In Australia, Aldi has achieved greater impact and faster. It has taken almost 10 per cent market share in 10 years. So while Woolworths and Coles have the benefit of learning from the UK experience, we expect to see the similar dynamics in Australia. Smaller local players will also be hit.

Aldi's sights are now firmly set on expanding through South Australia and Western Australia to further add to its east coast presence.

Another German discount supermarket chain, Lidl, has also successfully penetrated offshore markets and is earmarked to open its first Australian store in Melbourne this year. American discount giant Costco operates under a highly successful subscription model, with the majority of its profitability coming from its $65 annual membership fee rather than product sales.

While we expect Aldi, Lidl and Costco will reduce Coles' and Woolworths' two-thirds market share over the next decade, consumers will be the ultimate winners. Greater competition from the new entrants will increase choice and lead to lower prices. It will also see an expansion of home-brand products on the shelf.

If the UK example is anything to go by, Coles and Woolworths will struggle with lower margins and reduced market share. However, the two majors in Australia have the advantage of learning from the experience and are pre-emptively adapting to the changing industry dynamics.

With its sales figures recently cut, Woolworths is looking to stop the bleeding. At its recent strategy day, management pointed to neutralising Coles while containing Aldi on pricing.

Meanwhile, Coles supermarkets is nearing the completion of the investment turnaround initiative it began over five years ago. This has resulted in better sales results, particularly as a result of its refurbishment program.

Both players are also looking to expand their online presence and enhance customers' online shopping experience.


Supermarket revenue represents the majority of Woolworth's earnings, while it only accounts for 40 per cent of Wesfarmers'.

How Coles and Woolworths adjust to the heightened level of competition that is coming in Australia will be a major determinant of their profitability over the next decade.

Chris Stott is chief investment officer of Wilson Asset Management.

This article first appeared on www.afrsmartinvestor.com