The online grocer buckled under pressure from the long-standing duopoly of Woolworths and Coles — though, interestingly, it was the weight wielded by the supermarkets’ online operations that did it for Aussie Farmers.
With Amazon set to enter a heavily congested market currently dominated by the two majors and recent international arrivals such as Aldi, a new round of price wars is expected in the A$101bn (US$79bn) supermarket industry.
While Woolworths and Coles have been seeing double-digit growth in online sales recently — Woolworths reported an increase of 30% for the last six months, while its bitter rival weighed in at 14.5% last year — Aussie Farmers couldn’t keep up.
Fight for scale
The franchise-led operation, which began 13 years ago as a milk delivery service, moved to position itself as an online grocery with a focus on exclusively offering local produce direct from farmers.
This may well have over-extended the business, which appears to have been in trouble since 2015, when it sustained losses of A$15.5m in the financial year on sales of A$137m. Since then it has been propped up by its main investors, who pumped in more than A$20m before their decision to pull the plug.
"Unfortunately, it is not possible to continue trading and the business will stop operating immediately,” said Craig Shepard of restructuring firm KordaMentha, which was appointed as voluntary administrator.
From its three-man milk delivery days, Aussie Farmers became one of the first entrants into the online grocery delivery business, with a pledge to support domestic food producers.
Two years ago it added packaged groceries and ready meals to its fresh produce range in a bid to compete with the supermarkets and gain scale. At the same time, a raft of local meal kit delivery services came online to bring massive congestion to the market.
Giving way to dominance
Farmers Direct has blamed its closure on its inability to continue operating against the supermarket majors, alongside competition from imports.
“We are simply no longer able to compete against the domination of the major two supermarkets and the influx of cheap imported produce,” it said in a statement.
“We have worked with hundreds of farmers and local suppliers over the years, and we are proud to have played our part in getting farmers and Australian households a fair deal,” it added.
KordaMentha said about 100 franchisees and 260 employees will be affected by the closure. It will seek buyers for Aussie Farmers' assets, including its database of about 100,000 customers.
Tough times ahead
Retailers of all sizes and platforms are gearing up for a difficult year — even before AmazonFresh’s expected arrival, tipped for later in 2018. Industry analyst IbisWorld, in a report published last month, noted that profitability has been declining due to intense price competition.
“The supermarkets and grocery stores industry is one of the most fiercely competitive industries in Australia,” it said, adding that the rapid growth of discount chain Aldi over the past five years had significantly altered the industry.
The arrival of the German chain has forced Woolworths and Coles to cut prices and expand their private-label product ranges, causing smaller supermarket chains and online retailers to struggle to compete in an “increasingly price-intense” industry.
In addition, industry-wide profit margins have fallen over the past five years as players have reduced prices and accepted lower margins to stay competitive, IbisWorld said.
Despite heavy investment by the major chains, online grocery penetration in Australia is worth only about 2% of the overall market.