Cost-conscious retailers are among the ‘winners’ from inflationary pressures facing economies worldwide.
PRICE always matters, but never more so than during a recession.
That’s a lesson Australia’s retailers can learn from events overseas, where even wealthy consumers are embracing no-frills shopping.
Europe and Britain, which have been hit harder than Australia by an economic slowdown that could be heading towards recession, is where discount retailers are outperforming traditional shops.
Germany’s super-cheap pair of Aldi and Lidl are eating into the market share of long-term leaders, which in Britain means a decline for food retailers such as Tesco, Sainsbury’s and Waitrose.
If a similar trend develops in Australia, which is likely, dominant local retailers Coles and Woolworths could have a fight on their hands.
Promoting quality, freshness and choice are good ideas when there is overall economic growth and consumers do not feel threatened by the pressures of cost inflation and increasing mortgage repayments amid rising interest rates.
Unfortunately, however, Australia is following the rest of the world into tougher times, as the excess cash generated by governments to fight COVID is reeled back in through higher interest rates.
Since the start of the year, the average rate on a variable owner-occupied mortgage has risen from 3.5 per cent to 4.7 per cent, according to investment bank Morgan Stanley.
It looks even worse for homebuyers opting for a three-year fixed rate loan, which has risen from 2.2 per cent to 6.14 per cent.
Over time, and this is the real worry for homebuyers, the variable rate is highly likely to move closer to the fixed rate, which means most rates of new mortgages could soon be at 6 per cent or more, which will further dry up discretionary spending and force households to look for cheaper food and other consumables.
To see what that means it’s worth examining the business practices and success of Aldi and Lidl in Britain, which is something one of that country’s top newspapers, The Daily Telegraph, did early last month.
Six of the eight retailers surveyed have lost market share during the past 12 months.
The only two to win a bigger slice of the market were Aldi and Lidl, which are both up 0.9 per cent (a big gain in the retail game).
Long regarded as retailers to lower-paid workers prepared to put up with narrow aisles and less choice than offered at Tesco or Sainsbury’s, the two German discounters are winning because they’re cheap and cost-conscious.
A survey of a grocery basket containing the same goods showed that shopping at Aldi cost £74.23 ($128) versus £99.40 ($172) at Waitrose.
The more interesting result of the survey was that an online only and home-delivery retailer, Ocado, was the second most expensive at £95.33 ($165).
The fact that Aldi (with Lidl the second cheapest) was substantially cheaper than Waitrose, Britain’s most up-market food retailer, is not a surprise.
What is a surprise is that the German discounter was substantially cheaper than an online-only retailer offering home delivery.
Everything about the German super-cheap retailers is driven by efficiency in the use of space and costs.
The space issue is highlighted by narrow aisles, while the best example of cost saving is in tightly printed receipts that eliminate blank spots, saving Aldi in Britain an estimated £150,000 ($260,000) a year on paper.
For anyone who has noted the seemingly endless receipts printed at a Coles or Woolworths checkout, a small, simpler receipt seems like a no-brainer.
That’s not inflation … IF you think inflation is a problem in Australia, then you need to consider what’s happening in some of the world’s less well-run economies, which always collapse in a costs crisis.
And there is no better example than Argentina.
Australian consumers, annoyed by annualised inflation running at 6.1 per cent, would be shocked by Argentina’s 64 per cent inflation rate, and even more so by a forecast that it will hit 90 per cent by Christmas.
Apart from the obvious observation that 90 per cent inflation means the price of everything doubles in a little less than a year, there is the more worrying fact that if Argentina is on the cusp of another economic collapse, it will probably not be alone.
The world’s central banks have embarked on a coordinated attack on inflation with their interest rate policies and that means countries (as well as consumers) are feeling the pinch.
