The Rivalry in the Australian Market for Groceries - Literature review Example

Running Header: Competition in the Australian Market for Groceries Student’s Name: Instructor’s Name: Course Name & Code: Date of Submission: Competition in the Australian Market for Groceries Introduction The retail grocery sector in Australia has been affected by various criticisms for the past number of years because of the rising prices of goods. According to the Australian Competition and Consumer Commission (ACCC), Coles and Woolworths are some of the companies that are responsible for the increased competition. Armstrong and Fisher (1994) describes that these companies contribute about 70 percent of grocery sales while food products contributed 50 percent of the sales made in Australia. This study shows major of the competition in retail grocery sector by evaluating the characteristics of the market and showing customers implications. Characteristics of retail grocery market in Australia A small number of supermarkets that are publicly listed characterize the retail grocery market in Australia. Wholesalers and other international producers control these chains of supermarket. Burgelman et al. (2004) shows the retail grocery sector in Australia competes with about 30,000 other food businesses which specialize in different businesses which include shop fronts and franchise operators. The other characteristic of the grocery retail market is that the market is relatively small and there is a long distance between these markets. The market also consists of a low population growth rate. The national retailers enjoy the economies of scale since they deliver goods to the entire market. The major retailers in the market often compete with other options in order to achieve their investment goals. The retail sector is among the sectors that yield the country less revenue. This is because retailers strive in the market in achieving growth in profits and development of infrastructure. They get fewer returns due to the aggressive competition present in the small consumer market. The increasing competition in the market does not only affect the retail sector but few numbers of large international brands mostly control some brands of food. Coghlan and Brannick, (2002) suggests that Australian manufacturers therefore cannot evade these market pressures since they result of the global changing of food retails. These changes have enabled retailer to seek better methods of achieving economies of scale as well as providing their consumers with better services. The methods used by the retailers include asset utilization, improving methods of promotion and maintaining consumer value. The retail market may be a perfectly competitive since it contains many buyers and seller and they trade similar goods. There is also large number of firms in the industry which is the case in the Australian grocery market. The consumers in this market may not choose products since all the products are similar. This market needs one to have perfect knowledge which involves using all the opportunities in the external environment to achieve economies of scale. Perfect mobility is also necessary in this kind of market in order to enable retailers have a motive in changing an opportunity to become a benefit. This retail market however might not be a perfectly competitive one due to certain characteristics of the market. One is that retailers in the grocery sector do not always compete for price. They are other factors that consumers in the market look for before purchasing a particular product in the market. Some of these include price, the location of the store, product range and their quality. Consumers are also worried about the time they spend queuing in order to get served as well as the operating hours of the retail store. In large store such as supermarkets, consumers would consider one where there is enough space for parking and the price of products is also important to note (Camp 1995). Likely implications of consumers According to Grant (2002) smaller retail stores in the market compete basing on convenience as many consumers in the market would rather pay higher prices for products of higher quality and at a convenient store. This shows that there is a major relationship between price of goods and convenience which facilitates competition in the market in spite of the differences in prices of goods. The other implication posed by consumers includes their opportunity to weigh various prices according to the conveniences of a particular store. Customers then decided to purchase a product from a store that has convenience factors and whose price matches which the factors. The customers in the retail sector are the greatest assets that retailers have. This is why it is necessary for retailers to focus on improving convenience factors in order to maintain customers’ loyalty. Some of the ways of developing this loyalty include investing on the display of the goods and services provided. This would be by arranging products in a systematic way in which consumers will not have to take at their time searching for one product. Storage of goods should also be improved for example perishable goods should be stored in a refrigerator and fragile goods should be well stored. Technology is also necessary as most consumers consider purchasing goods at stores that have innovative technology for example where they do not have to queue to be scanned. Question two Concept of workable competition The concept of having a workable competition in the retail grocery market is evidenced by the structure of the retail market and the conduct of major participants in the market who are the consumers. ANRS is the leading Australian retailers company which employs about 500,000 employees accounting to 80 billion dollars in retail turnover. Recently, ANRA declared their support for an open and competitive Australian retail market. Members also believe that the various factors that influence consumers to buy may not affect the vigorous competition in the market. This therefore results to a growing retail sector for example in 2009 the biggest American retailer opened a store in Melbourne and plans to invest in more stores just like the German retailer, Aldi who now have about 700 retail stores all in Australia (Harrigan 2001). The increase in competition has an enormous impact on prices since sellers will have to decrease their prices so that they can beat the growing competition. Hill (2003) describes that consumers on the other hand will benefit from this competition due to lowered prices of goods. ACCC also support public arguments that the retail sector is competitive and it recently found out that inflation on prices of food have been so devastating. This is due to other factors influencing price apart from competition. It was also found out that the Australian independent sector do not initiate price competition due to the pricing strategy used by Metcash. One major hindrance of competition is the entry barriers that hinder new investors from entering the retail market. According to ACCC, the Horticulture Code of Conduct should be amended in order to include sale transactions carried out by the producers and the retailers. The commission also recommended that a unit pricing scheme should be introduced to form a consistent and standard price for groceries. A general acquisition law should also be put in place to incorporate competition analysis which can then be evaluated to come up with better strategies which will reduce entry barriers. Any retailer who operates against the lease agreement should be breaching the Trade Practices Act and legal actions should be taken. Some of the indicators used to assess whether there exists a workable competition in the retail market include presence of consumer demand factors. Question three Retail grocery chains in Australia are vertically integrated. Vertical integration in the retail sector means that the sector focuses on cost savings and investment of inventory. Gamble et al. (2004) argues that though Australia has a concentrated retail sector, this can not be compared to other countries such as Netherlands, California or Florida which are regions in the United States that comprise of low population growth rate. Vertical integration is a process where the production process is controlled by one company which aims at increasing its capacity in the market. In this case, one particular firm controls its upstream suppliers and some of its downstream buyers. This results to having an impact on the position of the business in the market in terms of costs, strategic issues and the business corporate strategy. The concept of vertical integration is based on various product movements for example through value chain. There are two issues connected to vertical integration. These include cost and control process. Cost issues are brought about by the market transactions among various firms. The major chains in the retail sector are therefore seen as vertically integrated since they tend to control their suppliers and the supply chain management if united by one owner. The benefits of vertical integration include reduced costs such as transport cost therefore the company enjoys the economies of scale. The other benefit is that this integration coordinated supply chain more effectively. More opportunities are provided due to the increased control over firms’ inputs. Firms using vertical integration can easily capture more profits by since they own their upstream suppliers and down stream buyers. Entry barriers into the industry are increased therefore potential competitors and especially those who can assess scarce resources can easily venture into the market. Vertical integration facilitates provisions of high quality goods which suppliers could not provide as a result of his core competencies increase. Strategies for entry of new competitors According to Fitzray and Hulbert (2005) in order for potential investors to be in a position of competing in the retail market, various strategies have to be put in place which will help reduce the entry barriers. One strategy is that government should reduce taxes and other regulations which control the retail market. Most investors are not able to pay for the taxes imposed on opening groceries. The regulations imposed by the government on how to run a retail grocery may also hinder potential investors form entering the market. The other strategy is that the government should eliminate factors that hinder formulation and monitoring of business contracts. Goodstein et al. (2003) shows businesses contracts should be often renewed to enable more businesses to operate and increase market competition. Firms should also be encouraged to form agreement with other firms for example through franchise or joint ventures. This will enable the smaller firms to join with large competing firms thus gaining a core competence. The strategy will also enable the firm benefit from the economies of scale. This strategy can be demonstrated using a payoff matrix which shows possible outcomes of two situations. This matrix also applied concepts of game theory which include setting up a strategy which and then waiting for what other firms will introduce. For example when one firm introduces a strategy of beating competition in the market, other firms also come up with a more stronger strategy that will enable them achieve a competitive position in the market (Hussey 1998). The diagram above represents a normal form game. Player 2 chooses left Player 2 chooses right Player 1 chooses top 4,3 -1,-1 Player 1 chooses bottom 0,0 3,4 In this matrix every player has to observe the other players move before making their move. Payoffs are received according to the actions played. This approach is necessary as it can be used to identify strictly dominated strategies. This form of presentation included both perceptible and conceivable strategies together with their payoffs for every player. Conclusion This study has shown that competition in the Australian market for groceries continue to grow rapidly due to increasing factors that determine prices of food. Some of these factors include supply chain efficiency, information volatility and quality, business factors for example product range and stores format and category factors which include convenience, loyalty and promotional cost. Other competing retailers in the market influence retail prices and it is therefore necessary to reduce entry barriers in order to allow more potential investors into the market. This stirs up competition in the market resulting to formulation of better strategies applying the game theory. The vertical integration as applied in the retail sector delivers the required expectations. However, there is lack of prospect for example in achieving growth in market share. References Armstrong, S & Fisher, N 1994, Benchmarking for increased customer satisfaction, Macmillan, Atlanta, Georgia. Burgelman, R Christensen, C & Wheelwright, S 2004, Strategic management of technology and innovation, McGraw- Hill, New York. Camp, R. 1995, Business process benchmarking. ASQC Quality Press, Milwaukee. Coghlan, D & Brannick, T 2002, Doing action research in your organization, Sage, London, p. 91. Fitzray, P & Hulbert, J 2005, Strategic management, Creating value in turbulent times, John Wiley & Sons, Northumberland. Gamble, J Strickland, A & Thompson Jr. A 2004, Strategy winning in the marketplace, 1st ed., McGraw Hill, New York. Goodstein, L Nolan, T & Pheiffer, J 2003, Applied strategic planning, McGraw- Hill, New York. Grant, R 2002, Contemporary strategic analysis, Concept, technique, and applications, 4th ed. Blackwell, Massachusetts. Harrigan, K 2001, Matching vertical integration strategies to competitive conditions, Management Journal, vol. 7, no. 6, pp. 535- 556, Kagiso Publishers: Pretoria. Hill, C 2003, International business, Competing in the global marketplace, 4th ed. Mcgraw- Hill, New York. Hussey, D. 1998. Strategic management, From theory to implementation, 4th ed. Butterworth- Heinemann, Oxford. Read More