In today’s global village, it is sometimes easy to forget just how far away Australia is from everywhere else. Even New Zealand, by far its nearest neighbour, is several hours’ flight away, while places such as China and Japan, which might seem close to observers in the west, can take longer to get to than it does to cross the whole of Europe. This splendid isolation, coupled with the sheer size of the country (7.7 million km²) and the fact that the majority of the 21 million population lives in just a handful of mainly coastal cities, has helped make Australia a unique place to live, work and do business – and the retail sector is no exception.

However, for Adrian Williams, senior business analyst at IGD in the UK, it is not simply the geography that affects the way the retail sector is developing - the current political and economic changes are having a major impact as well. “One of the first acts of the new Labour government, elected last year and led by Kevin Rudd, was to sign the Kyoto Protocol, which means that climate change, carbon emissions and sustainable development are now top of the agenda for many Australian companies,” Williams says. “A lot of retail companies have, independently, been following their own corporate social responsibility (CSR) agendas, but now the whole issue is being fast-tracked by the government.” This, he says, could have a major impact on the retail sector, which has found it hard, in particular, to keep its carbon emissions under control, given the long distances – and lack of alternative transport methods, with little in the way of rail infrastructure – involved in the supply chain. “Getting product to people cost-effectively and using transport in the most efficient manner will be the key focus for the whole Australian retail sector in the years to come,” says Williams. “Global best practice in getting product to place will be a major influence.” The challenge is further complicated by the shifting demographics in Australia. “The boom in Western Australia’s economy, driven by newly-exploited mineral resources, is attracting people from the traditional population centres in the southeast of the continent,” Williams says. “This has made it harder for retailers, whose main operations are around those major conurbations in the east, to recruit and keep good staff, with many people feeling that they can earn more money working in the west.” Williams believes that the Federal government will have a real challenge to avoid the development of a ‘two-speed economy’, an issue that retailers will also have to address.

Two-horse race? But the main Australian retailers already have plenty on their plates, according to Williams. “The biggest news in the Australian retail sector at the moment is the recent takeover of Coles, the country’s second largest retailer with around a 31 per cent market share. The group that has bought Coles – Wesfarmers – is a conglomerate with little retail experience; it made its money in coal mining, and is a great example of the Western Australia economic boom. But it has brought in UK retail executives – Ian McLeod and Archie Norman, both formerly of ASDA – to help advise it on the way to develop the Coles business, and that is exciting.” Coles’ new owners have made it clear that they intend to help the company regain some of the ground lost to arch rival Woolworths in recent years. In particular, Coles will look to improve the quality of fresh produce, review its store layout and refurbish existing stores, open new outlets and review its product range. “[Coles managing director designate] Ian McLeod has said he wishes to move away from the previous and remote decision-making model of Coles, and increase the influence of individual stores in his efforts to turn the chain around,” says Williams. Improvements in the supply chain will also be implemented, with six new distribution centres planned across New South Wales, Victoria and South Australia.  

ALDI takes discount market by storm Coles and Woolworths do not have the market entirely to themselves, however. German discount specialist ALDI entered the Australian retail sector in 2001, and now operates 136 outlets with a sales space of around 186,000 m². “ALDI has really expanded quickly, and somewhat under the radar of both Coles and Woolworths,” says Williams. “They have been too concerned with watching one another to notice ALDI’s ascent.” ALDI’s offer is “popular with Australian consumers”, according to Williams, who adds that the German group has single-handedly created a viable discount sector in Australia, opening up to two new stores a month. ALDI’s success in the discount sector is all the more remarkable given Coles’ ill-fated discount format Bi-Lo, whose 200 or so stores are being converted to the traditional Coles supermarket banner after several years of underperforming, and the slow recovery of New South Wales-based chain Franklins, relaunched in 2002 by South Africa’s Pick ‘n’ Pay after being sold by the Dairy Farm International group. The other main retail channel in Australia is the convenience/forecourt sector, where in urban centres such as Melbourne and Sydney companies such as 7-Eleven and IGA are by far the dominant forces. “7-Eleven is undergoing something of a change at the moment,” says Williams. “Like its US namesake, it has traditionally focused on the impulse sector, offering a range of spur-of-the-moment products. But it is now shifting towards a convenience format, with a broader range of everyday food and non-food products that allow consumers to top-up their shopping without necessarily driving to the out-of-town supermarket.” In particular, says Williams, 7- Eleven is becoming increasingly food-focused, with products such as fresh sandwiches and snacks that appeal to urban workers looking for lunchtime alternatives. IGA, meanwhile, has a number of “very strong stores”, according to Williams, although it is not a chain as such but rather a grouping of independent stores operating under the same banner and all supplied through the Metcash wholesale group. “The independent sector is very strong in Australia,” says Williams. “There are still many independent fresh food specialists, butchers, etc., and the main supermarket operators look to them for best practice when it comes to fresh food retailing. You will often find independent fishmongers or other stores adjoining the supermarkets themselves,” he adds. The two main supermarket groups have also dipped their toes into the convenience sector, although mainly via forecourt retailing: Woolworths has a deal with Caltex/Texaco to operate stores on its petrol stations, while Coles has a deal with Shell.

Costco sees its niche Hypermarkets, the dominant retail form in much of Europe and Asia, are virtually unknown in Australia, for no apparent reason, although Coles did experiment with a few pilot stores in 2007. “These were never really full-scale hypermarkets,” says Williams, “and it is now doubtful that Coles will continue its experiment following the takeover. It is more likely to focus on improving its existing store formats.” But one new retail format is expected to break into the market in 2009, when US cash & carry specialist Costco comes to Australia. “Australia is very similar to the US in many ways – notably the sheer size of the place - and this suits Costco’s ‘drive-to’ store format perfectly. The cash & carry sector is a niche worth exploiting for Costco, with Metcash the only real wholesale operator – and it operates solely through the IGA stores and does not sell directly to consumers.” Change will also come in the mainstream sector, according to Williams. “Woolworths and Coles will start to do more to differentiate themselves from each other,” he says. “The arrival of ALDI and Costco will mean that they will have to broaden their mix of products to compete, and look for new formats.” Williams mentions Woolworths move into upscale supermarkets “for premium shoppers”, while both the main chains have also started to expand their range of private label goods, following the ‘good, better, best’ format already widely seen in Europe.

Little chance of foreign invasion But Europe’s influence in the Australian market is likely to be limited to best practice ideas, according to Williams, with little chance of the acquisitive French and British chains such as Carrefour or Tesco, or the likes of Wal-Mart from the US, entering the market, despite their recent forays into other Asian markets. “Even if European companies get a strong foothold in China in years to come, it is still such a long way from there to Australia that it would still be hard to do business there, even with a more ‘local’ base,” he says. “Russia, China and eastern Europe are still more attractive to these companies than Australia which is a mature, highly competitive market of just 20 million people a long way from anywhere.” ALDI and Costco have seen niches that can be exploited, Williams says, but that is the exception rather than the rule. “Coles and Woolworths are also just too big for other companies to buy out. The capital expenditure involved would be too great, especially as any buyer would also have to take on some significant store investments.” However, Australia’s retail market is unlikely to stagnate, either. “Where we are likely to see growth is from the innovative local players seeking to extend their reach,” says Williams. Companies such as Macro Wholefoods Market and Foodworks for example, perform very well in their local markets, he says, and could look to expand further, while the international banner SPAR, which currently operates only in Queensland, has already confirmed its plans for growth in 2008 as it sees Australia as key to its wider Asian development.

Price concerns One factor that could curb growth, however, is the steady rise in food prices, which has affected Australia as much as anywhere else in the world. “Australians like to buy local produce – and again the distances involved mean that imported food products are not widespread – so the severe droughts that have hit the country in recent years and have badly affected local harvests have meant that food prices have risen sharply,” says Williams. The Australian federal government in January announced that it would carry out an inquiry into national grocery prices, targeting both Coles and Woolworths, as well as smaller chains, in order “to get to the bottom of what actually has caused Australian food and grocery prices to rise more than elsewhere in the world”. Australian food price inflation surged in 2006, rising from around two per cent to near ten per cent yearon- year, and while Williams said it was expected to fall to around six per cent this year, the increases remain difficult for many Australians, traditionally used to relatively inexpensive food products, to swallow. And with fuel prices expected to continue their upward trend, Australia’s long retail supply chain could come under increasing pressure, potentially throwing the expansion plans of the ‘big two’, at least, into serious disorder. •