Australia’s food and grocery marketplace is evolving rapidly, with competition intensifying far beyond the familiar faces of Woolworths and Coles. New power players like Amazon and ALDI are reshaping the landscape with their innovative strategies and cost leadership, challenging the traditional retail hierarchy and pushing Coles and Woolworths to adapt or risk losing their market share. This article delves into the real forces driving these changes and their implications for the future of Australian agribusiness. 

Despite their impressive FY23 revenues of $64.29 billion and $40.5 billion respectively, Woolworths and Coles are not the largest or most powerful retailers operating in the Australian food and grocery marketplace. 

Amazon is the world’s largest e-commerce marketplace, with a global revenue of $502.2 billion in 2023.ALDI generated $98 billion in global revenue through its network of approximately 11,235 stores in 2023.  As of January 30, 2024, there are 590 ALDI stores in Australia generating a revenue of $10.7 billion. 

Amazon Impact

Amazon’s worldwide strategy is ‘cost leadership’ enabled by its advanced computing and networking technologies. Automated purchase processing, picking, and scheduling allows Amazon to minimise the cost of online retail. In Australia, the e-commerce giant has teamed up with hundreds of popular domestic and international food and grocery brands, including Carman’s, Arnott’s, and T2 Tea.

Amazon Australia’s expanding distribution capability is accelerating growth and heightening competition within the online food and grocery marketplace, eroding Coles and Woolworths market share and profitability in a wide range of food and grocery categories.  

ALDI Effect

Through a systematic approach to distribution centre, supply chain, store, supply base, product range and business model design, ALDI’s Cost of Doing Business (CODB) is estimated by industry analysts to be between 6% – 8% lower than conventional supermarkets. By offering market-leading manufacturers material volume, due in part to ALDI’s narrow product range, analysts estimate ALDI’s Cost of Goods (COG) is between 20% and 25% less than their competitors. ALDI goes to market with world class, products anywhere between 26% and 33% cheaper than their competitors. 

Implications

Amazon and ALDI’s presence in the Australian marketplace has forced Coles and Woolworths to spend hundreds of millions of dollars on supply chain infrastructure & modernisation, global partnerships, consumer and supply chain data analytics, private label ranges, convenience formats and their online retail offer in order to improve their competitiveness. 

Despite the investments Coles and Woolworths are making, Amazon low-cost e-commerce business model will win the online food and grocery while ALDI, powered by its global innovation efforts, will maintain its’ cost of doing business (CODB) advantage.   

Battle for Fresh

A retailers fresh food value proposition will continue to be a primary driver of where consumers choose to shop and subsequently grocery market share. Coles and Woolworths will be endeavouring to be recognised as having the best value fresh food.

With a higher CODB than ALDI, Coles and Woolworths will apply a great deal of price pressure on their fresh food suppliers, using their substantial volume as a carrot.

ALDI will continue to introduce improvements in their fresh food offering including strategic and incremental expansion of the range and Improvements and tiering of their fresh food offer, which will weaken any advantage Woolworths, Coles or independent grocery retailers have.

Generally speaking, independent retailers will struggle to compete on range and cost of doing business against the big four. The best of the independent supermarkets with the right locations, in store theatre, meat, deli, produce and grocery offerings coupled with service and an ‘X Factor’ will still have their place.

By 2026 Woolworths, Coles and ALDI will hold in excess of 80% market share making Australia the second most concentrated food and grocery marketplace in the world.

Export – nowhere to hide

Despite our proximity to huge Asian markets.  Australian fresh produce export volume dropped from 785,000 tonnes in 2019 to 699,888 in 2023.   

Export competitors have access to same genetics, technology, mechanisation etc…   

With major labour cost disadvantage Australia will remain the highest-cost southern hemisphere producer.  Growing export volume will be very tough.  Asia will prove lucrative for a few, valuable to others but inaccessible to the majority of fresh food producers.

So What?

The established market dynamics will maintain extreme downward price pressure on all Australian fresh food producers. Producers face exceptionally high standards for both quality and price.