woolworths and Coles has forced Metcash to focus on their more profitable convenience store models, said JP Morgan analyst Shaun Cousins.
Following the release of Metcash’s financial year results on Monday, CEO Ian Morrice confirmed to Fairfax Media that Metcash would refocus its efforts on the convenience store business.
“It would be fair to say in recent years, those have been declining businesses for us as we’ve been trying to institute various recovery plans for the supermarket business,” said Mr Morrice.
“But actually the convenience business . . . has real growth potential.”
On Monday Mr Morrice announced that Metcash’s net profit fell 17.9 per cent to $169.2 million.
The only improvements to Metcash’s bottom line came out of the Mitre 10 Hardware distribution and its liquor businesses, two areas with growth potential along with its convenience store push.
Earnings from Metcash’s core food and grocery business, which operates and supplies independent grocers, fell 19.5 per cent.
But Australia can expect to see new levels of supermarket revenue efficiency if Aldi’s rapid expansion in the UK is anything to go by.
In the past year, Aldi has opened up a 50 per cent advantage over its rivals when it comes to a key measure of retail success, how much revenue has been generated per square meter of retail space - known in the business as “sales density”.
Aldi is hitting £25 per square foot, while UK giant Tesco is only achieving £15 per square foot.
In terms of sales per full time employee, Aldi has doubled its advantage over its rivals in the UK.