Competition in the Australia Market for Groceries

Competition in the Australia Market for Groceries

Introduction

Grocery food retailing in Australia just like everywhere else occurs in a number of retail settings which include the wholesale controlled chains, supermarket chains and international operators. The market for groceries in Australia is relatively small as compared to other industrialized countries. Every grocery retailer strives to benefit from the economies of scale and provision of products to customers consistently. On the other hand customers consider a wide range of factors before deciding what to purchase this includes; the price, quality, product range, queuing time, access to parking and the store location. Large stores such as supermarkets provide attractive prices in order to woo customers. Smaller stalls on the other hand are least profitable. Many customers are willing to purchase from small retailers for convenience purposes and hassle-free shopping.

a)Is the retail grocery market in Australia a perfectly competitive one?

Perfect competition refers to a situation whereby there are a large number of buyers and sellers such that the actions of one individual cannot affect the price of the commodity in the market (Tucker 2008, p128). Second, the products produced by all firms in the market are homogeneous. There is perfect mobility of resources within the market and both consumers and producers are aware of the present and future price fluctuations (Tucker 2008, p128). Whereas, there are many consumers in the Australian grocery market, the sellers are not so many. Two grocery retailers, Woolworths and Coles control about 80 % of the retail grocery market (ACCC 2008, P45). Competition in the Australian market has been stifled by the major supermarket chains. This is because they have managed to bar the entrance of new competitors into the market through local zoning technique. The supermarket chains include terms in their leases that deter shopping center managers from leasing out space to other grocery retailers in return for commercial incentives. The major supermarket chains have also been accused of creeping acquisition tactics where they seek to buyout smaller retailers in order to check any possible rise in competition. The cost of production is also different because the small scale sellers incur higher costs of doing business whereas larger players such as Woolworths and Coles benefit from economies of scale and vertical integration.

The consumers in the Australian market have an option to choose between variety and convenience. This is because the major supermarket chains provide their groceries at a cheaper price than the smaller retailers hence end up attracting more customers leading to long queues (Chung & Griffith  2009, p 220). The small retailers on the other hand provide speedy service and are usually located in friendlier places hence getting a few customers who prefer convenient shopping. Access to car parking, loyalty programs and flexible working hours are some of the few incentives that small retailers provide to customers. Due to barriers that have been created by the major grocery retailers especially the major supermarket chains (MSCs), other retailers may not be able to penetrate the market easily. Currently purchasing groceries at the outlets owned by Woolworths and Coles is not convenient. There are long queues owing to the fact that many customers who seek lower prices and a wider variety of choices flock these stores.

Customers also do not benefit from aggressive competition that occurs in other areas such as Britain where there are several large grocery sellers. Although the MSCs allow consumers to carry-out one stop shopping, new competitors into the market would allow for more fierce price wars, more innovative measures and a much wider variety of retail products. The government in Australia has tried to initiate competition among the Key firms in vain. However, there is not enough competition that could result to better products and better service.

The ACCC estimates that the two major supermarket chains i.e. Coles and Woolworths account for approximately 80% of the total grocery retail sales (ACCC 2008 p45). In combination Woolworths, Coles and Metcash account for 70% of grocery products sold throughout Australia (ACCC 2008, P39). The MSCs do not have fierce price competitions among them but rather seem to have matched their prices and once in a while give price promotions. This differs from Britain whereby the grocery market has at least four to five competitors who often engage in market rivalry.  In Australia other grocery chains such as ALDI, Costco, Foodworks and Franklins have a lesser share of the market although some of them are vertically integrated.

According to the Economic Cooperation and Development (OECD), the grocery prices in Australia have risen by 41.3% since 2000. This increase is faster and higher than that of other countries such as Britain 32.9% and America 28.4%.  The escalation of food prices in Australia growing concern. The food prices have risen sharply while the farm prices have not been very volatile. It is argued that the grocery market in Australia remains uncompetitive. This has attracted investigations and inquiries into the market conduct and the competition in the grocery sector. The Australian competition and consumer commission (ACCC) has undertaken these inquiries in the years 2002, 2004, 2007 and 2008 to establish whether the  market conduct is responsible for these escalations. These inquiries clearly show the gravity of the issue in the region.

The grocery market in Australia is oligopolistic. In oligopolistic competition a few firms usually the large ones control a bigger portion of the market share. In oligopolistic competition firms can improvise barriers and other restrictive trade practices and as a result can manipulate prices in a similar way to monopoly competition. The pricing of products by major firms influences the price of the product in the market. This is the situation in the Australian food market.

2. Concept of workable competition

It is widely accepted that perfect competition is difficult to achieve. Workable competition is one that promotes efficient production without necessarily fulfilling the strict requirements of perfect competition (Klein 2006, p136). This is competition which is economically desirable. Competition often springs from market rivalry between sellers over obtaining the buyers money. Firms in an effort to provide better services look inward and attempt to reduce cost by making sure that all resources are utilized in the best way possible thereby cutting waste, increasing efficiency and reducing costs. This process results in the establishment of workable competition. The indicators for workable competition are structure, conduct and the performance indicators.

a)Structure

In a workable competition the number of traders is large enough and is guided by the economies of scale (Klein 2006 p136). In Australia the number of competitors is large enough however the MSCs (Woolworths and Coles) share about eighty percent of the market leading to oligopolistic competition. Second, there should be no barriers to entry and mobility within the market (Klein 2006, p136). In the Australian market there are barriers that prevent new retailers from joining the market an example is the use of unfair lease agreements in shopping centers. Third, there should be more moderate and price sensitive quality differentials in the products offered (Klein 2006, p136). In Australia there is negligible difference in the quality of grocery products offered as well as the pricing.

b)Conduct

In a workable competition rival firms try to achieve their goals independently without collusion or use of unfair tactics (Klein 2006, p136). Firms are not sure if their opponents will use price wars to increase their market share. In the Australian grocery market there are no price wars between competitors, the reason being two major grocery retailers have control over 60% of the market. The Australian market experiences oligopolistic competition and the major firms use other strategies to acquire a larger market share. There is unfair use of coercive strategies to edge out other competitors. These strategies include buyouts of smaller competitors and use of unfavorable lease agreements.

c)Performance

The performance of the large firms is efficient. This is attributed to the fact that they have engaged in vertical integration and supply chain management. Customers in the market buy from firms which offer the best prices and services. In a workable competition profits made should just be sufficient to reward investment efficiency and innovation (Klein 2006, p136).  Although grocery stores in Australia have engaged in vertical integration, the profits made are likely to be more sufficient than those required to reward investment. By evaluating the indicators of workable competition it is clear that the grocery market in Australia is not workable.

3. Vertical integration of major grocery retail chains

Vertical integration occurs when a firm performs two stages of production (Hill & Jones, 2008, 293). Retailers can take over stage of the supply chain such as manufacturing or wholesalers and manufactures can enter into the retail business. Either way vertical integration leads to reduction of taxes resulting to higher profit margins and enables the supplier to transfer the cost of distributing products to the customers (Hill and Jones, 2008, 293). In Australia Woolworths and ALDI and Franklins have ventured into vertical integration (ACCC, 2008, pp 291). The independent grocers have not ventured into vertical integration. The supply chain also varies depending on the grocery category. Fresh produce usually has a short supply chain which may involve three functional levels. This involves purchase of product from farmgate by the wholesaler which is then sold to the retailer who in turn sells to the consumer. Produce such as meat may first undergo processing after the farmgate before wholesaling (Chung and Griffith 2009, p222). MSCs Franklin and ALDI perform the wholesale function in their capacity and thereby reducing their production costs. However, the independent retailers have to purchase their produce from a wholesaler. Metcash is the major firm involved in wholesale of groceries to the small retailers (ACCC 2008, p219). However, in order to realize higher profits growers are selling produce directly to retailers hence by passing the wholesalers. There are other groceries that are imported into Australia such as oranges and pineapples. Growers prefer selling food to the wholesalers because it is a straight forward and reliable way as opposed to individual retailers.

Strategy of successful entry for a new competitor

Entry of new firms into the Australian grocery market is largely stifled by the existence of trade barriers created by the major firms in the region. A rival firm seeking to retail groceries in the region must seek ways to surpass these barriers. This is usually best done through a joint venture because firms on the ground are aware of the market conditions. However, whether or not the firm opts for a joint venture, there is need for a superior and effective strategy to counter the superiority of the existing grocery firms. The following are some of the factors the firm should consider when formulating a strategy..

A payoff matrix is drawn to determine and illustrate the best strategy for a firm into a new market. According to the above payoff matrix, the new firm would least benefit if the MSCs alone adopted the online shopping strategy. The best returns would be realized if the new firm would adopt the online shopping strategy alone. However, even if MSCs and the new firm adopted the strategy the firm would still benefit in a much significant way than it would if it did not adopt the strategy. The dominant strategy for the new firm is the adoption of IT in shopping and delivery of products to customers.