Supermarket powerhouse Aldi has just reached ‘critical mass’ syas international banking giant Morgan Stanley.

Critical mass for an Australian supermarket chain is 350 stores together making $4.03 billion in sales. “This is the point when private label scale is achieved, which is critical for discounters’ in distributing terms.”

The report outlines senior Aldi executive strategy taking into account the initial struggle their chain would face: Product tastes differ by nation finding the right blend of products and price takes time.

An Aldi distributin Centre. Image: www.geograph.ie

An Aldi distributin Centre. Image: www.geograph.ie

The report continues: “The Aldi format works best when there is a 20 per cent-plus differential in pricing to national brands at the full-line supermarkets. At this point consumers are prepared to trade off choice for price.

“Given the high fixed cost nature of supermarkets, if [Woolworths, Wesfarmers and Metcash] volumes decline, margins would decline rapidly too.”

Furthermore, Aldi’s cost-to-sales ratio is two thirds that of the major supermarkets. Such a ration works optimally in countries with high labour costs, like Australia.

Western and Southern Australia were highlighted as posing the greatest opportunity to Aldi; since supermarket margins are 6 -7 per cent higher in these states than the rest of the nation, while the cost of transportation to these markets is around 2.5 per cent.

Aldi are hoping to build 70 – 75 stores in Western austral, 20 of which will hopefully be open and doing business by August of 2016. Their distribution centre is due to be functioning by june 2016.

The report added that Aldi’s growth is as much good news for suppliers as it is for consumers: After the Australian competition and Consumer Commission’s scrutiny of big supermarkets power is coming back to the suppliers.

Tom Godfrey, from consumer group Choice, echoed these sentiments, “I think it’s vital that Australia has a strong competitive third player in the supermarket sector.

“We’ve seen when Aldi enters other markets, the “Aldi effect” occurs and prices come down across the board. It’s great for consumers and it highlights how good Coles and Woolies have had it for so long.”

Wesfarmers and Woolworths took a shellacking yesterday. Wesfarmers dropped 1.79 per cent to close at $42.89; while Woolworths went into freefall, down 2.24 per cent to finish at $32.26.

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