Competition in the Australian Market for Groceries - Coles Supermarket and Woolworths - Case Study Example

Competition in the Australian Market for Groceries Name Course Name and Code Instructor’s Name Date Two major players dominate the Australian grocery retail, which are Coles Supermarket and Woolworths. These two stores determine and control the demand and supply and hence influence the market. A factor that comes with influencing the market is preventing new competitors from entering the market through maximizing in bargaining power (Australian Economic Review Policy Forum, 2004). Bargaining power is commonly utilised by major competitors to influence the price in which they purchase products and services from the suppliers (Hall & Lieberman, 2009). The aim of this paper is to highlight and discuss the implications in which Coles Supermarket and Woolworths have on primary producers, consumers and competitors. This can be achieved through utilisation of microeconomic principles into identifying on how these two retailers control the market and the consequences of the control. A perfect competition usually takes place in a market whereby there is no single business that has superiority compared to competitors (Mankiw & Taylor, 2006). A perfect competitive market is dominated by many buyers and sellers and there is no barrier for entry (Hall & Lieberman, 2009). It means that entry is simple and voluminous information is available regarding the market and such information can be utilised by any organisation to formulate and implement appropriate strategies. According to information presented by Australian Competitions and Consumer Council (ACCC) (2008), the major players in the grocery retail industry. The report indicates that Coles and Woolworths stores control around 80% of groceries in the industry. Even though numerous retailers and wholesalers exist such as the independent grocery associations and Aldi, Coles Supermarkets and Coles supermarket still controls the market even though they sell preserved groceries (Australian Economic Review Policy Forum, 2004). Woolworths and Coles can influence and control the process of the products and services and at the long run can make the other smaller organisations to either merge their organisations or close their shops because they cannot compete (Hall & Lieberman, 2009). For short term, consumers will experience better quality since the products will be cheaper and also value for money. However, if the smaller competitors close shop or merge, the dominance will be left to the two stores meaning a situation that may be refereed to as duopoly can be created (Mankiw & Taylor, 2006). This will be disadvantage for the consumers because there will be no many choices and also minimisation of opportunity costs will be witnessed. Woolworth supermarket and Coles have many shop fronts compared to their competitors (Mankiw & Taylor, 2006). Moreover, these two stores are found in many major towns and have many branches compared to their competitors creating better availability scenario and thus becoming a major player in the Australian grocery industry. According to understanding of perfect market, there should be many sellers and buyers, and the products and services sold should be identical or have similarities and there is also no or minimal barriers to entry (Hall & Lieberman, 2009). Since Woolworths and Cole stores dominate the market, competitors are disadvantaged since they cannot compete on prices (ACCC. 2008). The principle of perfect market is that there is clear relationship between demand and supply. This is because any competitor entering or in the market cannot dictate the price since they have to accept the market. It means no manipulation of market prices compared to the current scenario whereby two major players are the competitors. However, the Australian grocery market does not indicate the principle of perfect market because Cole and Woolworth supermarket do not accept the market and they set their princes relative to competitors (Australian Economic Review Policy Forum, 2004). They utilise this strategy to manipulate consumer buying behaviour and also gain to profit maximisation. Thus, the retails that can operate effectively are those who can withstand this competition of low prices and cost reductions. The grocery outlet that sells more products is likely that the store sells its products cheaper. The costs associated with bulk buying translates in more buying while at the same time purchases are lower compared to individuals who are buying fewer commodities (ACCC. 2008). Therefore, when these two stores purchase their products from wholesalers, they purchase the products cheaply (Hall & Lieberman, 2009). This means that consumers can easily purchase their grocers from Coles and Woolworths because lower prices drive consumers’ satisfaction (Mankiw & Taylor, 2006). Hence, consumers will purchase each time from these stores resulting in marginal benefits compared to the competitors. Apart from the price of the groceries, Cole and Woolworth supermarket have utilised technology to lure new customers. Most of Cole and Woolworth have banking services ensuring that consumers can transact their businesses easily before or after transactions (Mankiw & Taylor, 2006). In addition, Cole and Woolworth have entered into strategic alliances with banks such as Woolworths entering into partnership with master card resulting in Woolworth master card (Australian Economic Review Policy Forum, 2004). The benefit of utilising these cards is earning benefits such as frequent flyer points or other points that can be redeemed from certain stores (Pride, Hughes & Kapoor, 2011). Earning of points may make consumers to purchase in these stores compared to competitors because of the points that are accumulated. The Australian Competitions and Consumer Council states that reduction of barriers to new entrants may change the market share because the market environment could be competitive. In a perfect market, there are usually no barriers but in an environment such as that influenced by Cole and Woolworth may have barriers to new entrants (ACCC. 2008). Numerous barriers of entry to Australian grocery market exist. One of such example is scarcity of land because most strategic places have been taken by these large stores (Hall & Lieberman, 2009). When a competitor wants to lease a space, it is usually expensive and has huge penalties if the organisation who leased the building wants to leave. Therefore, such barrier affects how business is done and how new entrants can fair in the market. In a market that is perfect, the products on the market can be compared equally (Pride, Hughes & Kapoor, 2011). However, the Australian retail market does not allow this and such method usually favours the retailer and becomes a disadvantage to the consumer. For example, the price of tomatoes may differ in different stores because of relation of price weight (ACCC. 2008). In a perfect market, change in prices may result in consumers choosing other retailers to maximise on opportunity cost and will greatly affect the quantity demanded. In imperfect market, the prices stay fixed or there are small variables meaning that quantity demanded may not change (Burrow, 2006). However, in the case of Cole and Woolworth supermarket, there are no alternative and stronger competitors and prices may increase (Mankiw & Taylor, 2006). Nevertheless, imperfect competition does not mean inflation of groceries (Australian Economic Review Policy Forum, 2004). The inflation of groceries may be associated with increased product costs, high international demand and adverse climate. Therefore, competition might not be the only reason that has contributed to higher grocery prices (Hall & Lieberman, 2009). These different factors and analysis indicates the business environment may be viewed as a workably competitive industry (Hall & Lieberman, 2009). It means that numerous firms are selling similar products, the major organisations are not colluding and current organisations may not sustain cost advantages for longer periods. Moreover, consumers may be willing to change suppliers and retailers indicating that it is a workably competitive industry (Mankiw & Taylor, 2006). Workably competition exists in many Australian industries and grocery industry is such an example. Workable competition can be termed as a market environment in which monopolistic powers exist. There is enough competition between Coles and Woolworths, and this competition shield the consumers from factors associated with monopolistic abuse (Pride, Hughes & Kapoor, 2011). In addition, production is efficient even without the important factors that are associated with perfect competition. Workable competition is usually utilised by governments to analyse market environment and device strategies that guides competition policy (Hall & Lieberman, 2009). Generally, and according to ACCC 2008 report, it indicates the business environment is ‘workably competitive’. Competition in Australian grocery industry is not limited to Coles and Woolworths but also to other stores such as convenience stores, grocery stores or even speciality retailers that deal in fruit, bakers and vegetable retailers. Vertical integration can be defined as a business structure that is controlled through all it stages by a single company. All the stages includes from raw materials to actual selling the product to the consumer (Australian Economic Review Policy Forum, 2004). In Australian grocery retail market, Woolworths and Cole supermarkets indicates vertical integrated structure business model. This may contribute to been a barrier for competitors to enter into the market. Cole and Woolworth stores controls more than 70% of grocery industry in Australia and because of this, they have a bargaining power (ACCC. 2008). The bargaining power can be utilised to influence procurement princes resulting in decrease of costs. The primary producers are usually disadvantaged because agreements between the suppliers are retailers are low and may affect the prince in which the primary producers will be offered (Pride, Hughes & Kapoor, 2011). The smaller competitors will be forced to deal with lower procurement costs of larger stores resulting in these smaller businesses increasing the price of their products. The increase in price products may result in consumers moving to larger stores because the goods sold are cheaper and also identical. One of the strategies that new entrants may utilise is positioning their products as cheaper and fresher and hence value for money. Many of products sold by the large stores might have shelve life of more than one year and such span of time may affect quality of produce. This means that consumers can purchase the products at cheaper prices but at the long run many not achieve the requirements of opportunity cost (Hall & Lieberman, 2009). Therefore, a new entrant may capitalise on quality by depicting that products from the larger stores have not quality even though they are cheaper. Hence, the new entrant may state that it is better to purchase expensive but of better quality. Another strategy that can be utilised by the new entrant is ensuring operation costs are minimised and also ensuring they champion eco-friendly products (Pride, Hughes & Kapoor, 2011). Preservation of environment has been embraced by different stakeholders because of factors such as global warming (Australian Economic Review Policy Forum, 2004). A new entrant may utilise fewer plastic bags stating that they provided carry bags and every time a consumer comes with the carry bag will earn a discount. Moreover, the new entrant may ensure that they reduce operational costs through providing fewer check-outs and advertising resulting in cost reductions (Madura, 2007). Generally, it is important for an organisation to study a given market before formulating the approach to enter the market. Examining the market through analysing demographics will determine the behaviour of consumers and hence strategise successfully (Hall & Lieberman, 2009). Apart from effective marketing plan, it is important to consider decisions based on economic perspective. Microeconomics factors indicate that consumers are usually motivated by benefit and cost considerations (Pride, Hughes & Kapoor, 2011). Costs can be viewed from different angles, which are either total variable cost or average fixed costs or costs can be viewed in terms of opportunity costs (Australian Economic Review Policy Forum, 2004). Payoff is a strategy that is commonly utilised by organisations in determining the price of goods and at the same time been competitive. A new entrant may utilise payoff strategy in ensuring that it pulls customers (Hall & Lieberman, 2009). For example, a new entrant may introduce that every purchase of $100, a customer earns 10 points that can be redeemable at $1 per point. On the other hand, Cole store may state that for every $100 purchase attracts a discount of 10%. In reality, both stores are offering the same price but it is depend on the consumers. In the case in which Cole supermarket is offering 100 points while new entrant offers 0 points, the following illustrates the payoff matrix. Coles Supermarket New entrant Coles Supermarket (0%, 100%) (0%, 100%) New entrant (100%, 0%) (100%, 0%) From the analysis on this paper, the Australian grocery retail industry can be viewed as workably competitive. Competition between Cole’s supermarket and Woolworth’s supermarket is enough to ensure princes are not inflated. Inflation of the groceries prices is not because of lack of competition but it is because of international factors and climate changes. 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 Sept 2004. Burrow, J. (2006). 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