Supermarket giants Coles and Woolworths will be forced to replicate the model used by German discount grocer Aldi or face financial ruin, according to prominent entrepreneur Dick Smith.
Smith believes we have now reached a point of “extreme capitalism” that will eventually see the Australian food market dominated by international giants like Aldi, Lidl and Walmart at the expense of smaller, Australian-owned companies – including his own.
Speaking to SmartCompany this morning, Smith predicted his own food business will eventually fold as it becomes increasingly hard to source food products locally and “support local farmers”.
While Dick Smith Foods was once turning over as much as $80 million a year, Smith says that figure is now closer to $18 million. The entrepreneur counts “a couple of hundred” people among the business’s direct and indirect employees, which includes contractors and growers.
“It must eventually fail, because we support Australian farmers and workers,” he says.
“There’s no way we can compete with products coming from other countries because of the labour costs.”
Smith’s comments come in wake of a decision by Woolworths to walk away from its contract with Victorian food-processor SPC Ardmona in order to source its own brand of tinned tomatoes.
The “goodwill” deal, which was worth $70 million over five years, had been in place for two years.
In a statement issued today Smith said Woolworths is not to blame for the decision.
“Blame ourselves and capitalism as it gets to the limits of greed,” he said.
Smith drew direct links between the rising market share of Aldi and need for the supermarket duopoly to change their operating practices, agreeing with a previous statement from credit rating agency Moody’s that Aldi’s popularity among Australian shoppers is a major concern for Coles and Woolworths.
“Nothing could be closer to the truth,” Smith said in the statement.
“There is absolutely no doubt in my mind that Aldi with its incredibly low overheads – they hardly employ any Australian staff – and its private ownership in Germany – they don’t have the high costs of public listing – will mean they will eventually send one or both of our Aussie shareholder-owned food retailers out of business.
“It’s clear that Woolworths and Coles will have to either replicate Aldi, that is, move to around 90 percent home-brand products and reduce their product selection from over 20,000 [lines] to just a few thousand, while sacking most of their Aussie employees, or they will be sent into bankruptcy.”
Smith says if this occurs, the ramifications for Australian jobs will be drastic. But he believes there is little that can be done, and it is the system, rather than individual companies, that are to blame.
“Nothing can happen,” he told SmartCompany.
“We’re in a destructive mode of extreme capitalism. We’re going to end up … [with a situation where] basically half the people won’t be employed.”
More international giants on the way
Smith is emphatic in his belief that it won’t be long before we see the arrival of more international grocers in Australia, saying fellow German discounter Lidl will “absolutely” expand to Australia.
“They have to keep growing,” he says. Smith believes Walmart will also eventually break into the Australian market and could even seek to take over Coles or Woolworths.
In the past week, speculation has again circulated that Amazon will bring its fresh food delivery to Australia as early as September next year.
“Food has been cheaper than it ever has been,” Smith says, claiming that as there is also a link between the declining price of food in Australia and public health problems, such as obesity.
“People are buying far more food,” he says.
In response to Smith claim’s Aldi Australia told SmartCompany while it is proud of its “global heritage”, it is equally proud of establishing “an independent operation here in Australia”.
“Sales in Australia reached $5.8 billion in the year to 31st December 2014, a year-on-year increase by nearly $1 billion dollars,” an Aldi spokesperson told SmartCompany.
“All profits continue to be reinvested in our Australian operations, with the focus of these investments being directed towards store refurbishments and extensions, new store openings and produce buying centralisation.”
The retailer says it directly employs close to 10,000 people in its stores, distribution centres and corporate offices across Australia and works with more than 1000 suppliers, “the majority of whom are Australian and have enjoyed growth and success as we have expanded”. Among those suppliers is SPC Ardmona.
“Currently, 90% of Aldi’s everyday grocery range is private label, with the majority of these products sourced from Australian manufacturers,” the spokesperson says.
“We only source products from overseas when we can’t find the product, quality, efficiency or innovation we seek here in Australia.”
While low prices are a key tenet of the Aldi model, the retailer says it is committed to maintaining sustainable pricing levels.
“As a discount retailer, Aldi will not be beaten on price. However, as a business, we do not support the introduction of pricing levels that are unsustainable in the long term and may put pressure on the supply chain,” the spokesperson says.