Australian Market for Groceries
Since the early 1990s the Australian grocery industry is growing steadily. As we all know, grocery items are indispensable in our daily life. The fluctuations in the grocery industry have the potential to influence the overall economy, because the cost of living is directly linked to the price of grocery items. Thus competitiveness of the grocery industry should be considered seriously.
Grocery wholesaling and grocery retailing comes under grocery industry. Grocery wholesaling covers not only the acquisition and supply of products to grocery retailers but also the facilitating services to retailers. This includes assuring promotional support of manufacturers, and provision of, or access to, financial and accounting services. Likewise, grocery retailers supply a variety of goods ranging from fresh farm produce to dry goods to non-grocery items. Besides this, the retailer supplies a range of associated services including location, parking and in-store amenities such as lighting, checkout facilities and customer assistance. The recent development of new supermarket forms in Australia (Woolworths Metro and Coles Express) provides important insights into the changing geographical forms of grocery retailing and consumption in Australia.
Developments in Australian grocery retailing are directly linked with the developments in the United States and Europe. Computerization brought in a plethora of technological changes both in Grocery wholesaling and in Grocery retailing. At the retail level, the advancement in technology facilitated centralized warehousing by the vertically integrated chains. This facilitates reduced stock levels, fewer visits per store, less in-store storage requirements, fewer incidents of stores running out of particular products, and less product spoilage.
At the retail level, computerization introduced bar-coding and checkout scanning. This helped to improve the efficiency of store operation. Its real significance has been the detailed marketing information gathered. This limited the role of the retailer as a gatekeeper. Another significant change happened is in the format of the store. In the latter half of the 1990s, major supermarket chains introduced variations in their standard and large store formats, to compete more directly with the convenience stores and to respond to the changing consumer requirements in city and suburban locations.
At the retail level, small stores tried to justify their higher average price structure by claiming that they offered a higher level of customer service, and extended trading hours meant that they have a captive customer base. Some independent retailers established large store formats and compete directly with the major chains. Whereas, others introduced special offerings such as gourmets, etc. In general, the independents failed to adapt.
The Australian grocery retail market is not perfectly competitive. There emerged a number of fabulous opportunities in the food retail and allied sector. Now-a-days, most of the retailers focus their attention in the food retail sector.
At present the number of stores owned by the various supermarket industry participants is Woolworths around 800 (includes Safeways)
Coles around 750
Food works more than 700 (includes convenience outlets)
IGA around 1200 (includes convenience outlets)
Aldi more than 200
Spar around 100
Franklins more than 80
Supabarn 5
Costco 1. (Competition barriers to major supermarkets being torn down, 2009, para.15).
Although Coles and Woolworths have a major share of the packaged grocery market, other competitors are entering the market and expanding the number of stores they own. This means that there is only limited barrier to enter in the market.
From the consumers perspective, competition is good, because Competition is by far the most effective means of exerting downward pressure on grocery prices. Yet effective barriers have impeded entry by competitors into local and national grocery markets. These barriers to entry have stifled competition to the detriment of consumers. (Competition barriers to major supermarkets being torn down, 2009, para.22).
Limited shelf space is much less of a constraint for the grocery retailer than it is for individual manufacturers. Within the limits of this constraint, the more products offered for sale through a grocery outlet, the lower the costs associated with supplying any one product group. Thus, grocery retailers, particularly the supermarket chains, increasingly have expanded their product range to include products traditionally sold by specialty retailers (fresh fruit, bread, meat, fish, etc.) and other items such as paper products, newspapers and magazines, and plants. Some supermarkets have added even services, such as in-store banking facilities.
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
Workable competition is a market situation, where a high degree of monopolistic power exists, but there is sufficient competition between near monopolies which protects the customers from monopolistic abuse.
The idea of workable competition was first introduced by economist J. M. Clark in 1940. In his opinion the goal of the policy should be to make competition workable. He proposed criteria for judging whether competition was workable, and this provoked a series of revisions and counter- proposals. The criteria put forward are wide ranging e.g. the number of firms should be at least large as economies of scale permit, promotional expenses should not be excessive and advertising should be informative. No consensus has arisen over what might constitute workable competition, but all bodies which administer competition policy, in effect, employ certain version of it.
Workable competition can be defined as
Workable competition is a notion which arises from the observation that since perfect competition does not exist theories based on it do not provide reliable guides for competition policy. (Workable competition, 2002, para.1). Workable competition is indispensable in the Australian grocery market because, there are a number of companies operating in this sector. In order to protect the interests of customers and to maintain price stability in the market, workable competition is essential. Workable competition helps to maintain the overall control of the market. It helps to prevent the unexpected price hikes and falls.
The indicators used to assess whether workable competition exists in the grocery industry is listed below
No discrimination in price
Stability in Price
Whether Customers are aware that they have a choice.
Whether Customers know how to exercise choice.
Whether choice are made available to them.
Workable competition is relevant in the market, because
Workable competition is a market structure that results in efficient production without achieving the strict standards of perfect competition. The concept of workable competition is often applied by governmental authorities in guiding regulatory policy for oligopolies in energy and communications. (Workable competition definition business, 2009, para.1).
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.
Vertical integration is a process in which several steps in the production andor distribution of a product or service are controlled by a single company or entity, in order to improve the companys or entitys power in the marketplace. It is the integration along a Supply Chain. If a retailer starts manufacturing the product it sells, it is increasing its level of vertical integration. Vertical integration can be defined as the number of activities along the value chain that are performed within a single company. All the major retail grocery chains are vertically integrated. Here the various stagessteps in the process of distributing the products to the customers are controlled by a single company or organization. The degree to which a firm owns its upstream suppliers and downstream buyers is referred to as vertical integration. (Strategic management Vertical integration, 2007, para.1).
The main objective of vertical integration in retail grocery chain is to provide better services to the customer. It helps to improve the overall efficiency and effectiveness from the production of goodsservices to the delivery of goodsservices.
Vertical integration provides a bundle of benefits to the company, such as
Reduction in transportation cost.
Improves supply chain coordination.
Better opportunity to differentiate the product.
Captures upstream and downstream profit margins.
The advantages of vertical integration include the ability to secure supplies and future orders. The companies in the grocery retail must design a vertically integrated retail chain which provides greater attention on the timely delivery of goods to the customers. It must be designed in such a way that it would help to differentiate the companys products among the competitors. In addition to this, the firm must offer the after sale service facilities to the customer. Here the entire activities from the production to the delivery of goodsservice are controlled by a single company. So, a system should be designed in which there is no loophole for failure.
Vertical integration strategies aim to increase the firms coverage of the value added chain of an industry by extending backward into the production of components or raw materials or forward into wholesaling and distribution toward the end-user or customer.
The vertical integration strategy of a company is applicable only if it is able to strengthen the companys competitive position. One of the criticisms against vertical integration is that it reduces the companys manufacturing flexibilities, lengthening design time and ability to introduce new products. So the company must design a strategy which provides manufacturing flexibility and shorten the design time and ability to introduce new products. Besides these, while designing the strategy, the firm must consider that it require minimal transportation cost and creates increase in marketing power. Vertical integration is feasible only if it generates a bundle of benefits with minimal cost. It is always referred as a strategy with low cost. Vertical integration itself was viewed theoretically as being costless. That is, no internal organization costs were recognized, but only any costs realized through distortions in market prices, quantities, or the factor proportions used to produce output from a neoclassical production function. (Joskow, 2008, p.319). There are two types of vertical integration forward integration and backward integration. Forward integration is the HYPERLINK httpwww.investorwords.com1838expansion.htmlexpansion of a business HYPERLINK httpwww.investorwords.com3874product.htmlproducts andor HYPERLINK httpwww.investorwords.com6664service.htmlservices to related areas in HYPERLINK httpwww.investorwords.com3495order.htmlorder to more directly fulfill the HYPERLINK httpwww.investorwords.com5877customer.htmlcustomers HYPERLINK httpwww.businessdictionary.comdefinitionneed.htmlneeds. Backward integration is a form of vertical integration that involves the acquisition of suppliers in order to reduce dependency.
Payoff Matrix
A payoff matrix is a decision analysis tool that summarizes pros and cons of a decision in a tabular form. It lists payoffs (negative or positive returns) associated with all possible combinations of alternative actions (under the decision makers control) and external conditions (not under decision makers control). Also called payoff table. (What is the payoff matrix 2010, para.1).
The matrix drawn below is a normal-form representation of a game in which players move simultaneously and receive the payoffs as specified for the combinations of actions played. For example, if player 1 plays top and player 2 plays left, player 1 receives 4 and player 2 receives 3. In each cell, the first number represents the payoff to the row player (in this case player 1), and the second number represents the payoff to the column player (in this case player 2).