Aldi Might Not Be Australia’s Most Profitable Grocer for Long

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A few days ago, Aldi became Australia’s most profitable supermarket retailer. Aldi might soon grab a bigger market share than Coles or Woolworths [ASX:WOW]. According a UBS report, Aldi sales are expected to grow 15% a year for the next three years. This kind of growth is four to five times higher than the growth of the entire grocery market.

UBS analyst Ben Gilbert said: ‘[S]hoppers are telling us they shop with them [Aldi] but they don’t see them as being a place where they can do a total shop.

Aldi’s share of the national market is predicted to rise from 7% to at least 10% by 2019–20. This would take around $1 billion in sales each year away from Woolworths and Coles.

Aldi’s not just taking young parents and families away from the supermarket duopoly. Between 2014 and 2016, Aldi has grown it $100K-plus earner customer base by 20%.

ALDI Customer 2014-16

Source: UBS

UBS seems to think Aldi is an unstoppable force. However, I would argue it will only be a matter of time until Aldi reaches a crossroad. From there they will either choose to adapt or die.

A threat facing all supermarkets

Just like most industries, the grocery business will need to embrace the digital age we live in. No longer are shoppers forced to go in to stores in order to find the lowest prices. They can now have their preferences and needs automated. Whenever food stocks are low, you can get produce delivered to your door with a smile.

According to a Marsh & McLennan report, the future of groceries is expected to be a digital one. Food retail has always been a tough business. But competition is no longer confined to bricks and mortar. In 2014, online grocers had captured 6% of the market in the UK.

Customers of digital storefronts were largely driven by online offerings. And although online grocers control a small percent of the market, they are growing steadily. With interest from major players like Amazonfresh and Wallmart, their growth could explode in the coming years.

According to IBISWorld, Australian online grocery sales have grown at 15.3% from 2011–16. The industry generated around $2 billion annually. Yet these figures indicate slow growth when it comes to online grocers. As IBISWorld state:

Adoption of online grocery shopping has been slow, as Australian consumers have largely been satisfied with current grocery provided by bricks-and-mortar stores.

However, technology waits for no one. Much like the banking industry, there is huge potential for various processes to become digitalised. This isn’t necessarily a new frontier either. Some online grocers have been operating for more than 25 years.

One huge disadvantage of established grocers is their slender margins. For traditional grocers with 2% earnings before interest and tax (EBIT) and a 20% variable margin, a 10% loss in share market would destroy all profits. Even a 5% loss would be disruptive. And online grocers in the UK are already at 6%.

Of course, traditional grocers have already taken to online platforms. Coles, Woolworths and Aldi all have their own online shops. However, Coles and Woolworths seem miles ahead of Aldi in that department.

The way I see it, it doesn’t matter how many new stores Aldi opens. If they want to win the battle with Coles and Woolies, they’ll need to do it online as well as off.

Härje Ronngard,

Junior Analyst, Money Morning

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