TheAldi-fication of Australia is continuing as Coles trials a new, tough, low price booze seller.
The first store opened in Melbourne’s eastern suburbs this week. It is called Liquor Market and it takes more than a few cues from the discount retail model perfected by Aldi.
Firstly, as reported by the Financial Review, the new store is going to offer a reduced range. This is not a giant barn like Dan Murphy’s, selling everything from Chilean red wine to Chinese beer. It will focus on fewer items.
And they will be cheap. The shop — in the classic budget colour scheme of yellow and black — has “Low Cost” written on the front in great big letters.
The store being used to trial the new model used to be Coles’ First Choice liquor brand. The new Liquor Market will operate a bit differently, including putting stock on the shelves still in its pallets. This is a move Aldi has perfected, saving money on shelf stackers.
Aldi’s business model is to cut as many costs as possible — fewer staff, fewer check-outs, fewer products available and fewer opening hours, in order to pass on the savings. Aldi has already forced Coles and Woolworths to cut prices in their supermarket business.
But while Aldi is selling award-winning wine for $5 and other wines for as low as $2.89 a bottle, the big two can’t just cut prices. They need to cut costs as well or they will watch profit margins disappear.
That’s why Liquor Market makes sense. When I visited the store, some prices were lower than at a LiquorLand — also owned by Coles — located just 50 metres from the Liquor Market. For example, a bottle of Yalumba Pilot Grigio was $1 cheaper and a slab of Sapporo beer was $2 cheaper.
COLES v WOOLWORTHS BAR-ROOM BRAWL
Coles and Woolies have been slugging it out in Australia for decades. Woolies was king for many years, but recently, Coles (and its owner Wesfarmers) have got on top, as Woolworths supermarkets struggled to cope with the success of Coles’ Down Down campaign.
Woolworths also owned Masters Hardware, which was a rollicking disaster that cost it billions and distracted key executives. It also owns Big W, which is getting trounced by Kmart.
Last year, Wesfarmers posted a profit of $400 million while Woolworths managed a loss of $1.2 billion.
Of all the business Woolworths owns, the one doing best is Dan Murphy’s. If this new LiquorMarket competitor starts to do well, Coles might just have figured out a way to undermine Dan Murphy’s, and take away the last good business Woolworths had. Could Woolworths cope with trying to manage yet another struggling business?
DOWN DOWN, PRICES ARE DOWN (AND SO IS YOUR PAY)
It makes sense for Aussie businesses to cut prices. We keep voting with our feet, going to places like Aldi, and H & M for lower-price goods.
The head of the RBA has noticed the very low retail inflation and traces it to companies like Aldi. Here’s what he said in a speech this week:
“The entry of foreign retailers has made a real difference in groceries and clothing. Over recent times, food price inflation has been unusually low.”
The internet is also making us much more price conscious. Lots of people buy booze online (a dozen bottles got delivered to my house just this week.) In fact, Coles First Choice now does booze delivery — order by 2pm and your drinks will show up that night.
Pressure for low prices is changing the way we get paid. This graph shows that people are getting pay rises less often, and the pay rises are smaller.
When prices are lower, businesses can’t afford to pay as much. That means pay rises are a bit lower. But workers can afford to accept slightly lower pay rises, because their cost of shopping has gone down.
This is the side effect of Aldi-fication. We get lower prices but pay the price in lower wages. The good news is it can’t last for ever. Eventually all the profit margin has been squeezed out, and the low inflation in retail must end. The trial of Liquor Market suggests we may have to wait some time for that. We might as well enjoy a cheap drink in the mean time.
-Jason Murphy.
Jason Murphy is an economist. He publishes the blog Thomas The Think Engine. Follow him on Twitter @jasemurphy.
Online Source: News.com.au.
