What does Aldi’s presence mean for WA’s retail market?

The latest purchase of commercial property by German discount supermarket chain Aldi in Nedlands provides a timely opportunity to look at investment in Western Australia’s retail sector and the continued growth of international brand names seeking retail space in Perth.

In the midst of WA’s economic downturn, where the residential and commercial property sectors have stagnated, international companies continue to increase their presence in Perth’s retail space.

The likes of Top Shop, Zara and H&M have moved or are planning to move into prime retail spaces in Perth’s CBD as well as regional shopping centres such as Garden City and Lakeside Joondalup. Top Shop and soon H&M are transforming the CBD mall with large scale stores that (it is hoped) will attract more people to shop in the city centre.

The fact that these big brands continue to want to participate in the Perth market is a positive reflection of their long term confidence in our retail sector and in turn the broader economy.

Aldi have obviously spotted a potential market in Perth for their discount focused supermarket products. The first Aldi stores arrived on our eastern shores in 2001 and they have plans for a $700 million expansion into Western Australia and South Australia that includes more than 70 stores in WA. The first 20 stores are set to open between June and December 2016.

Aldi has added some much needed competition to Australia’s supermarket duopoly of Coles and Woolworths in recent years and is touted as the cause of significant price reductions of products in the two majors.

Aldi’s move into Nedlands (purchasing the Captain Stirling Shopping Centre) is likely to cause some controversy given the proximity of the site to the Captain Stirling Hotel which is owned by Woolworths. Woolworths has been engaged in a long running battle with local residents and the Nedlands Council in regard to redeveloping their site to include a Woolworths store and other retail outlets.

Despite the controversy surrounding the location of these supermarkets, the underlying positive aspect of these businesses on surrounding commercial property is hard to ignore. While competition will be heightened in the grocery market sector, other retail, particularly speciality stores may benefit from the patronage that the two majors are likely to attract. Much like an anchor tenant in a shopping centre, the larger store brings foot traffic and patronage to other shops in the surrounding area.

The retail market in general has struggled in recent years due to the growth in online shopping and weakened economic conditions. Employment insecurity, declining wages growth and a general decline in consumer confidence has had a negative impact on discretionary spending in WA, particularly in department stores, apparel and speciality stores.

The one sector that is somewhat buffered by these conditions is food retail, which traditionally tends to grow when other discretionary spending declines. In fact food retail constitutes around 40% of all retail expenditure.

The continued strength of the food retail sector is positive news for Aldi’s introduction to WA. The discount nature of the supermarket is also likely to be welcomed by WA consumers looking to save on grocery bills when trying to cut back on spending.

Given these conditions, Aldi’s timing couldn’t be better in entering the WA market.

In terms of the Nedlands site in particular, some might question why a discount supermarket would be interested in a location within one of Perth’s more affluent areas. However the proximity of high density apartment developments as well as student accommodation makes sense for the store. The high volume of traffic throughout the day would also be a major attraction for the company to choose that location.

Overall, Aldi’s arrival could be considered as a sign of hope for Perth’s retail sector.

For Nedlands retail and commercial property market in particular, it can be seen as a potential boost for the surrounding area rather than a threat to existing businesses.