Wow, that’s cheap!
In a follow-up to Russell’s popular blog post on the threat of Aldi to Woolworths and Coles, we are starting to see competitive responses from the incumbents – and whether they’re working.
As a brief background, Aldi is a discount supermarket that sells a relatively small number of branded goods at very cheap prices. This business model is effectively the opposite of that employed by the traditional supermarket, and needless to say it has had a meaningful impact on the margins of major supermarket companies in Germany, France and the United Kingdom. Aldi entered Australia in 2001, and its scale is now sufficient to start disrupting the competitive landscape.
Woolworths, traditionally recognised as the “Fresh Food People”, has responded to this threat by attempting to change the consumer’s perception of their brand. Their “Cheap, Cheap” campaign features shoppers walking through the aisles and exclaiming how cheap Woolworth’s prices are:
On the surface, it sounds like a reasonable strategy – if consumers are conditioned into believing that Woolworths has cheaper prices, then they will refrain from visiting the discount supermarkets. Yet the perception of lower prices is no substitute for actual lower prices, a point that Aldi is going to great lengths to point out:
Tesco is one of the major UK supermarkets that succumbed to the margin pressure of Aldi and Lidl. Tesco’s initial strategy to combat the rising discounter threat was very similar to the one employed by Woolworths. In 2011, Tesco allocated £500 million pounds to reduce the prices of 3,000 products in a campaign called the “Big Price Drop”. The price reductions didn’t go far enough, and the incumbents quickly learnt that consumers will vote with their feet if the amount at the bottom of their receipt does not meaningfully fall. Tesco doubled the UK investment to £1 billion the next year.
At Woolworth’s latest half-year results, management acknowledged that the campaign had not improved price perception sufficiently, and the focus had now shifted from being “competitive” on prices to being consistently cheaper. Woolworths has allocated $500 million to this strategy, and management has described it as the start of a broader investment strategy to provide market leading prices to customers. If the changes in the UK market are any indication of what could occur in Australia, then this investment is not going to be “Cheap, Cheap”.
Ben MacNevin is an Analyst with Montgomery Investment Management. To invest with Montgomery, find out more.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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Chris B
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I’ve left comments on this website for 2 or 3 years about how Woolies are not well managed and have an old model. Some of their managers are dumb and get promoted.
Woolies have promo’s. Aldi have none. I’ve seen all the work that goes into promo’s. It takes a lot of time in the headoffice of both the supermarket and food supplier. Aldi have none of that, they negotiate a price and it stays like that and it is also statewide, Coles and Woolies are regional and area based so more complexity.
If you use a trolley at Aldi, you must put $1 or $2 in, if you don’t return the trolley, a homeless guy (or ice addict) will and collect the money. Coles and woolies pay someone to collect the trolleys but still they go missing. Coles and woolies have a lot of expenses that Aldi just don’t have. Aldi have a big competitive advantage.
Roger Montgomery
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Aldi’s have plenty of promo’s. See “aldi price does not compute”. Coles and Woolies all tried the coin operated trollies but they gave in to the customer backlash.
Chris B
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Yes, they have promos but a much smaller number of sku’s and much much smaller number of promos. The headoffice expenses is much much smaller for promos, statewide pricing at Aldi also makes admin less expensive.
Interesting they tried the coin operated trolleys. Coles and Woolies is for time poor people more often I guess. Aldi put a line in the sand and said pay for bags and coin operated trolleys and no baskets (they used to have them). Costco only open 9-5. They put a line in the sand too. If you want much cheaper prices, no little fancy overheads.
Roger Montgomery
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Agree with you Chris. Perhaps the reason Coles and Woolies couldn’t do the same is: If Coles and Woolies tried to be more like Aldi, people would leave and go to Aldi!
Chris B
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Yes they would. Aldi are putting funny ads on TV and Coles and Woolies have no personality, and it’s something they are stuck with. They can’t change their business model. The “cheap cheap” campaign are just annoying stupid ads and an attempt to try to stop customers moving over to Aldi just like they did in the UK.
This website is the best value investor website in Australia. Some great info on it. The only thing is people who leave comments never interact with each other to learn more off each other.
Roger Montgomery
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Feel free to get that started Chris
Andrew Legget
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Thought of another point i thought i would share which relates to my own investment philosophy and process. Apologies if a bit long.
I have used three main categories to judge a companies quality. Competitive advantage, brand and financials.
The case study above shows why i have seperated out brand and competitive advantage where as some might believe they are linked. A brand is only as strong as the power of the companies competitive advantage behind it.
A brand is a companies promise to the consumers. The values that will allow consumers to “feel” a sense of connection with the business.
What WOW is doing is creating a brand around the competitive advantage of its competitor.
This is a promise that Woolworths knows it cannot live up to. As a result, i do not believe that the “Cheap, Cheap” campaign will be sucessfull as consumers know that the prices aren’t all that cheap. All it does is completley focus the attention of customers even more so on price. Aldi must be clapping their hands in glee at how easy the big 2 are making it for them. They essentially created an environment for them to show off what they do best.
Woolworths advantage is not in prices, but convenience, shopping experience and access to the branded products that customers will still want regardless of how much the generic aldi product is. These are things that customers are willing to pay a slight premium for.
Overall, looking at the overall umbrella of businesses as a whole that makes up Woolworths. I believe they got too caught up in the resurgence of Coles. They simply wanted to make sure the market thought they were cheaper than Coles and created an environment for an already growing and successful Aldi brand to grow at an even faster pace. It also took the focus off their other brands which is why Big W, Masters etc have been showing some poor performance.
It is still a good business, but they appear to have caught what i believe is some form of virus in Australian retailers management that makes them do some questionable things and misread the intelligence of the market.
In the meantime, the ad’s proclaiming how prices are “cheap,cheap” or going “down, down” will just be used to create clever puns by investment analysts, journalists etc about their troubles.
Roger Montgomery
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Nice Andrew. Thanks.
Andrew Legget
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We are eagerly awaiting our fourth Aldi within a short drive from where we live. We have found we have saved a fortune by shopping at Aldi for our everyday items.
the other good thing about this is that I am subjected to the “down, down” or “cheap, cheap” jingles for far less time then I used too.
I think the major players really need to look outside of prices as well. My local supermarket is a Woolworths, I went in there last night and found the “fresh food people” to not have all that much fresh food as half to three quarters of the fruit and vegetable area was empty. This is a regular site and leads me to wonder if this is the result of a general strategy or if my local one is just poorly managed. Empty shelves seems like breaking the cardinal rule of retail as customers can’t buy what is not stocked.
If my area is an indication, woolies and Coles are going to continue facing a huge battle. Aldi is no longer a fringe company but now a major player. The amount of times I have seen “start shopping at Aldi” as a strategy for saving money shows that the people have wished up to what Coles and Woolworths have been doing.
I used to think WOW was bullet proof, that perception hS sure changed and combined with their problems in other areas I have really rethought my view of their quality.
Roger Montgomery
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We used to think Woolies was a Blue Chip too. Not since we sold it though and maybe not for a very long time.