Competition in the Australian Groceries Market
1. Introduction to Australian consumerism
Australia s heritage has grown from its early penal days, forging a pioneering, multi-racial identity. This has strengthened a culture of egalitarian mateship, avoidance of the Tall Poppy syndrome, and looking after the under-dog . To elaborate on this, Australians do not like to appear pretentious and like to help those who struggle, and this relates to their food shopping habits as well.
This led to the popularity of family-owned corner grocery stores in the 1930 s to the 1950 s where loyal customers would wheel their little canvas shopping jeeps and be assured of friendly service by people they trusted. Fruit was handpicked and weighed for them, and the stock on the shelves was guaranteed fresh and usually very much Australian made. Meat could be bought here, too, making it a one-stop convenience shop, but it was more likely to be bought from the local butcher.
The food was packed into ones trolley or into brown paper bags or sturdy boxes, and there was home delivery or a young boy would help consumers take their groceries to their car if they needed. The store staff usually remembered their name and asked about their family. They had raffles and always helped out charities.
As many of the old grocery stores faded into the history archives with the advent of the large supermarkets, many locals were upset and thought that fair trade had disappeared in Australia. However, when those Australian consumers discovered the new supermarkets offered a much wider range of products and at competitive prices to the small grocery store, the appeal of the shopping giants became increasingly popular.
An article in the Sydney Morning Herald newspaper sums up what was happening to the marketplace in the 1960 s. There was a distinctive housewife consumerism with women being the main shoppers. A spokesperson for Woolworths, the largest operators of supermarkets in Australia said, More and more housewives are shopping in supermarkets... there is a different sort of atmosphere, lots to buy and lots of specials (Herald 1966 10).
A spokesperson for Franklins Foods Pty Ltd (with 66 independent grocery stores in NSW in 1966) also noted that due to falling profit margins, the smaller grocery store could not keep up with the larger supermarket chains Gross Profit margins in the grocery trade have declined from about 18 to 20 per cent in the 1950 s to about 11 to 12 per cent today (Herald 1966 10).
The Australian culture of fairness was still evident as the Australian democratic Government showed the consumers that it was progressive and fair to introduce the large supermarkets into the Australian marketplace because the small family grocery stores had been trading as a monopoly. Through increased urbanization from the 1950 s onwards, the Australian economy relished the introduction of supermarkets where shoppers could buy more but at competitive prices to the small grocery store. Thus, instead of family owned grocery stores, the Australian market place became the playing field of two leading players Woolworths and Coles Supermarkets. However, did this create an end to a monopoly of overpriced corner stores or start the oligopoly regime of the key players in the market
2. Is the retail grocery market in Australia a perfectly competitive one
2.2 Major reasons why it might not be perfectly competitive
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By the end of the 1960s Coles and Woolworths, the two largest food store chains in Australia, had moved from variety store bases to supermarket operations through acquisition of small chains and organic growth. They had also acquired in-store butchers who had previously operated as franchisees (Parliament of Australia 1999 cited in Griffith 2009 2)
According to the Australian Parliament (1999) government enquiry into the retailing sector, the competitiveness and market share expansion by major food chains is influential in providing a better service for Australian consumers through deregulated trading hours, wide product choice, and lower prices. So if this is the case, then why are consumers feeling pressed by increasing prices in supermarkets now
According to an article in The Age newspaper (2010), the dream of competition and lower prices has faded with Choice Magazine, a consumer action publication, demanding a fair go for Australian consumers. Mr Stace, Choice chief executive, believes Australia needs an impartial ombudsman to protect consumers and food producers
There is a need for real leadership on resolving supermarket issues in Australia - rip- off prices, endemic unfairness and the lowest level of competition possible...Australia has the tenth-highest food inflation of 30 OECD countries for the year to September 2009. (cited in Australian Associated Press AAP 2010)
It seems there is a big debate about the competitiveness in Australia s supermarkets, and Choice magazine pointed out that Woolworths profits remained high while Metcash, who distributes to the independents stores, has an even higher profit margin. Metcash is not seen as a threat to Woolworths or Coes Supermarkets, however, as it is on a different playing field (insert citation).
There is also evidence that the supermarket giants Woolworths and Coles Supermarkets have bullied small grocers out of regional areas through counter-slashing prices to under price the small grocery stores. Farmers and market garden owners believe the supermarkets use their economic force to push the fresh food producers to accept reduced input prices A significant concern raised during the inquiry is whether the gap between farm gate and check-out prices for groceries has been widening in recent times, such that farmers and suppliers are getting less, while retailers are getting more (Australian Competition and Consumer Commission ACCC 2008 xiii).
This information is creating negative images amongst Australian consumers who are turning towards a newcomer into the Australian supermarket arena Aldi Supermarkets, the German-owned discount store. Woolworths and Coles Supermarkets have had limited threat from Aldi Supermarkets, but with the increasing food prices at the two leading supermarkets Australian, consumers are testing the new Aldi Supermarkets and liking the results. The Australian HeraldSun newspaper article on the Aldi expansion and aggressive graduate recruitment program is evidence of the push from this new player into the Australian grocery retail market The company says its starting graduate package of 84,000 a year, five weeks holiday and a company car is the best deal for graduates on offer (Butler 2010). Thus, the competition is getting stronger and this surely will be good for consumers as both Woolworths and Coles Supermarkets have been building their brands.
Woolworths, trading as Safeway in Victoria until 2008, replaced all its Safeway branding to bring a united front to add value to the Woolworths brand. This was to strengthen Woolworths market share against its main competitor Coles Supermarkets. The logo of this new image for Woolworths was a stylised W in the shape of a leaf to suggest fresh produce and perhaps an eco-friendly appeal. The slogan The Fresh Food People remains as a key factor to the Woolworths logo.
It is significant to point out that in 2006, Coles Supermarkets also decided to re-brand and badge all their stores as Coles Supermarkets, but this strategy was not aimed at Woolworths but at the newly emerging player Aldi Supermarkets. This action illustrates that Coles Supermarkets were feeling Aldi biting at their heels.
(Coles and Woolworths) now control something in the order of 80 of grocery sales. Conversely, supermarket dominance has not provided sufficient incentives for foreign investment until very recently with the entry of Aldi from Germany, Pick n Pay from South Africa, and Costco from the United States. (Griffith 2009 21)
3. The concept of workable competition
The concept of workable competition is a market structure whereby production is achieved without perfect competitiveness. It is often applied when regulating policies for oligopolies in the market place. Due to the nature of the Australian retail grocery market being an oligopoly with Woolworths and Coles Supermarkets as key players but with Aldi and independent stores also playing a part, this is a relevant workable competition environment.
There are several indicators that could be used to assess whether workable competition exists in the retail grocery market. One of these is price discounting which is a perfect indicator that Australia s retail grocery market is a workable competition environment, even though there has been a track record of prices increasing in the Woolworths and Coles Supermarket stores. Market performance and store conduct are also indicators as to whether a workable competition exists. In a report produced by the ACCC on the Grocery Inquiry, the treasurer was convinced that even though indicators show the Australian Grocery market is a workable competition, there can be improvements
Also, the report finds that although the major supermarket chains, Coles and Woolworths, do compete on price, that competition is not as vigorous as it could be. The report also finds that the entry of Aldi into the eastern states some years ago has provided a substantial and beneficial impact on competition, and benefits to consumers. (cited in Bowen 2008)
4. Vertical integration
4.1 Implications
The term vertical integration can refer to management style and microeconomics. The leading supermarkets in Australia s grocery market oligopoly, Woolworths and Coles Supermarkets, both operate at the wholesale and retail level which is why they are seen as vertically integrated retailers. The report by the Joint Select Committee, Parliament of Australia (1999) highlights the vertical integrated structure (Fig. 1) of our major players in the grocery market showing the major chain supermarkets which are Woolworths and Coles Supermarkets, and the independents.
SHAPE
Fig. 1. Structure of the Grocery Market Players
The advantages for Woolworths and Coles Supermarkets in being vertically integrated are incorporated into their warehousing, buyer power, and pricing structure. The independent grocery stores cannot compete with the enormous buyer power of the supermarket giants and the advantages should flow through to the pricing but does it
In essence, Woolworths and Coles Supermarkets vertical integration benefits include
profitability from retail operations as core tenant in large shopping centres they would pay substantially less rent per square metre than other small retail tenants flexible terms and conditions in their leasing arrangements central marketing activities using generous advertising budgets
tax benefits.
The other vertically integrated retailer in the Australian grocery market is Aldi Supermarkets, which operate in Victoria, New South Wales, the Australian Capital Territory and Queensland (insert citation).
4.2 Strategy for a successful entry of a new competitor.
The strategic direction for any successful entry into the retail grocery sector of the Australian marketplace is to come in as the under-dog . To explain this colloquial term, the under-dog is the company that is struggling against unfair competition (or at least seen to be as unfair competition in the consumers eyes) (insert citation). The culture of fairness and looking after the under-dog will be a favourable advantage to any newcomer who plays on these qualities, but they have to be genuine in their desire to offer Australian consumers better prices.
Aldi Supermarkets may well be the successful entry as a relatively new competitor with current expansion and recent graduate recruiting programs. They have come into the market place with an international background, but playing on the Australian product range at low prices.
A payoff matrix can be viewed in terms of microeconomics as a visual portrayal of a company s strategic direction to mitigate risks and drive profitability. They are used in competitive situations and are well suited to illustrate the strategy for a new player into the Australian retail grocery sector (insert citation).
Australian consumers would significantly benefit if Woolworths and Coles Supermarkets faced more competitive threats as this would encourage more aggressive pricing strategies. Aldi Supermarkets could be the newcomer that grabs the brass ring from the two Australian supermarket heavyweights.
Even though Aldi have been in Australia for nine years, they are a virtual newcomer in the sense that they have not taken the market share from Woolworths or Coles Supermarkets. This could change if Aldi Supermarkets formulate a strategic direction that really works. They have the right idea about appealing to the Australian consumer in stocking good Australian produce at low prices and investing back into Australia rather than taking their profits offshore.
We continue to invest in Australia through new stores, employment and sourcing Australian products. We have excellent relationships with our suppliers and our people are rewarded with salaries that are considered to be the best in the industry. All of ALDI s profits in Australia have been reinvested in Australia and in the next 3 years alone, we plan to invest a further sum far in advance of 1 billion in Australia including the construction of two new distribution centres in southeast Melbourne and southwest Sydney. (Aldi 2008)
Aldi have been biting at the heels of Woolworths and Coles Supermarkets and the influence of increased prices at the major supermarkets have forced many Australians to change over to Aldi. The benefits for the Australian consumer are going to increase because even if they do not shop at Aldi, just having an Aldi Supermarket in their town will be a push to Woolworths and Coles Supermarkets to keep their prices honest . So in showing Aldi as a newcomer, my strategy and payoff matrix is summarising the player s decisions of Aldi and Coles Supermarkets as I believe Coles Supermarkets is the closest threat to Aldi.
Note This is purely a hypothetical payoff matrix as naturally we cannot speculate on the exact monetary strategies that these two Australian companies would use.
Coles Supermarkets
(B) StrategyLow profitsHigh profitsLow profits50 mil100 milAldi Supermarkets
(A) StrategyHigh profits50 mil
NOTE If you are considering any co-operative activity with one or more competitors, you should consult with appropriate legal experts regarding the legality of such actions.
Aldi Supermarkets should use a dominant strategy whereby they assume Coles Supermarket will keep the high ground and desire to achieve a larger profit margin. Thus, Aldi Supermarkets should cut prices across their product range to achieve a much lower return on profits in comparison to Coles Supermarkets.
Note that a dominant strategy does not necessarily provide a player with a higher payoff (profits) than the opponents. Being dominant simply means that strategy provides a higher payoff than any other strategy that player could use given the anticipated actions of the opponents. (Baumol 2007)
The effect of this type of game theory is to win the consumer confidence to change their buying intentions to the newcomer Aldi Supermarkets. Of course, Aldi Supermarkets will need to keep the comparative low prices in long term to secure the market share, but then the advantages of being a key player will be worth the monetary input because of the increased buyer power which will ensure the prices can remain cheaper than Coles Supermarkets. This competition will flow up to Woolworths Supermarkets who will be need to keep their prices at a reasonable level to stay competitive.
The benefits will cause consumer confidence and increase spending even though prices are less which will be a positive effect on the economy. So one can see how the assumed strategic direction of a key competitor can be beneficial to the strategic direction of a company. This style of competition is known as Betrand price competition as a game theory for considering price as the key factor in the payoff matrix and the new competitor s strategy. Joseph Bertrand, French mathematician, formulated the idea of price competition in 1883, ... that a different conclusion could arise when firms believe that rivals will act to maintain price... Hence, consumers will purchase from the firm that sells at the lowest price... (Strategic 2009)
5. Conclusion there should be no new information in the conclusion. Your conclusion should contain a gist of what you discussed and your inferences based on your discussion
Let the price wars begin
In January s Farm Weekly it was announced that Woolworths massive price cuts was aimed to lure Aldi customers back. A total of 3,500 grocery items will be discounted on Woolworths shelves. The other contender in the price wars is of course Coles Supermarkets with a new pricing standardization for 8,000 grocery products across the nation, excluding fresh produce. Once all the major supermarket chains have rolled out national pricing, Australian consumers will be better able to see how they can get the best value for money (Small 2010)
AFN (Aus Food News) website is displaying many articles with different views on the current climate in the Australian retail grocery market. It seems as predicted that Aldi Supermarkets are proving a challenge to the consumer satisfaction stakes and showing Woolworths and Coles Supermarkets that the newcomer s continuous low pricing and quality of goods is a winner The latest Roy Morgan Supermarket Satisfaction Report reveals Aldi still on top in the customer satisfaction stakes, with 91.4 surveyed as satisfied, despite a slight downturn from last month (Eckersley 2010).
The challenge to Woolworths and Coles Supermarkets supremacy could be moving to new heights and it will take time to see the outcomes of Aldi Supermarkets increased presence as a viable, discount supermarket in the Australian retail Grocery market.