In the 1970s, this young couple never imagined that their modest clothing business would make them some of the wealthiest people in the world.
They met while working at a well-known clothing store. He was the manager, and she was one of the seamstresses. Soon after they married, and decided to set up their own clothing store.
They found success by hand-making padded dressing gowns. These had become popular in post-civil war Spain, a time when heating wasn’t widespread.
40 years later, Amancio Ortega and his first wife, Rosalia Mera, have built a world business. Mainly due to the popularity of their brand, Zara.
And Zara is one of the many popular international players — such as Gap, H&M and Dayso — that are disrupting the Australian retail market. They have lowered prices and forced traditional retailers to compete.
Aldi seems to be having the same effect in the supermarket front. As shown by the chart below, the German supermarket keeps on gaining ground.
And it looks like it’s at Woollies expense. In the last nine years, Aldi’s market share has increased to 12% while Woollies has dropped to 37.3%.
Source: Roy Morgan Single Source (Australia)
Woolworths has had a bumpy ride. Last year it suffered the debacle of Master’s — the home improvement store designed to challenge Westfarmer’s Bunnings. Now German giant Aldi is taking a chunk of its market share. And to top it off, it has been forced into a price war with Coles.
Woollies announcement last week — job cuts and store closures — is a clear attempt to improve efficiency. The supermarket giant has also slashed prices on certain items to keep up with Coles.
Australia is a vast country. The Aussie grocery retail market has always had large distances to cover and a small population.
Moving items across country can be expensive. This has discouraged the entrance of new supermarket competitors to the market. And has promoted a ‘duopoly’ — Coles [ASX:WES] and Woolworths [ASX:WOW].
Between the two, they own an impressive amount of diverse businesses. Westfarmers owns Coles, Bunnings, OfficeWorks, Kmart and Target. Woolworths has Big W, Masters, Dan Murphy’s and EziBuy.
Since their entrance to the market, both Coles and Woolworths have been able to cut competition. And they have both pursued similar growth strategies.
They both first expanded into liquor. And then petrol, with the buy of Shell by Coles and Caltex by Woolworths. Coles and Woollies now own 48% of the petrol market. In recent years, they have also dabbled in hardware and insurance.
Their marketing strategies have also been similar. A few years back we went from Coles ‘Down Down’ to Woollies ‘Cheap Cheap’. Now they are both reaping the profits of the MasterChef craze by hiring celebrity chefs. Coles has commissioned Heston Blumenthal, while Woolworths has hired Jamie Oliver.
Both supermarkets have also had strained relationships with suppliers. According to an essay by The Monthly titled ‘Supermarket Monsters’, allowing the duopoly has changed the way food is produced in Australia. And only suppliers that provide supermarkets have been able to grow.
Australians have also traditionally been ready to pay high prices. So why do Aussies so readily accept high food prices? Especially when you consider that most products are produced right here in Australia?
It is mostly due to convenience. They would rather do a one stop shop than visit different suppliers to save price.
And high salaries. Australians can afford high food prices.
But this may be changing — as the increased popularity of Aldi and Costco are showing.
As salary increases stagnate, could we be seeing a shift to a more price oriented consumer than a convenience driven consumer?
As new players are coming in and gaining ground, the market is becoming wider. There may be more challenges ahead for Coles and Woolworths.
For The Daily Reckoning
PS: Selva recently joined the Port Phillip Publishing team as our macroeconomic analyst. She works closely with The Daily Reckoning editor Vern Gowdie on his advisory service,The Gowdie Letter.