The first two stores were to open in the Adelaide suburb of Prospect and the Melbourne suburb of Dandenong, with planning approvals secured for further locations.
Kaufland had said last year it expected to open between eight and 12 stores in 2020 although the more realistic timeframe, allowing for planning and development approvals, was likely to delay most of those openings until next year.
The final cost of the exit will depend on the sale of some of the properties Kaufland had acquired, compensation to developers and related parties and severance packages for staff.
Kaufland had opened and staffed a head office in Melbourne and had acquired a number of warehouse and retail sites as well as offices in Adelaide, Brisbane and Sydney.
The decision has left around 200 staff, developers and suppliers in the lurch, none of them receiving any forewarning that Kaufland had decided to exit Australia to focus on the “great growth potential” of European markets.
Kaufland is owned by the Schwarz Group that also owns the Lidl supermarket chain and is the fourth-largest retailer in the world. There are 1300 Kaufland stores across Europe.
Subdued consumer spending and the outlook with low wages growth and other menacing Australian economics were no doubt a factor, along with the competitiveness of the grocery and discount general merchandise categories.
However, the key issues were likely to have been the high costs of establishing a distribution and retail store network, an equation not helped by a flawed rollout strategy for its hypermarts, and the intense competition of entrenched retail brands.
Unlike Costco and Aldi, which both implemented a measured store rollout program that allowed them to consolidate before venturing into new markets, Kaufland was following the same aggressive expansion in multiple markets playbook as the failed Woolworths Masters Home Improvement chain.
While Kaufland was obviously attempting to achieve scale quickly in their Australian operation, the strategy adds to the cost of store development, distribution, staff recruitment and marketing.
The strategy was a key factor in the failure of the Masters Home Improvement chain, with the cost of each of its stores significantly higher than Bunnings and flaws in store formats entrenched.
The strategy simply translated to a long tail for a return on investment, particularly with the tight margins for the grocery sector and the oversupply of floorspace in the discount general merchandise category.
Ironically, the failure of the Woolworths hardware venture could have benefited Kaufland if the German retailer had opted to establish an initial batch of stores in the former Masters Home Improvement sites.
Negotiations may not have succeeded, with a Woolworths management wary of a new competitor for their grocery and general merchandise chains, but they could have been more fruitful with the companies that bought the properties from Woolworths.
The Masters Home Improvement locations were not necessarily prime sites but would be likely to have been more successful for a destination food and general merchandise hypermart than a hardware store.
Kaufland wanted to open stores of more than 20,000sqm with around 400 car parks, offering a merchandise range of up to 40,000 products.
The German retailer’s timing for entry to the Australian market was poor, not just in respect of missing out on the Masters sites, but also because it gave the US hypermart chain Costco a flying start and encountered a period of industry consolidation amid subdued retail sales growth.
Costco is generating sales of around $2 billion from 12 stores and is profitable.
Costco, Coles, Woolworths and even Aldi would be delighted with Kaufland’s withdrawal from the Australian market without opening a single store. Not only does the exit eliminate a new competitor but it also sends a warning signal to other international retailers about the difficulty of breaking into the mature and highly competitive Australian market.
However, for Metcash the news was no doubt greeted with sheer relief as the grocery and liquor wholesaler battles to secure sales, margins and earnings, buffeted by fierce competition in the categories and the loss of key chain contracts with Drake supermarkets and 7-Eleven.
Metcash half-year results to December 31 for the grocery and liquor channels stabilised, albeit recording a fall in profitability, low revenue growth and the contract losses have prompted Credit Suisse to suggest the wholesaler should spin off its food distribution arm.