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Last Trade - 29/07/21

Sector
Consumer Cyclicals
Size
Large Cap
Market Cap £134.30bn
Enterprise Value £132.11bn
Revenue £134.29bn
Position in Universe 60th / 7008

Apples and Oranges: ALDI hits Australia's retail giants where it hurts

Fri 19th June, 2015 3:18am
By Byron Kaye 
    SYDNEY, June 19 (Reuters) - Fresh fruit and vegetables are 
the new frontline in ALDI Inc's  ALDIEI.UL  assault on 
Australia's $70 billion supermarket sector, as the German 
discounter looks to beat the most profitable duopoly in global 
groceries at their own game. 
    For the first time, ALDI's Australian arm plans to ship 
fruit and vegetables direct from farms in Australia to its 
stores, according to one major fruit supplier, removing the only 
competitive advantage for incumbent heavyweights Woolworths Ltd 
 WOW.AX  and Wesfarmers-owned  WES.AX  Coles. 
    "It's not good news if you're Woolworths and Coles. I think 
they're scared already," said Greg McMahon, owner and executive 
chairman of Australian No. 3 citrus grower Seven Fields Pty Ltd, 
which currently sells oranges, mandarins, lemons, grapefruit and 
mangos to ALDI through intermediary distributors. 
    McMahon said ALDI had told him it planned to set up a 
distribution network for fresh produce so that, rather than 
relying on unaligned supply chain operators, it could deliver 
exactly the fruit and vegetables each store needed, straight 
from the field. 
    This would hit Woolworths and Coles where it hurts. For 
decades, the duo have fought over who offers the freshest fruit 
and vegetables, while ALDI's main weakness since it entered 
Australia 14 years ago has been its lack of a competitive 
fresh-food alternative. 
    An ALDI spokeswoman declined to comment directly on the 
company's plans for fresh produce in Australia, but told Reuters 
that a "direct-from-farm supply model provides efficiencies for 
our suppliers and value for our customers". 
    "As such, ALDI will continue to explore a variety of supply 
chain models," she said. 
    ALDI's strategy of weakening the majors by copying their 
strengths is not limited to Australia. In Europe, the world's 
largest discounter is challenging the likes of U.K. grocery 
giant Tesco  TSCO.L  by expanding its fresh produce offering, as 
well as opening in-house bakeries and offering a wider range of 
branded products. 
    Since opening two stores in Sydney's outer suburbs in 2001, 
the family-owned chain from the city of Mülheim an der Ruhr has 
grown from being an industry oddity with no-frills stores and 
unfamiliar labels to the third-largest player with 372 outlets 
and 8 percent of the market. 
    Lately it has begun revamping its stores complete with fresh 
produce prominently displayed close to entrances, where once it 
was pushed to the back. 
    "It's half the price and a lot of the products are the same, 
just with different packaging," Nina Patz, a business 
development manager, told Reuters while shopping in a central 
Sydney ALDI store. 
    ALDI isn't the only foreign grocer building a beach-head in 
Australia. U.S. membership-based discounter CostCo Wholesale 
Corp  COST.O  has amassed about 5 percent market share since 
2009. ALDI's German rival Lidl has been considered a likely 
entrant since registering its trademark in Australia 15 years 
ago, although the company said this week it had no plans for the 
country. 
         
    FEELING THE HEAT 
    The strain - from the foreign competition but mainly from 
Australia's sluggish economy - is starting to show on the two 
market leaders, which for half a century have banked more than 
70 cents of every supermarket dollar spent in the country.  
    Australia's No.1 grocer Woolworths on Wednesday warned of 
its first profit decline in two decades and announced the shock 
resignation of its CEO, as it cut hundreds of jobs as part of an 
restructure unveiled last month. 
    The stock of both companies has underperformed the broader 
share market this year, but while Wesfarmers has been flat 
Woolworths' stock has slumped 23 percent from its 2015 high in 
February. 
    Analysts said Woolworths' woes were a sign the incumbents 
could no longer cling to margins of 8 percent - twice the global 
average - in the face of leaner raiders like ALDI. 
    "The concentrated market structure in Australia is a good 
one for returns but they've pushed it too far," said David 
Thomas, a retail analyst at CLSA. 
    "That's where the attraction comes from for new entrants to 
the market and that's why ALDI has been so successful in the 
marketplace, and why potentially others are going to follow." 
    Analysts expect Woolworths and Coles - the world's 18th and 
22nd most profitable retailers in any category - to respond by 
slashing shelf prices and re-thinking their involvement in a 
range of distracting side projects. 
    Coles's market-leading Bunnings home improvement chain is 
profitable, but Woolworths's Masters hardware stores, which it 
jointly owns with U.S. hardware chain Lowes Companies  LOW.N , 
is expected to amass losses of A$500 million in the three years 
to mid-2015. 
    "The strategy to keep pushing margins up to cover for that 
business (Masters) has just been a really, really bad strategy," 
said a retail analyst who asked not to be identified. 
     
 
 (Reporting by Byron Kaye; Editing by Stephen Coates) 
 ((byron.kaye@thomsonreuters.com; +612 9321 8164; Reuters 
Messaging: byron.kaye.thomsonreuters.com@reuters.net)) 
 
Keywords: AUSTRALIA RETAIL/ALDI
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