COLES, Woolworths and Metcash's IGA chain are facing increased competition at both ends of the socio-economic spectrum as discounter Aldi ramps up its Australian presence and department store chain David Jones upgrades its gourmet food offer.
Ratings agency Moody's says Woolworths, Coles and IGA supermarkets will continue to lose market share over the next 24 months as Aldi expands into new markets and as David Jones skims off wealthier customers by refurbishing its gourmet food halls.
"These factors will shake up the strong duopoly structure of Australia's grocery market," Moody's said in a report on Thursday.
"As such, we expect the market share and profit margins of the two incumbents, but Woolworths in particular, to remain under pressure over the next 24 months."
Moody's expects same-store sales growth at both Coles and Woolworths to come under pressure as Aldi opens 60 new stores over the next 12 months, increasing its store footprint by 16 per cent.
Woolworths' same-store food and liquor sales, which fell in the June quarter for the first time in 12 years, are expected to remain in negative territory over the next two quarters – falling more than 1 percentage point by mid-2016.
At the same time, Woolworths' food and liquor margins are expected to fall from 8 per cent in 2014 to around 6.5 per cent by the end of fiscal 2016 as it cut prices on national brands and private label groceries to better compete with Coles and Aldi, Moody's said.
"Based on the assumption that private-label comprises around 15 per cent of sales at Woolworths, we estimate that a 5 per cent decrease in private label pricing would result in an EBIT (earnings before interest and tax) decline of around $270 million, or 7 per cent on a reported basis," the ratings agency said.
Moody's estimate is in line with recent forecasts by brokers such as JP Morgan and Morgan Stanley.
Moody's expects Coles' same-store sales growth to weaken marginally – falling from around 3.7 per cent in the June quarter 2014 to around 3.4 per cent in 2016 –but remain in positive territory.
This should enable Coles to maintain or improve margins slightly to around 5.4 per cent by year-end.
Moody's expects the bulk of Aldi's market share gains in South Australia and Western Australia – where the discounter plans to open more than 40 stores over the next 12 months – to come mainly at the expense of IGA supermarkets and other independent retailers.
"However, we still expect Woolworths and Coles to lose some market share, with the companies unlikely to benefit from opportunities resulting from IGA's weakness," Moody's said.
"Furthermore, we expect Aldi's expansion to boost price competition and reduce comparable-store sales and margins at a time when Woolworths and Coles reported average price deflation of around 1.7 per cent for the January to March quarter," it said.
Last month, David Jones' new owner, South African food and apparel retailer Woolworths Holdings, confirmed Fairfax Media reports that it planned to revamp its food halls and eventually open stand-alone upmarket food stores .
"While we expect that the scale of David Jones food retail, even over the longer term, will be very small in comparison with Woolworths and Coles, it will still lead to further market share losses for the Big Two," Moody's said.
"More importantly, it will mean that they will face increased competition at both ends of the socio-economic spectrum."
"David Jones targets higher income consumers who are likely to be less price sensitive, spend more in absolute terms, and be more profitable than the customers the discounters are targeting," Moody's said.