‘Walmart model’ driving competition and change in Australian retail

IBISWorld reveals trends in supermarkets and fuel retailing as supermarket and grocery stores industry revenue tops $88 billion.

Collectively, Australia’s supermarket and grocery stores and fuel retailing industries will generate an estimated $125.1 billion in 2015-16, according to IBISWorld, whose business information analysts forecast that this figure will reach $134.5 billion by 2020-21.

Traditional supermarket giants Coles and Woolworths currently account for more than 70 per cent of the supermarkets and grocery stores industry in Australia and more than 40 per cent of the fuel retailing industry.

The continued expansion of competitor Costco has seen the bulk-buying retailer grow its share of supermarket revenue.

According to IBISWorld industry analyst Brooke Tonkin, “the company already claims 1.2 per cent of this $88.1 billion industry, with only seven stores”.

Costco’s ongoing diversification into the fuel retailing industry is expected to increase competition, with the company’s low-price strategy attracting motorists, as customers have little brand loyalty in terms of fuel. Like Walmart in the US, the Costco model is based on ‘one-stop shopping’ and this, increasingly, is incorporating fuel.

“The trading landscape for supermarkets and fuel retailing has changed considerably over the past three decades, with new entrants increasing competition, and changing consumer preferences creating new challenges and opportunities,” Ms Tonkin said.

“While supermarkets continue to compete on the basis of price, other factors, such as convenience, product variety and quality, have emerged as driving forces in securing customer loyalty. This helps explain the growth of Costco, which has steadily gained market share over the past five years.”

Convenience has become a major factor in attracting customers, with major supermarket players attempting to broaden their ranges to include basic necessities as well as specialist gourmet products.

Meanwhile, Costco is attempting to increase its market share through the opening of new stores and the sale of a diverse range of products in bulk. The expansion of new stores has been a major driver of ALDI’s growth, and similar success is expected for Costco, as the number of stores is a key competitive factor.

Store location is also important and Coles and Woolworths have attempted to broaden their reach by expanding service-station grocery offerings into mini supermarkets.

“Costco’s expansion into fuel retailing is in line with this trend, as the wholesaler plans to become a convenient one-stop shop where customers can buy all their groceries and fill up on petrol in the one location,” Ms Tonkin said.

The fuel retailing industry faces a high level of competition, because price and location largely determine where motorists buy petrol.

“Most consumers see petrol as an undifferentiated product and therefore purchase on price,” Ms Tonkin said. “There is effectively no brand loyalty.”

The first Australian Costco fuel station was established at Liverpool in south-west Sydney in November 2013. The retailer has since added a fuel offering to its stores at Moorabin in south-east Melbourne and North Lakes, north of Brisbane.

Costco’s fuel prices have remained lower than those of other retailers in the city, with customers saving up to 15¢ a litre. In the months following each store’s opening, competition from Costco has continued to force down prices among other petrol stations in the area.

As ALDI and Costco continue to expand in the supermarkets and grocery stores industry, the well-established major players are expected to look for new ways to remain competitive and boost market share.

Woolworths announced in September that it would invest $65 million in store improvements and increasing staff hours. Meanwhile, Coles has already begun upgrading some of its larger stores to a new market-style format.

“These strategies are designed to keep shoppers in-store for longer by presenting stores as foodie destinations, and attract greater sales through premium offerings such as ready-made meals and delicatessen products,” Ms Tonkin said.

“These new stores also offer patisserie goods, artisanal breads and even sushi bars. However, major competitor ALDI is also transitioning its stores to a market-fresh approach, with more fresh food, branded groceries and ready-to-go and organic food. This is expected to further increase supermarket competition.”

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