It's "game on" in the battle for the Australian grocery shopper.
Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) may have some real competition heading their way from Aldi supermarkets.
Ratings agency Moody's said Germany-based discount retailer Aldi could grow enough to challenge the two retailing giants' long-time control of the supermarket industry, the Australian Financial Review reported.
Just how big is Aldi in Australia?
According to a separate Sydney Morning Herald article, Aldi had annual sales of $6 billion in fiscal 2014, up 13% for the year ended December 2014.
In contrast, Woolworths just announced a 3.4% interim revenue increase for its supermarkets, while Wesfarmers' Coles supermarket revenue was up 2.8%.
Aldi has 366 stores in Australia and has about 11% market share in the eastern states, the article stated. The discount retailer plans to grow its store count annually by about 20 stores along the east coast and is establishing a network of stores in SA and WA.
I have seen some of this growth myself. Aldi just opened a store in my neighbourhood last December- right next door to our local Woolworths store.
Estimates are that a basket of Aldi goods could be as much as 30% cheaper for a similar basket from Woolworths or Coles. Will Woolies and Coles shoppers stay loyal for long with such a price difference?
Woolworths' new cost-savings program
Woolworths has announced it will begin a cost-cutting program to carve out $500 million in savings that will be invested into its supermarket business. That can reduce its operating costs and improve margins as the retailing giant needs to discount store goods even more to stop Aldi's assault.
Wesfarmers to simplify operations, expand into new businesses
Wesfarmers said in its half-year results presentation it plans to simplify operations as well to realise cost reductions. The retailer will invest more in value and fresh foods to drive sales. If customers continue to do the bulk of their shopping in Coles, that lessens the chance they will also go to Aldi for groceries.
Wesfarmers has the successful Bunning Warehouse business, which had 10.6% interim segment earnings growth, to help offset weakness in Coles' performance. Still, Wesfarmers is also considering a move into financial services to maintain its long-term earnings growth trend.
The big retailing duo will have to adjust to the competition, so in the short term it may affect earnings. However, Foolish investors need to consider where the two companies will be in 10 – 20 years from now. This current situation can open buying opportunities if Woolworths and Wesfarmers stock slips. You may also want to stick with these market leaders for long-term dividend growth.
