Will Australia follow the UK in the grocery price war?

The price wars in the UK have been ongoing for the past few years and market dynamics have changed the way supermarkets run. Ever since the German discount stores Aldi and Lidl have entered the marketplace things have had to change. Aldi has become a mainstream name in many households around the UK and the main place to shop due to its low prices on commodity items.

No longer are the well-known brands such as Sainsbury’s and Tesco able to trade on their name alone, and simply offer weekly specials. They have had to embark on completely new strategies to lure back customers, setting aside enough cash resources to offer regular deeper price cuts to compete with Aldi. They’ve been forced to improve the quality of over 3000 products to try to differentiate themselves from the discount stores. This price war has damaged the big four supermarket chains drastically, where margins are reported to have fallen by 50% in the last 3 years.

The big question is: will Australia follow the UK and be forced into a more intense battle with the discount stores to maintain margins and market share?

Aldi opened its first store in Australia in 2001 and now have over 366 stores in NSW, Victoria and Queensland. A combination of cost-conscious shoppers and savvy marketing to families has encouraged more than half of Australian households to visit an Aldi store in 2014.

We are already starting to see an increase in the depth and frequency of weekly promotions and cut shelf prices on hundreds of food and grocery items amongst the big retailers. Over Easter, Coles and Woolworths slashed the prices of some products by as much as 50% to entice consumers.

However, Woolworths have been advised by investment bank UBS not to embark on an all out price war. Instead, they’ve been told to follow a strategy that enables them to reduce shelf prices by 30% on a thousand product lines to overcome perceptions its prices are too high, thus protecting its margin and minimizing fallout.

But will this be enough?

One thing for sure is the German discount chain Aldi have huge investment plans for Australia, and with an increasing market share they are certainly becoming a force to be reckoned with. Aldi’s planned $700 million expansion to WA and SA is expected to increase growth drastically. In WA alone Aldi plans to open 70 stores over the next few years. The recent acquisition of the Captain Stirling shopping centre in Nedlands in Perth’s wealthy western suburbs just shows the commitment this company has to compete with retail giants Woolworths and Coles. Just across the road, Woolworths have been fighting a losing battle to gain council approval to get a foothold into the area.

If our grocery stores are not to be dragged into a price war, the key must be differentiation. It will be interesting to see the changes over the next 12 months as this happens, Will they radically change their product offerings or focus on shopper experience? Recent behavior from the big two suggests not. And as prices come under pressure, will our stores continue to come down even harder on suppliers to reduce costs? The next two years will be fascinating to observe.

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