Supermarkets and Grocery Stores in Australia

Transcription

1 Stacking the shelves: Industry revenue grows despite intense competition and price cutting IBISWorld Industry Report G4111 Supermarkets and Grocery Stores in Australia February 2016 Brooke Tonkin 2 About this Industry 2 Industry Definition 2 Main Activities 2 Similar Industries 2 Additional Resources 3 Industry at a Glance 4 Industry Performance 4 Executive Summary 4 Key External Drivers 5 Current Performance 7 Industry Outlook 10 Industry Life Cycle 12 Products & Markets 12 Supply Chains 12 Products & Services 14 Demand Determinants 15 Major Markets 16 International Trade 17 Business Locations 19 Competitive Landscape 19 Market Share Concentration 19 Key Success Factors 19 Cost Structure Benchmarks 21 Basis of Competition 22 Barriers to Entry 22 Industry Globalisation 23 Major Companies 23 Woolworths Ltd 24 Wesfarmers Limited 25 ALDI Stores Supermarkets Pty Ltd 26 Metcash Limited 28 Operating Conditions 28 Capital Intensity 29 Technology & Systems 30 Revenue Volatility 30 Regulation & Policy 31 Industry Assistance 33 Key Statistics 33 Industry Data 33 Annual Change 33 Key Ratios 34 Jargon & Glossary (03) info@ibisworld.com

2 Supermarkets and Grocery Stores in Australia February About this Industry Industry Definition Players in the industry are primarily engaged in grocery retailing. Supermarkets and grocery stores retail a range of groceries and food products, including fruit and vegetables, bread, cigarettes, canned goods, toiletries, dairy goods, delicatessen items and cleaning goods. Specialist retailers, niche retailers and convenience stores are excluded from the industry. Main Activities The primary activities of this industry are Operating supermarkets Operating grocery stores The major products and services in this industry are Beverages Bread and bakery products Cigarettes and other general merchandise Dry and packaged foods Fresh fruit and vegetables Meat products Milk and other dairy products Toiletries and health products Similar Industries G4121 Fresh Meat, Fish and Poultry Retailing in Australia Operators in this industry specialise in retailing fresh meat, fish and poultry goods. G4122 Fruit and Vegetable Retailing in Australia Businesses in this industry primarily sell fruit and vegetable produce. G4123 Liquor Retailing in Australia Firms in this industry largely sell liquor goods. G4129 Bread and Cake Retailing in Australia Companies in this industry primarily retail bread and cake goods. G4279a Tobacconists and Specialised Grocery Retailing in Australia Establishments in this industry retail tobacco along with other specialised grocery items such as confectionery and small goods. G4112 Convenience Stores in Australia Stores in this industry have a narrower product range than supermarkets, but a wider range than milk bars. Additional Resources For additional information on this industry Australian Food News MGA Independent Retailers Retail Biz

3 Supermarkets and Grocery Stores in Australia February Industry at a Glance Supermarkets and Grocery Stores in Key Statistics Snapshot Revenue $88.1bn Profit $4.9bn Annual Growth % Wages $8.3bn Annual Growth % Businesses 2,022 Market Share Woolworths Ltd 39.5% Wesfarmers Limited 33.4% ALDI Stores Supermarkets Pty Ltd 9.1% Metcash Limited 8.6% Key External Drivers Real household disposable income Population Consumer sentiment index Demand from cafes, restaurants and takeaway food services p. 23 % change Revenue vs. employment growth Year Revenue Establishments 18.2% QLD Employment 7.8% WA % 1.5% ACT TAS 5.8% SA % change Real household disposable income Year SOURCE: 1.2% NT 31.9% NSW p. 4 Industry Structure Life Cycle Stage Mature Revenue Volatility Low Capital Intensity Medium Industry Assistance Low Concentration Level High 30.9% VIC Regulation Level Technology Change Barriers to Entry Industry Globalisation Competition Level SOURCE: SOURCE: Medium Medium High Low High FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE 33

4 Supermarkets and Grocery Stores in Australia February Industry Performance Executive Summary Key External Drivers Current Performance Industry Outlook Life Cycle Stage Executive Summary The Supermarkets and Grocery Stores industry is one of the most fiercely competitive in Australia. The rapid growth of German-owned ALDI over the past five years has significantly altered the industry. ALDI has grown in popularity over the past five years, partly due to its discount private-label products. This has forced the two established industry giants, Woolworths and Coles, to cut prices and expand their own range of private-label products. Changing consumer sentiment and shopping preferences have also influenced the industry s trading conditions. Industry revenue is projected to grow by 3.8% annualised over the five years through , to reach $88.1 billion. This includes forecast growth of 2.5% in The challenging retail environment has caused the industry s heavyweights to cut prices across a range of branded and private-label items over the past five years. Coles and Woolworths have pressured suppliers to lower their prices, continuing their price war. Supermarkets have also used weekly specials and other marketing initiatives, such as fuel dockets, to compete for customers. These practices have faced scrutiny over the period, prompting both the Senate and the ACCC to launch investigations into the conduct of Woolworths and Coles. Growing demand for cheaper privatelabel products has increased their share of shelf space over the past five years. Consumers increasingly view privatelabel products as acceptable alternatives to more-expensive branded products. This is largely due to ALDI s growing presence in the industry. In response, Woolworths and Coles have also expanded their own ranges to secure their place in the market. This increasing shift towards private-label products, which attract higher margins for retailers, has boosted industry profitability over the past five years. Industry revenue is forecast to grow at an annualised 2.2% over the five years through , to reach $98.1 billion. Fierce competition, subdued consumer sentiment and the continued expansion of private-label products are expected to contribute to price deflation, constraining revenue growth. The continued development of sophisticated online sales platforms is expected to influence shopping patterns. Convenient online shopping options such as pick-up and home-delivery will help industry firms boost their business. The growth of discount companies such as ALDI and Costco will continue to influence consumer shopping trends over the next five years. Key External Drivers Real household disposable income The level of real household disposable income affects the industry. In periods of low disposable income, consumers are more likely to focus on household necessities and do without luxury products such as gourmet foods and deli items. However, the greater range of private-label products, which are often cheaper than branded merchandise, has enabled consumers to enjoy gourmet and discretionary items without paying significantly more. Disposable income is forecast to rise in , which could provide an opportunity to boost industry revenue. Population Population growth affects the number and location of supermarkets and grocery stores. The age distribution of the population also influences the type of products stocked. The development of new residential developments increases the amount of consumer traffic at existing supermarket locations and can raise demand for new stores. The population is forecast to increase over , leading to a rise in customer numbers and growth in the volume of items purchased from supermarkets.

5 Supermarkets and Grocery Stores in Australia February Industry Performance Key External Drivers continued Consumer sentiment index Trends in consumer sentiment have a significant effect on consumer spending at supermarkets and grocery stores. A decline in consumer sentiment can reduce demand for more-expensive goods such as gourmet items, branded merchandise or organic produce. Fluctuations in the index also affect the volume of pantry-stocking items purchased by consumers, or their inclination to take advantage of weekly specials and other instore offers. Consumer sentiment is forecast to strengthen in Demand from cafes, restaurants and takeaway food services Cafes, restaurants and takeaway food providers compete with supermarkets and grocery stores for consumer dollars. Over the past decade, the number of Australians eating out has increased and households now spend a greater percentage of their income on meals outside the home. Expenditure on cafes and restaurants is forecast to increase in , which may pose a threat to industry revenue. Real household disposable income 8 6 Population % change 4 2 % change Year Year SOURCE: Current Performance The industry landscape has changed immensely over the past five years. The rapid growth of ALDI and the increasing popularity of private-label products have altered the playing field. These changing dynamics have sparked a price war between the industry s two largest companies, Woolworths and Coles. Both have chased market share by slashing the prices of goods such as household basics. Despite lower product prices, industry revenue has remained strong, and is projected to post annualised growth of 3.8% over the five years through This includes forecast growth of 2.5% in , to reach $88.1 billion. Woolworths and Coles have opted to reduce prices as a competitive strategy, going against the trend of overseas supermarkets to compete through product differentiation. Consequently, both players have focused less on profit margins and more on market share. This strategy has hurt Woolworths profitability. However, increasing private-label sales have enabled Coles to post profit growth over most of the past five-year period. ALDI has also enjoyed profit growth over the period. This has lifted the industry s average profit margin over the past five years.

6 Supermarkets and Grocery Stores in Australia February Industry Performance Competition controversy The latest price war between the two industry giants has resulted in prices being slashed across a range of everyday goods, including milk, bread, meat, fruit and vegetables. Concerns have been raised that the price war will harm agricultural industries and force farmers off the land, prompting a Senate committee to investigate these claims over After more than a year of such discounting, the committee found no evidence that farmer and other primary producer prices had been squeezed. Dairy farmgate prices were found to have actually increased over the past five years. Alleged uncompetitive behaviour by Woolworths and Coles has attracted the attention of the Australian Competition and Consumer Commission (ACCC). The ACCC took Woolworths and Coles to Federal Court in February 2014, alleging that the supermarkets had breached a deal with the ACCC regarding fuel dockets. In April 2014, the court found that Woolworths had breached the agreement, while Coles had not. In May 2014, the ACCC launched legal action against Coles, following an 18-month investigation into unconscionable conduct and application of undue influence on suppliers. The ACCC launched further action against Coles in October 2014, alleging the company was forcing suppliers to pay fees for markdowns and waste to protect its profitability. The two parties reached an agreement, which included a $10.0 million fine, in December Woolworths attracted the attention of the ACCC in December 2015 for unconscionable conduct with suppliers, with the matter in its early stages with the courts at the time of writing. Product preferences Trends in private-label merchandise have played a pivotal role in the industry s performance over the past five years. Historically, consumers shunned privatelabel merchandise due to its questionable quality, limited range and bland packaging. Changing consumer shopping trends and the increasing popularity of private-label goods in ALDI stores have led Coles and Woolworths to improve their range of private-label merchandise. The private-label segment has grown phenomenally over the past five years, now accounting for approximately one-quarter of all supermarket sales. Private-label goods are now offered across all product segments, from basic household goods to high-end and organic product ranges. Volatile consumer sentiment over the past five years has contributed to growth in private-label products. Turbulent economic conditions have hurt consumer optimism about future income, employment prospects and buying conditions for essential household items, such as groceries. The improving quality of private-label products have made them increasingly appealing to customers, particularly low income families. Growing satisfaction with private-label products has also prevented many consumers from switching back to branded products during times of positive consumer sentiment over the period. The organic products market has been a growing area for the industry since the early 2000s. While retailers have traditionally charged a premium for organics, increasingly widespread consumer acceptance has lowered prices. All major supermarkets now stock a larger range of organic products than they did five years ago, with some sections in supermarkets dedicated to organic products. Furthermore, the two major supermarkets have released their own private-label organic ranges: Coles Organic and Woolworths Macro Organic and Baby Macro Organic.

7 Supermarkets and Grocery Stores in Australia February Industry Performance Wholesale bypass Growth in private-label products has contributed to increasing instances of wholesale bypass. Supermarkets have entered into contracts with food manufacturers to produce privatelabel goods for them. This has encouraged supermarkets to make direct purchase agreements for branded products as well, which has reduced the need for wholesalers. Furthermore, supermarkets and grocery stores have increasingly dealt directly with primary producers. Coles and Woolworths have been sourcing fresh fruit, vegetables and meats directly from farmers and growers over the past five years, making many wholesalers redundant across much of the industry. When supermarkets still need to use wholesale services, they typically deal with firms that fall under the General Line Grocery Wholesaling industry, which sells a diverse range of products. This has come at the expense of specialised wholesalers. Store operations Strong industry competition has resulted in almost stable enterprise numbers over the past five years. Potential players are likely hesitant to enter the industry, due to the dominance of Coles and Woolworths. The most recent major player to enter the industry was Costco, opening its first Australian store in Melbourne in August Costco operates like a wholesaler, with customers purchasing products in bulk in a warehouse-style set-up. Costco stores are on average over 13,000 square metres, more than triple the size of a typical Coles or Woolworths store. Furthermore, Costco s range of products is vast. Aside from groceries, the company offers appliances, hardware, toys, sporting goods, jewellery, books and furniture. Total industry employment is forecast to grow at an annualised 1.5% over the five years through , outperforming the projected growth in store numbers. This is due to the shift towards larger stores, particularly by Coles and Woolworths. Larger stores cater to the needs of a wider range of consumers, making them attractive to a greater portion of the market. This trend towards larger stores has increased the need for staff, particularly shelf stackers. Industry Outlook Supermarket shelf wars are expected to intensify over the next five years. The increasing prevalence of private-label merchandise and changing consumer shopping patterns will create a difficult operating landscape for smaller operators with less purchasing power. The low-price environment will likely continue, putting profit margins under pressure. Price deflation arising from fierce price competition and the growing popularity of private-label products is anticipated to constrain revenue growth over the next five years. Industry revenue is forecast to rise at an annualised 2.2% over the five years through , to reach $98.1 billion. Given the industry s mature nature, % change Industry revenue Year players will need to fight even harder for market share over the next five years. 22 SOURCE:

8 Supermarkets and Grocery Stores in Australia February Industry Performance Industry Outlook continued ALDI s growing presence and an increasing number of Costco stores will only increase price competition. Woolworths and Coles, which have dominated the industry for over 25 years, are expected to be forced to keep prices low to maintain market share. As suppliers have already accepted price decreases over the past five years, there is little room left to move on supply chain prices. Thus, Woolworths and Coles will be forced to accept lower profit margins on branded items over the next five years if they continue lowering prices. As a result, they are expected to rely on growth in privatelabel product sales, where margins are higher, to preserve profitability. Volatility in consumer sentiment has contributed to growth in private-label products over the period However, the industry s average profit margin is anticipated to decrease slightly over the next five years. Smaller operators will be hit the hardest by the ongoing price war, due to their limited buying power. This is likely to contribute to smaller independent supermarkets joining chains such as IGA to capitalise on brand-owner Metcash s buying power. Demand drivers Factors such as consumer sentiment and household disposable income will drive consumer purchase decisions over the next five years. Despite projected small increases in household disposable income, the anticipated negative consumer sentiment over much of the period means that consumers will likely be price conscious and attempt to reduce their weekly expenditure on groceries. Consequently, sales of private-label products are expected to grow. The share of total sales for private labels is expected to approach 35% by The types of private-label products available will likely continue to diversify, expanding into specialty products such as ethnic foods. By , it is unlikely there will be a branded product range completely safe from private-label competition. Industry demand will be influenced by changing demographics, specifically the shrinking size of households, the time-poor nature of consumers and more complex consumer preferences. The industry will also need to adapt to the segment of consumers that shop more frequently and demand more convenient dining options. Investing in technology The ability of major supermarkets to innovate and use new technologies to attract customers will be crucial in the battle for market share. Investment in store systems, mobile applications, tablets and online platforms will be a major factor in expanding consumer reach. Furthermore, players that are able to tap into consumer preferences and shopping habits will be at a distinct advantage. The use of data will be essential to future planning and development. This has been highlighted by Woolworths 2013 investment into a data analytics firm, aimed at improving knowledge of consumer product preferences and spending habits. The ability of supermarkets to tap into personalised consumer marketing can give them a competitive advantage in attracting new customers. Technology will hinder employment growth over the next five years. The increasing conversion of traditional checkouts to self-serve checkouts will reduce staff requirements across the industry. These checkouts provide significant cost efficiencies for retailers, because fewer staff are required to operate checkouts. However, new store

9 Supermarkets and Grocery Stores in Australia February Industry Performance Investing in technology continued openings will drive the marginal employment growth forecast over the next five years. Fierce competition and challenging operating conditions are expected to inhibit the entry of new players, with enterprises forecast to remain steady over the five years through New shopping experience Busy lifestyles restrict the amount of time customers have to spend in stores. Industry players appear to be planning dramatic changes to their stores to encourage customers to shop for longer, which boosts spending and word-ofmouth marketing. There is evidence of this trend emerging in Coles has already converted four stores in New South Wales to a new market-style layout, following the successful trial of its foodie destination at Westfield Southland in Victoria. Customers are able to purchase Lavazza brand takeaway coffee instore, as well as a variety of takeaway options such as baguettes and pies that have been prepared instore. These types of stores are expected to continue to be built over the next five years, as players look for new ways to keep customers shopping for longer and encourage them to return more frequently.

10 Supermarkets and Grocery Stores in Australia February Industry Performance Life Cycle Stage Continued rationalisation indicates a mature industry Fierce competition is preventing new player entry IVA continues to grow in-line with GDP % Growth in share of economy Maturity Company consolidation; level of economic importance stable Quality Growth High growth in economic importance; weaker companies close down; developed technology and markets Key Features of a Mature Industry Revenue grows at same pace as economy Company numbers stabilise; M&A stage Established technology & processes Total market acceptance of product & brand Rationalisation of low margin products & brands Meat Processing Supermarkets and Grocery Stores Outdoor Vegetable Growing Fruit and Vegetable Retailing Fresh Meat, Fish and Poultry Retailing Quantity Growth Many new companies; minor growth in economic importance; substantial technology change Convenience Stores -5 Decline Shrinking economic importance % Growth in number of establishments SOURCE:

11 Supermarkets and Grocery Stores in Australia February Industry Performance Industry Life Cycle This industry is Mature The Supermarket and Grocery Stores industry is in a mature life cycle phase. Steady growth and contribution to the economy, stable enterprise numbers and product rationalisation all indicate a mature industry. The nature of products sold and technological advancements are expected to prevent the industry from entering the declining phase over the next 10 years. Though industry revenue has fluctuated in response to tough economic times for households, growth has remained steady. Industry value added, a measure of the industry s contribution to the overall economy, is forecast to grow at an annualised 2.5% over the 10 years through GDP is anticipated to grow at a slightly higher annualised rate of 2.6% over the period. This indicates that the industry is growing in-line with the overall economy. Enterprise numbers have steadied over the past five years, while establishments have increased. Intense competition from the industry s major players has limited the entry of new players. Woolworths and Coles have continued to dominate in physical size, scope of products and market share. However, rapid growth by ALDI is threatening the long-held market share dominance of the major two supermarkets. Some rationalisation of brands has occurred across supermarkets and grocery stores over the past five years, which is typical of a maturing industry. For instance, Woolworths began converting its Victorian stores from the long-standing Safeway brand to Woolworths in , with the overwhelming majority now operating under the Woolworths name. A range of technological advances in equipment have entered the industry over the past decade. The most prominent of these has been the introduction and application of new point-of-sale systems. These systems have revolutionised product scanning and processing accuracy and efficiency. From the retailers perspective, other key technological innovations included self-checkout systems, self-labels and wireless scales.

12 Supermarkets and Grocery Stores in Australia February Products & Markets Supply Chain Products & Services Demand Determinants Major Markets International Trade Business Locations Supply Chain KEY BUYING INDUSTRIES Z Consumers Households demand a range of grocery, meat, fish, poultry, fruit and vegetable items from supermarkets. KEY SELLING INDUSTRIES A0123 C1111 F3601 F3603 F3605 F3609 F3722 Outdoor Vegetable Growing in Australia As the trend for supermarkets to reduce the supply chain increases, fresh vegetables are more commonly purchased directly from the producer. Meat Processing in Australia Supermarkets now commonly purchase meat directly from processing plants. General Line Grocery Wholesaling in Australia Wholesalers in this industry supply supermarkets with the full range of grocery products, including biscuits, canned goods, cereals, Asian groceries, coffee, condiments, cooking oils and fats, eggs, fish, honey, rice, salt, tea and yeast. Dairy Produce Wholesaling in Australia Dairy goods sold to supermarkets include items such as butter, cheese, cream, ice-cream and milk. Fruit and Vegetable Wholesaling in Australia Fruit and vegetable departments in supermarkets stock an expanding range of locally produced and imported goods that are supplied by fruit and vegetable wholesalers. Soft Drink and Pre-Packaged Food Wholesaling in Australia These wholesalers supply confectionery, cordials, nuts, potato chips and soft drink to supermarkets and other grocery stores. Cosmetics and Toiletry Wholesaling in Australia Toiletry goods supplied to the industry include perfumes, detergents, soaps and other toiletries. Products & Services The range of products available across the industry has changed over the past five years due to several factors. These include the introduction of private-label goods by the industry s major players, increased consumer demand for organic goods, consumer trends towards healthier eating and rising demand for ready-to-eat and prepared meals. Other factors such as rising consumer awareness about packaging and concerns about the origin of products have also affected the range of goods on supermarket shelves. At the national level, private-label products account for approximately one-quarter of grocery sales. This compares with over 40.0% in parts of Europe and almost 20.0% in the United States, indicating that there is room for expansion in Australia. Organic products, which account for approximately 1.1% of retail grocery sales, are another potential growth area. Dry and packaged foods The dry and packaged foods segment consists of household staples such as flour, cereals, pasta, rice, sugar, spices, eggs, edible oils and fats (such as olive oil or margarine), canned and frozen foods, tea, coffee, confectionery and prepared meals. This segment accounts for the largest portion of industry revenue and composes a correspondingly large proportion of shelf-space in supermarkets. Private-label products dominate this segment, as this was one of the first segments where private-labels were successful. Many consumers do not mind purchasing private-label products for household staples, such as flour or sugar. This segment has increased as a share of industry revenue over the past five years.

13 Supermarkets and Grocery Stores in Australia February Products & Markets Products & Services continued Milk and other dairy products The industry sells a variety of dairy products, including milk, cream, butter, cheese, ice cream and yoghurt. This segment has been subject to heavy competition among players, due to discounted private-label milk selling at $1.00 per litre. This has attracted heavy scrutiny in the media and resulted in a Senate inquiry over to determine if these low prices were hurting farmer returns. Despite lower private-label milk prices, this segment has increased as a share of industry revenue over the past five years. Lower prices have encouraged consumer purchases of milk in supermarkets, increasing purchase volumes. Increased purchases of previously niche dairy products, such as Greek yoghurt, have also helped to boost this segment. Fresh fruit and vegetables The majority of consumers purchase fruit and vegetables regularly from supermarkets and grocery stores. However, the size of this segment is restricted by consumer purchases of fruit and vegetables from greengrocers and specialty fruit and vegetable retailers. The major supermarkets have increasingly entered into direct purchase agreements with farmers over the past five years to gain greater control over their supply chain. This segment has increased as a share of revenue over the past five years, due to rising prices and increasing health consciousness. Toiletries and health products The toiletries and health products segment includes non-prescribed pain medications, vitamins, sunscreen, toothbrushes, toothpaste, soaps, deodorants, feminine hygiene products, shampoos and conditioners. Medications in particular have faced increasing competition from discount pharmacies. Toiletries are generally purchased from supermarkets and grocery stores, and private-label products have increased as a share of toiletry products over the period. Collectively, this segment has remained a stable share of revenue over the past five years. Cigarettes and other general merchandise This segment includes cigarettes and other tobacco products, pet food, stationery, cards, containers, plastic cutlery and plates, crockery, aprons, tea towels and cleaning agents. Cigarette and tobacco product sales have decreased as a share of revenue over the past five years. Increasing health consciousness and awareness of the dangers of smoking have negatively affected demand for these products. Plain packaging laws introduced over the past five years and the requirement to hide tobacco products from display have hurt cigarette and Products and services segmentation ( ) 9.9% Meat products 6.8% Bread and bakery products 8.2% Beverages 28.5% Dry and packaged foods Total $88.1bn 10.5% Cigarettes and other general merchandise 10.7% Toiletries and health products 12.1% Fresh fruit and vegetables 13.3% Milk and other dairy products SOURCE:

14 Supermarkets and Grocery Stores in Australia February Products & Markets Products & Services continued tobacco sales. Other general merchandise sales have increased slightly. This is due to supermarkets expanding product ranges. As a whole, this segment has remained stable as a portion of revenue over the past five years. Meat products The meat products segment includes fresh meat products, such as steaks, chops and roasts, along with processed meat products, such as smallgoods, mince and sausages. The segment includes all types of meat, such as beef, lamb, pork, chicken, fish and game meats. Fresh meat sales have remained steady as a portion of revenue over the past five years. Consumers have sought out discounts to enable them to increase the volume of fresh meat purchased, creating a stable net effect. Processed meat product sales have declined as a portion of revenue due to increasing preference for fresh meat. Overall, this segment has declined as a share of revenue over the past five years. Beverages Beverages, such as bottled water, juices, soft drinks, sports drinks, cordials and dairy substitutes, have increased as a share of industry revenue over the past five years. This is due to increased purchases of healthier beverages, such as bottled water, sports drinks and lowsugar soft drinks. Sales of dairy substitutes, such as soy and almond milk, have also increased as more consumers have sought beverages that meet specific dietary requirements. Conversely, sales of unhealthy soft drinks have marginally decreased over the period. Bread and bakery products The bread and bakery products segment includes packaged bread, bread baked instore, cakes, tarts, puddings, biscuits and baking mixtures for home cooking. Similar to milk, private-label products have significantly affected this segment. The major supermarkets introduced $1.00 private-label bread loaves in 2011 to stimulate consumer purchases. In 2014, the major supermarkets lowered prices again, to $0.85 per loaf. This has negatively affected demand for branded bread products. Price discounts coupled with increased spending in other areas have decreased this segment s share of revenue over the past five years. Demand Determinants Groceries are a staple item, so consumer demand will always exist for the industry. Price and corresponding fluctuations in real household disposable income are key industry demand determinants. However, operators also need to be mindful of consumer sentiment and shopping motivations as demand determinants. Income and prices Household disposable income is the amount consumers have to spend after taxes, mortgage repayments and interest. Household food expenditure typically declines when income falls, as consumers become more price conscious. Consumers tend to opt for lower priced and on-special items, rather than higher end items. The latter includes items such as organic fruit, vegetable, dairy and meat products, which are generally more expensive than traditionally grown or manufactured items. Alternatively, income may affect the type of goods purchased. For example, price-conscious shoppers may opt to purchase private-label goods for staple items, such as bread and milk, and allocate more income towards higher scale items, such as their favourite biscuits or meat and poultry items. Consumer sentiment Consumer sentiment plays a significant role in determining overall retail spending patterns. Improved consumer sentiment bodes well for retailers as it signals that consumers are content with their current financial status and are positive about their future job prospects

15 Supermarkets and Grocery Stores in Australia February Products & Markets Demand Determinants continued and finances. When consumer sentiment is buoyant, households are willing to spend more on basic goods and services and revenue growth is higher. Poor sentiment causes consumers to switch to cheaper products, constraining revenue growth. Shopping motivations It is important for industry retailers to understand a customer s motivation for shopping. Convenience is vital to store selection and is the key to maximising the amount spent by shoppers. Timeconscious shoppers are less concerned about the price of items, instead placing more importance on proximity and convenience. Consumers want staple items located close-by and not spread out across the store. Major Markets The customer base for the Supermarkets and Grocery Stores industry has been divided in accordance to income distribution quintiles. The income disparity between the highest and lowest quintiles suggests that supermarket and grocery store consumption patterns differ for each quintile. Fifth income quintile The fifth quintile represents the highest 20% of household incomes. It spends the largest amount on groceries in absolute terms but the lowest percentage of income. Supermarkets have developed premium private-labels to make inroads in this market. Such labels include Woolworths Macro and Select brands and Coles premium ranges of fresh produce and meats. This market often demands organic products or highquality and easy to use products. Woolworths high-quality supermarket chain Thomas Dux is placed in highincome locations, supplying premiumquality niche products for consumers. Not surprisingly, this group spends the largest percentage on dining out. Increased consumption of meals outside the home has contributed to this market s decline as a share of industry revenue over the past five years. Fourth income quintile The fourth income quintile is composed of diverse consumers, from larger families to busy time-poor workers. These consumers are willing to pay for convenience, contributing to this market s growth as a share of revenue over the past five years. This quintile spends slightly more on seafood than the third quintile and roughly the same amount on fruit and vegetable items as the second and third quintiles. This group is likely to be responsive to the introduction of readymade meal products at supermarkets, increasing their spending on these products. The fourth income quintile has remained a steady share of revenue over the past five years. Third income quintile The middle quintile of household income earners consists of low- to mediumincome families, spending the least amount of money on fish and seafood. This group is likely to purchase a range of both private-label and branded products, although they often purchase branded products when they are discounted. This market is expected to have increased its consumption of high-quality private-label products over the past five years, although its contribution to revenue has remained steady. Second income quintile Major purchases made by the second income quintile include meat, condiments, confectionery and preserved meals. This consumer group spends the largest percentage of disposable income on non-alcoholic beverages. This market is expected to have increased its consumption of bulk and discount goods, contributing to growth in sales of these products over the past five years. This has

16 Supermarkets and Grocery Stores in Australia February Products & Markets Major Markets continued also expanded this market s share of revenue marginally over the past five years. Costco and ALDI are expected to continue successfully attracting customers in this quintile, due to the affordability of their products. First income quintile The first quintile is comprised of the lowest 20% of households, accounting for a stable portion of revenue over the past five years. The first quintile group spends the highest percentage of income on food and non-alcoholic beverages, compared with the other quintiles. Specifically, they spend a larger percentage of their disposable income on meat and vegetables. It is anticipated that this demographic purchase low-cost privatelabel products, benefiting from discount stores such as ALDI and Costco. Consumers in this quintile are expected to continue viewing affordability as a product s most important feature. Major market segmentation ( ) 13% Second income quintile 9% First income quintile 19% Third income quintile 35% Fifth income quintile Total $88.1bn 24% Fourth income quintile SOURCE: International Trade International trade data is counted at the manufacturing level. Consequently, the Supermarkets and Grocery Stores industry does not record any imports or exports. However, international suppliers of branded products remain a vital part of the industry. Aside from lowering prices, operators have broadened their product range to attract new customer segments. For example, various Asian products previously only sold by specialist retailers are now sold in the major supermarkets. To achieve this, players have resorted to importing the required merchandise from international suppliers and distributors. As a result, importation levels have increased across a range of food items. Exported products affect supermarkets and grocery stores, as they limit locally produced food items available for domestic sale. For example, upstream meat processors derive more than 70.0% of their income from export markets. While this is partly due to oversupply for the domestic market, demand from overseas markets is growing as incomes rise. This has the potential to create supply difficulties for domestic supermarkets and grocery stores.

17 Supermarkets and Grocery Stores in Australia February Products & Markets Business Locations NT 1.2 QLD 18.2 WA 7.8 SA 5.8 NSW 31.9 VIC 30.9 ACT 1.5 Establishments (%) Cold Zone (<10) <25 <50 Hot Zone (<100) Not applicable TAS 2.7 SOURCE:

18 Supermarkets and Grocery Stores in Australia February Products & Markets Business Locations The distribution of establishments is in line with population trends, with the highest proportion of stores based in New South Wales, Victoria and Queensland. Strong population growth in Queensland over the past fifteen years has resulted in the state s proportion of establishments increasing. ALDI s strong growth has increased concentration on the east coast. ALDI has plans to open a significant number of stores in Western Australia and South Australia in the coming years. The appearance of supermarkets in capital city CBDs is a fairly new occurrence. Traditionally, major supermarkets were located in suburban shopping centres or local shopping strips. The number of supermarkets in or close to CBDs has grown as population levels have increased. For example, the number of permanent residents in Melbourne s CBD increased from 35,000 in 1991 to an estimated 116,431 in (latest data available). CBD supermarkets also cater to city commuters. For this reason, large supermarkets are commonly located in or near train stations, public transport hubs and, in the case of Woolworths, at airports. Strong population growth is expected over the next five years, especially in Queensland and Western Australia, Percentage Distribution of establishments vs. population ACT NSW Establishments Population NT QLD SA TAS VIC WA SOURCE: supporting the development of the state s economies. The population growth in these states will increase demand for groceries and boost the number of establishments in these states. Demand is also expected to increase for developing outer metropolitan areas, particularly those with growing housing estates. Such developments result in an increase in population spread towards rural areas requiring further establishments in these areas.

19 Supermarkets and Grocery Stores in Australia February Competitive Landscape Market Share Concentration Key Success Factors Cost Structure Benchmarks Basis of Competition Barriers to Entry Industry Globalisation Market Share Concentration Level Concentration in this industry is High The Supermarkets and Grocery Stores industry is one of the most concentrated industries in Australia. The top four players are expected to account for 90.6% of the market in Acquisition activity undertaken by Woolworths and Coles has contributed to increasing concentration since the mid-1970s. These two players alone account for more than 70% market share. The strong growth of German-owned ALDI has increased industry concentration. ALDI operates as a low-cost player that stocks a limited range of popular grocery items. Consumers have responded positively to this model, contributing to ALDI s rapid growth over the past five years. ALDI holds 9.1% of the market, an incredible achievement considering it only launched in Australia in Costco s expansion in the industry is likely to add to concentration. Its discounted prices across a mass range of products will appeal to price-conscious consumers, as the company gains market share at the expense of smaller operators. This includes IGA-branded stores, owned by Metcash. These stores have lost market share over the past five years, due to the ongoing growth of ALDI, Woolworths and Coles. Key Success Factors IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are: Attractive product presentation Store layout and design and the presentation of products are important so that shoppers can easily locate goods. Store layout and design also enhance impulse purchases. Experienced workforce Supermarket staff need to be well trained and knowledgeable of product location to provide efficient service to customers. Proximity to key markets Supermarkets benefit from being located in an area with high consumer traffic, as this bodes well for impulse purchases. Availability of car parking Supermarket car parking should follow a clear layout and have sufficient spaces to cope with peak demand periods. Ability to control stock on hand Due to the quantity of goods on offer, supermarkets require efficient stock management systems to record and reorder goods as required. Cost Structure Benchmarks Actual cost structures vary among players according to their size, product range, distribution capabilities and number of stores. The industry s high market share concentration means that average cost structure benchmarks are heavily skewed towards the larger players. Smaller players are expected to have higher operating expenses and lower profit margins than Woolworths and Coles. Profit The industry s average profit margin has grown over the past five years. This is largely due to Coles and ALDI, which both enjoyed profit margin growth over the period. Despite a slight decrease in profitability, Woolworths continues to have the strongest profit margins in the industry. Changing consumer shopping trends and increased consumer demand for private-label merchandise have all influenced profit growth. Private-label products cost less for consumers and have higher profit margins for retailers. This is because the wholesale portion of the supply chain is eliminated, thereby reducing costs. Many independent players have struggled due to the dominance of Woolworths and Coles, with intense trading conditions forcing operators to accept reduced product margins to remain competitive.

20 Supermarkets and Grocery Stores in Australia February Competitive Landscape Cost Structure Benchmarks continued Purchases Purchases are the largest expense for industry operators due to the volume of merchandise sold by supermarkets. Growing sales volumes of private-label merchandise across the Woolworths and Coles chains have caused several branded product lines to be removed or replaced. Consequently, industry purchase costs have fallen slightly as a share of revenue over the past five years, as more branded merchandise has been replaced by private-label goods. Purchase costs are influenced by climatic events, such as droughts, floods and cyclones, which affect the price and availability of fresh produce. Other factors affecting the cost of fresh produce and packaged groceries include fluctuations in the exchange rate (which influence imported produce) and the price of petrol, which affects transportation costs. Wages The industry has a strong reliance on labour. However, wage costs have fallen as a portion of revenue over the past five years. This is because automated processes and self-serve checkouts have become more widespread over this period. Staff undertake a variety of tasks including shelf stocking and checkout operation. Supermarkets tend to employ teenagers on a casual or part-time basis, which helps to keep wages and salaries low. As the number of self-serve checkouts increases over the next five years, the number of staff per establishment is expected to fall slightly. Depreciation, rent, utilities and other costs Other costs, such as depreciation and rent, have increased as a share of revenue over the past five years. Depreciation costs have risen due to the considerable number of refurbishments and store upgrades undertaken, including the rollout of self-serve checkouts. Similarly, rent expenses have risen due to demand for prime retail locations. Rising energy costs have contributed to higher utility costs as a portion of revenue. Other costs incurred cover a range of miscellaneous Sector vs. Industry Costs Average Costs of all Industries in sector ( ) Industry Costs ( ) Percentage of revenue np r o fi t n Rent n Utilities n Depreciation n Other n Wages n Purchases 20 0 SOURCE:

21 Supermarkets and Grocery Stores in Australia February Competitive Landscape Cost Structure Benchmarks continued and sundry expenses, such as insurance and retrieving shopping trolleys from car parks. Advertising accounts for a substantial portion of the industry s other costs. The continued strong competition among players has increased the frequency of advertising and the range of media used by operators. Industry operators have also increased their advertising expenditure due to pressure from convenience stores. Basis of Competition Level & Trend Competition in this industry is High and the trend is Increasing The trading landscape for industry operators has changed considerably over the past three decades. Supermarkets and grocery stores once operated alongside specialist food retailers. Now, they compete fiercely with specialist retailers on price and product range in a bid to attract shoppers. Additionally, new players such as rapidly growing ALDI and newer entrant Costco are altering the industry trading landscape. Internal competition Supermarkets primarily compete on the basis of price. Consumers are price conscious, wanting to be assured they are purchasing value-for-money goods. Industry retailers such as Coles have placed an increased focus on the importance of price by implementing greater transparency in their pricing structure. The ongoing price war between Coles and Woolworths demonstrates the competitive importance of price. Other key areas for competition include product ranges that tie into new consumer trends, especially in health and organics, private label prevalence, store location and accessibility, in-store layout, convenience and freshness. Competition has also emerged from the internet over the past five years. Increasing use of phone and tablet applications, online shopping and convenient pick-up or delivery options have contributed to this trend. External competition Players operating in the industry compete with specialist food retailers. These include fresh meat, fruit, vegetable, bread and cake retailers. Specialist retailers typically focus on customer service, but have become increasingly price competitive over the past five years. In some instances, these key competitors are actually viewed as complementary businesses. For example, ALDI only offers a narrow product range of about 900 lines, compared with larger retailers, such as Coles, which stock closer to 30,000 lines. ALDI s smaller range complements small businesses as ALDI does not have a butcher, bakery, delicatessen, bank, pharmacy, dry cleaning services or petrol retailing. As a result these other services are used while customers are at the supermarket. Convenience stores are creating additional competition for supermarkets and grocery stores. A growing number of convenience stores and milk bars are stocking a wider variety of products, creating a mini supermarket store set up. These stores are particularly attractive to consumers in a hurry, who only need to purchase a few essential items. Cafes, restaurants and takeaway food services also compete with supermarkets, particularly when disposable incomes increase. Consumers purchase less food items from supermarkets when they eat out of the home frequently.

22 Supermarkets and Grocery Stores in Australia February Competitive Landscape Barriers to Entry Level & Trend Barriers to Entry in this industry are High and Steady Entry into the industry is difficult due to numerous factors. Establishing a new store or purchasing a franchise licence is expensive. Operators may also struggle to find suitably sized premises. Most operators in the industry state that prime retail sites are becoming increasingly difficult to find. Difficulty in finding a suitable retail site may be a direct result of store size. Analysis indicates that ALDI stores measure about 830 square metres on average, compared with the average Coles or Woolworths store, which measures about 4,000 square metres. The availability of prime real estate sufficient to house large-format stores may also be an issue for international operators planning to launch stores in Australia. The dominance of major players in the industry poses a barrier to entry. Major industry players have significant breadth of locations and range of products, which new entrants cannot compete with. The limited level of product differentiation among players, with most players stocking similar if not identical goods, further hinders entry. As a result, there is significant competition within the Barriers to Entry checklist Competition Concentration Life Cycle Stage Capital Intensity Technology Change Regulation & Policy Industry Assistance High High Mature Medium Medium Medium Low SOURCE: industry based on price variations. Recent points of difference have occurred with specialist grocery stores, discount supermarkets and organic produce. Operators planning to enter the industry need to obtain relevant council licences. However, in most cases, this is not a formidable barrier to entry. Under current Federal Government legislation, operators have five years to develop vacant commercial land. This legislation is particularly attractive to retailers such as ALDI and Costco. This legislation reduces barriers to investment and provides international companies with greater certainty about entering the local market. Industry Globalisation Level & Trend Globalisation in this industry is Low and the trend is Increasing The Supermarkets and Grocery Stores Industry displays a low level of globalisation. The industry s two major players, Woolworths and Coles, are locally owned. Additionally, the majority of smaller participants are Australian owned. All players in the industry earn their revenue domestically, due to the perishable nature of products and the exclusion of international trade from retail industries. However, Woolworths operates 177 supermarkets in New Zealand under its Countdown brand. While revenue from these operations are not included in the industry, they are indicative of Woolworth s expansion overseas to generate additional revenue. Wesfarmers operates in New Zealand through its home improvement, general merchandising and insurance operations, signalling potential to expand into supermarkets. The dominance of the two most powerful players, Woolworths and Coles, makes it difficult for international retailers to enter the Australian market. Slow growth by US-owned Costco in Australia and hesitance from overseas operators, such as UK-based Tesco, to enter the market demonstrate this difficulty. ALDI s preference for and track record in mature markets has contributed to its rapid growth in spite of fierce competition from the major two supermarkets. Fellow German-owned chain Lidl has reportedly shown an interest in entering the Australian industry. However, the company is yet to officially confirm these reports or advise an official launch date in Australia.

23 Supermarkets and Grocery Stores in Australia February Major Companies Woolworths Ltd Wesfarmers Limited ALDI Stores Supermarkets Pty Ltd Metcash Limited Other Companies Major players (Market share) Metcash Limited 8.6% Wesfarmers Limited 33.4% ALDI Stores Supermarkets Pty Ltd 9.1% Woolworths Ltd 39.5% 9.4% Other SOURCE: Player Performance Woolworths Ltd Market share: 39.5% Industry Brand Names Woolworths Safeway Thomas Dux Woolworths Ltd is one of the largest companies in Australia, as measured by annual revenue. The company s headquarters are in Bella Vista, NSW. Woolworths was established in 1924 and listed on the ASX in The company operates in Australia and New Zealand across several segments including food and liquor retailing, general merchandising (Big W), hospitality (through over 300 hotels) and home improvement retailing (Masters Home Improvement). However, the company announced in January 2016 that it is looking to sell or close down the Masters chain. Woolworths most lucrative operating segment is food and liquor retailing. The company operates in the industry through its everyday supermarkets, Woolworths and Safeway, and its Thomas Dux premium supermarkets. Reports surfaced in June 2015 of a potential sale of the Thomas Dux chain, although no sale has been made to date. In the late 1970s, Woolworths share of the Supermarkets and Grocery Stores industry stood at about 15.0%. Today, it is the industry s largest player, accounting for almost 40% of industry revenue. Savings and prudence have typified the consumer climate in the past five years, and so instore marketing has focused on selling products appealing to these attributes. However, the ACCC commenced legal proceedings against Woolworths in December 2015, alleging that the company had dealt unconscionably with its suppliers in its attempt to fund price cuts without affecting its profit margins. Woolworths aims to open between 15 and 25 stores per year and enjoys the Woolworths Ltd - industry segment performance* Year Revenue ($ million) (% change) ,400.0 N/C , , , , , *Estimate SOURCE: ANNUAL REPORT AND IBISWORLD highest profit margins in the industry. The company has also shifted focus towards online sales. In August 2014, Woolworths opened its first dark store (i.e. with no customers), dedicated to online shopping purchases. The store was opened in Mascot, NSW, as a trial to determine if dedicated warehouses were more efficient for online shopping than the current personal shopper in a local supermarket set-up. The company is reportedly considering opening dark stores in Melbourne and Brisbane. Financial performance Woolworths industry-specific revenue is forecast to grow at an annualised 2.7% over the five years through Growth in industry sales on the back of improving consumer sentiment contributed to the company s strong revenue growth in , increasing an estimated 6.1%. This growth was higher than that of the overall industry and an improvement on , when Woolworths lost market share to Coles

24 Supermarkets and Grocery Stores in Australia February Major Companies Player Performance continued after the launch of its rival s successful Down marketing campaign. However, the company has underperformed the industry over the past five years. While sales have increased over the past five years, strong competition from major rivals Coles and ALDI has contributed to weakening sales revenue growth. Woolworths revenue growth over the two years through is anticipated to slow substantially, due to strong price competition from Coles and ALDI. Woolworths launched a price discounting strategy over in response, although sales for the company s food and liquor segment decreased by 1.0% in the first quarter of Despite sales challenges, Woolworths profit margins remain the strongest in the industry. However, profitability is expected to have decreased marginally over the past five years. Player Performance Wesfarmers Limited Market share: 33.4% Industry Brand Names Coles Bi-Lo Wesfarmers Limited is one of Australia s largest diversified companies. The company is headquartered in Perth and has traditionally operated in retail trade through its Bunnings hardware business. However, Wesfarmers became a pivotal player in the Supermarkets and Grocery Stores industry in late 2007, with its acquisition of Coles Group for $22.1 billion. Wesfarmers operates in the industry under the Coles and Bi-Lo businesses, which it acquired as part of the 2007 deal. The majority of Wesfarmers supermarkets operate under the Coles brand. While some supermarkets continue to operate under the Bi-Lo brand, they fall under the new Coles division of Wesfarmers. Coles (formerly Coles Myer) was created in 1985 with the merger of GJ Coles & Coy Limited and Myer Emporium Limited. After the merger, Coles expanded rapidly for two decades, opening new stores and acquiring existing independent supermarkets and chains. Coles has gradually increased its store numbers over the past five years, as it has fine-tuned its operation and development of its supermarket chain. This has allowed the company to open more stores with a developed, successful formula, helping it to compete with the largest player and its main competitor, Woolworths. The Coles division has gained significant ground on Woolworths over the past five years, entrenching itself as the industry s second-largest player. The Coles brand has been rejuvenated under the ownership of Wesfarmers and Wesfarmers Limited - industry segment performance* Year Revenue ($ million) (% change) ,335.8 N/C , , , , , *Estimate SOURCE: ANNUAL REPORT AND IBISWORLD revenue has grown strongly. Revenue growth has allowed Coles to become the 18th-largest global retailer. This has not come about without its share of controversy, with the ACCC investigating claims of unconscionable conduct towards suppliers. The ACCC and Coles reached a settlement agreement regarding the unconscionable conduct claims in December Coles has announced plans to open an additional 70 stores nationally over the next three years, as it continues to challenge Woolworths for the place of largest player in the industry. Financial performance Despite a sustained price war with Woolworths, Coles revenue is expected to grow at an annualised 4.8% over the five years through This represents an outperformance of the

25 Supermarkets and Grocery Stores in Australia February Major Companies Player Performance continued industry over the period. The ongoing Down Down marketing campaign has contributed to this, as customers are becoming increasingly conscious of their expenditure on groceries. Coles has become particularly competitive through its large range of cheap privatelabel goods. Sales of private-label products are anticipated to account for almost one-quarter of Coles supermarket revenue. Increased new store openings and increasing average sales per store have contributed to the company s growing revenue over the past five years. As a whole, Coles share of the market has risen slightly over the past five years. Its profitability has also increased with private-label sales volumes, which have higher margins for the company. Player Performance ALDI Stores Supermarkets Pty Ltd Market share: 9.1% Industry Brand Names ALDI ALDI Stores Supermarkets Pty Ltd is the Australian entity of the global company ALDI. Established in Germany in 1913, ALDI operates discount self-service stores with a network spread across the world. ALDI was initially a dry-goods retailer, with fresh produce introduced in the 1980s. The company now has over 9,000 stores, primarily throughout Europe and more recently in the United States and Australia. It operates as two separate groups, with ALDI North largely responsible for European operations such as Spain, France and the Netherlands. ALDI South has a more diverse focus that includes some European countries, such as Austria and Switzerland, but also manages operations in the United Kingdom, the United States and Australia. The Australian entity, ALDI Stores Supermarkets Pty Ltd, is headquartered in Minchinbury, NSW. The company supplies largely exclusive product lines owned by the business across three main ranges: grocery lines, fresh produce and special buys. However, ALDI has begun stocking more branded products. ALDI entered the Australian market as a private company in January 2001, opening two stores in New South Wales. A typical ALDI store stocks about 1,000 products, compared with about 30,000 in an average Coles or Woolworths store. ALDI currently operates over 400 stores nationally. Parent company ALDI South has invested $700 million to extend ALDI s network into Western Australia and South Australia. The expansion is expected to include two warehouse distribution centres and up to 120 stores ALDI Stores Supermarkets Pty Ltd - financial performance Year* Revenue ($ million) (% change) ,523.0 N/C , , ** 5, ** 6, ** 8, *Year end December **Estimate SOURCE: IBISWORLD across both states. Construction of a distribution centre in South Australia commenced in March 2015, with its first stores opening in early The company has had a significant effect on the Supermarkets and Grocery Stores industry. Since commencing operations in Australia, ALDI has pushed the major supermarkets to reduce prices by offering a national price, ensuring price consistency nationwide. Consumers have responded to these low prices, contributing to rapid revenue increases and dramatic expansion of the store network. ALDI is estimated to hold 9.1% market share in , an incredible accomplishment for a chain that launched in Financial performance ALDI s industry-related revenue is anticipated to grow at an annualised 17.9% over the five years through

26 Supermarkets and Grocery Stores in Australia February Major Companies Player Performance continued December This is a considerable outperformance of the industry, with growth expected to be more than four times that of the wider industry. ALDI has significantly increased its market share over the past five years, as the high number of store openings has increased revenue and enhanced brand recognition and customer loyalty. The number of new store openings has been inconsistent over the past five years, contributing to fluctuating revenue growth. As ALDI expands into South Australia and Western Australia in 2016, its market share and revenue are expected to continue to grow strongly and influence competition for grocery prices in Australia. Profit margins have increased over the past five years, due to increasing sales of higher margin products. Player Performance Metcash Limited Market share: 8.6% Industry Brand Names IGA Supa IGA Metcash Limited is a publicly owned Australian company based in Macquarie Park, NSW. The company was originally established as a local grocery store called Davids in South African company Metro Cash and Carry Ltd acquired Davids in 1998, with the company changing its name to Metcash Trading Ltd in The company moved back into local hands following the 2005 sale of Metcash Trading by its South African parent to a newly created Australian parent of the same name. Today, the company operates under the name Metcash Limited across a range of industries including food and grocery, liquor and hardware. Metcash earns over 90% of its income through wholesaling. It manages a portfolio of brands that independently owned stores pay a fee to operate under. Metcash is responsible for the purchasing, merchandising, warehousing, marketing and distribution of products to stores. Individual store operators are then responsible for day-to-day operations. The company earns a negligible portion of its revenue through franchise fees, instead generating revenue through exclusive wholesaling agreements with the stores operating under its brand names. Metcash operates in the industry under its IGA and Supa IGA brands. Metcash s market share is calculated using the aggregate revenue of all IGA-branded stores nationally. IGA-branded stores have lost market share over the past five years, due to intense competition and Metcash Limited (IGA segment) - financial performance* Year Revenue ($ million) (% change) ,779.8 N/C , , , , , *Estimate SOURCE: IBISWORLD lower store numbers than the other big players. Metcash launched a strategic review in June 2013, to address plateauing sales and competitive pressures in its food and grocery operations. Following the review, Metcash announced in March 2014 it would launch Project Diamond, a five-year transformation strategy aimed at achieving efficiencies through operation consolidation. The project will cost an estimated $675 million to implement, with up to $180 million in capital expenditure allocated to supply chain enhancements. Financial performance Earnings from IGA-branded stores are forecast to fall at an annualised 0.4% over the five years through This represents an underperformance compared with the industry, underpinning the chain s declining market share. IGA-branded stores have suffered due to

27 Supermarkets and Grocery Stores in Australia February Major Companies Player Performance continued the ongoing price war between Woolworths, Coles and ALDI. Consumers have been drawn to lower prices at the other major supermarkets. In particular, revenue across IGA stores suffered in as the price war heated up. Advertising and discounting efforts have attempted to increase the chain s revenue, although these efforts have had minimal success to date. Profit margins are anticipated to have fallen over the past five years, as IGA stores have struggled to lower prices in an attempt to match discounts in other major supermarkets. Other Companies Australian United Retailers Limited Estimated market share: 2.4% Australian United Retailers Limited (AUR) operates in the industry via its Foodworks chain. AUR and Foodworks merged in August 2004 in response to increasing competition across the industry, agreeing to keep the Foodworks brand in operation. Prior to the merger, AUR and Foodworks operated under a variety of brands, including Buy Rite, Cut Price, Rite-Way, Tuckerbag and Food-Way. AUR s market share has decreased over the past five years, as consumers have turned away from local supermarkets in favour of large supermarkets offering discount prices. The company is anticipated to generate approximately $2.1 billion in SPAR Australia Limited Estimated market share: 2.1% SPAR Australia Limited entered the Australian market in 2002 with the launch of three stores in Queensland. SPAR operates in the industry in a similar nature to Metcash, under its SPAR and 5 Star SPAR brands. SPAR wholesales grocery products to independently owned and operated SPAR branded stores. The company operates stores throughout New South Wales and Queensland. Like other independent networks, SPAR has struggled to grow its revenue over the past five years. The company is expected to earn approximately $1.8 billion in Costco Wholesale Australia Pty Ltd Estimated market share: 2.0% Costco Wholesale Australia Pty Ltd is a subsidiary of US-based Costco Wholesale Ltd. Since commencing Australian operations in Melbourne in 2009, Costco has provided an alternative to traditional supermarkets and grocery stores. Costco offers low-price products in a wholesale format to customers who purchase memberships for about $60 per year. It operates seven stores in Victoria, New South Wales, the Australian Capital Territory, South Australia and Queensland. The company posted earnings of $1.3 billion over the twelve months through August 20145(latest data available), up 50.5% on the previous year, largely due to new store openings. Costco is opened a new store at Moorabbin Airport, VIC, in November 2015, with another store likely to open in Epping, VIC, in The new store at Moorabbin Airport is the first in Victoria to also sell petrol. Costco s market share is projected to increase over the next five years, as new stores open and consumers become more aware of the diverse range of low-cost products available. Membership requirements help to ensure customer loyalty and are likely to assist with continued growth. Costco has the ability to increase competition for discount stores such as ALDI and for wholesalers through the Costco business membership and its highly competitive prices. The company is expected to earn almost $1.7 billion over the twelve months through August 2016.

28 Supermarkets and Grocery Stores in Australia February Operating Conditions Capital Intensity Technology & Systems Revenue Volatility Regulation & Policy Industry Assistance Capital Intensity Level The level of capital intensity is Medium The Supermarkets and Grocery Stores industry is moderately capital-intensive. For every dollar spent on capital, stores spend an estimated $6.79 on wages. While advances in technology have made the recording of sale items easier and faster, manual labour is still required in many aspects of supermarket operations. Consequently, labour remains a substantial portion of daily operating costs. Staff are required to undertake a variety of tasks according to their position descriptions. These include assisting customers with their purchases, processing transactions and restocking display shelves. Capital expenditure for the industry comes in the form of fixtures and fittings, such as display shelving and cash registers. Over the past decade, the industry has increased its capital expenditure through the installation of self-service checkouts. Many players have Capital intensity Capital units per labour unit Economy Retail Trade Supermarkets and Grocery Stores Dotted line shows a high level of capital intensity SOURCE: installed these checkouts in stores across the country, particularly Woolworths and Coles. Self-serve checkout systems are expected to become more widespread over the next five years, increasing to the point where automated checkouts will exceed the number of cashier-assisted checkouts. Tools of the Trade: Growth Strategies for Success New Age Economy Recreation, Personal Services, Health and Education. Firms benefit from personal wealth so stable macroeconomic conditions are imperative. Brand awareness and niche labour skills are key to product differentiation. Investment Economy Information, Communications, Mining, Finance and Real Estate. To increase revenue firms need superior debt management, a stable macroeconomic environment and a sound investment plan. Labour Intensive Traditional Service Economy Wholesale and Retail. Reliant on labour rather than capital to sell goods. Functions cannot be outsourced therefore firms must use new technology or improve staff training to increase revenue growth. Meat Processing Supermarkets and Grocery Stores Outdoor Vegetable Growing Fresh Meat, Fish and Poultry RetailingOld Economy Fruit and Vegetable Retailing Agriculture and Manufacturing. Convenience Stores Traded goods can be produced using cheap labour abroad. To expand firms must merge or acquire others to exploit economies of scale, or specialise in niche, high-value products. Capital Intensive Change in Share of the Economy SOURCE:

29 Supermarkets and Grocery Stores in Australia February Operating Conditions Technology & Systems Level The level of Technology Change is Medium Over the past decade, the development of new technologies and systems has led to significant changes from both the client and supplier side of the Supermarkets and Grocery Stores industry. New technologies have enhanced service quality, streamlined systems and aided innovative promotions and services. EDI and RFID The introduction of electronic data interchange (EDI) has brought with it many benefits for retailers and consumers. EDI is an efficient way to control data flow in the supply chain, benefitting manufacturers, wholesalers, retailers and providers of banking solutions. Radio-frequency identification (RFID) systems use radio signals to identify individual products and log and track goods through the supply chain. This enables better management of inventory levels, increases efficiency and allows retailers to better anticipate trends. The widespread use of these electronic systems has also enabled the introduction of self-serve checkouts, as the systems recognise many goods electronically rather than relying on a cashier. Self-serve checkouts Self-scanning technology has been widely accepted, providing cost efficiencies for retailers. Despite ongoing implementation of such technology, problems acknowledged by retailers include queues at checkouts and confusion when scanning fresh produce. While self-checkout technology has experienced slow adoption rates, it is envisaged that the technology will become commonplace across retail outlets. Self-scanning checkouts are anticipated to exceed cashier-assisted checkouts by the end of Apps and tablets Smartphone and tablet applications have increased rapidly over the past five years. Three major supermarkets - Woolworths, Coles and ALDI - all use smartphone and tablet technology to enhance the customer s experience, many allowing ordering options. In late 2012, Coles introduced the use of ipad screens in stores to promote specials and send receipts to customer s smartphones. Coles is known for its feed your family app and ALDI has a personalised ALDI lunchbox app organising school lunches based on the child s food preferences. Retailers are able to use this information to determine weekly specials and required stocks. Online shopping Online and home-delivery grocery services have become particularly attractive for time-poor customers. Online purchasing offers options such as drive thru grocery collection, home or work delivery and Woolworths new Airport click, fly & collect. Both Coles and Woolworths have significantly invested in providing useful online shopping solutions with fast and efficient delivery options. Online grocery sales account for only 2.5% of total grocery revenue in However, it is anticipated that the use of online grocery purchasing will continue to become more prominent.

30 Supermarkets and Grocery Stores in Australia February Operating Conditions Revenue Volatility Level The level of Volatility is Low The industry has displayed low revenue volatility over the past five years. Growth rates have been largely strong, maintained at slightly above the level of inflation in most years. The consistent nature of industry growth is mainly due to the staple nature of the products the industry sells. However, over the past five years as competition has become more intense between operators, price deflation has occurred, especially for staple products such as bread and milk. This has caused revenue growth to become slightly more volatile. Fluctuations in industry revenue are also associated with changes in the level of real household disposable income and consumer sentiment. Income affects the overall quantity of goods purchased and the frequency that consumers shop. Consumers generally limit their retail spending when sentiment is low, due to the increased uncertainty about their future position. Consumer sentiment has fluctuated over the past five years, contributing to moderate revenue volatility over the period. A higher level of revenue volatility implies greater industry risk. Volatility can negatively affect long-term strategic decisions, such as the time frame for capital investment. When a firm makes poor investment decisions it may face underutilised capacity if demand suddenly falls, or capacity constraints if it rises quickly. Revenue volatility* (%) Volatility vs Growth Hazardous Supermarkets and Grocery Stores 0.1 Stagnant Blue Chip Five year annualised revenue growth (%) Rollercoaster * Axis is in logarithmic scale SOURCE: Regulation & Policy Level & Trend The level of Regulation is Medium and the trend is Steady The main regulations affecting supermarket retailers are those governing shop-trading hours and the Australian Competition and Consumer Commission (ACCC), which deal with a diverse range of issues from mergers to pricing and supply issues. Trading hours In general terms, trading hours are trending towards total deregulation. In New South Wales, supermarkets are permitted to trade on any day of the week, unless it is a restricted trading day (Good Friday, Easter Sunday and prior to 1 pm on ANZAC Day). Similar trading regulations apply to supermarkets in Victoria. Trading hours for stores in Queensland are complex due to the large number of trading-hour zones. In general, supermarkets are regarded as non-exempt stores and hence are not permitted to trade on ANZAC Day or Labour Day. Increased online presence could potentially subvert opening hour restrictions. Pricing issues The supermarket price wars that rolled out in 2011 resulted in significant political manoeuvring and commentary. The Senate launched an inquiry into the effects of the $1.00 per litre milk on dairy farmers. The inquiry found no significant effects on dairy farmers and in the years since the introduction of price discounts, farmgate prices have not fluctuated any more than usual. This is because the