It was expected that 2020 would be a challenging year for Australian supermarkets, with intense competition, increasing costs, emerging global competition, brand repositioning and an ever-changing consumer, but no one could have predicted such upheaval and disruption of the industry. With the Black Summer bush fire crisis and floods at the start of the year followed by the COVID-19 pandemic and strict lockdowns, the retail sector has faced unprecedented times requiring a rapid response to market demands, supply chain challenges and drastic changes in consumer shopping behaviour.
The Australian grocery sector is worth AUD116.2bn and is dominated by 4 main retailers who account for 80% of the market; Woolworths, Coles, Aldi and Metcash. Metcash is the country’s largest grocery wholesaler and its retail brands include IGA, Supa IGA (supermarkets) IGA X-press (convenience stores), IGA Fresh, Foodland and Friendly Grocer.
The Independent Sector also has strong regional players such as Drakes (South Australia and Queensland) and Harris Farm Markets (New South Wales and more recently Queensland). Other companies include Australian United Retailers Limited (AURL) which operates nationally through the FoodWorks brand, and Costco. The industry had also been gearing up for the entrance of German discounter, Kaufland, but having invested heavily in real estate, announced their surprise exit from the Australian market at the beginning of 2020.
Department store David Jones is another player in the market with its premium foodhalls and standalone foodstores. It has recently undergone a strategy review to streamline its food offering with the closure of some stores, revamping others and an increased focus on e-commerce. It has also partnered with petrol giant BP to open several high-end convenience stores with plans to launch more in the next year.
Amazon has also been competing in the grocery market since 2018, offering a limited range of ambient food and beverages under Amazon Pantry. It is likely that AmazonFresh will enter the market over the next five years and is anticipated to continue to use low-price strategies to gain more market share.
The ongoing dominance of Coles and Woolworths has deterred new industry entrants. The most recent larger player to enter the bricks and mortar retail space was Costco, opening its first Australian store in Melbourne in 2009.
The Woolworths Group is the market leader with a share of 37.1% of the total grocery market followed by Coles 29%, Aldi 9.7% and Metcash 6.6%.
The market share of the two major players has marginally declined over the past five years, mostly due to the growth of ALDI and Costco. Metcash's decline in revenue and market share has partially offset the rise in concentration attributable to ALDI's growth.
Over the next five years, ALDI's revenue growth is anticipated to be more organic, rather than driven by expanding store numbers which it has previously done. The company is reaching relative saturation in key markets, including regions it has only recently entered such as Western Australia and South Australia.
Over the past 5 years, the industry has also been affected by strong growth among food delivery service firms, such as UberEats and meal-kit delivery businesses, such as HelloFresh, Youfoodz and Marley Spoon, with their innovative technologies being a notable source of disruption. Food delivery services have boosted competition from food service firms, such as restaurants and fast-food enterprises.
An increase in demand for groceries during the COVID-19 pandemic has boosted industry revenue however, real household disposable income is expected to fall in 2021 posing a threat to the industry's overall performance.
• Sustainable competition
In the last couple of years, price-based competition has eased as major players have moved their focus to profit growth. In 2021, it is expected to see less variable pricing and more consistent “value” offers as players shift to a stronger value proposition and convenience offer. The major players are also increasingly relying on loyalty programs and promotions rather than discounts.
• Private Label
There has also been a shift in Private Label over recent years. Aldi has legitimised supermarket private label products and Australian shoppers have become more trusting of “no-name” brands and this sector is predicted to continue to grow significantly. Coles and Woolworths have expanded their private label offering and are projected to further expand ranges, up to 40% in some cases, with a strong focus on the prepared foods and meals categories. The rise of private-label products has allowed Australians to enjoy luxury products, such as gourmet foods and deli items, without paying significantly more.
Online sales are projected to become increasingly important for industry operators and there have been major advances in the last year due to the pandemic. Coles and Woolworths have reported a combined online sales growth of 32% for 2020.
To improve their online grocery operations, Coles and Woolworths have been investing heavily in supply chain optimisation as well as in store systems, mobile applications and online platforms. Coles' model focuses on centralised, heavily-automated distribution centres in partnership with Ocado to improve efficiency and Woolworths' focus is on micro-fulfillment centres.
Metcash entered the online grocery sector in 2020 with the launch of IGA Shop Online. Although this was partially in response to the COVID-19 pandemic, the company is also attempting to leverage the continued rise of online grocery shopping.
• Improving the shopping experience
Coles and Woolworths have increasingly focused on improving customers' shopping experience through store refurbishments and increased online shopping capabilities. They have been transitioning towards market-style formats, particularly in regard to fresh food sections as well as moving towards smaller metropolitan stores with value-added products and pre-prepared foods.
IGA and Foodland businesses have been facing the perfect storm over the past decade with increased price competition, Coles and Woolworths rolling out smaller format convenience-style stores, the growth in online grocery shopping and the restrictions of a franchise business model. After years of promoting “price matching” and “locked down pricing”, IGA are now returning to focus on their core strength which is the community and local food.
• Health & Wellbeing
Health, wellness and the environment continue to be major focuses among Australian consumers and as a result the healthy eating and free from categories are booming along with sports nutrition. Traditional snack categories such as confectionery and sweet biscuits are set to record modest growth, with consumers instead embracing other packaged foods as a healthy on-the-go snack.
In line with increasing concerns about health and wellness, consumers are seeking better quality and healthier ingredients in their packaged food products. They are also looking for better for the planet offerings in their food as well as in packaging. More people are adopting “flexitarian” lifestyles where they are consciously choosing to have less meat in their diets with “meat free” days and are seeking alternative sources of protein. Changing lifestyle trends have also driven demand for fish and seafood, offering a premium alternative to meat as a rich protein source along with plant-based foods. This said, convenience continues to be a main driver for many consumers leading them to look to packaged food. This has constrained growth of fresh food especially as consumers looking for meat alternatives are buying meat substitutes, tracked under packaged food.
Health and wellness also remain key issues defining the soft drinks industry in Australia. While all major manufacturers now offer low and sugar-free drinks to alleviate these concerns, many consumers remain concerned about the safety of artificial sweeteners so products with natural sweeteners are seeing significant growth. There is also a boom in the zero and low alcohol beverage category with consumers looking to cut out or reduce alcohol consumption or find a healthier alternative.
• Free From products
• Vegan products
• Organic, healthy and natural products
• Alternative sources of protein
• Meal kits
• Ready Meals
• Private label
• Healthy Snacking
• Premium soft drinks
• Premium spirits
• Low or No ABV beverages
Australia is a significant producer of a wide variety of agricultural and food products and buying local is more pertinent than ever. There is a real focus on “Made/Grown in Australia” labelling and marketing so there therefore needs to be a strong unique selling points for imported products. That said, international suppliers remain a vital part of the industry. Portion sizes are increasingly important too as consumers want quality over quantity and they expect packaging to be informative and environmentally responsible. There is also the need to offer innovative food products to break into what is a highly competitive food retail sector as most categories already have substantial market leaders.
Logistics and distribution are major factors due to the enormous scale of the country. The climatic and industrial environment varies as do market conditions, particularly between States. A good partner with national coverage is therefore vital in order to maximise sales. Many Australian companies provide a nationwide distribution network, either with interstate warehousing and distribution or by alliance with other distributors. There are also strict quarantine regulations with regard to fresh produce, meat and dairy products so it is key for all parties to understand the relevant procedures and requirements.
The commercial environment in Australia is regarded as exceptionally friendly and an attractive place to do business. Australians are open to giving new products and ideas a try. Apart from a very strict quarantine regime it offers few barriers to entry, a familiar legal and corporate framework as well as a sophisticated yet straightforward business culture.
With negotiations well under way for Australia-EU and Australia-UK Free Trade Agreements, market access could soon be improved significantly for imported products. Exporting to Australia can also be a gateway to other markets in Asia-Pacific due to close trading links and free trade agreements.
Naturally Good Show 30-31 May 2021, Sydney
Foodservice Australia 27-29 June 2021, Melbourne
Fine Food Australia 6-9 September 2021, Sydney
If the Australian market is of interest or you are looking to grow your export business, do not hesitate to Get in touch.