DISCOUNT grocer Aldi may soon be facing competition from cut-price European rivals or local players if trends in the $88 billion Australian grocery market mirror those in the United Kingdom.
Sainsbury's controversial decision to back the relaunch of Danish discounter Netto has underscored the popularity of budget grocers Aldi and Lidl and highlighted the challenges facing traditional grocery retailers as consumers shop across multiple channels and markets become fragmented.
Aldi and Lidl have almost doubled their share of the UK market to more than 8 per cent in recent years and are tipped to reach at least 13 per cent longer term. Aldi has been even more successful in Australia, garnering 10 per cent of the east coast market as even middle-class consumers seek to reduce the cost of their weekly grocery shop.
In a report this week, Commonwealth Bank analyst Andrew McLennan says there is room in Australia for a second discount grocery chain and sees scope for Netto, Lidl or others to open stores, either under their own steam or in partnership with Metcash.
Woolworths, Coles or Metcash may also develop "price fighter" banners to augment their traditional grocery offer and better compete with the discounters.
"Based on the trends from international markets and the apparent willingness of Australian consumers to embrace the format, we see potential for another discount retailer to enter the Australian market," Mr McLennan said.
"While Lidl has previously been mentioned as a candidate to enter the Australian market, there is also the potential for Netto or a local alternative," he said.
Lidl has been scouting for sites in Australia for several years but is believed to have postponed global expansion plans after senior management changes earlier this year.
The arrival of a new discount player would have significant implications for Woolworths, Coles and Metcash, which have responded to Aldi by reducing prices and expanding their range of private label groceries.
Market leader Woolworths had "the most to lose", Mr McLennan said, but was also in a strong position compared with other incumbents because of its low cost of doing business.
"Like Tesco, we see potential for Woolworths' margins to come under pressure, but we recognise Woolworths does not have the same exposure to superstore formats and is well positioned online in Australia," he said.
Metcash is the most exposed because of its relatively high cost of doing business and high retail prices.
However, there is scope for Metcash to enter the discount market directly or in conjunction with an international partner, who could take advantage of its excess distribution capacity.
Woolworths and Coles played down the perceived threat, saying Aldi had taken market share from Metcash and it was well placed to compete after reducing prices and investing in customer loyalty and online retailing.
"Woolworths is Australia's lowest price full-range supermarket," a spokesman said. "Strong competition in the grocery sector has driven 19 consecutive quarters of price deflation, which is a great thing for our customers. [We] welcome competition."
Coles has no plans to revive its discount banner Bi-Lo after spending the last few years closing or converting Bi-Lo stores.
"We are confident in Coles's position as a provider of value to customers," a spokesman said, adding that Coles food and liquor prices had risen just 4 per cent in five years compared to national inflation of 12.2 per cent.
"We've lowered prices on thousands of products, including key staples," he said. "We know the cost of living remains a challenge for consumers [and] that's why providing great value to our customers is a key pillar of our strategy going forward."
In the UK, Aldi and Lidl have been growing at a faster rate than the major chains as consumers embrace the discounters' low-price private label offers. The incumbents have retaliated by slashing prices, but the price cuts have come at a cost to sales and margins.
