Christine St Anne: Today I am joined by Alphinity's Bruce Smith who challenges the notion that Wesfarmers and Woolworths will continue to be dominant players. Bruce, lovely to see you again.
Bruce Smith: Thank you Christine. Thanks for coming in.
St Anne: So Bruce, are we really operating in a supermarket duopoly?
Smith: It does seem like that sometimes. But you couldn't really call it a duopoly, there are plenty of other players. Coles and Woolworths are very major players and between them they make probably three-quarters of the whole market. But there are plenty of others as well, there is the IGA, the Independent Grocers that operate. There is also more recent entrants like Aldi. Aldi has been in for about 10 years and they have been gradually building up 300, 400 stores now on the East Coast and they've announced their plans to go into South Australia and West Australia. So there are also other players like Costco. Costco's entered about five years ago and they have a number of stores around Australia. So it's not really duopoly it's, it's an oligopoly, more than anything else.
St Anne: Bruce, you mentioned companies like Aldi and IGA, but do these companies have the pricing power and scale to effectively compete.
Smith: Not as yet, but they have other advantages. So the IGA operating model is quite different, rather than selling branded goods on equal footing with Coles and Woolworths. They tend to have, very much a private label strategy although lot of people don’t recognize it as private label, because they mostly presented branded goods. It's just they are Aldi’s own brands. So that really means that they can come into much lower prices than people perceive, Coles and Woolworths because they are not really comparing like for like. They are not comparing Coles and Woolworths own label with Aldi’s own label. In which case they are very close, but they do seem to be quite inexpensive from a consumer point of view.
So that's their advantage. It's a little bit more difficult for the IGA's of the world. So they have the problem of not having the scale or the distribution efficiencies that Coles and Woolworths have and they often find themselves uncompetitive from a price point of view. But having said that in a lot of cases they are in uncompetitive areas as well, they can be in lot of country towns where they might be the only player, in which case it's less of an issue for them.
St Anne: So Bruce do you see Aldi as a game changer for the industry.
Smith: Well it hasn't been so far. So what Aldi's been doing is just nibbling away at the market share that Coles and Woolworths would have add, had Aldi not been there. But as it is Coles and Woolworths are both still growing slowly, but they are still growing. It's just that the marginal growth that they would have had is being taken up by Aldi and a couple of the other players. So it's actually been quite a successful market for Aldi one of their advantages is that as a private company they can be, they can fly a little bit under the radar and not be quite as open about what they are doing as the majors have to be. So that's really helped them in getting quite a strong market position now.
St Anne: Bruce you raised an interesting point that Aldi is a private company. Of course investors already have investments in Wesfarmers and Woolworths. So how can they play the investment trend that you are speaking about?
Smith: Unfortunately they can't really do that at all, so Aldi is private they are run by a family in Germany and they are essentially funded that way. Costco is a publically listed company, but in United States. And like I said international – a potential for international shares and that’s fantastic but it's also very small part of Costco's global operations, so not really all that relevant. So it is very difficult for someone to actually take advantage of the growth of the smaller players.
St Anne: So Bruce do you expect maybe Aldi could go to an IPO.
Smith: I think a lot of people would love to see that, but I think it's pretty unlikely. One of the strengths that Aldi has is the private ownership and the fact that they can fly under the radar. So I'll be very surprised if they decided to IPO the Australian business.
St Anne: Finally Bruce can you give your outlook generally for Wesfarmers and Woolworths.
Smith: Wesfarmers and Woolworths have had – both Wesfarmers and Woolworths have had some difficult times over the last couple of years. There have been market performance rather than outperformance. And part of the reason that is that even though the supermarket operations for both are going quite well. They have other businesses that have been struggling a bit more. So in Wesfarmers case it is companies like Target and some of their industrial and resource related businesses. For Woolworths it's been their startup business which is Masters, the hardware business and because of those factors it's been difficult for other stock to really outperform the market. So they both have been suffering from downgrades over the last couple of years.
St Anne: Bruce thank you very much for your challenging insights.
Smith: It's a pleasure. Thanks for coming.