Coles has stepped up its price investment in a bid to catch up with Woolworths’ renewed momentum amid a warning that promotional fatigue may be setting in among shoppers as the supermarket wars rage on.
UBS analyst Ben Gilbert’s latest report, citing a survey of 1.5 million prices, has found that Coles’ prices from January to August have decreased faster than Woolworths quarter-on-quarter.
Coles’ prices have dropped 1 per cent in Q317, 2 per cent in Q417 and 2 per cent in the first quarter of FY18, while Woolworths has made little-to-no change over the same period.
Gilbert said that industry feedback suggests Coles is investing to catch-up with Woolworths rather than simply accelerating its investment, reaffirming his assessment that the market is still rational.
“We continue to believe the market is rational, with a step-up in sequential investment at Coles more so the result of ‘catch up’ to Woolworths vs. a step-up in discounting,” Gilbert said.
“That said, the market remains competitive, with share of basket on promotion high, Aldi cutting prices across fresh and new competition coming [Kaufland & Amazon],” he continued.
Gilbert warned that increasing promotional intensity in both cold grocery and fresh categories is leading to promotional fatigue among customers, and that there remains an opportunity for the big-two in reducing the breadth of their high-low offerings.
Since committing circa $1 billion into prices and service last year, Woolworths has gained the upper-hand over its rival Coles with IBISWorld data released on Wednesday morning finding that the giant increased its market share in 2016-17 for the first time in several years.
IBIS reckons Woolies will continue to gain share over 2017-18, moving to 36.8 per cent of the total market compared to Coles’ 30.9 per cent and Aldi’s 8.6 per cent.
“[Coles] is likely to invest strongly in prices in 2017-18, which should see its market share remain relatively stable,’ IBISWorld’s senior industry analyst Nathan Cloutman said.
But Coles is moving fast in other areas, according to Gilbert, who noted that the Wesfarmers-owned chain is aggressively rationalising its range through a simplification of its supply chain.
“Range rationalisation remains a major cost-out opportunity for both retailers through simplification of supply chain. We believe Coles is further advanced, albeit needs to be careful not to cut too far, and provide an opportunity for Woolworths to establish a competitive advantage around range,” Gilbert said.
IBIS reckons ranging changes will likely be dominated by a shift to private label over the next twelve months, with Woolworths’ recent decision not to stock Coke’s new no-sugar product providing evidence that the big-two are cracking down on excessive SKUs. The research firm’s data says private-label products account for approximately 25 per cent of total sales in the supermarkets and grocery stores industry.
Fresh challenge
According to IBIS, the imminent entry of AmazonFresh is making online sales increasingly important in the supermarkets and grocery stores industry. IBISWorld anticipates revenue in the online grocery sales industry will grow at an annualised 12.4 per cent over the next five years.
“Woolworths and Coles are constantly improving their online sales channels by expanding their click and collect options and investing in consumer data analytics,” said Cloutman.
“Despite this, Australians spend significantly less time and money on online grocery shopping than in comparable countries, such as the United Kingdom and the United States.”
Costco is also accelerating its move towards online sales, with the company currently trialling an online delivery service for businesses based in Melbourne. IBISWorld found that despite growing strongly, online grocery sales are expected to still represent a small share of total grocery sales at 2.0 per cent in 2017-18.
