A YEAR OF TRANSITION DOWN UNDER

MARK TOSH -- RICHARD SNARE

MELBOURNE, Australia -- From Perth to Sydney, the Australian grocery industry went through whirring change last year.

Driven by the expansion of chain supermarket operations, the evolution will likely continue in 1994.

Using their strong financial base, the chains are moving ahead in the race for market share on the strength of store openings and upgrades, implementation of new technology and an increasing emphasis on fresh programs.

In the meantime, wholesalers are scrambling to keep pace. With their independent customers lacking the financial resources to test new formats or undertake major expansion projects, some wholesalers are turning their attention to the equity markets, with an eye on raising money to fund future growth.

Davids Group, Sydney, the leading Australian wholesaler, is considering an early 1994 public offering, according to John David, chairman.

The seeds for much of the ongoing transition were planted last summer with Woolworths relisting on the Australian Stock Exchange.

Woolworths, Australia's food retail leader with a 30% market share and 421 full-line supermarkets, issued 1 billion shares last July. The offering, which drew bids for 2.65 billion shares, raised $2.45 billion Australian ($1.2 billion U.S.) and was deemed an "outstanding success" by Paul Simons, executive chairman.

A month later, Coles Myer, which operates about 380 Coles Supermarkets, announced plans to invest $4.15 billion Australian over the next five years, primarily for new stores, remodels and retail property development. Coles is the country's largest retailer and ranks second to Woolworths in food retailing, with slightly more than a 25% market share.

At the time Coles Myer stepped up its capital-expenditure program, securities analysts said it was responding to the competitive pressure that followed from the successful Woolworths offering and a proposal calling for a merger of four leading Australian wholesale distributors.

The four wholesalers -- Davids Group, Foodland Associated Ltd., Independent Holdings Ltd. and Composite Buyers Ltd. -- said they intended to merge their operations to form a national grocery wholesaler surpassing Coles Supermarkets in market share.

David said in a letter to retail customers last August that "against the onslaught of the chains we will continue to lose market share. We, Davids, cannot match their resources on our own."

However, the merger plan collapsed in mid-December when two of the key players split ranks, Davids Group and Foodland Associated, Perth.

Instead, David said the company would keep its options open, but that its best interests would probably be achieved "by floating the Davids Group early in 1994."

In the meantime, Woolworths and Coles Supermarkets continue jockeying to improve their competitive position. Woolworths plans to open 12 new supermarkets next year and Coles Supermarkets 57 over the next five years.

In Australia -- which has about the same geographic size as the United States but with a population less than New York City's -- the industry appears to be in the midst of consolidation.

"The supermarket industry is very much an oligopoly," said Debra Levin, a securities analyst at Morgan Stanley, New York. (Morgan Stanley was the offshore coordinator of last year's public stock offering by Woolworths.)

"You do have these three major players -- Woolworths, Coles Supermarkets and Franklins, with some smaller chains in there -- but it is not as fragmented as the U.S. market," she said. Franklins, a division of Hong Kong-based Dairy Farm, operates 237 stores in Australia.

Levin said she expects the smaller independents to come under even more pressure as the larger chains become more efficient by upgrading their technology. "We're really in an age when having better technological systems is extremely beneficial," she said.

Levin said Woolworths has done an impressive job driving sales by adding value-added specialty departments and focusing advertising on the "Fresh Food People" theme.

"Woolworths has taken market share from its competitors," Levin said. "Part of what is happening is that the smaller independents have weakened, but Woolworths also has taken share from the major competitors such as Coles and Franklins."

To keep pace with the chains in 1994, Foodland Associated will attempt to push ahead on a merger with Composite Buyers, Melbourne, and Independent Holdings, Adelaide, according to David Fawcett, managing director.

Bob Burton, managing director of Composite Buyers, said in a smaller merger proposal his company is likely to be a willing partner.

"I think we have always recognized the need for rationalization in the industry sometime, and if it means taking it on with Foodland, then that's there," Burton said.

Australia's Market at a Glance

# Market Grocery sales

stores share (in bil. $US)

Self-Distributing Retailers

Woolworths 421 30% $4.14

Coles Supermarkets 380 25% $3.45

Franklins 237 15% $2.07

Wholesalers/Independents

Davids Group NA 12% $1.66

Composite Buyers NA 6% $0.828

Foodland Associated NA 5% $0.523

Independent Holdings NA 3% $0.428

Queensland Independent NA 3% $0.372

Others NA 1% $0.138