Citi is predicting the arrival of German discount supermarket Kaufland will wreak havoc with private label margins at the major chains.
Kaufland traditionally has a strong offering in private label, which Citi says is likely to result in elevated private label price competition.
The current market conditions have seen Woolworths increasing its private label pricing.
According to Deutsche Bank’s latest supermarket pricing study, Woolworths raised prices for its premium private label products by 8.6% in the March quarter, after a 6.7% increase in the December quarter and 8.4% in the September quarter.
Coles’ premium private label prices fell 4.6% in the March quarter after falling 5% in the December quarter and 2.8% in the September quarter.
Woolworths’ value or entry-level private label prices rose 5.8% in the March quarter, while Coles’ value private label prices rose 3.6%.
“Coles continues to focus on raising prices in the value private label product offering whereas Woolworths seems to be focusing on raising prices in the premium end of the private label spectrum,” Deutsche Bank analyst Michael Simotas said.
As a result, total private label prices rose 4% in the March quarter after growing 2.6% in the December and September quarters.
Private label is becoming increasingly cornerstone to profit in the liquor market.
At IBA’s annual conference in September, interim CEO Rod Pritchard told attendees that one of the biggest value growth proposition opportunities for retailers was in the wine category.
He added that private label was key to IBA being future fit, as it offered category profitability in both volume and value growth.
“The brands have been built with shopper in mind and focus on delivering exceptional quality, but more importantly increased margin and profitability,” he said.
ALDI best positioned to battle Kaufland pricing
Citi predicts ALDI will be the most agile competitor in the private label space.
“The potential exists for ALDI to respond to Kaufland’s entry by reinforcing its value position, lowering its private label prices,” Raymond said.
“This in turn could trigger a response from Kaufland, as they look to gain share in the value segment and could result in elevated private label price competition across the market.”
Raymond said smaller retailers such as IGA were more vulnerable.
“While this will impact profitability for Woolworths and Coles, it would accelerate the market share loss for independents, who are less able to compete in this type of environment,” he noted.
“As a result, this should see independents cede share, as was the case in the UK.’’
Citi’s concerns have prompted it to downgrade Woolworths to a “sell” and Coles to a “neutral”.
Raymond added: “The Australian grocery market has been rational over the past 12 months, however we expect competition to intensify once Kaufland enters the Australian market in 2021.
“Kaufland is gradually building out their Australian network, with work underway on nine confirmed retail sites across three states and a large distribution centre ahead of a planned late 2020 launch date.
“Current population density implies a potential of around 190 stores in Australia at full maturity, however the availability of suitable large format sites may limit the pace of the potential store rollout.’’
Citi believes that based on independent economic assessments of Kaufland in Australia and of its offshore operations, 9% of its sales mix will be derived from liquor, with 80% from grocery and 11% from general merchandise.
Lidl predicted to enter the Aussie market by 2026
Citi also asked: “Could Lidl follow Kaufland into Australia? Lidl has followed Kaufland into each new market after around five years. On this basis, Lidl could enter Australia as early as fiscal 2026, supported by Kaufland’s large distribution centre and broader supply chain.”
Kaufland and Lidl are both owned by the German Schwarz Group, which has set up a number of Lidl trademarks in Australia in the past few years.
The Group has previously suggested the Australian market as too small and concentrated for Lidl, and chose to enter the US market instead.
Lidl has a strong offering in the private label alcohol category. Most recently, a bottle of its whisky costing less to $25 scooped the trophy for ‘Best Scotch Whisky’ in the ’12 year old and under’ category in the ‘Blended’ section at the World Whiskies Awards.