Implications of Retail Grocery Market in Australia, Concept of Workable Competition - Assignment Example

Retail Grocery Market in Australia Name: Course: Tutor: Date: Q1. Implications of retail grocery market in Australia A perfectly competitive market refers to a situation in which the market is characterized by three conditions. First is that number of buyers and sellers in the market is so large that no single decision maker can significantly affect the price of any given product by changing the quantity it sells or buys. Second is that the market must have a standardized product offered by sellers; that is, buyers do not perceive differences between the products of one seller and another. Third is that the market is characterized by easy entry into and exit from the market. For instance, it would be assumed that new sellers would incur no costs in beginning their operations and also in attracting new buyers through means such as advertising (Hall & Marc Lieberman, 2007, pp. 220-221). Rarely are markets perfectly competitive, and this is the case with the retail grocery market in Australia as will be explained next. The retail grocery market in Australia is dominated by two major players: Coles that accounts for about 70 percent of packaged grocery sales and Woolworths that accounts for about 50 percent of fresh sales in Australia. This means that other retailers account for only a small portion of the market – the rest being taken by the aforementioned companies. In addition, the retail grocery Australia is likely not to have standardized products as there are already well-known companies that have flooded the market with their goods. When buyers notice significant differences in outputs of different sellers, the market is not perfectly competitive. Although this may not necessarily be the case in Australia, it is true that the two major players have dominated the market, which gives them an unfair competitive advantage (other competitors such as Franklins and ALDI are restricted to region in their coverage). The retail grocery market has a number of distinctive characteristics including geographic isolation, a relatively low and concentrated population, and a regulatory environment (ACCC, July 2008). The relatively low number of consumers implies that it is not easy for new entrants to get a good share of the market (Department of Agriculture, Fisheries and Forestry (DAFF), 2007). All these factors characterize the market as not a perfectly competitive one. The reasons why the retail grocery market in Australia is not perfectly competitive are closely related to the dominance of the market by Coles and Woolworths. There is only a small number of wholesale controlled chains, publicly listed supermarket chains, and international operators in the Australian market. Further, competition is curtailed by large distances that sellers have to travel to reach potential buyers, coupled with the small population in Australia. Additionally, major retailers compete with other investment alternatives to access investor capital. New market entrants have to invest heavily in new infrastructure and other requirements, which makes the retail sector unprofitable and thus uncompetitive. The presence of largely internationally controlled branded manufacturers such as Coles and Woolworths means that entry for new players is restricted because such players have to incur heavy start-up costs, which makes it difficult to recoup the initial investment. For instance, Coles and Woolworths have been maintaining low prices for their products to lure customers (DAFF, 2007). This is appropriate for increasing competition, but it hurts new players in the industry, especially those in the start-up phase. The implications of the status of the retail grocery market in Australia for consumers include low prices for products offered by the two main players, that is Coles and Woolworths as a means of maintaining the market share. For instance, Woolworths promotes ‘everyday low prices’ whereas Coles applies a ‘save everyday’ principle as a market-capturing strategy. According to DAFF (2007, p. 115), the two firms have rolled back their prices to promote sales and maintain a target margin on their sales plans. As such, buyers are persuaded to buy the products offered at relatively lower prices instead of trying new competitors. On the other hand, it is important to note that pricing is not the only factor that determines competition. Smaller retailers often times compete on the basis of convenience. As such, some consumers offer to pay slightly higher prices for hassle-free shopping. This creates a link between convenience and price, which underpins competition across all market participants in spite of the price differentials. This means that consumers increasingly have the chance to compare the price range against convenience factors before making their decision on what to purchase and where to purchase. Whereas a perfectly competitive market presents an opportunity for consumers to have equal preference on the margin (Scitovsky, 2003, p. 178), the converse, which is the situation in the retail grocery market in Australia, presents differences in consumers’ preferences on the margin, which means that consumers do not have equal preferences for goods in the market. This is dictated by many other factors in addition to price as indicated above. Notably, sellers are price makers and not price takers as the factors of convenience determine the prices at which consumers have to buy the products in the market. Q.2. Concept of “workable competition” Workable competition refers to a market formation that results in efficient production without attaining the strict standards of a perfectly competitive market. Workable competition is attained when a regulator such as the government intervenes in the market to prevent dominant firms from unfairly capturing the market and exploiting dominance. The government can also intervene to prevent a group of firms from colluding to exploit consumers. For the retail grocery market in Australia, achieving workable competition might be an appropriate idea to protect the smaller firms from unfair competition strategies introduced by the dominant players, that is, Coles and Woolworths. As noted by DAFF (2007), there are various types of dealers in the grocery market; these include listed supermarket chains and wholesale control chains that compete with more than 30,000 specialty food businesses that range from single shop fronts to multiple franchise stores. By encouraging workable competition, it is possible to create a fair level playing ground where all these players compete for the market. One of the indicators that there is workable competition in the grocery market is the measures intended to be taken by the government against acquisitions. The government intends to amend Section 50 of the Trade Practices Act in order to contain the creeping acquisitions (Henrick, 2010). The act as it is currently does not deal effectively with the issue of creeping acquisitions (ACCC, July 2008). One of the main disadvantages of acquisitions is that they promote the existence of giant firms such as Coles and Woolworths, which enjoy even better economies of scale when they acquire the existing smaller firms. One suggestion about the amendment is that companies should be required to notify the ACCC before entering any negotiations with the others that they intend to acquire. It has been identified that acquisitions and creeping acquisitions have played a major role in increasing concentration of the grocery retail market. A notable example is the acquisition plan announced by Woolworths in 2009 in which it intended to acquire Thomas Dux fruit and veg/deli stores and BWS and Dan Murphy liquor stores among other small retail stores (Henrick, 2010). Acquisitions serve to ensure that the market does not the bear characteristics of a perfectly competitive one as it promotes the existence of large stores that have an unfair advantage over the smaller ones. By amending this law therefore, the Australian government is ensuring that what exists in the market can be likened to the attributes of a perfectly competitive market. This is not easily achievable but at least it creates a level playing ground with many competitors, which confers advantages to both retailers and consumers as ‘workable competition’ is attained. 3. Vertically integrated chains Vertical integration refers to the extent to which an organization possesses its downstream buyers and upstream sellers. Expansion of upstream activities is referred to as backward integration while expansion of downstream activities is known as forward integration. By entering vertical integration, a company is entering new industries to support the business model of its core industry – that which is the source of the company’s competitive advantage and profitability. The major retail grocery chains in Australia are vertically integrated because they have pursued the objective of expanding their scale of operations by venturing in other businesses that support their core operations. In order to increase their level of entry into the market, the retails stores may establish their own operations and build the value chain required to effectively compete in that industry. Alternatively, the retail stores may acquire other companies that already exist in the industry (Hill & Jones, 2009, p. 292-293). The latter strategy has largely been used by both Coles and Woolworths in their bid to capture the Australian retail grocery market. Vertical integrations such as acquisitions imply that there are fewer outlets, which in turn reduces consumers’ surplus. This is based on the assumption that consumers have a preference for variety, or that their search costs increase with distance travelled to the closest shop. However, it does not necessarily denote a decrease in welfare since more outlets also imply relatively higher fixed costs. Vertical integration eliminates competition in the market and thus limits the production of excess variety. This also implies that it becomes relatively difficult for new entrants to join the market as higher costs are involved, including those to be incurred in advertising and penetrating the market. Vertical integration also limits the possibility of production of duplicates as only the dominating firms are able to produce their brand (which integrates the effort from the acquired firms) (Motta, 2004, p. 325). This means that vertically integrated chains are characterized by major players who enjoy undue advantage over the smaller competitors. Large firms such as Coles and Woolworths are likely to offer goods at relatively lower prices. This is a good for welfare but hurts smaller players who may not be able to recoup their investments and are therefore likely to collapse in their start-up phases. There are also other vertical integrated chain stores in Australia, that is, Franklins and ALDI. These though have employed a different strategy from that adopted by Coles and Woolworths in that they operate regionally rather than nationally (ACCC, July 2008). It is however difficult for Franklins and ALDI to expand and compete nationally because their strategy does not allow them to build the critical masses required to make them gain economies of scale. Strategy for entry by a new competitor into an industry with vertically integrated chains As it was noted above, vertically integrated chains dominate the market by using strategies such as offering very low prices in order to bar new entrants from being successful even though they offer products of high quality. A new entrant will therefore have to seek a strategy that deviates from competition on pricing. It was discussed earlier that competition is not just about pricing but involves consideration of other factors such as convenience. The strategy employed here thus revolves around these factors to make a new competitor successful in the retail grocery market in Australia in spite of the presence vertically integrated chains. The new competitor must focus on identifying areas that offer a high payoff but which have low risk. It must focus on issues that promote customer confidence in its products so as to win them from the vertically integrated chains. These are highlighted below: Customer intimacy: The retailer must pay attention to the importance of intimacy with customers. The operator must understand that the customer is the latest asset, not the new store itself. Thus, the new player must invest in display, technology, and storage with a strong sense of enthusiasm to enhance a lasting relationship with the customer. The market entrant could also invest in loyalty programmes to enhance repeat visitation. Category management A clear focus on management strategies to promote shopper enthusiasm for the product category. Leverage The new entrant should invest in a wide range of merchandise rather than retail grocery alone. This will increase its leverage and ability to rapidly penetrate the market. Points of difference While the vertically integrated chains focus on areas such as ‘lowest prices across the store,” the new competitor should focus on promoting non-price points of difference based on a combination of quality goods, quality of service, convenience, range and so on. These points are analysed in the payoff matrix below The new competitor should thus focus on areas that confer high payoff and have low level of risk. References ACCC 2008, ‘Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries,’ Available from http://www.accc.gov.au/content/index.phtml?itemId=838251 (8th October 2010) Department of Agriculture, Fisheries and Forestry (DAFF) 2007, Section 5, available from http://www.daff.gov.au/__data/assets/pdf_file/0004/182443/section5.pdf (30 September 2010). Hall, R.E. & Lieberman, M. 2007, Microeconomics: Principles and Applications (4th edition), Cengage Learning, New York. Henrick, K. 2010, “Current Issues in Australian Competition Policy – Creeping Acquisitions,” National Association of Retail Grocers of Australia (NARGA), 2010, Available from http://www.narga.net.au/?p=141 (30 September 2010). Hill, C. & Jones, G. 2009, Strategic Management Theory: An Integrated Approach (9th edition), Cengage Learning, New York. Motta, M. 2004, Competition Policy: Theory and Practice, Cambridge University Press, Oxford. Scitovsky, T. 2003, Welfare and Competition, Routledge, New York. Read More