Last week, analysts at IBISWorld released a market research report about the supermarkets and grocery stores industry in Australia.
For the first time in several years, the market share of the Wesfarmers Ltd (ASX: WES) owned Coles fell to 30.9%.
Furthermore, major rival Woolworths Limited (ASX: WOW) gained market share for the first time in a number of years as it now accounts for 36.8% of the industry. Following the disaster of Masters, Woolworths has engineered a new strategy focusing on its Australian Food division.
Increasing competition
The IBISWorld report also revealed the continued growth of German chain Aldi.
Aldi's market share grew from 7.9% to 8.6% of the $101 billion Australian grocery market. The rapid expansion of Aldi over the last several years has forced the two established major players to lower prices and enhance their private label product ranges which has lowered profit margins.
Until recently, Aldi had concentrated mainly on the east coast markets of New South Wales, Queensland and Victoria, but has now expanded into South Australia and Western Australia. I see no reason why Aldi cannot replicate its east coast success and continue to increase its market share by expanding into new markets.
Metcash Limited (ASX: MTS), the other minor player in the Australian supermarket industry also saw its market share increase from 7.2% to 7.5%. Further competition in the industry is also looming with German chain Kaufland planning an Australian launch after it recently acquired a large site in Adelaide.
Kaufland is owned by the Schwarz Group, the fourth largest retailer in the world by revenue.
Declining profitability
In August, Wesfarmers released its FY 2017 numbers to the market and confirmed the weakness of its Coles division. Revenue was flat at $39.2 billion with EBIT declining from $1.86 billion in 2016 to $1.61 billion, a decrease of 13.5%.
The lack of top line growth was compounded by the 60 basis points of margin compression as margins decreased from 4.7% to 4.1%, resulting in 2017 being the least profitable year for Coles since 2013.
