Australian Supermarket & Duopoly (Chapter 3)

Kaustav Ghosh

Chapter III

Coles vs Woolworths

A)Coles and Woolworths: history and criticisms – Since the 1960s, the food supply chain in Western nations has been increasingly controlled by retailers, following post-war economic changes and the deregulation of manufacturing and processing industries. The control that retailers exert over the food supply chain in Australia is particularly pronounced. In Australia, Wesfarmers Group and Woolworths Limited are the two largest retail corporations, collecting an estimated 23 cents of each dollar spent in the country.

Aside from the major supermarket chains of Coles and Woolworths, the interests of these corporations include liquor retailing, home improvement and office supplies, general merchandise, mining, insurance, chemicals and fertilisers, energy, hotels, and consumer electronics. The following will explore how these supermarkets affect local and regional producers and communities, and describe attempts by the government and other lobbyists to curtail their influence. Coles and Woolworths dominate the food retail market in Australia due firstly to the sparse and highly urbanised population that fosters the development of large, metropolitan food retailers rather than smaller, locally based retailers. Secondly, the widely dispersed centres of habitation and key food producing areas require effective transportation networks, a difficult feat for smaller producers. Thirdly, as Wade and Bradley (2002) identify, the sparseness of the Australian population favours substantial economies of scale in order to keep costs low.

                          Given these factors, the Australian food retail market has been shown to be the most concentrated in the world, with Coles and Woolworths responsible for the sale of up to 80% of all packaged groceries. Store numbers have increased appreciably in the last decade; for example, Coles built 229 new stores between 1998 and 2008, to a total of 750. It has also been estimated that Coles and Woolworths have more than 90% of the ‘one-stop’ shopping market. Since 2000, Coles and Woolworths have also aggressively pursued a larger share of the liquor retail market; their current share is around 45%, and industry research suggests that by 2015 the liquor industry may be totally subsumed by the supermarket industry.

Concerns have been raised over both the sustainability and anti-competitive effects of the increasing concentration of the retail sector, in particular its effect on smaller producers and retailers. These concerns fall into three main areas; selling power (where reduced competition results in reduced incentives to lower prices for consumers), buying power (where a concentrated buyers’ market limits competitiveness of prices offered to producers and suppliers, and limits the range of products available to consumers with preference given to larger, cost-effective brands over smaller players), and retail (where the presence of a large, ‘one-stop’ shop in an area may hinder smaller independent competitors and local development). The current state of the sector regarding these three areas is discussed below.

B)Macro environment analysis– External environment analysis is very much important as we cannot and should not develop strategies without knowing the external factors. The strategies must be responsive to the external business environment; otherwise the firm could become the most efficient producer of goods. To ensure avoidance of such mistakes, firms must have knowledgeable about the external business environment. For this we have briefly analyzed the external environment of Australian retail industry where both these chain operates.

C) Political Legal Environment: Government has a direct impact on the supermarket industry in regards to its legislation, and through the monitoring and regulatory authority such as the Australian Competition and consumer commissions (ACCC), Competition and consumer act, the commonwealth Government and the foreign investment Review Board (FIRB).

D)Technology: Woolworths has adopted new innovative technology. It has subscribed to GEMMnet (Global Electronic Marketing & Merchandising Network) in 1994. It has invested heavily to improve its supply chain and distribution system. This step has a direct impact on cost savings. Online shopping facilities has been increased to a great extend and the company is reaping its advantage. Global Segment: Woolworths has expanded its business operation in New Zealand & India to sustain its growth in retail industry and capitalize its market share.

E) Economic Segment: The slow growth rate and uncertainty in the Australian economy poses a threat for the retail sector as it may stagnate in future. Possible increase in fuel prices and low wages and growing unemployment rate, may impact the industry the industry in the long run.

F)Demographic Segment: Australia‘s population was 24.6 million in 2019 but there is a mix of ethnic and religious group. In Australia, the age of 85+ group is experiencing the fastest growth rate. The number of people in this age group is expected to be almost quadruple ie approximately 5% of the total population in 2050 and those over the age of 65 currently constitute are 12% of the population and the forecast is a 24% growth by 2050.

G)Socio-cultural Segment: Changes in attitudes and lifestyles have resulted in dramatic shift in the supermarket industry. People are very much concern about health issues these days. Hence, there is a demand for easy to cook food, low-fat foods, GM-free organic food. The participation of women in workforces has also increased in recent time may be one of the causes for it.

H)Porter’s Five Forces Analysis: – Awareness of the five forces can help a company understand the structure of its industry and stake out a position through future planning that is more profitable and less vulnerable to market attacks. Industry structure drives the competition thus the profitability no matter whether the industry is high tech or low tech, emerging or mature, regulated or unregulated. From the five-force analysis a company through its competitive strengths can take its position in the industry. But it should not be focused on elimination of rivals.

I) Bargaining power of Buyers: Australian Supermarkets offer homogenous products which have low switching costs between the stores and thus have provided buyers with extremely high bargaining power. When it comes to specific market and products bargaining power is less so retail outlets must specialize in specific customized products only available to Australian consumers. For the rest of products the bargaining power of buyers in this industry is very high.

J)Bargaining power of Suppliers: British American Tobacco and Coca Cola enjoys near monopoly over the market because of its reputation and uniqueness of the product. Customers flock to buy such products. The bargaining power of suppliers varies depending on the brand name of the supplies and the size of the supermarket. Bargaining power of such suppliers in the supermarket retail industry in Australia is high to moderate.

K)Industry diversified products: In the supermarket industry there are also a number of diversified products available for the consumers such as pharmacies, convenience stores, online stores, non-affiliated petrol stations, grocery stores, fresh food markets and delicatessens. Consumers are willing to pay high prices for these conveniences when it is closer to home, easier parking and no queues. Stores should be opened in residential areas with products that are unique to the locality.

L)Threat of New Entrants: Due to low price offered in Australian retail shops is making domestic supermarket industry it is not an attractive industry to enter because of low profit potential. The scarce availability of proper location and high market price of land, government restrictions and regulation and huge capital requirement can act as barriers to new entry. Another barrier is the relationship of existing big players with the suppliers and requirement of establishing its own distribution centres by the new entries can also be a barrier. The best method is to enter into joint venture with big players with its own unique products suitable for the market.

M) Rivalry among competitors: The rivalry between competitors in the supermarket industry is intense. The best way to stop the rivalry is through acquisition and merger.

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