Price Wars in Suppermarket

In Australia, supermarket chains industry competition has become increasingly fierce. Coles and Woolworths are keep a near monopoly on supermarket industry with market shares 72% to 74%. Profit increases as price increases, however it will lead demand decrease or change the market share. As low-priced grocery leader, Aldi entered into Australian market and disrupt the age-old battle between retail giants Coles and Woolworths. By the figure below, the market share is shifting from the majors to the discounters that Aldi’s market share is increasing rapidly compare with 2002.

supermarkets_market_share

The major market share gain of Aldi is in Australia and Western Australia and the discounter plan over next 12 months set up more than 40 shops. The Morgan Stanley team forecast there will have a quick transformation that Aldi would be top of the retail sector within five years. The following table show the industry space summary which can found the space of Aldi is forecasetd to be more than Woolworths, Coles, IGA and Costco become the bigger one in 2020.

supermarkets

However, why Aldi can open new shop to increase the market share? It is inseparable from the consumers’ support.Price sensitivity greatly influence the choice of consumers. A shopping survey about the consumers’ choice show that Australian cut their bill in half at Woolworths and Cole to purchase in Aldi. Pricing is influenced by company cost, competitive pricing and customers’ willingness to pay. Aldi adpot low pricing strategy so the product is immediately snapped up. The figure below show the total price of a basket items in Adli, Coles and Woolworths. A bakset of leading brand items that consumer buy from Coles is $162.56 and $172.15 from Woolworths. However, it just cost $87.57 from Aldi to get a basket of equivalent items.

baskets

People realize that Aldi is a discounter that can be very cheap. It is for this reason that everyone would buy at the supermarket week valia-269x200after week. For example, the yoghurt (left) be sold at $6.99 for 18 tubs in Aldi but $9.25 for tubs in Woolworths. After calculation, each tub is 98% more expensive in Woolworths. Likewise, lamb rack is $44.99/kg in Woolworths but just $19.99/kg in Aldi.

Price is the basis and origin of the attraction for consumer to choose Aldi. But how can they do it? It is necessary to cover the cost which could divide into fixed and variable costs  to set the minimum floor on pricing. The fixed costs are high relative to variable, maximize volume. Therefore, Aldi’s own private lavel product account for 90% of whole product. However, it may be house-brand products in Coles and Woolworths. Before, Coles and Woolworths considere more about quality and freshness. But under the severe competition, they changed their approach to cope with new competitors and compete to win customers. Therefore, Coles and woolworths are focus on expand their own range of private-label products and cut the price.

These ads is that coles want to deliver the message about “ price is down down” to consumers and creat a perception that they provide quality value with low price.

The variable costs such as labor are relative to vairable, maximize per unit profit margins. Aldi keep them down to support low price. One of example is the trollleys which people have to insert $1 if they want and get the refund after return it. Therefore, it is not necessary to pay someone to hang out the trolleys. In addition, consumer should pay for plastic bag if they need. It could save the money. The amount of core product that Aldi offer is only nearly 900 which means it just need small shop with lower rent.

In this fierce competition of supermarket industry, pricing consideration and approaches is important to keep the competitive advantage. Aldi pay more attention on pricing consideration, doesn’t it?

By: Dandan Liu 214353927

Reference:

BT Investment Management 2015, Supermarkets-no longer a defensive safe haven for investors, retrieved 27 April 2016<https://btim.com.au/education-and-resources/supermarkets-no-longer-a-defensive-safe-haven-for-investors/>

Colgan, P 2015, CHARTS: Aldi is coming after the supermarket giants, Business Insider Australia, retrieved 27 April 2016<http://www.businessinsider.com.au/aldi-market-share-australia-supermarkets-2015-9>

Coles  2012, Coles Down Down Commercial-60 Second Version, YouTube, retrieved 27 April 2016<https://www.youtube.com/watch?v=j0cunDXeTEg>

Moncrief, M 2015, Supermarket price wars: Choice finds Aldi shop 50% off, The Sydne Morning Herald, retrieved 27 April 2016<http://www.smh.com.au/business/retail/supermarket-price-wars-choice-finds-aldi-shop-50-off-20150603-ghfjyu.html>

Murphy, J 2015, What are the secrets to Aldi’s super low prices?, The New Daily, retrieved 27 April 2016<http://thenewdaily.com.au/money/2015/05/24/secret-aldis-super-low-prices/>

 

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