In March 2017, Kaufland announced it was entering the Australian market and for the next two years proceeded to make several significant local investments including purchasing retail outlets and distribution infrastructure with a plan to open 20 stores.

In January 2020, Kaufland suddenly announced its decision to withdraw from the Australian market not long before the unexpected COVID-19 pandemic arrived in March 2020. 

Kaufland’s decision to exit the Australian market before it even launched was incredibly surprising given the investment they had already made. 

The decision was likely made after Kaufland looked at the wider economic conditions and growth forecasts, which may have seemed attractive in the initial stages but more recently were potentially not as appealing. A change of leadership in April 2019, the tyranny of distance and supply chain issues, ensured Australia was always likely to be a smaller market in the context of its global footprint, with potentially bigger and easier opportunities closer to home in adjacent European markets.

Heavy price competition between the major retailers in the grocery market, and price deflation, had started to stabilise over the last 12 months. The concern with Kaufland entering our local market was the potential to re-ignite some of that pricing pressure, of course that threat will now ease. In fact, recent indications show retailers may see a bit more price inflation return supporting better sales growth (not taking into account the more recent Covid bump in grocery sales).

The announcement would have no doubt made smaller independent retailers relieved, having been under pressure as it is for several years. Another large retailer coming in, particularly given the breadth and scope of Kaufland’s offer and price competitiveness, would have been an additional threat to them on top of the challenges caused by COVID-19 weeks later.

Following Aldi’s success and disruption to the Australian market over the last 10-15 years, Kaufland’s entry would have been cause for concern if it had gone ahead with a successful launch and plans to grow. They’re a huge business and could certainly have driven an increase in competition across the grocery market.

Today’s retail environment

We have been following the evolution of large macro trends in retail, including convenience, locally sourced, healthy, and unique shopper offers which deliver the right product selections to targeted demographics in specific locations. 

Kaufland’s hypermarket model, with a huge range, more homogenous offer and large centres, is in many ways counter-intuitive to these current shopping trends and research about shoppers and where they want to go. However, the value-driven segment is still large and still lucrative. 

Costco is a great example of this.  It’s established itself successfully with only a handful of large warehouses in the country.  Of course, Australia’s geography is limited by where such bulk retailers can flourish – both from a logistics and population mass perspective; they can only generally thrive in major metro centres. However, in February 2020, Costco Australia launched its online shopping and delivery platform for its membered customers helping to expand its customer-base.   Covid will no doubt fast track the adoption of online for a range of consumers, making a genuine online fulfilment platform even more important for future growth. 

In contrast to Costco, Aldi can operate both in suburban and regional areas, thanks to a mix of its value-driven offering, convenience, smaller store footprint, and Australia’s growing trust in and adoption of private label products, which is at an all-time high. There is no longer a significant perceived drop in quality associated with buying private label.

Are we likely to see another giant take Kaufland’s place? Large international retailers looking at the Kaufland experience would be thing thinking twice before moving in. Given the significant investment required, and inherent challenges, acquiring an existing retailer’s footprint rather than starting from scratch and building a new distribution and store network may be a more economically viable approach.

Supply chain acceleration

Coles and Woolworths are both highly sophisticated retailers and have significant investment plans in their supply chain. The improvements and streamlining of supply chain and distribution centre operations are not necessarily a direct result of the imminent arrival of Kaufland, however it may certainly have contributed to sharpening their focus to some degree. 

Both retailers are putting a lot of time, effort and money into driving those efficiencies, getting a better, smarter, quicker supply chain, opening up supply chains that can service online better, more rapidly whether it’s through ‘dark stores’ or more automated systems. 

What’s next?

With no imminent threats on the horizon from other international retailers, we won’t see any significant moves come from the grocery sector. We are more likely to see a pick-up in the online retail dollar, boosted with the likes of Amazon and Costco.

Will online shopping remain elevated after the COVID-19 crisis? If the experience for those shopping online for the first time is positive, and early reports indicate it has been, then it is expected that online shopping will continue to grow, particularly as more Australians enjoy the convenience and savings it can offer.

This may present more challenges for physical retailers and as a result, consumers may expect to see more convenience, more customised product offerings and of course, price volatility. What is successful in grocery is also a barometer of what society values as a whole. It will be an interesting few months ahead.

Andy Kirk is CEO of Crossmark, Australasia’s largest retail marketing services company, with multi-channel expertise across grocery, mass, convenience, hardware, consumer electronics, pharmacy, and specialty retail, and serving more than 200 manufacturers and brands.