According to Smith, suppliers are moving away from Australia’s most infamous duopoly towards the greener pastures cultivated by German discount grocer Aldi which, he said, are on a war path towards eliminating their Australian competitors.
“Suppliers I’ve spoken to say that they’d rather deal with Aldi then with the major supermarkets that have the overheads of 100,000 staff, plus the huge overheads of public listing,” Smith told Inside Retail Weekly.
“They’re going to take over … [Coles and Woolies] would have to sack virtually 80 per cent of their staff to compete – they are doomed,” he continued.
Is Smith right? It’s no secret that Aldi has been doing a roaring trade. Figures released last week revealed that Aldi’s year-on-year sales growth to December 2014 was $1 billion, and it isn’t the only discount retailer making moves down under either. Since beginning its physical move into Australia in 2011, Costco has also managed to etch out a cult following and, as Inside Retail Weekly understands, French sporting goods retailer Decathlon is also on the brink of opening physical locations on Australian shores.
The nitty gritty truth
These three retail names have a few things in common. They all focus on a value offering underpinned by an extensive private label range and global buying power. It’s this combination that has Smith calling end times on Australia’s largest supermarkets, and as Costco Australia’s CEO Patrick Noone explains, the nitty gritty of the discount retailer supply chain is about more than just slashing price tags.
Speaking to Inside Retail Weekly, Noone outlined Costco’s no-frills, efficiency first approach to its supply chain that extends from the vendor right across to the shop floor. He maintained that ultimately, the number one thing retailers need to focus on is efficiency and translating that to value on shelves.
“We’re a concrete floor, opened frame ceiling retailer that sells everything on pallets. We stock the floor with pallet jacks and forklifts – it’s extremely efficient in terms of moving freight,” Noone said.
“We’re buying everything on pallet quantities and ideally on full truckloads, which creates efficiencies of scale for the vendor shipping to our distribution centre … Then we ship it out to stores on the same day.
The success of models that have been built from the ground up to deliver low prices to market is indicative of times to come, according to Gary Mortimer, associate professor and food retailing expert at QUT Business School. Speaking to Inside Retail Weekly, Mortimer he said while he doesn’t think Coles and Woolies are “doomed”, the private label approach of discount operators like Aldi gives them a distinct advantage in the current retail climate.
“Because [Aldi] has a private label product, it owns the intellectual property and is able to avoid paying wholesalers and brand owners,” he explained.
“It can buy it at a wholesale price, put a margin on it and put it in store … Its operation model allows it to do that at a fairly low price.”
Make love, not war
Noone explained that Costco uses its private label to create value when there was an excessive amount of brand equity in an item, creating competition in the warehouse to add to value on the shelf. However, while he admitted that its global presence was a bonus, he pointed out that the vast majority of its food offering was Australian-made for domestic consumption.
“You don’t get leverage out of Vegemite by being a global vendor,” Noone said.
“It’s a mutual interest to sell more products. We believe that having a long-term relationship with partners helps us both to understand each other’s issues better and ultimately drive that value.”
Australian suppliers have a long and tumultuous history with their Australian retail partners. Coles and Woolworths have repeatedly come under fire from the Australian Competition and Consumer Commission for their treatment of suppliers. Most recently, the ACCC has launched court action against Woolworths, alleging that it made undue, unreasonable and unfair demands for money from suppliers in an attempt to plug a $50 million dollar hole in its profits in the weeks before Christmas 2014.
As the big supermarkets defend making war, Australian Food and Grocery Council (AFGC) CEO Gary Dawson pointed out that although Aldi drives a hard bargain, it is ultimately a surprise free partner.
“Aldi is very tough to negotiate with, but once an agreement is reached it’s a very straightforward and efficient relationship,” Dawson told Inside Retail Weekly.
“Suppliers tell us that with Aldi, they don’t get nasty surprises. They’re not being asked to make top up profit gap payments. They aren’t hit with retrospective charges, asked for additional rebates or funding … There’s quite a history of that with the other major retailers.”
Smith isn’t convinced; he argues that global buying power ultimately makes too much sense for international discounters like Aldi to resist and suggest that in the long-term, the German grocers will drop Australian suppliers off the deep end.
“I have absolutely no doubt that Aldi will sever its relationships with Australian suppliers … It will have pressure from Germany to buy virtually everything from low cost countries – the greed is unlimited,” he said.
For its part, Aldi has indicated that it is committed to long-term and sustainable relationships with Australian suppliers.
“We only source products from overseas when we can’t find the product, quality, efficiency or innovation we seek here in Australia,” a spokesperson said.
Battle of the German giants
While the success of discount retailers like Aldi and Costco is shifting consumer expectations, Mortimer said their increasing familiarisation with the discount model will make it easier for prospective entrants like Lidl to shake the pot if, or when, it does move into Australia.
“Lidl is a direct competitor to Aldi and it’s much bigger. It has a bigger foot print and it carries national brands like Coca Cola and Cadbury alongside its private label,” he said.
“Aldi has conditioned shoppers to understand what a discount food retailer provides and that will provide Lidl with faster growth into the market. We’ve seen that in Europe, Britain and Ireland. Over there, you literally see a Lidl across the road from an Aldi.”
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