Aussie Supermarket Fight Gets Real with Digital

The Australian grocery industry is essentially a duopoly between the Coles and Woolworths brands, and in the supermarket wars technology has been a critical differentiator.

Back in the 2000s, it was Woolworth’s IT and point of sale which put the company ahead of its rival. But the position changed in around 2009 when Coles caught up and took the lead.

Woolworths fought back and resumed the lead in around 2016 after focusing strongly on customer service and also by cutting prices. But Coles fired the latest salvo recently when it announced a significant transformation that included a substantial investment in AI and robotics.

Technology is only one part of the retail mix, which includes a combination of store locations, size, and product assortment. However, at every stage in the struggle, technology has been an essential factor.

Surveying the Battleground

Today, Coles has around 30% of the Australian grocery market, and Woolworths has 37%. It doesn’t leave a lot for the other competitors such as German chain Aldi or U.S. giants Costco and Amazon, although everyone is living in fear of Amazon.

The Coles refresh comes after the company was spun off by parent company Wesfarmers and listed on the Australian Stock Exchange last November in a float which valued the standalone business at AUD 16 billion.

(In an interesting sidenote, Wesfarmers – which owns other retail brands in hardware and office supplies and the Kmart chain - and Coles retained joint ownership of the Fly Buys loyalty scheme, primarily so they both can mine its data)

The Coles strategy announced last week is based on three pillars: Inspire Customers, Smarter Selling, and Win Together.

Technology is core to the Smarter Selling strategy and is expected to deliver AUD 1 billion in cumulative savings by 2023, mainly by using technology to automate manual tasks both in-store and at the warehouse level.

A key to the strategy is the overhauling of the warehouses and the deployment of more robots, which will save money and improve margins.

The technology is not all about cost savings either. AI is being increasingly used as a solution to curate product assortments and deliver more personalized shopping choices based on more efficient data collection and analysis.

According to investment bank Credit Suisse, data use is a secret weapon for both Coles and Woolworths against its rivals, because it enables the incumbents to profile and target shoppers with greater accuracy.

Both supermarket groups have already invested heavily in data analytics to crunch through the vast amounts of data they are getting from loyalty schemes, apps, and online shopping.

Localization and Personalization

In the new strategy, around 40% of Coles stores will differ from the generic. It allows the localization of products and presentation, which will be partly based on these insights.

Credit Suisse retail analyst Grant Saligari said in a report released in early June 2019 that the supermarket chains were only at the beginning of what is possible through data and leveraging their own and already mature loyalty schemes.

It starts, said Saligari, with emails to customers highlighting products they have purchased before and which are on special. But it will also become more sophisticated.

Data analysis will identify customers who are more sensitive to price. They will be targeted over those who the data shows will buy the same product regardless of the cost.

It will also enable them to zero in on “intermittent” shoppers, those who are more likely to switch supermarkets based on discounts. It will concentrate on promotional expenditure on them.

Finally, AI will be able to measure the success of these promotions and help improve them over time.

Targeting the promotion spend is crucial, said Saligari, because he estimated that for every AUD 1 a shopper spends at a supermarket, the supermarket and the brand has spent a cumulative AUD 20 promoting that particular product.

Partnership Strategy

The strategy does not factor in anticipated savings from Coles’ new home delivery partnership with the U.K. online supermarket Ocado or the creation of two new automated distribution centers by 2023.

Ocado already has deals with other major retailers in the U.S., France, Canada, and Sweden. It offers Coles proven expertise in automated fulfillment for online orders.

Coles already uses eBay and UberEats as online channels, but the Ocado deal is a step up as Coles seeks to respond to the new challenge of Amazon, which launched in Australia in late 2017.

Ocado itself made its business out of disrupting incumbents in its home U.K. market. But it is now partnering up with incumbents around the world as part of its own growth strategy. Ironically, in Australia, it will be defending the incumbent against new disruptors such as Amazon.

Amazon Worry

In particular, it is the Amazon Go app, which has the traditional supermarkets worried. There has been a positive response to the innovation, which allows shoppers to walk in and fill their bags using the app, which is powered by a range of technologies such as AI and sensors.

As it currently stands, Coles is rapidly increasing its online grocery sales but is making very little or no profit. This is mostly because of the cost of having staff go through shelves like personal shoppers.

Online sales currently account for only 2% of Coles revenues, against 2.7% at Woolworths. But this is a channel set to take off as a new front in Australia's grocery wars, with technology the big enabler.