Competition in the Australian Market for Groceries

According to Griffith and Wright (2009), under the Australian and New Zealand Standard Industrial Classification, retail grocery operators include grocery stores, supermarkets and specialized food, vendors. The Australian retail market has experienced rapid expansion that has been catapulted by investment and growth by supermarket chain holdings. Their entry and tendency to dominate have heightened levels of competition as evidenced by increased strategies to win the market.

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According to Griffith and Wright (2009), the accelerated growth has taken half a century. The retail regimes for groceries have shifted from simple specialized market stores in the 1950s to chain self-selection stores (Griffith & Wright, 2009). This has translated to the current grocery market transition from multiple individually owned stores to a few predominant chain stores. During that transition period, the adoption of urban life provided a favorable environment for supermarket predominance.

This take over has been opportunistic in that ability of the chain supermarkets to manipulate the market to their advantage, both widely and intensively. These have been actualized by applying the retail consolidation concept. The use of this concept in a contested market has had greater chances of favoring predominating business owners for a long time.

Furthermore, it could benefit big investors more than smaller ones. Due to the retail rivalry, newcomers stand a lesser chance of penetrating this kind of market and this gradually lowers retail diversity in that market. For example, the Franklins Stores that sought to offer deep discounts at lowered prices were unable to sustain their sales due to economic conditions set by the lead supermarkets (Griffith & Wright, 2009).

According to Report Buyer (2010), the ease of market entry of a private label in the US and Western Europe are far much better than that of Australia. Within a period of eight years since 1992, the number of independently owned retail groceries fell by 56% (Griffith & Wright, 2009). Market share value for grocery and meat products declined in the years1998 and 1999 in favor of the predominant supermarkets (Griffith & Wright, 2009).

Figure I: Retail Sales by Store Type.

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Store type 1998-99 (%) 2004-05 (%)
Supermarket and Grocery 80.5 79.5
Specialized 19.5 20.5
Fresh Fish, Meat and Poultry 4.5 n.a.
Fruit and Vegetable 3.6 n.a.

The economies of scale have allowed the supermarkets’ to win more customers. This is through the bundling concept of discounted retail products (Gans & Kings, 2004). Arguably, discounts are strategically used for the supplier to share the cost-saving of the products with the buyer. Such an arrangement becomes attractive when the supplier applies through a wide range of goods. This ultimately benefits supermarkets over smaller retailers not only due to the variety of customers but also as a one-stop shopping premise.

In the case of grocery retailers versus the supermarkets, this predatory pricing as it inhibits competition on potential products. Consequently, the prominence of such supermarkets ends up selling their business label rather than products at the expense of smaller retailers (Bharat Book Bureau, 2009). For instance, the case applies to Coles and Woolworths Supermarkets (Report Buyer, 2010). This has monopoly and anti-competitive effects. The effort by Australian authorities to regulate operating hours of supermarkets vis-à-vis smaller retail stores is an indication of the competitive business environment. According to Griffith and Wright (2009), this measure benefited the consumers.

Australia has experienced high retail prices for groceries due to competition. The bundling strategy has led to more customers opting for the supermarket to avail of the special discount. Competition between the lead supermarkets has over time partly been driven by retail rivalry. This has been concentrated in the pricing of the bundled products. This has raised standards barriers for new entrants especially in finding strategic sites for venture (ACCC, 2008).

Established chain supermarkets have the advantage of extensive geographic coverage and economies of scale (DAFF, n.d.). In addition, bundling of discounts has resulted in predatory pricing. This has a potential for monopoly of the two otherwise different products. Consequently, Coles and Woolworth have usurped the price setting of grocery not only affecting their peers but also smaller grocery operators. According to ACCC (2008), there is fear of the long-term implication of the unbalanced competition on smaller retail greengrocers.

There is an influx of customers to supermarkets. Rising prices have had implications on the consumers considering expenditure is about 13% of their taxed income on groceries (ACCC, 2008 and The Age Company, 2010). Bundled products under discount limit beneficiaries to only those willing to spend on both products. Or else, the customer may consider abstaining from spending on bundled products to be safer. Those customers spending on one product may in the long run end up spending more (Gans & King, 2008).

The bundling concepts ensure that the customer has to switch product lines in order to avail for the discount. The switching has been regulated by price manipulation on the alternate bundled products. For instance, when the price of bundled grocery reduces in Coles Supermarket, Woolworths respond by lowering price of petrol. This has led to marginal switching of consumers between these lead supermarkets.

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The concept of workable competition applies in market where there is no party with definite capacity of out doing their competitors (Clarke, 2009). This makes it difficult for monopoly of the market among the operators. This kind of competition avoids extreme practices of market manipulation while protecting interests of players as much as possible. There should be a framework for consensus among the stakeholders. According to Clarke (2009), such a market provides the customer with a competitive deal.

The market predominance of Coles and Woolworth supermarkets has an indication of an edge above other players (Propertyoz, 2009). The perpetuity of the bundled discounted products by these supermarkets through retail rivalry is a potential for market manipulation. It is still arguable whether the competition is balanced with the existing high standard market barriers for new entrants and the decline in the retail diversity (Mallesons Stephen Jaques, n.d).

Legal and pricing indicators would aid in monitoring these kinds of markets. Legal indicators enable the authority to apply appropriate legislations that restrain use of competitive malpractices. According to Clarke (2009), segmenting the market that allows the authorities understand local dynamics could be coupled with planning laws to rid out competition biases. These are consistently monitored. The need of price discrimination is an indication of unbalanced competition in market.

The predominance of Coles and Woolworth Supermarkets by applying the bundled discount on products have concentrated the power of price control between the two such that operators of the same genre consider competing on based on convenience and service (Clarke, 2009). Impacts of local planning and zoning laws may present an indication of how the public rates its operations. Use of unfair competition practices may lead to public outcry or demonstration.

That is why businesses set aside resources for corporate social responsibilities as well as reserve some opportunities specifically for the immediate community. Giving community preference within the premise operations instils a sense of local ownership even if the real owner is an outsider. For instance, individual stores of a chain supermarket spread over a region.

The commitment of locals to pass regulation at the local council that will sustain operation in the area can be an indicator of this. The outcry for the need for Australian Government to regulate trading hours of major supermarkets at the expense of local independent and retail operators is an indication of public displeasure.

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Vertical integration occurs when an operator considers undertaking both functions of producing and supplying the product in the market (ACCC, 2008). This means the firm provides for its chain supply logistics with goods and services and avails them directly to the consumer without market intermediaries. The market intermediaries that have been overlooked are the retail and wholesale operators. The initial stages of Coles and Woolworth Supermarkets dominance applied vertical integration and economies of scale concepts to maximize their cost savings and bring down prices of products unit in their favour.

They also focussed on ensuring efficiency in their service delivery along the supply chain. Vertical integration by these Supermarkets entailed: warehousing functions, which were placed under a single core team vis-a-vis a devolved system of management; stocking activities were kept under close monitoring to avoid under or over supply leading to minimized wasting; keen stock taking and turnover functions; installation of appropriate cooling facilities and efficient delivery missions.

In order to boost their businesses, their strategic operations enabled them to negotiate for down payment for recurrent expenditures such as rent and insurance. This strategic arrangement gave them a competitive edge over their competitors in savings especially at wholesale level, which were reserved for buyers of products at their retail stores. Operating chain stores with large economies of scale over an extended area associated with high prices for grocery products translates to significant returns.

Operations over an extended geographic area stand to benefit from spreading of costs due to compensation of freights between the proximate and remote areas. The vertical integration allowed for accelerated flow of products, especially farm produce, into the chain stores thus supplying them to market while they are relatively fresh. This supply arrangement led to rise in the market share of these Supermarkets. This weakened independent and smaller retail stores as shoppers shifted their purchases to these Supermarkets to cease the opportunity of saving.

The pricing of products under the vertical integration by the major chain stores negated any chance for other retail and wholesale operators to compete in pricing (Master Grocery of Australia, 2008). The independent or smaller retail stores could not sustain themselves at low prices over long period of time. In addition, they could not operate a long-term bundled discount similar to that of the major stores. This privilege increased the potential for the chain stores for market sharing behaviours. Much as these major chain stores have yet to agree on a pact, market orientation is rife for the implications of the market sharing.

Independent retail stores can combine under a banner group to tap the advantages that are associated with predominating chain stores. This banner group have a better bargaining power as well as economies of scale. Arguably, banner groups and chain store operators achieve market power, which independent and smaller retail stores cannot compete.

Local planning and zoning laws present a barrier for new entrants. Existing chain stores and resources that have been accumulated over long time are able to protect their interest against a public opposition. This is improved by the positive image gained through public relation drives as the retails brands itself. Corporate social responsibilities that target enhancing welfare of the public also boost this aspect. Cooperate social activities seek to involve the local community in a manner, which seeks to benefit them

. The supermarket may also give locals an added advantage by offering job opportunities to the locals vis-a-vis outsiders. These impacts in the sense of benefit sharing between the immediate community and the owner of the premises. This instils a sense of responsibility and ownership for the premises to prosper among the employees both at the workplace and without. This is because the employees perceive to be stakeholders of the premises; thus, it is within their interest to protect it for prosperity. The figure below presents a chart of a payoff matrix.

Chart of a Payoff Matrix.
Figure II: Chart of a Payoff Matrix.

References

ACCC, (2008). Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries . Web.

Bharat Book Bureau. (2009). Australian Retail Grocery Market Case Study: challenging the dominance of Coles and Woolworths. Web.

Clarke, J. (2009). Grocery Inquiry 2008. Web.

DAFF. (n.d.). Grocery retail: Determinants of prices in the retail. Web.

Gans J. S. & King S. P. (2004). Supermarkets and Shopper Dockets: The Australian Experience. Web.

Griffith, G. & Wright, V., (2004). Chapter 2: The Case of Australia. Stiegert K W. & Kim D H (ed.). Web.

Propertyoz. (2009). Supermarket competition myth busted. Web.

Mallesons Stephen Jaques (n.d). Key findings of the ACCC’s grocery inquiry. Web.

Report Buyer (2010). Australian Retail Grocery Market Case Study: challenging the dominance of Coles and Woolworths. Web.

The Age Company Ltd. (2010). Rising food prices: Can competition help? Web.

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