Aldi's fresh food is grocery 'game changer'

That's the view of Morgan Stanley analysts who say Aldi's new store format, which its started rolling out in 2016 and increases floor space dedicated to fresh food from 15 per cent to 25 per cent, had been a "game changer".

Refurbishments have been completed at 50 stores to date, which had seen shopper traffic increase 7 to 8 per cent and basket size (how much each shopper bought) grow about 6 to 7 per cent, implying a 13 to 15 per cent uplift in sales, analyst Thomas Kierath said in a note to clients based largely off discussions with industry expert and former senior Aldi executive Paul Foley

Mr Kierath said the new store format would boost Aldi's encroachment on Coles and Woolworth's market share by about 30 basis points a year, and that the proceeds of the extra sales could be funnelled into further price cutting.

"Margins tend to be higher in fresh food products which means the success of the refurbishment gives Aldi more dollars to invest in price," Mr Kierath said.

"We think life gets more difficult for the supermarkets post the refurbs."

Aldi has 483 stores in Australia, including 105 of the newer "Aldi 2.0" format stores, which were first introduced as it started expanding aggressively into South Australia and Western Australia. Aldi plans to have all its stores using the "2.0" format by 2020.

Based on discussions with Mr Foley, Mr Kierath said he saw it as a "given" that Aldi would have 800 stores and a 14 per cent share of the Australian grocery market by 2024.

The German company generated $8.1 billion in local sales last financial year, representing 7.8 per cent market share, based on Morgan Stanley's estimates.

Aldi started its billion-dollar refurbishment program in late 2016 with an eye to the profitable fresh food segment as sales growth started to ease in its mature east coast stores.

Morgan Stanley said Aldi was again widening the price gap against the two major supermarkets, being about 18 per cent cheaper today compared to 14 per cent cheaper two years ago. The price comparison is on about 350 frequently purchased items and mostly compares leading supermarket brands with the Aldi's private label equivalent.

"What's interesting is that when the price gap reduced to 14 per cent Aldi's share gains slowed (and in some regions Aldi's share fell), however, as the price gap expands Aldi's share gains are now accelerating," Mr Kierath told clients. "To us it seems likely that Coles moves again on price to re-accelerate the top line."

Woolworths, Australia's largest supermarket, grew sales by 3.6 per cent on a comparable basis last financial year, outpacing rival Coles, which grew sales at 1 per cent.

An Aldi spokeswoman said customer feedback on the new store format had been positive and the company was "pleased to see that the improvements have made a difference to their shopping experience".