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happy, healthy home life, at prices they can afford. Founder GJ Coles
created a store that would lower the costs of living for Australian
families. This philosophy continues 100 years later: "The customers
themselves really decide what goods we shall stock in our stores."
On average, Coles serves 20 million customers each week. Coles is
owned by Wesfarmers, one of Australia's largest listed companies.
With headquarters in Western Australia, its diverse business
operations cover: supermarkets, liquor, hotels and convenience
stores; home improvement; office supplies; department stores; and
an industrials division with businesses in chemicals, energy and
fertilizers, industrial and safety products and coal. Wesfarmers is
one of Australia's largest private sector employers with around
210,000 employees.
From my perspective, Coles is an exceptionally well-run company
with strong leadership and dedicated associates. I like the fact that
Coles places so much emphasis on reducing costs and utilizing
innovation to create a competitive advantage.
Odds are high that Coles and Woolworths would have continued with
their market domination of Australias grocery landscape had it not
been for a seminal event. As Australians celebrated Russell Crowes
success in A Beautiful Mind in 2001, a German-owned discount
grocery retailer named ALDI opened their first store in Australia in
the very same year.
Unlike traditional grocery supermarkets that can stock 40,000 or
more SKUs (products) on their shelves and who focus on selling and
stocking the leading brands in every category, ALDI is the worlds
leading discount retailer that stocks only 1,350 core items and
focuses on selling their own high-quality, private label brands. With
a corporate philosophy that states All people, wherever they live,
ALDI didnt fail. In fact, ALDI did what many considered impossible
they found success. According to an April 18, 2016 Roy Morgan
Research report: ALDIs share of the Aussie market still rising, ALDI
has become the number three retailer in Australia with a 12.1%
market share operating just 400 stores compared to Coles and
Woolworths operating a combined 1,760 stores. ALDI has not
announced how many total stores they plan to open in Australia but
an April 20, 2016 research note by Morgan-Stanley estimates that
ALDI will achieve sales of $15B by 2020.
Based on a review of the leading grocery retailers globally, and
based on my first-hand experience providing supply chain,
operations, innovation, and strategy consulting to the largest
grocery retailers in the world, I consider ALDI and another German
discounter named Lidl, to be the two best grocery retailers in the
world. Although the name of ALDI isnt as well-known as Walmart,
Kroger or Carrefour, ALDI is on a path to becoming the largest
grocery retailer in the world.
Turmoil at Woolworths
For the 12 months ending 30 June 2015, Woolworths Food and
Liquor made AUD $42.1 billion in sales while Coles rang up $30.8B in
sales in 2015. What the numbers dont convey is that for the last 27
quarters, Woolworths has significantly underperformed against their
rival Coles. Simply put, Coles is an immediate threat to Woolworths
whereas ALDI is a growing threat. Woolworths will continue to lose
market share to Coles without a significant shift in strategy. The
danger and challenge facing Woolworths is that they must find a
way to compete against a traditional supermarket, Coles, and a
discounter, ALDI.
Faced with declining sales and increased pressure from
shareholders, Woolworths CEO Grant OBrien resigned in 2015
requiring Woolworths Chairman Gordon Cairns to conduct a lengthy
search to find a CEO to take the reins. Anyone who wasnt convinced
that Woolworths was a company in trouble had all doubt removed
when Mr. Cairns stated publicly that he could not convince a single
executive in Australia to take the job of CEO. Mr. Cairns then turned
his attention to finding an experienced grocery executive in the
United States or the United Kingdom to take the job as CEO. Unable
to find a candidate, Mr. Cairns selected an internal Woolworths
executive, Brad Banducci, to become CEO.
Since becoming CEO, Mr. Banducci has ordered a review of all areas
of the company and has continued with Woolworths policy of
reducing the price of items in Woolworths stores to better compete
with Coles and ALDI. Over the last nine months, Woolworths has
reduced prices by over $400 million with plans to reduce prices an
additional $150 million in 2016. Reducing prices has not increased
sales. In addition, Mr. Banducci is focused on trying to minimize the
damage to Woolworths bottom line after Mr. Cairns pulled the plug
on a losing do-it-yourself retail chain named Masters jointly owned
by Woolworths and the U.S. retailer, Lowes. Woolworths and Lowes
poured over $3.1 billion into Masters only to have Woolworths make
the decision to sell or liquidate the company.
A World of Hurt and Red Flags
As we used to say in the Marine Corps when describing a bad
situation, Woolworths is in a world of hurt. Coles had comp store
sales of 4.9% for the month of April, 2016, while Woolworths
experience a decline of 0.9%. Woolworths also lost customers to
Coles and to ALDI. Big W, Woolworths general merchandise retail
chain, experienced declines of 4.6% to $865 million. Woolworths
ALDI on price as well as achieve the desired profits when doing so.
The strategies simply change the focus to maximizing value vs.
head-to-head competition on price only. However, implementing
such a strategy requires a significant amount of business model
transformation, vertical integration, supplier relationship
management, and innovation. Out of respect for Woolworths, I am
not presenting the strategies I have identified in this article as doing
so would provide ALDI and Coles with an unfair competitive
advantage.
What about differentiation? The process of creating a competitive
difference from a competitor usually by focusing on the following
key areas:
Location
Store Format
Merchandise and Assortments
Visual Merchandising
Staff
Service
Mass Communications
Price
Woolworths can certainly pursue a differentiation strategy against
ALDI and Coles. I believe a key focus area for Woolworths should be
on segmenting customers and focusing on Price Discrimination to
extract the most Consumer Surplus - If a business can identify
groups of consumers within their market who are willing and able to
pay different prices for the same products and charge the
consumers what they are willing to pay, a business can make higher
revenues and profits. For example, identify more niche markets and
work to satisfy those consumers.
Woolworths can also expand product selection within their stores
based on customer segmentation. Since ALDI only sells 1,350 core
items, Woolworths already has a product selection advantage.
However, against Coles, Woolworths does not have an advantage as
Coles and Woolworths sell nearly identical items. A challenge faced
by retailers who attempt to gain a competitive advantage by
increasing product selection is tying up working capital in inventory.
Expanding product selection only works if an equilibrium to
maximize profit and minimize carrying cost can be achieved.
Back to the question: compete head-on or differentiate?
Differentiation is the better strategy but doubts remain if
Woolworths can differentiate to such an extent that they reverse
losing market share to Coles and ALDI. The reason why I advocate
the use of game theory and Industrial Organization theory is to
provide an additional level of analysis and understanding to
Woolworths executive team that doesnt exist today. Woolworths
runs the risk of being in a position whereby none of the strategies
they implement result in increased revenue or market share and
losses continue; a Sisyphean task.
Woolworths Achilles Heel
The cold hard truth about Woolworths is that theyre too big, too
inefficient, and they have too much costs based on the new reality
of the grocery market within Australia. A favorite saying of mine in
ALDI, even though they have the lowest market share, they are
the biggest threat to Woolworths and to an extent, Coles
Although not covered in this article, I would be remiss if I didnt
point out that once Lidl expands in Australia, they too will find
success similar to ALDI. Lidl will take market share from Coles and
Woolworths but little if any market share from ALDI.
If we fast-forward to 2020, what will the grocery landscape look like
within Australia? Based on the completion of several What If?
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true. But does it have to? Isnt there something that Woolworths can
do? Is there no hope? Let me remind the reader that the title of this
Post is A Beautiful way to Save Woolworths.
Although challenging due to regulations in Australia governing
business and competition, and made even more challenging by the
intense and somewhat toxic environment between Coles and
Woolworths, a strategy worth exploring is collaboration between
Coles and Woolworths on two key areas of their businesses:
procurement and supply chain/logistics. I need to inform the reader
at this stage that I received several different opinions on the topic of
collaboration between Coles and Woolworths from several key
officials in Australia who asked not to be named. Each agreed with
me that what I am about to propose would provide the desired
benefits to Coles and Woolworths. However, there was disagreement
on whether or not such collaboration would be approved and/or
whether or not Coles and Woolworths would ever be willing to
collaborate.
For the sake of this Post, I have chosen to be optimistic at the
prospect of Coles and Woolworths collaborating as well as regulators
providing all required approvals. I can hear the collective howls and
laughter here in Seattle from Australians who will think Im naive
and crazy for thinking that Coles and Woolworths would ever agree
to collaborate. However, please allow me to present my argument
and then judge me based on the merits of my argument and not on
my optimism.
Supply Chain and Logistics Coles has their own supply chain,
logistics network, and transportation needs requiring hundreds of
millions of dollars of investment and costing hundreds of millions of
dollars to operate. The same can be said about Woolworths.
However, if Coles and Woolworths collaborated, they could conduct
an end-to-end supply chain network optimization engagement to
identify the optimal low-cost supply chain capable of meeting all
service level requirements, and profitably meeting customer
demand across all channels. Collaborating on such a level would
result in Coles and Woolworths utilizing 3rd party logistics providers
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Where will we focus? How do we take the focus off pricing and
put it on providing value?
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tools, and to Dr. Jan Van Mieghem for his comments related to the
Nash Equilibrium and Woolworths.
This article incorporates primarily my own opinions but I have
utilized information from Coles, ALDI, and Woolworths annual
reports as well as financial data pulled from numerous sources.
Since this is not an academic paper, I did not utilize the APA format
for writing or sourcing. Not utilizing the APA style and format is
standard practice on LinkedIn.