Could a new breed of supermarket reshape how Australia shops?

Supermarket shopping in Australia is set for a shake-up as European discount stores Aldi and Lidl look to challenge the dominance of legacy players such as Coles and Woolworths. 

While other lower cost supermarket brands have tried and failed to gain a foothold in Australia, it appears that German chain Aldi is here to stay. Meanwhile another successful German discount operator, Lidl, is planning to enter the Asia Pacific region.

“The market is changing and it may be that the traditional 3,000 to 4,000 square meter supermarket with a full line of products does not fulfill the needs of all Australian consumers,” says Nik Wallis, senior retail project manager, JLL Australia. “Lifestyles are changing, and supermarket operators need to adapt to this changing market.”

No-frills model

Aldi was founded in 1946 and now has 9,000 stores in 18 countries. Since its entry into Australia in 2001 it has gained over 10 percent market share. The no-frills formula, with smaller stores and limited product lines and services for shoppers, keeps costs low on own brand groceries and basic food items.

Should Lidl enter Australia, it would likely adopt a similar strategy. The company was founded in Germany in the 1930s, and is now one of Europe’s largest grocery retailers. It enjoys particular success in the UK, where it has opened more than 600 stores since 1994.

In recent years, consumer sentiment towards the UK’s large, established supermarket brands – such as Tesco, Asda and Sainsbury’s – has waned as discount chains offer a competitive alternative. As a result, the large, full-line supermarkets are struggling with negative comparative growth, while Aldi and Lidl are expanding.

According to recent reports, the two German grocers are now in the process of setting up shop in the U.S. as well. So can they expect to take Australia by storm?

Changing retail formats

“Price and value are stronger considerations with a volatile dollar, while convenience has also become a critical factor for many consumers,” says Wallis. “Shopping habits are also becoming smarter. Buying as required, rather than stocking up on a weekly basis, has become the preferred method of food shopping for time-poor commuters.”

In this context, smaller retail formats such as convenience and independent stores are becoming an increasingly visible feature in small towns and suburbs across Australia. These businesses tend to operate as franchises, enabling them to expand at a faster pace. Customers are willing to pay a little extra for their basic and top-up items in return for the ease of a store close to home.

Meanwhile superstores, which typically stretch to over 5,000 square meters, are making inroads in Australia. The market leader Costco has established membership-based superstores in each main Australian city, with some second tier stores starting to roll out. Its model is quantitative – based on bulk sales, big packs, and large quantities of product. Domestic retailer Coles has also opened some superstores with limited success.

“These developments are really challenging the pricing and service delivery models of established supermarket chains. As a result, we’ll see new opportunities opening up for property developers as they have to adapt to meet the demands of this rapidly evolving sector,” says Wallis.

Whether Australian shoppers embrace discount groceries as enthusiastically as their UK counterparts remains to be seen, but the country’s longstanding supermarket brands may need to move fast to keep hold of their customers.

From JLL Real Views