Aldi trick Coles copied for huge profits
Remember when Coles first cut the price of milk to $1 a litre? That was January 2011 meaning that in 2021 Coles is celebrating the 10 year anniversary of its famous 'Down, Down' campaign
The 'Down, Down' song is one of the most famous jingles in Australian advertising history. It was stuck in my head for years. It was a major marketing victory for Coles, helping it overtake Woolworths and bringing in an era of intense price competition.
So what are they doing to mark the ten year anniversary? I listened to the Coles CEO announce their most recent financial results and apparently profits are up, prices are up and … so are gross margins. Is Down Down Dead Dead?
Coles supermarkets gross margin went up in the most recent six months compared to the same period a year earlier. It was 25.1 per cent in the second half of 2019, but 25.8 per cent in the second half of 2020, which was more than enough to account for higher costs due to covid.
Gross margin? It tells you how much money is left after accounting for the cost of goods, the cost of logistics to deliver them, stuff that goes off etc. In simple terms you can think of gross margins as the mark-up on each item sold.
Of course, supermarkets have costs other than buying the item, such as rent and staff. But looking at profits and gross margins tells us something about whether a supermarket is shaving prices down as low as they can go.
Coles isn't. Its margins rose and profits rose too, with net profit after tax up 14.5 per cent.
Coles prices were 2.3 per cent higher in the last six month period compared to the same time a year earlier.
That is not all due to circumstances they control - it is partly due to higher prices for fresh food due to weather, and higher tobacco taxes. Prices net of tobacco and fresh food went up 0.7 per cent in the half.
One reason margins went up is people stuck at home bought more fancy goods - champagne and steaks. We were trying to recreate the restaurant experience at home. Of course, this doesn't let Coles off the hook entirely. If they wanted to they could have cut prices elsewhere to compensate for the luxury goods flying off the shelves.
Despite the fact prices are rising, the halo effect of the Down Down campaign is continuing. Coles are proud to say they have cutting prices on 10 per cent of its range. But that still leaves 90 per cent where they aren't. They don't feel the need to extend the discounting spree because customers believe Coles is cheap.
Coles - which recently split off from its corporate parent Wesfarmers and listed on the stock market - surveys customers on whether they think the supermarket is good value.
Here's the Coles CEO describing their attitude to putting more things on special.
"I'm not concerned about our price position, I think it's very strong. And so do our customers, by the way." He pays close attention to customer perceptions. Seems we all still have the jingle stuck in our head.
THE HISTORY OF DOWN DOWN
Really, it is all about Aldi. When Aldi first came to Australia, the Coles/Woolworths stranglehold on Aussie groceries got disrupted. The German invader was eating their lunch and they needed to respond.
What followed was a huge price battle from which Australians were the big winners. As the next graph shows, grocery price inflation went missing for years.
Between 2011 and 2019 there was only one three-month period where groceries cost 3 per cent more than they did a year earlier. But there were seven three-month periods where groceries cost less than they did a year earlier. This was the 'Down Down' era. It was beautiful.
But now grocery price inflation has been over 3 per cent for most of the last year, and it has been three years since the last time grocery inflation went negative. Aldi has realised it can stop being so budget, and the big two supermarkets have relaxed.
Down Down is over. Up Up is here.
Part of what supermarkets did to drive down food inflation was to stock more home brand items. I don't know if everyone here remembers, but supermarkets used to be full of brand name items. They only sold a few of their own home brand things, and those were usually not very good.
Now almost every product range includes home brand and the quality is usually fine. Coles is still trying to do even more home brands, at the expense of brands. In the most recent period, home brand item revenue at Coles grew by 10 per cent, delivering $5.7 billion in sales. That means over a quarter of its sales are now home brand items.
But the fancier home brands get, and the fewer brands are on the shelf, the less motivation supermarkets have to make them really cheap. Back when home brand meant Black and Gold, the supermarkets had to make them crazy cheap to get us to buy them. Now the strategy is different. You can, for example, buy Woolworths Macro dried Blueberries for $55 a kilogram.
Of course not everything is going up. Even with higher margins Coles can still be good value and have lots of things on special. Higher margins can simply mean they have got very good at cutting costs and they are pocketing the difference.
It also doesn't mean prices for fresh foods will always go up. Fresh food prices have a lot to do with the weather, and the end of the drought means we should get much cheaper vegetables for the next little while. That will reduce prices for consumers, although we shall have to see whether it reduces margins.
STILL COMPETING WITH ALDI
Coles hasn't given up competing with Aldi. It's just not about prices these days. These days Coles supermarkets offer something they call "Best Buys". This is a clever strategic endeavour to stock their supermarkets with the same kind of amazing Special Buys you can find in the middle aisles of Aldi.
This week, for example, they are selling a stainless steel microwave, some juggling balls and a fabric lint shaver.
The Coles CEO seems proud of the Best Buys initiative. Announcing the Coles financial results last week he made special mention of it.
"Products such as the hibachi grill, leaf blower and fitness equipment all sold out within days," he said.
Are Aussies really willing to trade a lower cost of living for a leafblower? The crazy thing is we probably are.
Originally published as Aldi trick Coles copied for huge profits