Coles and Woolworths weighing up strategies

ColesWoolworths are certainly supplying us with fodder! I read with interest Gary Mortimer’s article on Lidl this week. To put a somewhat different spin on the possible outcome if they do indeed enter Australia, please read on.

On March 9, Chris Pash from Moody’s wrote that since opening its first Australian store in January 2001, Aldi’s store base has grown to more than 360.

Based on Nielsen estimates, Aldi now has an eight per cent share of Australia’s grocery market and an 11 per cent share across the east coast, which includes NSW, Victoria, and Queensland. Its gross annual sales reached more than $5 billion in 2014.

Moody’s expects Aldi’s store growth on the east coast to continue at five per cent to six per cent a year over the next five years. This is about double that expected for Woolworths and Coles.

Enter Lidl, with annual sales of $128 billion – a formidable competitor. While not confirmed, they are applying for home brand trademarks and they are apparently talking to logistics companies.

Traditionally, Lidl’s main competitor has been Aldi. However, Lidl is sure to take market share from Coles and Woolworths, who are already feeling the pinch as Aldi grows. Woolworths’ first quarterly decline in sales in 20 years, announced recently, resulted in CEO, Grant O’Brien, falling on his sword this week.

 Aldi has been clever to position many of its stores close to Woolworths and Coles. Will Lidl do likewise? Or do they primarily plan to take on Aldi? With Aldi nowhere near saturation point, it might make sense for them to open where there is no Aldi and attempt to lock them out.

Wherever Lidl open, in the Australian environment they are inevitably going to steal market share from Coles and Woolworths, while Aldi will continue to do likewise.

Rumour has it that Coles and Woolworths are in full flight strategising mode.  The population is not growing in proportion to the market share that they are and will be losing. The predicament is what to do.

If they downsize, this has huge consequences relating to scale. Their entire logistics operation is geared to a certain projected growth in volume. Their staffing strategy is also geared towards at least current volumes. 

We have seen Woolworths shedding 1200 jobs recently and a few senior executives jumping ship, including the CEO. There’s more than a small sense of irony in the fact that they are shedding jobs but advertising on TV for new recruits.

If Woolworths and Coles cannot deliver a meaningful strategy to their teams, more people will leave voluntarily as sales tighten, even before the chains start on redundancies.

Going upmarket is not a strategy they can follow. The market is too small. Rationalising their ranges will mean reduced sales. Already, many people are shopping for basics at Aldi, and going to the other chains for goods that Aldi does not stock.

Diversifying is another option, but this is not so easy, as Woolworths has found with Masters. Bunnings is a well-oiled retail operation and proving to be a formidable competitor.

So, what is the prognosis? One scenario is that Coles and Woolworths merge and that many stores are then closed. Wesfarmers must surely be considering this option.

Another is that they both shrink and/or look to diversify into a market where they wouldn’t have a huge competitor – ie, do the opposite of what Woolworths did when it pitted its Masters brand against Wesfarmers’ very well established Bunnings. And there are probably a whole lot more options that they are considering.

Meanwhile morale at all levels in the organisations will be a challenge in the months and years to come.

Stuart Bennie is a retail consultant at Impact Retailing and can be contacted at [email protected]actretailing.com.au or 0414 631 702

Comments

7 comments

  1. Avatar

    bigvic posted on June 19, 2015

    There is a greater likelihood of pink elephants flying than ACCC allowing a Coles-Woollies merger. Lidl may come and inevitably it will cut into the market shares of Aldi , Coles and Woollies. All Coles and Woollies vcan do is fight them on price and securing sites. But from what I've seen in Europe Lidl is not as appealing as Aldi, so they will have to find ways to be even cheaper. and getting sites in Oz will prove very hard.Lidl's impact will be nothing like Aldis. reply

  2. Avatar

    Brett Stevenson posted on June 19, 2015

    Couldn't agree more bigvic. I think even pigs might need to be flying for the ACCC to allow that. I would think if Wesfarmers were considering this option of merging Woolies and Coles, the perhaps Richard Goyder has been in his job for too long, or one of the large consulting firms has been doing a lot of fancy negotiating to pick up some easy dollars. reply

    • Avatar

      bigvic posted on June 19, 2015

      Brett, i have too much respect for the large consulting firms. It's one of them that's been well identified, even in the Senate, that helped turn Coles around. i suspect the journalist has been reading too many weekly Celebrity magazines and decided to invent his own story for a Sensational Scoop Headline !!!! reply

  3. Avatar

    Old Retailer posted on June 19, 2015

    Sorry Stuart- you have floated a stupid idea that would have absolutely no chance of succeeding. Those of us old enough to remember can recall those days when Woolies was the leader and Coles were desperately trying to emulate them, how times have changed. Re-planting ex-Tesco's execs might not be the best answer (just have a look a the struggle Tesco's are having) Retail needs a retailer as CEO - financials are important but I have seen few CFO's that double as merchants. Oh for the Woolies merchants of old Harry Watts, Reg Clairs, Paul Simons, Roger Corbett. I am sure an adequate replacement can be found for Grant without casting the net too far from home. reply

  4. Avatar

    Brett Stevenson posted on June 19, 2015

    I tend to be of the view that whenever consulting firms are engaged to do a strategic review or such like, it is a default acknowledgement that the current management aren't up to it. I daresay you are right about their impact on Coles but that says a lot to me of the Coles management. This is why all the large accounting firms are really pushing their consulting services hard at the moment. It's easy money for them. Many in senior management of large corporations never take a risk in their lives yet expect and receive very very large salaries. Their fall back position is 'let's engage a consultant to do what we are paid to do but haven't got the smarts to do' . And who bears the cost of all this - the shareholder. Whenever I see a private equity deal being put together (as we see at the moment in retail) I think that also is an acknowledgement that the current management have failed that company badly (as well as coming under the spell of these avaricious investment bankers who make a quick killing in fees). And who pays for this corporate greed - the shareholder again. reply

    • Avatar

      bigvic posted on June 19, 2015

      From the outside you may appear correct. sometimes they haven't got the smarts. sometimes they haven't got the guts. But I've seen it from the inside. The best firms and the best consultants have world-wide connections , resources and experience they can bring to a local company and will often have the skills to prepare the paths for the local management to follow. certainly there are plenty of firms which don't have the so-called smarts. i know quite a few which have enough smarts to know when to call in outside help to run their place better.No shame in that reply

  5. Avatar

    Stuart Bennie posted on June 21, 2015

    Gentlemen, I stand chastised. But never is a long time. The ACCC must maintain a level playing field and not allow unfair competition. How low does Coles and Woolworths market share need to drop and how long will it take? I don't know Personally hate celeb magazines but not averse to a scoop. Remember you read it first on Inside Retail !!!! And by the way there is no way that Woolies and Coles can compete on price. Aldi and Lidl have it down to a fine art and will leave Coles and Woolworths for dead. Incidentally someone told me that Princess Charlotte is not Caroline's baby. She ordered her on line. I lied about the celeb mags. I love them reply

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