Does Costco spell the end of Australia’s supermarket duopoly?

The power of consumerism and a price taking industry will act as a drag on the two heavyweights’ profits in the long-term.

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Let’s face it, supermarkets have had it all their own way for too long. Wesfarmers Ltd’s (ASX: WES) Coles and Woolworths Limited (ASX: WOW) have offered customers less, whilst simultaneously playing hardball with suppliers and Aussie farmers.

Even Coca-Cola Amatil’s (ASX: CCL) tinned fruit company SPC Ardmona has been in doldrums which, partly, can be accredited to the pressure stemming from the ‘price war’ between the supermarket giants. They have driven our farmers and suppliers into the ground, whilst allegations of bullying and misconduct run rampant.

The price war might be excusable if they gave more back to the community, like Metcash Limited’s (ASX: MTS) Ritchie’s, IGA and Foodwork’s stores do with their community benefits program.

The hardball tactics employed by Coles and Woolworth’s have not allowed them to install any amount of brand loyalty amongst consumers or suppliers. Something they will regret in the near future.

A solution

It wasn’t that long ago when Aldi stores arrived on Australia’s east coast – in fact it was only in 2001. As time’s gone by, the Aldi brand has stepped up its pressure on the two giants’ market share and in February 2013 announced the opening of between 90 and 110 new stores in South Australia and Western Australia.

But Aldi isn’t likely to bring the Coles and Woolies duopoly to its knees. It does not match like-for-like products which consumers are familiar with. For example, if your favourite brand of baked beans is SPC or Heinz, you’re unlikely to find those same products on the shelves of Aldi, who instead opt for the cheapest alternative, or Australian made. If you’re like me this can sometimes be frustrating, but that’s what makes Aldi cheaper and a unique shopping experience.

The power of consumerism

In 10 years from now, I think everyone in Australia will buy their pasta shells, toilet paper, rice, noodles, meat, dairy and flour from Costco Wholesale Corporation (NASDAQ: COST). I recently stepped foot into one for the first time and found myself purchasing things I didn’t even need, simply because it was so cheap, comparatively, to what I had been used to.

The customer service is first rate, the guarantees are better, the amount of products are unbelievable and the price is why we’ll all go there at least once. It’s possible everyone leaving the store had spent twice as much as they expected to on their visit but, they still had a smile on their face.

That’s because it’s not until you see the price of bulk goods that you realise just how much you’ve been paying for the same, or lesser, quality product. There’s no generic brands commanding all the easily accessible shelves, nor are there self-service counters which require you to get assistance whenever you make a mistake on a computer screen.

These warehoused supermarkets will sweep through Australia just like they have in the US, Mexico, UK, Canada, Japan and more. In just 30 years since opening, the total number of Costco warehouses stands at 648 which includes five in Australia. In fiscal 2014, the company plans to open four new stores, but its Australian network is likely to grow much larger in the near future.

What does this mean to investors?

I think the supermarket duopoly is at the beginning of the end. I’ll never shop at Woolworths or Coles again. Never. I understand Costco won’t be applicable in every remote Australian community but in those cases Aldi and smaller convenience type supermarkets – such as IGA or Foodwork’s – will fill the void.

Foolish takeaway

A competitive industry is awaiting the supermarket giants and a behemoth has just entered the room with a superior service and supply chain. The power of consumerism is already upon us and, as a result, my investment dollars won’t be finding their way into the pockets of the supermarket giants anytime soon.

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