Coles are expanding into convenience stores and that could be bad news for IGA

IT WAS an easy to miss bullet point at the strategy day of Coles conglomerate Wesfarmers last week.

It was buried on page 58 of the tome of documents given to investors so you’d be forgiven for not hearing about it, especially given all the coverage from the event was about the closure of a fifth of all Target stores.

But, there it was in black and white: Coles plans to open a slew of convenience stores, far smaller than its current supermarkets.

Retail analysts have said there’s one retailer who could be very badly affected by Coles’ move to downsize — the already struggling IGA.

Australia’s fourth largest supermarket chain by sales (Aldi took the number three spot several years ago), is already in a world of pain having recently issued a $352m write down, facing a revolt from its supermarkets and, somewhat carelessly, losing its chief executive to — you guessed it, Coles. The company said they had positive plans for the future.

At Thursday’s strategy update, outgoing Coles boss John Durkan flagged a number of new initiatives at the supermarket, which will be demerged into a listed company, separate from Wesfarmers, later this year.

These initiatives include an increase in private label, a move towards everyday low pricing and rollout of click and collect to more than 1000 locations, from stores to on-street lockers.

However, it was the new store formats that raised eyebrows.

“We are developing flexible store blueprints that will allow us to fill network gaps with smaller formats in inner city locations,” Mr Durkan told investors.

“These smaller formats tap into emerging customer trends of healthy eating and increased convenience.”


Associate Professor Gary Mortimer, a retail expert at Queensland University of Technology, told the supermarket chains needed to slim down in some suburbs in order to expand.

“I call them the shrinking giants, where bigger businesses shrink their store footprint to get into those premium suburbs.

“One of the challenges of traditional supermarkets is that you’re constrained with the availability of land and that makes it difficult to get into those urban fringe areas where we are seeing the residential growth. This is certainly a move by supermarkets to capture some of that shopping dollar.”

Mind you, he said, Woolworths had got there first with its burgeoning portfolio of smaller stores. These “Metro” stores are around 600sq m in size, four times smaller than an average supermarket.

“Woolworths has certainly been more on the front foot trialling Metro stores so this is Coles going, ‘We’ve probably missed the mark’.”

Indeed, in Melbourne’s CBD, Woolworths has 10 stores — eight of them Metros — to Coles’ three.


Prof Mortimer said it was likely Coles’ new format would be similar to Woolies’ Metro stores with a focus on grab and go meals and fresh food.

With Aldi gnawing away at the majors’ market share in malls, smaller stores are far from the firing line of the German giant. But it brings Coles and Woolworths into the territory of another grocer.

“The competitor most exposed to these types of stores is Metcash and its Foodworks and IGA businesses,” said Prof Mortimer.

“IGAs are often situated at the bottom of residential towers where most people expect to pay a premium for convenience. When Coles and Woolworths venture into this smaller format they can offer the convenience and they can replicate their supermarket prices.”

IGA was “in danger,” he said, on several fronts due to the unique, and somewhat clunky, way the chain operated. Coles, Woolies and Aldi own their distribution centres, where the food passes through, and the stores, where the food is sold.

IGA is different; the ASX listed firm Metcash owns the IGA name and distribution centres. But the stores are independent. That’s why you see so many co-branded stores, like “IGA Romeo’s Foodhall” rather than just plain old “IGA”.

“Their wholesaling model doesn’t work and doesn’t allow for price competitiveness,” said Prof Mortimer. “Metcash are buying in bulk, adding a margin, on selling to franchises, who are adding a margin, and ultimately franchises can’t discount to any extent.”


Coles’ move couldn’t come at a worse time for Metcash. Chief executive Steven Cain recently left the company to run Coles while franchisees are increasingly sourcing product direct from manufacturers, bypassing Metcash’s warehouses.

This week, Metcash announced its 2018 profit would likely be wiped out by a $352 million impairment largely due to one of the biggest IGA franchisees telling Metcash it was going it alone and would build its own distribution centre.

Drakes supermarkets is no minnow — it has 50 stores across South Australia, the newest of which barely feature the IGA logo. Losing that contract could cost Metcash $270m annually, although the firm’s current CEO Jeff Adams said analysts were being overly “pessimistic,” the company had a positive future and its plans would soon be revealed, reported The Australian.

Prof Mortimer said Metcash needed to change if IGA was to prosper. For instance, the store experience was inconsistent. Some IGAs are plush, with walk in cheese rooms, while some are shabby.

“But that inconsistency can be a good thing. It means franchises can order their own ranges that suit the demography of the area, they can have their own retail flair and provide local products.”

The chain should consider a premium format for neighbourhoods with more cash sloshing around and a smaller format for other areas, he said. And if its larger rivals were heading further into home brand territory, IGA should go the other way with more choice.

“IGA can be more agile and flexible which is something Woolworths and Coles struggle with because they are about nationally ranging products”.

But Metcash can’t rest on its laurels. While Coles’ new smaller stores may initially only be in inner city areas, Woolworths’ Metro branches are already beginning to pop up on street corners far from CBDs in suburban areas — previously solid IGA territory.

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