A foodie’s confession
I’m a regular supermarket shopper (and foodie) and feel I should by now own shares in one of the operators, like Foodstuffs, Woolworths or independents like Moore Wilson’s or Farro Fresh! I’ve spent many hours traipsing the aisles spending my retirement savings on all things food, wine and household essentials!
While I’m generally happy with the range of products and services, having spent some time in Aussie supermarkets recently, we do seem to lack some choice and pay too much by comparison, as has been well documented.
The duopoly dilemma
Despite the efforts of independents like Julie Moore, and disruptors like failed online player Supie, the supermarket sector is clearly dominated by two major players. And these two players are as much real estate businesses as they are grocery and fresh produce providers.
Supermarkets = property giants
On the back of the Commerce Commission enquiry two or so years ago, John Duffy at Consumer NZ asked me what the barriers were, from a real estate perspective, to setting up a third national provider. The same questions the Minister of Finance, Hon Nicola Willis, has been asking herself and others.
John clearly decided at the time that the more pressing issue was access to products, supply chain and distribution (you can listen to the podcast here), but rolling out the bricks and mortar is still a key barrier.
Through our conversation, Consumer NZ was trying to get a feel for the timeframes and quantum of cash needed to establish a nationwide network, at sufficient scale to provide a viable alternative.
As someone who has rolled out national networks, like when Rabobank came into the New Zealand market, and oversees other retail portfolios within our client stable, my initial assessment was bleak. If you follow a conventional approach, it’s a multi-year and enormous capex programme of land and site acquisition, consenting, design and construction… if you can even find suitable sites.
Rolling out a retail network: The reality
Not surprisingly, my advice was for any new entrant to acquire an existing retail network and repurpose this network to accelerate entry into the market. And not surprisingly, I indicated that the obvious network was The Warehouse.
Now we know they are in the mix to potentially extend their current grocery offering, but even if not, acquiring the business for the bricks and mortar may be a more economical and certainly faster solution for a new entrant. The large format stores would need some adaptation but provide the perfect footprint.
By the numbers
The Warehouse Group’s current market capitalisation is ~$300M and they operate 85 The Warehouse stores, 66 Warehouse Stationery stores and 66 Noel Leeming stores across the country, with 85% of the population living within 20 minutes of a store. These stores often sit alongside the major supermarket brands within retail precincts. Some of these stores are owned and some are leased, often through a sale and leaseback structure.
Whether all stores would be suitable for a new supermarket network would need to be determined, however even if the 85 The Warehouse sites were used, the cost to potentially acquire the business compared to the cost of establishing a national network of similar type stores (from scratch) of the scale needed to compete with Foodstuffs and Woolworths may be an interesting consideration, even if many are leased. And if not The Warehouse, there are other brands with national networks that might provide a similar takeover target.
Looking ahead
With or without more regulation as planned, or a forced downsizing of the current two major players, establishing a national network of bricks and mortar alongside distribution facilities is a practical problem for any new entrant to the market.
Any way of accelerating the development of this network of stores is surely a priority workstream – but I’m sure the Aldi’s and others have this in hand.
