Supermarket Giants Expand Smaller Stores, Reshaping Urban Shopping

Australian supermarket chains Woolworths and Coles are rapidly expanding their networks of smaller-format stores, such as Woolworths Metro and Coles Local, across major cities. This expansion has seen the number of these stores quadruple in seven years to nearly 140 nationwide, profoundly altering shopping patterns, product availability, and pricing structures, particularly in inner-city and higher-income areas. The strategy aims to enhance convenience for consumers while also serving corporate objectives related to market share and online delivery logistics.

Expansion and Geographic Distribution

Over the past decade, Woolworths Metro and Coles Local stores have significantly increased their presence, now numbering close to 140 outlets across Australia. These smaller formats are predominantly located in inner-city, higher-income postcodes, including eastern suburbs, inner west, and north shore areas of Sydney and Melbourne. This concentration has led to the development of what some sources describe as "Metro lines" in these cities, with traditional, full-service supermarkets more common in lower-income areas.

Specific examples of this distribution include:

• Sydney: A "Metro line" extends from Parramatta's south-east to Maroubra, encompassing inner city, inner west, eastern suburbs, and the north shore. Coles Local's first Sydney store opened in Rose Bay in 2020, followed by locations in Manly, Avalon, and Chatswood.
• Melbourne: A similar pattern runs from Ascot Vale to St Kilda and Caulfield South, with Coles Local stores prominent in eastern suburbs (e.g., Surrey Hills, St Kilda, Hawthorn, Camberwell) and inner-city areas like Fitzroy and South Melbourne.

Store Characteristics and Purpose

These smaller stores typically measure approximately 600 square meters, about a quarter the size of a standard 2,500 square meter supermarket. They stock fewer than half the products, offering around 10,000 items compared to the 28,000 found in larger stores. Designed primarily for "top-up" or mid-week shopping rather than full weekly provisions, they often sell items by unit, which may limit opportunities for bulk savings.

Coles Local, launched in 2018, states its focus is on "personalisation of offer," tailoring product ranges to specific community needs, such as incorporating local bakery suppliers or ethnic food items.

Pricing Structures

Observations indicate that pricing at these smaller format stores can differ from larger supermarkets:

• Woolworths Metro: Groceries at these locations can carry a price mark-up of between 5% and 15% compared to full-sized stores. Woolworths cites higher leasing and operational costs associated with these smaller formats as a reason for increased prices. Pricing can also vary between individual Metro locations.
• Coles Local: While Coles denies an intentional price mark-up, the emphasis on premium offerings and specialized product ranges, including gourmet items and local suppliers, can result in higher overall shopping costs. Budget-friendly or private-label alternatives may also be less available compared to larger stores.

This pricing variation challenges the traditional expectation that grocery prices remain consistent across different postcodes.

Strategic Rationale and Operational Aspects

Former chair of the competition and consumer watchdog, Allan Fels, suggested that the expansion of Local and Metro stores serves as a defensive strategy. This approach aims to meet consumer demand for convenient smaller outlets, deter new market entrants, and enhance market share and buying power for the major supermarket chains.

Operationally, these smaller stores also play a crucial role in facilitating faster online grocery delivery. Delivering from Metro or Local stores in dense urban areas can streamline logistics for rapid delivery services, with online orders accounting for a percentage of sales for both chains.

Community and Consumer Response

In 2023, residents in Alexandria, Sydney, protested Woolworths' plan to convert their local supermarket into a Metro outlet. Concerns were raised regarding potential price increases and reduced product variety, though Woolworths proceeded with the conversion.

Customers frequently observe higher prices at these smaller stores compared to full-sized supermarkets. Despite this, some consumers continue to shop at Metro and Local outlets due to convenience or a lack of nearby full-service alternatives. Some shoppers have also reported confusion regarding inconsistent branding and pricing variations across different Metro stores.

Future Outlook

Coles plans to expand its Local fleet, aiming to operate 39 Local stores by the end of the year, including its first in South Australia. The strategy involves converting existing supermarkets into Local branches when suitable for the smaller format and local demographic needs.