The Australian Grocery Industry

According to Hubbard et. Al. , (2010) perfect competitions takes place in markets where no businesses within an industry have market dominance as there are many sellers and buyers and there are no barriers to enter that particular market as a free of charge flow of information exists.

According to the Australian Competitions and Consumer Council (ACCC) the Australian grocery industry is dominated by two key players, Coles and Woolworths, who together have around 80% market share. While there are other rivals on the market such as independent wholesalers and retailers including a number of speciality retailers such as independent grocery associations (IGA) and Aldi; Coles and Woolworths have a significant influence to control prices which in the long-run would see these smaller retailers either merge through acquisitions to compete or close their doors as they can't compete. In the short term there are benefits to consumers with lower prices and better value for the money. However if this dominance were to continue the Australian grocery industry may see the effects of any duopoly that could involve some serious implications to consumers as there would be no other choices available on the market and the opportunity costs would be minimised.

Coles and Woolworths have more retailer shop fronts than their opponents (Bonn, 2004) they're in more towns than their rivals and demonstrate better option of grocery products in the Australian grocery industry. Hubbard et al (2010) addresses that in financial terms, a perfect market indicates many buyers and sellers, all products sold by all firms must be identical and there are no barriers to enter the marketplace. Given Coles and Woolworths market dominance many opponents are unable to compete on price. While correctly competitive markets are established by the partnership of demand and offer any competitor or consumer within this market could have no adverse effect on the marketplace price as they would need to simply accept and acknowledge the market price. The current retail grocery market doesn't indicate this kind of behaviour as Coles and Woolworths do not accept the market price as they set their own price relative to not only competition but also to the trend of buying behaviour and also to gain profits which in the long-term only these retailers would reap the benefits of cost reductions hence the dominance in market share.

It should be noted that the more something sells at a grocery outlet the cheaper that product will be at that particular outlet (Smith, 2006). As the costs associated in buying products from the wholesaler the more bargaining power they have. This can be said for Coles and Woolworths as the marketplace leaders more folks will have a tendency to buy products at these stores rather than competition as the clients willingness to pay is driven by satisfaction for lower prices every time they buy producing a marginal benefit.

Smith (2004) indicates that Coles and Woolworths have used technology as a method to lure in potential consumers. Banking facilities are available at all of these stores which give consumers convenience to conduct banking transactions before or after they conduct their shopping. Strategic alliances with certain banks give Coles and Woolworths the power to get goods using their specific brand of credit card/s such as the Woolworths master card gives consumers added benefits such as frequent flyer points. This can increase the amount of purchases as consumers may be influenced to buy more to gain points at their stores as opposed to purchases made at other competitor locations. An additional rewards program card stores information so clients can get discounts when shopping at their other stores and gives these major players marketing data to analyse what products are popular at certain prices. That is evident in petrol consumption (Smith, 2004). Coles and Woolworths have affiliated themselves with Shell and Caltex, respectively, which allows buyers to save some fuel if they shop at their stores. In monetary theory a big change in technology will either cause a supply curve to shift. These incentives can cause a rise of demand for goods which in turn would decrease the level of supply creating prices to increase. If the grocery industry is a properly competitive market these businesses would not have the ability to affect the market price. (Hubbard, et. al. , 2010)

The ACCC suggested that reducing barriers to new entrants for retail food markets could potentially increase the competitive landscape in Australia. In this regard some barriers can be identified. In a very perfect market there are no barriers to entry (Hubbard, et. al, 2010). Inside the Australian retail grocery market barriers of entry are evident. For example the scarcity of land for new entrants into these markets is bound by the lack of appropriate sites as the most notable store sites are mostly all taken by these large players. Generally leases are signed for long periods of time and in order to cease these agreements high penalties are usually enforced triggering competitors to have a poor market position (Smith, 2004). With reference to the Trade Practices Act 1974 (Smith, 2006)) these lease restrictions could highlight concerns of significantly lessening competition in another geographic area. The ACCC suggests this will put a strain on independent retailers as these large supermarkets receive rights to keep to effectively as a monopolistic business. Perfect market conditions do not exist in this industry and barriers to entry are apparent.

In a perfect market, products can be compared equally (Hubbard, et. al. , 2010). The retail grocery industry doesn't allow this to be easy. Unit pricing can bring about a gain for the retailer and a disadvantage for the buyer. For example when comparing a vegetable such as beans at different retailers both may have unusual weights and usual pricing mechanism. According to Bowen (2009) unit pricing can minimise prices to a per gram or per litre relative value, with respect to the suitable value for the nice. Perfect market conditions reveal a change in higher price will cause consumers to look around for a cheaper alternative (opportunity cost). While in an imperfect market an alteration in higher price will not necessarily change the quantity of quantity demanded. As there is absolutely no other alternative (i. e. competitors) consumers often pay for the purchase price increase. However, the customer may have an option to substitute the product with a cheaper alternative at the same store as opposed to a competitor which would limit competition and subsequently increase revenue at that particular retailer.

Imperatively, the ACCC suggested that the level of competition in grocery retailing has not been a substantial contributor to food price inflation in Australia (ACCC, 2008). While food prices were reported to possess increased a variety of other factors including high international demand, increased costs of production and adverse domestic climate also participated to high price inflation.

Such findings are steady with a 'workably competitive' industry (Smith, 2004). This means that there are several firms selling closely related products; the companies are not colluding; and incumbent businesses do not face substantial long-run cost advantages. Alternatively, consumers are able and willing to switch between alternative suppliers. This is the type of competition that exists is most Australian industries. It is to be contrasted with the theoretical idea of 'perfect competition', where many producers sell homogeneous goods to many identical consumers. Such a thought can be a useful analytical tool, but it'll rarely (if) match real world markets where companies have the ability to legitimately differentiate themselves and earn monetary profits.

Smith (2004) refers to workable competition as market situation where a high amount of monopolistic power exists and there is enough competition between near-monopolies to safeguard the buyers from monopolistic abuse. Furthermore, efficient production exists without reaching the strict standards of perfect competition. The idea of workable competition is often applied by governmental authorities in guiding regulatory policy for competition policy.

A recent study by the ACCC in 2008 revealed that supermarket retailing in Australia is 'workably competitive'. The analysis makes mention that consumers are given a decision when they conduct their grocery shopping. Consumers are not limited by these larger retailers as there's a choice of other food markets, convenience stores and speciality retailers such as bakers, fruit and vegetable retailers and butchers etc.

An ACCC enquiry in to the competitiveness of retail charges for standard groceries concluded that store switching is a reality for consumers as 85% of consumers visited more than one store in a monthly period. More so, more than a third of these shoppers visited speciality fresh store outlets to buy fresh produce. This gives some evidence that individuals are making a choice when deciding what they will consume particularly when it comes to fresh produce and this non-supermarket outlets show signs of strength when competing (ACCC, 2008). However, depending on the amount of men and women researched will indicate if the analysis concludes a valuable argument.

Differentiated products and services that reflect innovation on the part of sellers in response to the preference of customers, and prices that reflect the efficient costs of those products and services are evident in the grocery market. Smith (2004) argues that the number of offers in virtually any market will change from time to time depending upon the success of the offer. Coles and Woolworths regularly monitor their opponents pricing and react to price matching. This may indicate signs of allocative efficiency (Hubbard, et. al. , 2010). Resources such as price matching have been used to reflect demand by consumers. Competition therefore increases allocative efficiency because these retailers use certain resources (price matching) more effectively influencing consumers away from their competitors by approach to price. This demonstrates that the idea of workable competition exists, as this provides consumers with a reasonable level of competition (ACCC, 2008).

Specifically, workable competition can be measured by microeconomic indicators such as profits, revenues, quantities, qualities, information, property and rights (Batey and Friederich, 2000). For instance where Coles and Woolworth retailers exists, especially in shopping malls, there exists evidence that other grocery speciality stores surround them (ACCC, 2008). There's a demand for certain products as mention previously fresh produce. The average shelf life of some fruits can be stored for up to annually in these large retailers while speciality grocers pride themselves on delivering quality fruits recently obtain by the principal producers (Smith, 2006). However, an evergrowing trend for organisations such as Coles and Woolworths indicates a way of vertical integration (Stiegert and Kim, 2009), as their display of dominance when negotiating prices from producers is pushing smaller businesses or new entrants from the retail grocery industry which poses a threat to consumers.

Stiegert and Kim (2009) argue that vertical integration is a structure of some businesses which all stages of the production of the good, from the acquirement of raw materials to the retailing of the final product, are manipulated by one company.

The Australian grocery industry indicates that Coles and Woolworths have a business model that displays a vertically integrated structure. This might result in a barrier for new entrants getting into the market. Given the top market dominance (Coles and Woolworths 80% market share) of these retailers their bargaining power can influence a reduction in procurement prices which would decrease costs incurred by primary producers. This positions the larger retailers to influence and dictate agreements to food manufactures who subsequently push these changes back to the principal producer level (Stiegert and Kim, 2009). Smaller players on the market would have to compete against lower procurement costs by inflicting higher prices to the buyer which can result in a insufficient consumer's affinity for buying their products compared to a cheaper, identical product at the bigger retailers.

While productive efficiency might occur in the retail grocery industry for certain products such as staple stuff like flour and sugar, where a variety of goods/services is produced using the least amount of inputs easy for cost minimisation other products such as fruits/vegetables may have dire value for consumers over time. Usually fruits/vegetables are bought at low prices by Coles and Woolworths who then add a margin to market to consumers. These things may take upwards of a year going to the consumers once they have been picked by the farmers so the quality of the products is not often as effective as those bought by opponents at local fruit/vegetable markets. So in the long run while consumers gets a better price the opportunity cost is an inferior product. This not only poses a threat to the grade of fresh foods but also indicates that the retail buying power of the large retailers manipulates members of the supply chain i. e. primary producers and consumers (Hubbard, et. al. , 2010) to benefit, mostly their own interests.

The Australian grocery market is indeed a challenging industry to find yourself in given the market dominance of Coles and Woolworths and, at a smaller scale, IGA's. However, new entrants in to the market, such as ALDI in 2001, indicated that this can be done. ALDI determined a gap in this industry and developed a distinct segment market need to consumers who wanted to cut costs by purchasing items without the accumulation of waiting for you advertising or the use of plastic bags, less check-outs etc. This plan was developed to reduce procurement costs and present value to potential consumers (Bonn, 2001).

For a new entrant to be successful there would be a need to carefully examine the specific market they wanted to appeal to i. e. the ability to understand what level of demographics that can be found in that area to find out buying behaviour of potential consumers. In addition to the need to build up a sound marketing plan new entrants would have to consider an monetary perspective to understand the marketplace. At a microeconomics level organizations and individuals are motivated by cost and benefit considerations. Costs can be either in terms of financial costs such as average fixed costs and total variable costs or they can be in terms of opportunity costs, which consider alternatives foregone (Hubbard, et. al. , 2010).

A new entrant may consider that there surely is a need for a brand new produce store in market dominated by Woolworths where a niche opportunity would be present. Suppose these large retailers obtain information a new entrant will be opening their doors in next to Woolworths. A technique for the existing retailers may be to include a cost war by offering a price match for fresh produce. The counter argument is usually that the new entrant may advertise that there surely is no substitute for quality which their products are of superior quality in comparison with Woolworths. The brand new entrants opening specials advertises that if customers spend over $30 they will receive 10% discount. Woolworths have advertised that for every $30 customers spend they'll receive 10% off indicating a price match. The payoff matrix illustrates strategy A: where both businesses provide a discount while strategy B: demonstrates both businesses do nothing. On the opening weekend of the new store consumers have a choice where you can shop, many are enticed by the discounts of both retailers, some may choose to continue to conduct there shopping through Woolworths while other believe the quality at the new place will be much better than Woolworths.

The new entrant and Woolworths have an option, and can pick to offer the discount or not. For example, with a payoff matrix 100 equals Woolworths and 0 equals the new entrant. The following is a payoff matrix to illustrate the strategy created by the new entrant compared to the large retailers Woolworths.

In this case there are two strategies where both choose to own discount or not offer any discounts. If we admit mixed strategies (where a pure strategy is chosen randomly, subject to some fixed probability), then there are three strategies. The first two indicate two where the probabilities are (0%, 100%) for new entrant, (0%, 100%) for Woolworths; and (100%, 0%) new entrant, (100%, 0%) for Woolworths, respectively. Another strategy is the probability for each and every participant is (50%, 50%).

While the ACCC has investigated staggering price increases with reference to Coles and Woolworths the findings indicated that there was no influence on price rises due to insufficient competition and that a workable environment exists. The data in this paper suggest otherwise. Although some areas of workable competition can be found the buying power of Coles and Woolworths is influencing price within the marketplace. Smaller competitors cannot compete adequately enough with these lenders. The scarcity of land presents a barrier for new entrants in to the market place. The use of new technologies are being bought by Coles and Woolworths are pushing smaller players aside as consumers time values are essential so a quicker, more efficient processing store is more appealing. As Coles and Woolworths are in direct competition with one another it is more beneficial for each of these competitors to increase their prices in sync as a price war will only deter consumers to smaller players (as price war indicates workable competition to value consumers). Over time these methods would cause higher charges for products finally at the consumer's expense.

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