Woolworths' new chief launches review
Woolworths CEO Brad Banducci is conducting a strategic review as the company's supermarket sales fall further behind rival Coles.
Grocery prices at Woolworths and Coles are still more expensive than at Aldi, but the gap has fallen sharply as the big chains invest more than $1 billion into promotions and shelf prices.
And for the first time in years, Woolworths can now honestly claim that a basket of groceries at Australia's largest supermarket chain costs less than an almost identical basket at Coles.
According to a survey by Credit Suisse, a basket of 110 packaged groceries and fresh food at Woolworths cost $573 last week, compared with $586 at Coles and $465 at Aldi.
Based on promotional prices, the Woolworths basket was 23 per cent more expensive than Aldi, a big improvement on the 32 per cent premium a month ago. Coles' promotional basket cost 26 per cent more than the Aldi basket, down from 30 per cent in April.
Based on standard shelf prices, Woolworths' prices were consistent with Coles but about 29 per cent more expensive than a similar basket at Aldi. Six months ago, the Woolworths basket was 6 per cent more expensive than Coles and 38 per cent more than Aldi.
Credit Suisse analyst Grant Saligari said the price of Woolworths' promotional basket had fallen below Coles in the past few weeks and was now the closest it had been to Aldi for more than a year.
"It's an important milestone for Woolworths," Mr Saligari told Fairfax Media.
"They've recognised that pricing needs to improve ... and it does appear to be becoming more price competitive to Coles on different metrics." However, on average, Coles' shelf prices were still slightly cheaper than those of Woolworths.
The basket measured by Credit Suisse includes packaged groceries, fresh food and produce, a mix of private label and national brands, and promotional as well as standard shelf prices.
The price reductions reflect the $1 billion that Woolworths and Coles have invested into grocery prices since 2015 to reduce the gap with Aldi and protect their dominant share of the $90 billion grocery market.
Earlier this month, Woolworths announced its fourth consecutive quarter of negative same-store sales growth and signalled plans to invest an additional $150 million into promotions, everyday shelf prices and service in the June-half, on top of the $400 million invested to date.
"Our focus is to make sure our customers get good prices in our stores and trust us on the topic of prices," Woolworths chief executive Brad Banducci said at the time.
"It's a combination of getting the investment right but also the shape of it right, between EDLP [every day low prices] and promotions," said Mr Banducci, who is expected to update suppliers on Woolworths' progress when he delivers the keynote address at the Australian Food and Grocery Council's annual conference in Brisbane on Wednesday.
While Coles is funding its price reductions from cost savings and petrol, Woolworths is sacrificing margins.
Analysts believe Woolworths' food and liquor margins are likely to fall to about 4.7 per cent this year and as low as 4.1 per cent next year before same-store sales start to recover, possibly in the second or third quarter of 2017.
While Woolworths' volumes and customer visits are improving, the retailer is losing share of the lucrative big basket or "main" grocery shop, particularly as Aldi opens stores in new markets.
"Aldi is winning share via expanding its customer reach, but not by getting existing customers to spend more," UBS analyst Ben Gilbert said in a report this week.
Since arriving in Australia in 2000, Aldi has been opening between 25 and 30 stores a year on the east coast and plans to launch a record 60 this year as it moves into South Australia and Western Australia.
So far this year, it has opened 17 stores – seven on the east coast and 10 in South Australia. It plans to open 20 stores in Western Australia by the end of the year, and the first four are due to open next week in Mirrabooka, Kwinana, Belmont Forum and Lakeside Joondalup.
Another six will open in South Australia by the end of the year, including Berri, Gilles Plains, Westfield Marion, Smithfield, West Lakes and Evanston.
Aldi now has about 410 stores but is under-represented compared with Coles and Woolworths, with one store for every 56,000 people, double its target penetration of one store for every 20,000 people.
Based on a catchment of 20,000 people, UBS estimates that Aldi has scope for about 1150 stores – 930 on the east coast and 220 in South Australia and Western Australia. Woolworths has 940 supermarkets in Australia and Coles 782.