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Predictions for the Australian grocery retail market

Five trends that will shape the Australian food and grocery market in 2017

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The Australian grocery market is more competitive than ever. Two of Asia-Pacific’s largest retailers are battling it out for market leadership, the online, discount and wholesaling channels are growing rapidly, and new contenders are potentially set to enter the market.

With an eye on the year ahead, IGD’s Nick Miles, Head of Asia-Pacific, identifies the five key trends we expect to shape the market and influence retailer strategy in 2017.

1. Woolworths fighting back

Woolworths CEO Brad Banducci has now been in his role for almost one year and has made significant and rapid progress in improving the performance of the business following a difficult FY2016.

Last year was characterised by some significant developments at the retailer and although it announced an overall decline in FY2016 sales, sales rebounded impressively in Q1 of FY2017.

In 2017, we expect Woolworths to continue its progress on its AU$1bn restructure and look to restore stronger like-for-like performance, potentially outpacing the growth of main rival Coles for the first time since its acquisition by Wesfarmers.

Watch out for more disposals of non-core assets, store renewals prioritised over new store openings, ongoing private label rebranding and process improvements to drive a leaner organisation.

 

Source: IGD Resarch

2. Fresh battlegrounds

Throughout 2016 we saw retailers continuing to invest in fresh food improvements as a strategic priority, looking to drive shopper penetration in the category.

All major retailers in the market continue to develop longer term relationships with fresh food suppliers, plus strengthen their Australian first sourcing policies. Better in-store execution of all fresh categories is also a focus, with greater emphasis on attractive displays, good availability, excellent product freshness and staff skills.

Expect more of these developments to come in 2017, with Aldi opening larger stores and focusing on fresh food, Coles and Woolworths introducing new store designs and Harris Farm Markets rolling out impressive stores, with standout fruit and vegetable and service counters.

 

Source: IGD Research

3. Focus on new market entrants

Not since Aldi’s entrance into the market in 2001 and Costco’s in 2009 have we seen another global retailer enter the Australian grocery market. However, in 2016 we saw increasing confirmation that other retailers are interested.

Although any entry into Australia would not be without its challenges due to the existing high density of supermarkets, a strong independent sector and a shopper preference towards Australian-made, the performance of Aldi and Costco in recent years shows that there are still gaps in the market waiting to be exploited.

We don’t expect 2017 to be a game changer, but we do expect to learn more about how the landscape might change over the coming years:

  • Amazon is expected to launch in Australia in the second half of 2017. Whether Amazon chooses to enter as a marketplace, with Amazon Fresh or even with physical stores, we will have to wait and see, but the long-awaited arrival of the retailer, with its focus on customer service and its Amazon Prime loyalty program, means that competition in the market will move to another level
  • Schwartz Group, the parent company for both Lidl and Kaufland, has for a while been linked to entry into the Australian market – with many expecting Lidl to enter the market around 2020. However, in 2016, the Kaufland side of the business announced that it was conducting a feasibility study into the market

Source: IGD Research

4. Intensified online capability

With Amazon’s expected and imminent market entry, we expect to see both Coles and Woolworths focus more attention on improving their online capabilities in 2017.

Amazon’s key strengths lie around its unwavering focus on the customer – both individuals who buy products and those that sell products via their platform. Amazon’s level of customer service and flexibility, plus the growing capability of Amazon Prime’s loyalty scheme, will mean that retailers with online operations in Australia will need to take their service to a new level.

Expect to see a renewed focus in 2017 as online grocery retailers put plans in place to repel the new competitive challenge from Amazon.

 

5. Convenience becoming a reality

In 2016 we saw an increasing level of innovation in Australia in small stores. Melbourne especially is rapidly establishing itself as a hot spot of convenience store innovation, with new style formats being tested.
Increasingly, we see stores tailoring their ranges to deliver better quality food-for-now and food-for-later options, plus a growing level of innovation to deliver new and exciting choices that keep the offer fresh and different from competitors. Two of our favourite stores include:

  • 7-Eleven has launched a new style of urban store in Melbourne’s CBD, with a greater focus on food-to-go ranges and product innovation, including: a nacho station, popcorn, hot food, sushi, an improved sandwich range, plus both hot and iced coffee
  • Fresh Pantry is a new convenience concept being trialled by Metcash. The store has an on-site kitchen delivering fresh food solutions throughout the day, plus a fresh coffee bar and bakery, as well as a credible top-up grocery range, all at competitive prices

 

Source: IGD Research

An increasingly dynamic market

Without a doubt the Australian market is evolving rapidly, driven by competitive influences and changing shopper habits. Therefore, retailers and suppliers in 2017 will need to continue innovating over the next 12 months or risk being left behind. New market entrants are an exciting new channel of growth for suppliers, but stronger collaboration with existing retailers will also be required in order to protect existing market share.

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