Fresh research from IbisWorld has forecast increased competition for industry giants Woolworths Limited (ASX: WOW) and Coles – owned by Wesfarmers Ltd (ASX: WES).
As noted by news.com.au, Costco Wholesale Corporation is likely to increase its current 1.5% market share of Australia's $125 billion grocery and fuel retailing market.
Costco's discount warehouse format has proven to be wildly successful throughout the world, leading to share price gains of some 17,000% in a little over 33 years.
Indeed, the U.S retailer's growth in the local market, including its 1.5% market share, is quite astounding when we consider it has just seven stores. It's also quite possible many of these stores are unlikely to have reached maturity considering the first store opened in 2009, and four of the seven stores are less than two years old.
Undoubtedly, Costco's ability to charge an annual membership and offer very cheap products is adding pressure to Australia's largest supermarket operators, Woolworths and Coles. The two heavyweights are currently locked in a price war, with both pushing cheap, store-owned, private label products.
Costco's Kirkland provides a cheaper alternative to branded products. However, Costco's quality branded products are cheap enough so that it doesn't detract away from the group's overall customer experience. The same arguably couldn't be said of Coles and Woolworths' home brand products.
"While supermarkets continue to compete on the basis of price, other factors such as convenience, product variety and quality have emerged as driving forces in securing customer loyalty," IbisWorld analyst, Brooke Tonkin, was quoted as saying by news.com.au.
In recent years, Woolworths' sales and profits have slowed as competition from Aldi has also taken its toll on the retailer's margins. "The rapid growth of German-owned ALDI over the past five years has significantly altered the industry," IbisWorld notes.
Woolworths and Coles are believed to control more than 70% of the grocery market, and 40% of retail fuel sales.
Foolish takeaway
Australia's two largest supermarkets have their work cut out dealing with a lean discounted grocery operator in Aldi, and the cheap but quality service offered by Costco. Therefore, while Wesfarmers and Woolworths' shares may appear cheap at today's prices, it's vital long-term investors keep a close watch on the industry by reading through reports such as IbisWorld.
