German discount supermarket Lidl is showing signs of a move into the Australian market, putting further pressure on Woolworths (ASX: WOW) and Wesfarmers-owned Coles (ASX: WES).
Reports show that Lidl has recently applied for trademark protection in Australia and has been in discussions with logistics providers in order to coordinate infrastructure requirements needed for a roll out of their supermarkets.
The majority of the Australian supermarket sector was dominated by Woolworths and Coles up until 2001 when other German discount supermarket chain, Aldi, crashed into the Australian market. The move forced both Woolworths and Coles to lower prices as Aldi’s market share continued to grow. Currently Aldi has a market share of approximately 11 percent and is expected to grow at around 5 percent for the next five years, double the expected rate of its bigger rivals.
With the probable entrance of Lidl, Woolworths and Coles will come under further pressure as Lidl and Aldi could increase their combined market share towards 20 percent in the next five to seven years. Both Woolworths and Coles have and will continue to lower the prices of their private labels, resulting in a reduction of sales revenue as the volume of sales across the board is likely to remain constant.
In the last 14 years, Aldi has expanded their number of Australian supermarkets to approximately 300 stores and leading into the Lidl entrance, Aldi will work hard to further increase their number of stores in an attempt to secure prime locations.
According to Moody’s Senior Analyst Ian Chitterer "Although it may take a number of years for Lidl to build up its store base and take market share, we would expect the effect on the grocery market to be felt much sooner because Aldi, which competes with Lidl throughout Europe and the UK, is likely to ramp up its store roll out to secure the best sites in the lead-up to Lidl’s arrival,"
The news of Lidl’s entrance comes after Woolworths CEO Grant O’Brien announced his retirement on Wednesday following poor results as Woolworths downgraded its full year profit guidance from $300 million to $2.15 billion.
Author: Imran Valibhoy
Jun 19, 2015
Since Joining the firm in 2006, Imran has worked on a range of M&A and Capital Market transactions in the natural resources, mining as well as projects in the renewable energy sector. Prior to joining Wise-owl, Imran worked at Euroz Securities in Perth, aiding in the advisory and valuation of companies in the mining and industrial sectors in Australia. Imran has a Masters in Banking & Finance from City University's Class Business School in London and a Bacheloor degree in Commerce from UWA.