30/04/2019 - 15:21

IGAs feel pinch as Aldi rolls in

30/04/2019 - 15:21

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Perth's grocery wars, amplified by giant Aldi’s market push and price cuts by Coles and Woolworths, have claimed five struggling smaller supermarkets over the past five months.

IGAs feel pinch as Aldi rolls in
The Thornlie IGA is one of at least four IGAs to go into liquidation or administration so far this year. Photo: Gabriel Oliviera

The increasingly competitive retail grocery market has forced some IGAs to shut their doors, but others have carved out their own niche.

Perth's grocery wars, amplified by giant Aldi’s market push and price cuts by Coles and Woolworths, have claimed five struggling smaller supermarkets over the past five months.

The supermarket collapses in Western Australia’s $10 billion grocery market have had a knock-on effect on some of their suppliers, while other independent operators have upgraded their stores and business offerings to survive.

Since December, five IGAs in the metropolitan area have been liquidated or fallen into administration, as the full impact of Aldi’s rapid 48-store expansion into WA begins to unfold.

Thornlie IGA went into administration in December, while so far this year Girrawheen IGA, Ballajura Supa IGA, Sisters IGA in Joondalup, and Coolbellup IGA have gone into liquidation.

The failed IGAs were located in suburbs where the median house price is lower than the Perth metropolitan median price of $510,000, according to the Real Estate Institute of WA’s latest data. 

They were also within a 15-minute drive of an Aldi store.

But the WA Independent Grocers Association has downplayed the Aldi effect on the smaller stores and pointed to operators battling lower prices and margins, and tougher economic conditions.

The association’s president, John Cummings, told Business News Aldi’s share of the WA grocery market was not large enough to directly threaten the survival of IGAs.

“The retail grocery market in WA is around $10 billion a year, and I’d put Aldi’s grocery sales at around $300 million, they might put it at $400 million, but whatever it is, it’s not even near the billion-dollar range,” Mr Cummings said.

He estimated IGA’s market share of the retail grocery market in WA was around 20 per cent.

IGA stores are supplied by listed wholesale distribution and marketing company Metcash, which reported national revenue of more than $14 billion in the past financial year.

A spokesperson did not disclose market share in WA to Business News, saying the company did not break down IGA store financials by state.

But, in its report for the first half of the 2019 financial year, Metcash revealed that WA “continues to be our most challenging market”.

The IGA closures have affected other Perth-based businesses, including some listed on the stock exchange.

In February, bottled water company Eneco Refresh, formerly Refresh Group, reported a loss of $274,000 for the 2018 calendar year.

The Malaga-based Eneco, which supplies its products to IGAs, said the poor result stemmed from a decline in its WA operations “due to the sharp growth of Aldi, which has subsequently resulted in many IGA supermarkets closing down”.  

The company has purchased a factory in the Northern Territory to increase its focus on other markets in Australia.

Aldi launched in WA in June 2016, and in less than three years it has opened 48 stores in the state. 

In June 2018, Aldi said it had a network of 70 stores planned for WA within “the next few years”, but the German company has not publicly disclosed where these proposed stores would be located.

None of their current stores are located in Perth’s western suburbs.

Mr Cummings said the remaining independent grocers, including Farmer Jack’s and Spudshed, had a combined market share of between 5 per cent and 8 per cent. 

Last month, Spudshed number 11 opened its doors, as the Tony Galati-owned company cut the ribbon for a store in Spearwood.

Farmer Jack’s also opened a store in the suburb last month, making it 10 in total. 

In February last year international retail giant Costco announced plans to build its first Western Australian store at Perth Airport, located alongside the DFO Perth store, at a cost of $55 million.

Costco closed a round of tenders, worth an estimated $20 million, for the 14,000-square metre development on December 10 last year.

Mr Cummings said the “well-documented” downturn in retail turnover in the state was the key reason behind the closure of numerous IGAs, but said the consequence of Aldi coming to WA was that margins in some areas were tightened amid a price war in a grocery market that was becoming more crowded.

“Coles, Woolworths and Aldi have decided that the best way to compete in the tightening and more competitive grocery market is to sell more of their house brand merchandise, with the belief that they can lower their retail prices while increasing their margins,” he said.

“Independent grocers on the other hand still predominantly sell branded merchandise.

 “This has been a longer-term trend but you can definitely say the consequences of this ‘Aldi effect’ have now fully been felt over the past several months or so.”

Piggott Partners’ Ross Thomson, who was appointed liquidator of the Sisters IGA in Joondalup, echoed Mr Cummings’ sentiment.  

“The directors (of the Sisters IGA) have suggested to me (that their financial difficulties) was because of Coles and Woolworths lowering their prices in response to Aldi, rather than directly Aldi itself,” he told Business News.

However, Mr Cummings said some IGA stores in Perth’s wealthier suburbs that shifted their focus to providing an upmarket, gourmet experience to customers have flourished. 

“The emphasis for these IGAs has been on fresh produce over the last few years, which has developed into a niche offering of prepared meals from the fresh produce, which has commanded a premium price that the customer base in those suburbs can afford,” he said.

As an example, he pointed to the Preston Street IGA in Como, which has been owned by Pierre and Aylmyr Sequeira since 1988.

Como has a median house price of $890,000, according to Reiwa.

In 2016, the Preston Street IGA store had a complete renovation, including substantial investment to refurbish and upgrade to its kitchen and prepared meals section.

 “On a rostered basis they now have grown to about eight or nine chefs in their business preparing meals of all sorts for their customers,” Mr Cummings said.

O’Connor-based Lane Industries was responsible for the refurbishment of the Preston Street IGA, as well as for several other independent grocery shops in Perth’s most expensive suburbs, including the Taylor Road IGA in Nedlands and Boulevard IGA in City Beach, which are both owned by James Kelly.

Lane Industries owner David Wyness said some IGA owners had made an investment in their shops to put themselves above the competition.

Aldi (stores) are competing primarily on price, and have made Coles and Woolies more conscious about prices to stave them off, but for some customers price alone just won’t cut it,” Mr Wyness said.

 “Some of these IGAs have recognised there is a demand for that premium experience and products, particularly in wealthier areas, that the competition can’t really provide.

“So there’s been a lot of refurbishment activity happening at the moment and in recent times to cater to this (demand).”

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