Time for change: Are independents changing battlefields?

Spar-supermarketIt’s all too easy to forget about Australia’s independent grocery chains when the headlines are dominated by the Q1 performance of Coles and Woolworths. After all, even amid Aldi’s disruption, Australia’s two largest grocers still account for more than 60 per cent of the $105 billion grocery industry.

However, despite only maintaining 3.8 per cent of the market, Australian United Retailers (Foodworks) and SPAR Australia still maintain a combined retail footprint of more than 700 stores, representing many of Australia’s independent grocery vendors.

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It’s a declining segment of the market. Foodworks posted a 50 per cent decrease in net profit from its member operations in FY15. Similarly, SPAR Australia posted a $25 million slowdown in sales in FY13, despite expanding its name to 19 new stores, according to annual reports.

Consumers are moving away from independent grocers to the bigger names, which Foodworks’ chief procurement and commercial officer, Anthony Abdallah, concedes are better placed to compete on price.

“Supermarkets compete on price … The expectation our shopper has is that Coles, Woolies, IGA and Foodworks are all interchangeable, so you’ve got to have a similar offer,” he told Inside Retail Weekly.

“The effect that Aldi has in every market it goes to in the world is that it lowers prices. Unfortunately the major competitors follow it down in a race to the bottom.”

The turbulent period has forced Foodworks to divest from its company-owned stores, even after acquiring 45 supermarkets from Wesfarmers in 2009 for $35 million. In a similar fashion, SPAR Australia has also decreased its footprint from its FY13 peak of 141 stores, down to 129 in FY15.

Time to differentiate

Their dwindling forces just can’t keep up with the major’s everyday low-price offensives tying up Coles and Woolies, motivating a re-think of the independent grocery model. Abdallah said Foodworks is done playing by the rules of engagement set by the bigger players and will instead fight on the convenience front.

“The one-size-supermarket … I think that’s over,” he said.

“We’re saying, nah; we aren’t going to do that anymore. We’re going to have an offer for you as an express. We’re going to have an offer for you at a local level and we’re going to have an offer for you for pantry. That’s what underpins the strategy.”

In September, Foodworks announced plans to roll out three new store formats: Foodworks Supermarkets, which will be targeted at families and the primary shopping in major cities; Foodworks Local, targeting customers in regional areas with tailored offers; and Foodworks Express, which will offer a transient customer base a range focused on impulse categories and on-the-go meal solutions.

“If you are an independent, it’s about servicing a different customer need … We’re saying that price is important, but don’t compete on it,” said Abdallah. “What’s your point of difference? How do you carve out your niche in the community? You need to give customers a reason to come to a Foodworks and that’s all about ensuring that customers gets the variety of choice they need.”

The new formats are slated to roll out in 2017 in a move that Abdallah stresses is a permanent change in philosophy rather than an event. He expects the positive impact on Foodworks’ bottom line to be immediate. That confidence seems to have rallied the group, with the plans receiving unanimous support from network partners attending a company conference last week, IRW has learned.

Citi Australia’s head of research, Craig Woolford, also sees the new formats as a step in the right direction, telling IRW that there was room in the Australian market for variation following the success of diversified grocery markets overseas.

“Australian retailing needs more variation and innovation. The mainstream grocery retailers tend to have a very standardized format … Smaller and independent retailers can tailor their offerings better,” he said.

“If we look at global trends there are opportunities around convenience categories like smaller formats. I expect that there’s an opportunity for the likes of Foodworks if it develops the right model.”

However, Woolford warned that that operating a diversified portfolio with smaller formats changes operating metrics and requires an in-depth understanding of local customer demographics.

“The operating metrics become more acute for a smaller format store in that you’ve got fewer staff.  If your staff aren’t working well, you’re very exposed,” he explained.

“Small format stores have to win on convenience as they’re unlikely to win on price, so the process needs to be tailored to the local customer demographic.

“In some areas, it might be food to go. In other areas it might be convenience items. It’s the things that people typically run out of and need in an emergency situation.”

Abdallah said most of Foodworks’ 597 store network will become local or express offers in the next 18 months, with the supermarket format remaining in areas where a Coles, Woolworths or IGA are nearby in order to compete.

“We want a place where you can go and buy a different shaded offer with different brands and the things that you aren’t necessarily going to get at Coles and Woolies and still have a competitive offer on those grudge known valued items such as laundry powder, toilet paper and nappies,” he said.

“Convenience is not getting in there and buying a sausage roll and a pack of cigarettes. Convenience is knowing that you can go in and get whatever you need to do whatever you want to do.”

Following international trends

As Woolford indicated, smaller format grocery formats have proven popular in Europe, where SPAR International has experienced strong growth after tailoring its offering to local eastern European markets in Austria, Slovenia and Hungary.

SPAR International recorded 3.5 per cent in global sales growth to $33 billion last year, driven by a differentiated offer that includes convenience, neighbourhood, supermarket and hypermarket formats.

According to Euromonitor, SPAR has successfully localised its range to suit many of the nuances in the European market while also modernising its store formats and maintaining product ranges that provide traditional cultural foods for reasonable prices.

“SPAR uses a franchising model for network expansion in Eastern Europe. This model allows development that is more effective in the country with the help of local partners, who are well aware about local business specifics,” Euromonitor’s senior research analyst, Eastern Europe, Marija Milasevic, told IRW.

For its part, SPAR Australia is embarking on a store refurbishment program, but declined to be interviewed about its future plans or whether it will be pursuing a diversified format model similar to the ones SPAR maintains in Europe.

SPAR Australia believes regular contact with retailers and supporting them through promotions and store investment programs are critical to the success of SPAR’s independent network of retailers,” SPAR International stated in its FY15 annual report.

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