Thursday, March 5, 2015

Aldi posing real long term threat to Coles and Woolworths, Moody's warns

The rise of the cut-price supermarket chain Aldi is posing a long term challenge to to the traditional retail giants of Woolworth and Coles, according to credit ratings agency Moody's.

While Moody's says Aldi's penetration into the supermarket sector has been at the expense of independent retailers and Metcash IGA, the habits of traditional grocery shoppers are changing.

Moody's vice president and senior analyst Ian Chitterer says the "increasing acceptance of Australian consumers" and Aldi's "aggressive expansion plans" are a long term threat to the duopoly of Woolworths and Coles.

"In such an environment and based on international experience with the growth of discounters, we expect the market shares and margins of Woolworths and Coles to come under pressure over time," Mr Chitterer said in a note to investors.

But Mr Chitterer signalled the rise of Aldi would be gradual and that the Woolworths and Coles dominance was not in immediate danger of being toppled.

"It is important to note that the credit quality of the Big Two - which together account for 60% of Australia's grocery market by value - is supported by strong margins, healthy cash flows and ongoing cost reductions," Mr Chitterer says.

"Accordingly, we do not expect their credit quality to be materially impacted by competition from Aldi over the next 12-18 months".

Aldi's credit status is unrated by Moody's while Coles and Woolworths are both rated as A3 stable.

The long term reality check for Woolworths and Coles comes in a Moody's report released today on the challenges for the two supermarket giants.

The report says that since launching in Australia in 2001, Aldi's has opened 360 stories and now has an 8% share of Australia's grocery market with sales reaching more than $5 billion in 2014.

Moody's now forecasts that Aldi's stores will grow 5 to 6% per annum over the next five years which is double its expectations for Woolworths and Coles.

Just last week as it surprised the market by downgrading its full year profit forecast, Woolworths chief executive Grant O'Brien said the retailer is working to counter the competition and that customers are shopping around for bargains more than ever.

"They've certainly been more value conscious than they've been and that's a continuation of the trend we've been seeing," Mr O'Brien told analysts.

"So smaller baskets more often and that's aligned with modern busy lifestyles."

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