According to IbisWorld analyst, Brooke Tonkin, the company already claims 1.2 percent of the $88.1 billion dollarsupermarket industry, with only seven stores.
“Costco’s ongoing diversification into the fuel retailing industry is expected to increase competition, with the company’s low price strategy attracting motorists, as customers have little brand loyalty in terms of fuel,” said Ms Tonkin.
Collectively, Australia’s supermarket and grocery stores and fuel retailing industries will generate an estimated $125.1 billion in 2015-16, with this figure is forecast to reach $134.5 billion by 2020-21.
The traditional supermarket giants, Coles and Woolworths, account for more than 70 percent of the supermarkets and grocery stores industry in Australia, and 40 percent of the fuel retailing industry.
“The trading landscape for supermarkets and fuel retailing has changed considerably over the past three decades, with new entrants increasing competition, and changing consumer preferences creating new challenges and opportunities,” she said.
Supermarkets and grocery stores once operated alongside specialist food retailers, but now compete fiercely with specialist retailers on price and product range in a bid to attract shoppers. Industry retailers like Coles have recognised the importance of price competition by implementing substantial price cuts across their stores. Consumers have become increasingly price-conscious, and want to be assured that they are purchasing value for money goods.
Sales volumes generally remain relatively static for supermarkets, as shoppers tend to buy similar goods from week to week. As a result, price cuts have a significant effect on profit margins. To combat price competition and maintain profit margins, Woolworths has been forced to reduce costs.
“While supermarkets continue to compete on the basis of price, other factors such as convenience, product variety and quality have emerged as driving forces in securing customer loyalty. This helps explain the growth of Costco, which has steadily gained market share over the past five years.”
The Costco model
Convenience has become a major factor in attracting customers, with major supermarket players attempting to broaden their ranges to include basic necessities as well as specialist gourmet products.
Meanwhile, Costco is attempting to increase its market share through the opening of new stores, and the sale of a diverse range of products in bulk. The expansion of new stores has been a major driver of Aldi’s growth, and similar success is expected for Costco, as the number of stores is a key competitive factor.
Costco offers a much wider range of products than the current supermarket duopoly at its seven Australian stores, including clothing, televisions and other appliances. Costco’s bulk buying power allows it to offer very low prices. The wholesaler is able to offer such large discounts on its products and remain profitable due to its annual membership fee of $60.
The majority of the company’s profitability comes from this fixed source of revenue, allowing it to pursue aggressive price competition. Costco’s earnings before interest and tax have only shown positive results once in Australia since 2009, indicating that the company is primarily focused on gaining market share in Australia. The membership fee also helps foster customer loyalty.
Store location is also important, and Coles and Woolworths have attempted to broaden their reach by expanding fuel station grocery offerings into mini supermarkets.
“Costco’s expansion into fuel retailing is in line with this trend, as the wholesaler plans to become a convenient one stop shop where customers can buy all their groceries and fill up on petrol in the one location,” said Ms Tonkin.
The fuel retailing industry faces a high level of competition, as price and location largely determine where motorists buy petrol. “Most consumers see petrol as an undifferentiated product and therefore purchase on price – there is effectively no brand loyalty.”
The Costco fuel retailing strategy offers customers convenience and consistently lower prices, in line with the company’s grocery strategy. Costco’s establishment of a Moorabbin store with fuel pumps is a first in Victoria. The first Australian Costco fuel station was established in Liverpool, NSW, in November 2013.
The introduction of a fuel station at the Brisbane North Lakes store in May 2014 prompted a flurry of price cutting in the surrounding area, as other fuel retailers scrambled to compete with Costco’s low prices, however, Costco’s fuel prices remained lower than other retailers in the city, with customers saving up to 15 cents per litre.
In the months following its opening, competition from Costco has continued to force down prices among other petrol stations in the area.
The way forward
As Aldi and Costco continue to expand in the supermarkets and grocery stores industry, the well established major players are expected to look for new ways to remain competitive and boost market share.
Woolworths announced in September 2015 that it will invest $65 million in store improvements and increasing staff hours. Meanwhile, Coles has already begun upgrading some of its larger stores to a new market-style format.
“These strategies are designed to keep shoppers instore for longer by presenting stores as foodie destinations, and attract greater sales through premium offerings such as ready-made meals and delicatessen products.” These new stores also offer patisserie goods, artisanal breads and even sushi bars.
Major competitor, Aldi, is also transitioning its stores to a market-fresh approach, with more fresh food, branded groceries, and ready to go and organic food. This is expected to further increase supermarket competition.
|Supermarkets and grocery stores
|Top four players account for over 90% of industry revenue
|Top four players account for over 70% of industry revenue