Just when investors thought things were bad enough, German grocer Aldi has upped the stakes in the supermarket wars.
An article in Fairfax media this morning reported that Aldi is planning to transport fresh produce straight from the farm to stores – cutting out intermediary distributors – in a bid to make its produce the freshest, and the cheapest.
While Aldi declined to comment specifically on its strategy, a spokeswoman told Reuters that a "direct-from-farm supply model provides efficiencies for our suppliers and value for our customers. As such, Aldi will continue to explore a variety of supply chain models."
Supermarket Woolworths Limited (ASX: WOW) has already felt the impacts of discerning consumer choice in fresh produce, with average range and quality part of the reason that shoppers have moved to alternative sources like Coles – owned by Wesfarmers Ltd (ASX: WES).
Woolworths and Metcash Limited (ASX: MTS) are struggling in an increasingly competitive market, with both grocers handing out profit downgrades in recent weeks. Curiously, Wesfarmers shares have remained relatively buoyant despite the increased competition. I think it could be the next stock to take a beating however, and Aldi's fresh produce could be the catalyst.
Simple market dynamics are the cause. The Australian grocery market is mature, and the total size of the market won't grow a lot faster than the size of Australia's population and its growth in weekly income – of which a good ballpark figure is 2-3% growth per annum.
So now you have Woolworths, Coles, IGA (Metcash), and Aldi competing to grow sales. Either they each grow 2% per year, or one or more grows faster because it steals market share from the others.
Recently this has seen Wesfarmers taking share from Woolworths and IGA, Woolworths taking market share from IGA, and Aldi taking market share from everyone.
However Wesfarmers' profit margins are lower than Woolworths, which means it has less room to adjust prices while Woolworths theoretically can cut prices and maintain its market share.
As it is the prospect of Aldi's improved fresh produce offering removes another one of the barriers separating the mini-mart from the majors, and with it another of the pillars supporting their share price.
Woolworths and Metcash shares are already falling but with a Price to Earnings ratio of 26 Wesfarmers begins to look incredibly overpriced – and ripe for a tumble.
