Aldi to benefit as shoppers shift to cheaper private label groceries
Australia's largest supermarket chains say people are changing the way they shop - a shift that may benefit discount supermarket chain Aldi.
Shoppers are increasingly buying cheaper private label products at Woolworths (WOW) and Coles (COL) supermarkets to cut their grocery bills as inflation and the cost of living hits household budgets.
Woolworths says shoppers are trading down to private label products.
Woolworths CEO Brad Banducci says overall customer spending remains resilient and all shoppers are looking for value, although budget-conscious or "saver" families are under the most pressure.
"They are families that live in the suburban catchment that are under more pressure than they have historically been, primarily due to either their mortgage or rent, but it all manifests back into food shopping and what they do," Banducci says.
Consumers are tightening their belts and Tuesday's surprise interest rate hike by the Reserve Bank of Australia will add to that pressure, Morningstar director of equity research Johannes Faul says.
"Rising housing costs are increasingly impacting grocery shopping behaviour, and shopping behaviour is going more towards private label," Faul says.
"Our expectation is that the pressure on budgets will increase over the course of 2023."
More private labels and home cooking
Faced with rising food prices, energy bills, mortgage costs and rents, people are changing the way they shop and trading down to private label products and eating at home.
About 75% of Coles customers have changed their purchasing behaviour over the last few months, according to new Coles CEO Leah Weckert, who took over the top job on Monday.
"You're seeing customers change behaviour because they're focused on the budget and they're optimising their grocery spend," Weckert says.
"What we're seeing them do is much more meal planning, much more batch cooking, and freezing off that batch cooking to make the meals go further."
Coles' private label sales jumped 11.4% in the third quarter, while Australia's largest supermarket chain Woolworths' own and exclusive brand sales grew 9.1%.
Coles' own brand pasta sales surged 40% year-on-year,while Woolworths' own brand pantry and chilled dairy products grew more than 20%.
Across branded and private label products in Coles stores, customers are also trading down from the 'best' or premium tier to the own brand-heavy 'good' tier.
Banducci says there are many moving pieces as people change the way they shop due to inflation, with value-conscious customers becoming more thoughtful about their discretionary spend and trading into more affordable options such as Woolworths' own brands.
Banducci says saver or budget families are becoming more functional in how they shop, shifting to entry-level own brands for pantry essentials like flour, rice and sugar.
They are also having more "meal occasions" at home, returning to traditional family recipes and scratch cooking. The dinner favourites are roast chicken and vegetables, "the old spag bol" but with a cheaper alternative to mince meat, and premium pizzas.
More affluent consumers at its more premium stores are also trading in eating out for dinner occasions at home, according to Woolworths Supermarkets managing director Natalie Davis.
"We're seeing the dinner occasion continue to grow and people trading in from out-of-home into in-home entertaining and in-home meals."
Woolworths is also selling more coffee beans as many customers switch to making coffee at home instead of buying it in cafes.
"We're seeing a lot of growth in those affordable indulgences or little luxuries," Davis says.
Aldi may gain market share
Faul says the average shopper at Woolworths and Coles is increasingly preferring cheaper private label brands over national brands, a shift that may benefit discount supermarket chain Aldi.
Faul says Aldi is likely taking market share from Coles and Woolworths. Picture: AP
He says the pronounced shift to private label products means Aldi is likely taking market share in the current economic environment given its greater private label penetration.
"That product mix shift towards private label that's currently playing out might lead to market share gains by Aldi because they have a larger portfolio of private label products," Faul says.
"Consumers will be more inclined to switch to private label and that opens the door for Aldi to grab some share."
While Faul says Aldi presents a near-term risk to the majors, he expects the market shares of the big three supermarket chains to remain stable over the next decade.
Morningstar estimates Woolworths has a 36% market share, Coles 28% and Aldi 9%.
Aldi says it has gained total market share, as more customers shopped at its stores more often in the last quarter of 2022.
Its sales grew 13.2% in the December quarter compared to a year earlier, as customers switched some or all of their spend to Aldi and existing Aldi shoppers increased their spend.
Aldi Australia managing director Jordan Lack says there has been a shift in customer purchasing behaviour, highlighting an increase in proteins and vegetables - the "centre of the plate" - as households try to reduce pressure on their budgets.
"Existing customers are shopping with us more frequently, and an increasing number of Australians are looking to Aldi for their grocery needs," Lack says.
High inflation drives sales lift
Third quarter sales at Australia's major supermarket chains beat market expectations.
Woolworths on Tuesday reported an 8% rise in group sales to $16.34 billion, and Coles on Friday announced a 6.5% increase in group sales to $9.67 billion.
Faul says the key driver of sales growth is still extraordinarily high price inflation, with a 6% rise in food shelf prices at both retailers during the quarter accounting for most of the industry's sales growth.
Banducci says there are signs overall inflation in food is starting to moderate.
"However, in many areas inflation remains frustratingly elevated and we need to continue to work hard to provide our customers with great value across their shopping basket."
Growth in food-related spending - in supermarkets and other food retailers as well as cafes, restaurants and takeaway food services - drove a 0.4% rise in overall retail sales in March, Australian Bureau of Statistics figures released on Wednesday show.
ABS head of retail statistics Ben Dorber says food retailing has now recorded 13 consecutive monthly rises, largely driven by high food inflation.
But he says spending on discretionary goods has slowed in response to interest rate rises and increased cost-of-living pressures.
Morningstar expects cost-of-living pressures will drive greater at-home consumption in 2023, and that higher interest rates will mostly hit nonessential retail spending with demand for food and liquor to remain robust.
After holding rates steady in April following 10 consecutive hikes, the RBA lifted the cash rate by another 25 basis points to 3.85% on Tuesday.
Faul notes it can take at least 12 months for each RBA hike to have a full effect on the economy including consumption.
Morningstar views both Woolworths and Coles shares as overvalued compared to its fair value estimates of $27 and $14, respectively.