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With its aggressive expansion in Australia, the discounter chain Aldi is increasingly challenging the country’s two dominant grocery retailers, Woolworths and Wesfarmers. In Turkey, the discounter BIM Birlesik Magazacilik (BIM) is also expanding rapidly and gaining ground on supermarket and hypermarket operators, notably Migros Türk, Carrefour and Tesco. With a business model similar to Aldi, BIM became the largest grocery retailer in Turkey in 2010 and has since outperformed its main rivals.
In addition to challenging the dominance of supermarkets, the strong expansion of a major discounter chain in both Australia and Turkey is also fuelling greater acceptance of private label among consumers and providing growth opportunities for private label suppliers.
The heavily concentrated grocery retailing competitive environment in Australia and the unbalanced relationships between the two largest retailers and their suppliers have been in the media spotlight since the competition watchdog launched an investigation to determine if the two retailers were abusing their market power. One of the negative effects of the dominance of the two retail giants is the pressure on local suppliers and the resulting damage to the Australian farming industry, typified by the highly publicised price war to offer one litre of milk for A$1. Coles saw sales of its private label milk priced under this threshold soar at the expense of branded products, forcing Woolworths to react by matching its prices, also using private label to keep up with Coles.
The price battle in Australian grocery retailing has also intensified as a result of Aldi’s expansion, leading Wesfarmers and Woolworths to put their suppliers under more intense pressure to lower their prices in order to protect their profits and maintain their margins, which are among the highest in grocery retailing by international standards.
In their battle to improve their price positioning, Wesfarmers and Woolworths are also increasing their private label offer, with plans to double their number of SKUs between 2012 and 2020. The proportion of private label in their assortment remains low at around 6% for Woolworths and 25% for Coles, compared to over 90% for Aldi. Hence, the share of private label in packaged food sales, which remains lower in Australia than in Europe and North America has significant potential for growth.
Private label manufacturers may also be tempted to benefit from Aldi’s future expansion as the retailer plans to more than double its presence between 2012 and 2020 to around 600 stores, expanding in the four states on the east coast, as well as entering South Australia and Western Australia, which would bring over 100 new outlets.
Under difficult conditions imposed by the two big retailers, Australian food manufacturers see opportunities in diversifying their client base and supplying other retailers, including Aldi.
Some of Aldi’s suppliers find it easier to deal with the discounter chain than with Wesfarmers and Woolworths due to the discounter’s simpler operations focusing on supply chain efficiency and its strategy to build long-term relationships. Companies also cite that they sometimes need to contribute to marketing costs when supplying Coles and Woolworths, which can account for up to 3% of the selling price, while such a practice is absent at Aldi.
Despite being German-owned, Aldi strongly emphasises local sourcing, with over 90% of its assortment in the dairy, fruit and vegetable and fresh meat categories sourced from Australian producers. Australian suppliers are benefiting from Aldi only asking them to compete on price against other Australian companies, whereas the other grocery retailers also incorporate foreign companies in competitive tenders for potential suppliers.
Like Aldi, Turkey’s largest grocery retailer BIM also operates a simple business model based on supply chain efficiency and no-frills stores to achieve low costs, for example with a reduced area for chilled cabinets. As BIM’s assortment comprises only 600 SKUs, it has few suppliers and also emphasises building long-term partnerships with them. Over half of its suppliers have worked with the retailer for over 10 years. Private label accounts for around 60% of BIM’s assortment, a proportion which is much higher than for other retailers in Turkey, but is still increasing.
While retailing conditions are markedly different in Australia and Turkey, both markets have in common the presence of large supermarket operators being challenged by the rise of a rapidly expanding discounter chain, and are reacting by increasing their private label offer. In both markets, the rise of a single discounter chain has given a major boost to private label sales and has also helped to change consumer perception of these products against branded items.
These conditions allow food manufacturers which can meet the discounters’ low price requirements to participate in their expansion while avoiding being over-reliant on supermarket chains.