Why these two Australian Retail Giants Will Fall

Saturday night is grocery night in my house. My girlfriend and I make our way to the nearest Coles or Woolworths Ltd [ASX:WOW]. Our decision depends upon which fuel docket we want at the time.

It’s always nice to get out of the house. But grocery shopping on a Saturday night isn’t always exciting.

The time we spend shopping almost seems wasted. We could always do the weekly shop online. Both Coles and Woolies offer online options. We could order what we want, and go out to the cinemas or a night on the town. The only thing holding me back is the delivery cost.

Your first three deliveries with Woolies are free. After that, they charge based on your order. Delivery costs start at $11 for orders up to $149.99. A shop over $300 is be rewarded with free delivery.

The offer from Coles is slightly better. Your first delivery is free with a coupon code. After that, if you accept delivery in flexible hours and spend over $150, delivery is free. Also, if you spend over $100 on your Coles credit card delivery is free.

Outside of these options, Coles charges delivery fees ranging between $4 and $14.

I’m guessing the costs will come down in the future. Coles and Woolies have had prices wars forever. If more shoppers shop online, competitive delivery fees could be next to fall.

But in a few years’ time, I don’t expect to be buying groceries from Coles or Woolies. I, and millions of Australians, could be ordering our weekly shopping from Amazon.com, Inc. [NASDAQ:AMZN].

Your margin is our opportunity

If you haven’t heard of Amazon, you’ve been living under a rock. The company was created by Jeff Bezos in 1994. They went from selling books to everything else. In 2015 they became the most valuable US retailer by market cap.

They rival Apple Inc. [NASDAQ:APPL] as a device maker. They even threaten International Business Machines [NYSE:IBM] as a data provider. Amazon has become the Everything Store. And they’ve now set their sights on the $222 billion Australian retail sector.

They expect to destroy the competition when they land in September next year. The retailer is armed with books, electronics, consumer products; you name it, they’ve got it. They are even looking to knock out supermarkets by offering fresh food.

Amazon started offering food in 2007 under the service, Amazon Fresh.

To accept delivery, customers sign up to a monthly membership, costing US14.99 (AU$20.53). This is around AU$4.74 dollars per week. Not as low as Coles in some cases. But Amazon has economies of scale on their side.

That means what they could lack in delivery costs, they make up for in product pricing. They could potentially offer a 30% discount on products, as they have done in the past.

Quidsi, parent company of Diapers.com, has experienced Amazon’s ruthless price-cutting first hand. Quidsi’s co-founders noticed that Amazon dropped its prices on diapers and other baby products by 30%.

As an experiment, Quidsi executives manipulated their prices to see what would happen. To their surprise, the Amazon website had changed its prices accordingly. Their pricing bots picked up Quidsi price drop and immediately adjusted.

Amazon’s motto could be, ‘your margins are our opportunity’ thus far.

But not all Aussie retailers are shaking in their boots. According to Business Insider, Woolworths and Aldi are welcoming Amazon to Australia and calling ‘game on’. Yet if they want to compete they’ll need to adapt to the changing retail market.

Increasing online presence

In the next five years a majority of our purchases could be online. Clothes, consumer products, even our weekly grocery shopping. It’s not a surprise to Aussie retailers that more consumers are buying online. That’s why almost all retailers now offer online stores. Some have even created their own online apps to make purchasing online easier.

But going forward, they’ll need to do a better job of creating a solid online presence.

Nielsen’s 18th Annual Australian Connected Consumer Report, released earlier this year, showed a ‘major shift in the Australian online retailing landscape.

‘For the first time, consumers are purchasing more clothing, shoes and accessories online than travel related purchases. Entertainment purchases such as concert, movie and event tickets as well as food and grocery (excluding fast food) also experienced growth.

Online food and grocery experienced a significant jump in consumer engagement, with almost one-quarter (24%) of online shoppers making a purchase in this category in the past six months (up from 16% in 2014). This was largely driven by steep increases in purchases by males and those aged under 45.

Consumer preferences are also in Amazon’s favour. Nielsen found ‘more than seven in ten online grocery shoppers say price is most important.

Amazon is paving a way for the future of retail. If Aussie companies don’t want to get left behind they’ll need to push digital strategies to the limit. Not only that, they’ll have to come up with a way to combat Amazon’s low prices.

Whether this is too big a task for Coles and Woolies is yet to be determined. But Amazon is coming, and Australia’s two retail giants need to do something quick.

Regards,

Härje Ronngard,
Contributing Editor, Money Morning

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