Competition in the Australian Grocery Retail Sector - Assignment Example

Competition in Australian Grocery Retail Sector Name Course Name and Code Instructor’s Name Date 1. Nature of retail grocery market in Australia Numerous complains in the recent pasts have been reported because of competitiveness of retail grocery sector in Australia. Woolworth and Close supermarket dominate the business sector with more than 70% in market share and thus dictate the sector (Australian Economic Review Policy Forum, 2004). To understand better the nature of competitiveness within the retail grocery sector, it is important to analyse type of competitive markers, which are either imperfect or perfect competitive model (Smith, 2004). In theory, the perfect competitive market has numerous sellers while imperfect market has fewer sellers that dictate the market prices (Hoag and Hoag, 2006). This means in competitive environment, sellers and buyers have more freedom in dictating the price and choosing the stores, which they can purchase their groceries or products. Hence, in competitive market, there are no barriers of entry or exit (ACCC. 2008). Conversely, imperfect competitive are those markets that cannot fit the requirements and policies of perfect competitive (Baumol and Blinder, 2007). The imperfect competitive businesses are either monopoly or oligopoly. Monopoly market is when the business is controlled by only a single business while oligopoly is when few businesses dominate the market resulting in either cooperation between the few businesses for the market or competition existing between the few businesses. In the retail grocery sector in Australia, two companies dominate the market meaning they can easily manipulate and dictate the price of products. To understand whether a market is perfect competitive, four criterions will be utilised to analyse the retail grocery sector (Griffin, 2010). These criterions are presences of large number of small firms, identical goods, perfect resource mobility and perfect knowledge. A perfect competitive business should have numerous small firms, which cannot dictate the market. In the case of Australia retail grocery sector, there are two major suppliers, which are Cole and Woolworth and they are commanding more than 70% of the market (ACCC. 2008). This makes it an imperfect competitive market environment. Another aspect associated with perfectly competitive market is that identical goods are sold. In this case, ‘identical’ can be viewed in terms of what the goods are and can also be seen in terms of branding. The two major stores, Cole and Woolworth, brand their products and thus they are not identical meaning that the requirements of identical goods is not championed thus it is imperfect business environment. Perfect resource mobility is another aspect that is associated with perfect competitive environment (Griffin, 2010). In such scenario, entry and exit is free and easy. Moreover, no restrictions in terms of policies, government legislations and other business restrictions are in place. This means that the environment is easily accessed by any business (ACCC. 2008). Retail grocery sector in Australia is difficult to enter because of infrastructure and structures in place that these two major grocers have commissioned (Hoag and Hoag, 2006). Due to imperfect environment, it is difficult for a new entrant because Cole and Woolworth may introduce unhealthy business strategies that can prevent the new entrant from operating optimally and also may influence suppliers in their decisions (Mankiw and Taylor, 2006). Commonly, business places restrictions to suppliers and if they fail to adhere to the restrictions may result in term of contracts. The last component is perfect knowledge in that consumers know and have knowledge of product prices (Griffin, 2010). Customers in the retail grocery sector know the price of products but since two major dictate the prices, the prices remain the similar. Moreover, since they brand their products, it is difficult for consumers to choose other products rather than products from specific stores. This also means that the market environment is imperfect. Since the competition is imperfect, consumers are at a risk because the power is left to only some few businesses. These few organisations are able to control availability of products meaning they dictate everything regarding the product. Control of prices and determining the prices of products is also a disadvantage to the consumers (Baumol and Blinder, 2007). Since two major companies control the retail grocery sector means they dictate the price and may hoard the products to manipulate the price of these products. In addition, leaving the sector to some few players’ means that creativity and innovation is not encouraged. 2. Explain the concept of ‘workable competition’. Why might it be relevant in this market? What indicators could be used to assess whether workable competition exists in the retail grocery market? Justify your answer. (400 words) According to ACCC (2008), competition in the grocery retailing industry in Australia has not contribute to inflation cost groceries but other factors have played a major role. Even though prices have increased, some factors that are not associated with competition include increased production costs, international demand and adverse domestic weather have inflated the cost of groceries. These factors are consistent with a ‘workably competitive’ sector (Hoag and Hoag, 2006). This analysis means that numerous firms exists that deals with related products and these firms are not colluding and any incumbent company does not face long-term advantages. Moreover, the consumers within the grocery industry can easily move from one competitor to the other (Griffin, 2010). This leads to what is workable competition? Smith (2004) defines a workable competition as a market environment whereby monopolistic power exists and also there is enough competition between similar monopolies ensuring that the consumers are protected from monopolistic abuses. In addition, in a workable competition market, efficiency in production ensures that high standards of quality are championed comparably to perfect competition (ACCC. 2008). This criterion is usually utilised by government in formulating regulatory policy to guide in analysing competition (Baumol and Blinder, 2007). From this analysis, it is evident that Australian retail groceries sector is workable competitive because a high number of consumers visited different stores (Mankiw, 2011). Workable competition is important for this market to ensure that the consumer’s accesses products of high quality and at the same time ensure that the prices are within set prices. Those products that are differentiated reflect on innovation and price preference of consumers in that efficient cost of services and products influence the grocery market. Offers in any given market changes from time to time because of offer success (Hoag and Hoag, 2006). For example, Woolworths and Coles frequently monitor each other and competitors’ prices and respond through price matching. This introduces aspect of allocative efficiency (Food System Research Group, 2009). Allocative efficiency aims at ensuring one competitor having to ensure consumers are attracted to the product because of the price and value for money (Baumol and Blinder, 2007). This is one aspect that can be utilised in monitoring workable competition (Griffin, 2010). Another approach is utilisation of microeconomic indicators that include revenues, profits, information, rights and property, qualities and quantities. For example, location of Woolworth and Coles retailers, evidence exist that shows other grocery speciality stores exist. These stores are speciality and since Coles and other major stores, store sometimes products for over a year, these specialty stores, stores fresher products and thus appealing to consumers. This illustrates that workable competition exist between the speciality stores and the regular stores (Coles and Woolworths). 3. The major retail grocery chains are vertically integrated. Explain the meaning of this term and the implications for any competitors in the industry. Suggest a strategy for successful entry of a new competitor. Draw up a payoff matrix to illustrate your strategy Many organisations such as Woolworths and Coles indicates vertical integration method as they indicate their dominance when negotiating prices with their producers in preventing new entrants or pushing smaller businesses from retail grocery sector, which translates into threats to consumers. Accordingly, Woolworths and Coles indicate embracement of structure that is vertically integrated (Hoag and Hoag, 2006). Since Woolworths and Cole controls a high percentage of the retail grocery, their bargaining power can easily influence the buying prices from suppliers and may dictate agreements to groceries suppliers (Griffin, 2010). Smaller retailers will be forced to compete with lower procurement costs that will translate in increase of product prices to the consumers. These consumers will be forced to go back to the major retailers since the products are identical and cheaper. Productive efficiency occur in certain products in retail grocery sector such as staple items like sugar and flour, whereby cost minimisation is possible but in other instances such as vegetables and fruits, cost minimisation is not possible and thus affects consumers at long run (Bauer, 2012). Usually, vegetables and fruits are bought at lower cost by Woolworths and Coles and then they add a margin. However, these products take a longer time for the consumers to purchase or the products may stay on the shelves for a longer time affecting quality (Hoag and Hoag, 2006). Conversely, smaller retails can easily access fresher products and thus ensures for quality products. Larger retail stores sell inferior products because of time required to supply the products. No only does the quality is affected by the strategy utilised by these large stores but also manipulates the prices of produce through supply chain management. The Australian retail grocery market is challenging given the dominance of Woolworths and Coles but entrants can maximise on weaknesses of these two retailers. ALDI stores for example, reduced procurement costs through utilising a strategy of less check outs, reduction of store advertising and reduction of utilisation of plastic bags that resulted in creation of value potential for the consumers. This means an entrant should analyse the market and introduce strategies that ensures the business is in a better position compared to competitors (Griffin, 2010). For example, the new business should study the demographics to determine the behaviour of consumers, formulate and implement sound managing plan, and cost and benefit analysis should be done. In addition, costs can take two fronts which are both total variable costs and average fixed costs or they can utilise opportunity costs alternative. In addition, a new entrant may decide a need for fresh produce is required in an environment that is dominated by Woolworths and Cole whereby an opportunity can be presented (Chen, 2009). Suppose also the large retail stores such as Woolworth obtain information, informing a new entrant will be opening a new store nearby (Hoag and Hoag, 2006). Woolworth in receiving such information will introduce a strategy incorporating a price war such as offering price matching with those of fresh food. On the other hand, the need entrant may say that there is no substitute for quality and hence the product offered by Woolworth is not superior. This can be achieved through adverting and incorporating an appropriate marketing strategy (Taylor and Weerapana, 2009). In addition, the new entrants may advertise that every purchase of $40 will attract a discount of 10%. Similarly, Woolworth will also state that for every purchase of $40 will attract a price off of 10% indicating that price matching is championed by both camps. This strategy in which discounts is championed by both camps can be referred as payoff matrix while the other indicative plan is that both businesses are not approaching an issue differently (Hoag and Hoag, 2006). When both business opens the next day, some consumers will continue purchasing from the same retailers e.g. Woolworth while other consumers while acquire their products from the new entrant believing on quality. This option of offering discount is optionally for both stores: new entrant and Woolworth. As an example, with a payoff equalling 0 for the new entrant and Woolworths equalling 100, the following illustration illustrates this strategy (Griffin, 2010). Two strategies will be utilised by these two organisations in promoting their stores. One of the options is offering a discount while the other strategy is a mixed strategy. In the first option of offering a discount, the options of probabilities for the new entrant will be (0%, 100%) or (100%, 0%) while for Woolworth, the probabilities will be (100%, 0%) if they utilise discount strategy and (0%, 100%)if they do not utilise discount strategy. In the mixed strategy, the probability is (50%, 50%) for utilising discount strategy for both retailers. References ACCC. 2008. Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries. Available on the web at www.accc.gov.au Australian Economic Review Policy Forum. 2004. Competition Issues in the Australian Grocery Industry, vol. 37, no. 3 Bauer, P. 2012. West African Trade: A Study of Competition, Oligopoly and Monopoly in a Changing Economy. London: Routledge Baumol, W., and Blinder, A. 2007. Microeconomics 2007: Principles and Policy, 10th Ed. London: Cengage Learning Chen, J. 2009. Monopoly, Competition, and Productive Efficiency. Toronto: Carleton University Food System Research Group. (2009). Structural Changes in Food Retailing. Available at http://www.aae.wisc.edu/fsrg/publications/Monographs/!food_retailing2009.pdf Griffin, R. 2010. Management, 10th Ed. London: Cengage Learning Hoag, A., and Hoag, J. 2006. Introductory economics, 4th Ed. New York: World Scientific Mankiw, N. 2011. Principles of Economics, 6th Ed. London: Cengage Learning Mankiw, N., and Taylor, M. 2006. Economics. Sydney: Cengage Learning EMEA Smith, R.L. 2004. Policy Forum: Competition into the Australian Grocery Industry. The Australian Grocery Industry. The Australian Economic Review, vol. 37, no. 3, pp. 306-310 Taylor, J., and Weerapana, A. 2009. Principles of Microeconomics: Global Financial Crisis Edition, 6th Ed. London: Cengage Learning Read More