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Here’s one party Woolies and Coles will not be attending

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Twenty years ago this weekend, the biggest existential threat to Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL) quietly landed in Australia.

Funnily enough, back then, no one knew what it was and what impact it would have.

German budget supermarket Aldi opened its first two stores in Australia on 25 January 2001.

They were located in Marrickville in inner west Sydney and near Bankstown Airport further out west, according to QUT professor Gary Mortimer and University of Tasmania senior lecturer Louise Grimmer.

And the stores looked very odd to Australians at the time.

“Each stocked just 900 products, 90% of which were unknown brands,” the academics wrote on The Conversation.

“Shoppers had to bring and pack their own bags themselves. To use a trolley required a gold coin. They didn’t seek to entice customers with loyalty rewards or other gimmicks.”

Not many in the supermarket industry, let alone in the ASX investment world, thought Aldi posed a serious challenge to the massive Australian incumbents.

Right place at the right time

After all, budget supermarkets Franklins and Bi-Lo had just failed. It seemed Australian shoppers in 2001 were in no mood to buy weird brand names, pay for bags, then pack their own groceries.

But Mortimer and Grimmer explained Aldi stepped in just at a time when there was a low-price power vacuum in the market.

“Aldi expanded quickly. By mid-2003 it had 38 stores in New South Wales and six in Victoria. By 2011, it had 251 stores. By early 2013, more than 280,” they wrote.

“It overtook the IGA group [owned by Metcash Limited (ASX: MTS)] to become the third-biggest player in Australia’s supermarket sector by the end of 2013 – taking 10.3% of all grocery dollars (with Coles having 33.5% and Woolworths 39%).”

In case you’re wondering, you can’t buy shares in Aldi. Both the Australian arm and the German parent are privately held.

How Aldi changed the way Woolies and Coles behave

Woolworths and Coles were forced to respond to the success of Aldi.

The biggest impact, according to Mortimer and Grimmer, has been the rise of private label and “phantom” brands on our shelves.

“Aldi sells no ‘ALDI’ branded products. Instead it trades in phantom brands, such as Belmont ice cream, Radiance cleaning product and Lacura skin care. These brands are intended [to] overcome perceptions of private label items being lower quality,” they wrote.

“In 2016, Woolworths launched its own range of phantom brands. Coles followed suit in 2020 with brands including Wild Tides tuna and KOI toiletries.”

But Aldi still remains ‘good, different’

Despite the incumbents cloning some of Aldi’s business practices, the challenger still remains significantly different.

Aldi has shunned self-service checkouts. It still levies a surcharge for credit card payments. And despite COVID-19 lockdowns last year, the retailer has no plans to sell anything online, let alone deliver groceries to anyone.

Mortimer and Grimmer pointed out Aldi never faced a customer backlash when plastic bags were phased out around Australia a couple of years ago.

“It [had] never offered free shopping bags, always charging 15 cents for them,” they wrote.

“So Aldi continues to be an exception to the rule in Australian supermarket retailing. History suggests that’s a recipe for continued success.”

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Returns as of 15th February 2021

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Woolworths Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Tony Yoo