CORPORATESSECTOR IN-DEPTH 13 AUGUST 2015TABLE OF CONTENTSMarket leaders Woolworths and Coles face rising structural headwinds 2 Woolworths has a higher risk of material decline in its profit margin2Aldi's market share will continue to grow as it accelerates expansion 3 Aldi brand is valued by consumers 4 Competition is increasing for both discount and premium customers4ANALYST CONTACTSIan Chitterer 612-9270-1420VP-Senior Analyst ian.chitterer@moodys.comShawn Xiong 612-9270-1421Associate Analyst shawn.xiong@moodys.comPatrick Winsbury 612-9270-8183 Associate Managing Director patrick.winsbury@moodys.comFood and Grocery - AustraliaMarket Leaders Woolworths and Coles Face Rising Structural Headwinds Market leaders Woolworths and Coles face several structural challenges. The dominant market positions of Woolworths Limited (A3 negative) and Coles, the supermarket operated by Wesfarmers Limited (A3 stable), are being challenged by the aggressive expansion of discount supermarket chain Aldi (unrated). They will also face headwinds from the possible entrance of Lidl (unrated) into Australia and from David Jones (unrated), which is reinvigorating its food offering. As such, we expect the joint market share of Woolworths and Coles, which we estimate to be over 60%, to fall over the next 24 months.Woolworths has higher risk of material decline in profit margin. Woolworths issued a surprise profit warning on 17 June after its comparable-store sales turned negative (-0.7%) for the first time in 12 years. Given the falling sales and consumer perceptions of the company being more expensive than its peers, we expect Woolworths to reduce its shelf prices, which will subsequently reduce its margins, as it defends its market share over the next 24 months. In contrast, Coles has continued to report robust comparable-store sales, which grew 3.4% in the quarter ended 31 March 2015 and should be supportive of margins.Aldis market share will continue to grow as it accelerates expansion. Aldi plans to open around 20 new stores each in South Australia, Western Australia and the eastern seaboard for a total of 60 new stores by year-end 2016. This implies a growth rate of 16% in the 2016 fiscal year ending in June, up from 9% in fiscal 2014. By contrast, we expect Woolworths and Coles to grow their store bases by 2.5%-3.0% over the next year.Aldi brand is accepted by consumers. In July, consumer ratings agency Canstar Blue named Aldi as Australias best supermarket for the second year in a row based on its consumer survey, underscoring customer satisfaction with the store.Competition is increasing for both discount and premium customers. Lidl, which runs a similar discount retail model to Aldi, is, according to The Australian, preparing to enter the Australian market in 2016, which will increase pricing pressure. Department-store operator David Jones will revamp its food halls to target higher income consumers and we believe it may then open stand...
