The IGD team has just returned from its most recent trip to Australia, spending time in the three Eastern Seaboard cities of Sydney, Melbourne and Brisbane to discover the latest developments in the market. Here are some of our observations regarding the future direction of the Australian retail industry.
The Australian grocery retail market is one of the most concentrated in the world, with the top two players Woolworths Ltd and Coles Group commanding over 65% of the market. However, Coles Group has recently been the centre of a takeover battle involving private equity consortiums and Wesfarmers Ltd, a Western Australian conglomerate that owns the Bunnings DIY chain.

Grocery Market Share (2006)Grocery Market Share

Source: IGD

Coles’ Future?
Going forward, the development of the Australian retail environment will largely depend on Wesfarmers Ltd’s management of Coles Group Ltd. Coles went up for sale in February 2007 following a decreasing performance in its grocery division. The retailer is set to be acquired by Perth-based Wesfarmers Ltd by November 2007.
Wesfarmers has interests in a range of industries including insurance, coal mining, industrial safety, chemicals and fertilisers, energy and home improvement. Its experience of retailing is predominantly through operating 245 Bunnings home improvement stores in Australia and New Zealand.
The main challenge for the company will be to successfully implement a clear strategy focusing on the simplification and transformation of Coles’ food operations. With Woolworths Ltd gaining market share, Wesfarmers could potentially retain Coles’ general merchandise portfolio and divest the grocery stores to an international operator. This is the only real opportunity for a global player to enter the market and gain scale quickly.

Format Development

While supermarkets remain the main grocery format in Australia, the discount and convenience sectors are becoming increasingly developed. Both Woolworths and Coles operate a broad portfolio of stores including liquor stores, consumer electronics, forecourt and department stores.
The convenience and forecourt sectors are experiencing strong growth. This is likely to continue as fuel-retailing plays an increasingly central role in the strategy of mainstream retailers. Both of the major players plan to capitalise on the AUS$8.5bn Australian convenience market. Woolworths currently operates forecourt stores in collaboration with Caltex Alliance and Coles is planning the expansion of its Coles Express fascia.
Convenience specialist 7-Eleven Australia has focused on the growing ‘Food to Go’ market and in-store communication and display space is dominated by the ‘Munch’ range.

'Munch' Range 'Munch' Range

However, Aldi remains the chain with the most ambitious expansion programme within the market, with plans to reach 200 stores by 2008. As in other markets, the discount retailer has broadened its offer and consumer appeal by ranging more organic, healthy and premium products.

Organic, Healthy and Premium Products Organic, Healthy and Premium Products

Shrinking Middle Market
Woolworths Ltd and Coles Group have built their dominant positions based on offering mid-priced products to Australia’s middle market. However, as in many markets, this strategy is under pressure due to the increasing emergence of ‘split-personality’ shoppers, who seek both low-priced and premium products.
Coles is tackling the issue by following Tesco’s ‘good, better, best’ private label strategy. Woolworths has also tiered its private label range but has to date been less active than Coles in launching private label products.

Coles’ ‘Good, Better, Best’ ranges

Coles Smart Buy You'lll Love Coles Cole's Finest Range

Aldi has taken an opportunistic approach to these changing attitudes and more of its discount stores are cropping up close to independent fresh food stores – thus satisfying customer’s needs for both low priced products and premium goods.
As consumer attitudes continue to change, we can expect the larger supermarket businesses to evolve to encompass the adapting needs of the Australian consumer.

New Entrants?
While Tesco was rumoured to be interested in the acquisition of Coles Group and Wal-Mart has long been linked to market entry, the market appears to be of relatively low priority for most international retailers, as they concentrate resources in other locations, particularly emerging markets. Australia remains a mature and relatively small, isolated market. The potential break up of Coles Group by Wesfarmers in forthcoming years remains the biggest question mark in the foreseeable future.

For further information on the Australian retail sector, visit IGD’s premium online service, Retail Analysis, which profiles over 140 retailers and 50 markets worldwide. Free sample downloads are available here.