Competition in the Australian Retail Grocery Market - Essay Example

Retail Grocery Market in Australia Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecturer Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 11th September, 2012. Introduction The retailing of grocery in Australia takes place by the use of various retail formats, and there are a small number of supermarkets, international operators and wholesalers in the Australian market. The retail markets in Australia are characterized by a small market, low growth and large distances. This calls for economies of scale for all the nationwide retailers to offer grocery items to their customer in a consistent manner. This essay sets out to research whether the retail grocery in Australia is a perfectly competitive market or not, this section will be followed by an outline of a number of reasons why the market if not perfectly competitive and any possible implications to the consumers. The essay will also explain the concept of workable competition its relevance to the retail grocery market. The essay will also discuss some indicators that can be used to assess if there is workable competition in the market. The last section aim at explaining the meaning of the term vertically integrated, the implications that it may have for the competitors in the industry, a strategy will also be proposed for any new entrant to the market and, a pay off matrix will also be applied in support of the proposed strategy. Competition in Australian retail grocery market Within the replica of competitive market, there exist two principal models that are the imperfect competitive model as well as the perfect competitive model. In reality perfect competitive can be termed as a market where there are a sizeable number of sellers as well as buyers (customers) and both of them have no control or insignificant control of the market in which they operate in and they are also well informed of the price takers and the price. Hubbard and O’Brien also argued that in instances where a perfect market is prevalent there are no obstacles to entry and exit (Hubbard & O’ Brien 2010, p. 109). However in reality there is not market that can be termed as been perfectly competitive because none of the market can be able to meet the principles of perfect competition. Therefore most markets are said to be imperfect competitive and there exists two main types of this market that is the monopoly and oligopoly. In monopoly market, the markets are dominated by a single firm this is mainly attributed to the fact that the products been offered by the firm do not have any substitutes. Therefore the monopoly firm is able to control and at the same time change the pricing of their goods as required and thus they end up gaining greater level of profits as compared to other firms that operated in segments where there exists heightened competition. In an oligopoly market, there exist a number of firms who have control over the prices and the market this they tend to share the profits gained from the sales of the products (Anderson & Nesterov 1995, p. 1285). In this case, there exists a lot of competition between the firms operating in the industry, the companies operating in the industry can cooperate so as to achieve a mutually beneficial payoff or at the same time compete aggressively for a greater share in the market (Hubbard & O’ Brien 2010, p. 112). In relation to the Australian grocery, the industry has two dominant chains, Coles and Woolworth. Coles has a market share of 35% while Woolworth has a market share of 41%, thus the two market giants tend to control approximately 70% of the retail market shares hence they tend to dictate the retail grocery sector in Australia this has eventually led to a rise in grocery prices over the years. Thus the Australian retail grocery market seems to be an oligopoly one. There exist a number of principles that make the Australian retail grocery market not be a perfectly competitive one. A perfect competitive market has a number of characteristics in common such as selling identical products, freedom of entry and exit, clear knowledge of prices and technology and a large number small firms (Anderson & Nesterov 1995, p. 1289). The retail industry in Australia does not have the characteristics required for a market to be considered as been a perfectly competitive one. For example in relation to the presence of various small firms the industry has two principal players who occupy a considerable market share that is 70% while all the other small firms share the remaining percentage. In relation to the characteristics of a perfect competitive markets it is not easy to discern products from certain retailers in the grocery industry this is chiefly based on the notion that the products that are been marketed by the firm are not branded (Marshall 2006, p.90). There are certain implications of the market been an imperfect competition to the consumers. The first implication is related to the price of the products. The setting of prices to be charged on the products may have a positive impact to the organization while at the same time it may be disadvantageous to the customer. Since the companies tend to place high prices on their goods so as to gain more profits. The other implication is based on the fact that this kind of market may limit the choices been made by consumers. Customers are supposed to be offered a variety of alternative to choose from and thus this may have a negative implication in relation to the customers. Another implication that this kind of competition may have on the customer is related to products been offered. Since there exists little competition the principal players in the industry may tend to be dominant and they may not improve their products therefore they end up offering goods and products that are of low quality to customers (Menger 2011, p. 59). This kind of market also offers certain barriers to entry and thus it proves difficult for new firms to enter the market. The customers have a lesser options to choose from and customers may end up been exploited in terms of been offered with low quality products which are charged high prices. A positive implication of this kind of market is based on the fact that the customers are able to make price comparisons between the few players who exist in the market. The companies also sets their prices in such a way that customers can be able to make price comparisons this seems to be a positive point in relation to the customers. This kind of market also offers a stable price for their products and therefore customers are in one way or another assisted in planning and stabilizing their daily expenditures (The economist & Datta 2010, p. 67). Workable Competition Workable competition is termed as a situation that exists in a market and the market tend to have a heightened level of monopolist power but in the aim of protecting consumers from monopolistic abuse there exist sufficient level of competition between the close monopolies in the market for example in the case of grocery retailers in Australia there exist two monopolies that are; Coles and Woolworth and thus in the aim of protecting the consumers of products from exploitation the two have a heightened level of competition. Workable competition may seem relevant in the retail grocery market in Australia since the grocery market has only two principal players that are Coles and Woolworth while the other small retailers have an exceedingly small market share. This kind of competition will in one way or another be of much benefit to the consumers since there exists a lot of competition between the two principal players thus customers will not be exploited since the two players will be forced to moderate their prices so as to maintain their market share or at attract some new customers which will eventually lead to a higher level of sales for the companies which will mean that they will be able to gain higher profits (Mosteanu 2000, p. 12). Workable competition may be relevant in this market in that since a lot of competition and thus the customers will be offered with quality products. Heightened competition between Coles and Woolworth will lead to each of them aiming at offering quality products to customers in the aim of pulling customers towards their premises. With time the customers tend to be advocates for the company. There exist various indicators that can be used to assess whether workable competition exists in the Australia grocery retail market. These indicators include but are not limited to: the high number of companies that are drawn in the delivery of grocery products in Australia and they use various modes of delivery of products to the consumer (Beattie 2010, p. 78). The other indicator is that there is noteworthy countervailing power between the principal players in the retail business this can in a way mitigate the level at which the suppliers can impose unfavorable conditions to the customers. Meaning and implication of vertically integrative retail grocery chains and the proposed strategy and a payoff matrix for the proposed strategy The grocery industry is made up of their principal activities that are; the retailing of grocery, wholesaling of the grocery as well as the supply and production of the grocery products. There exists a lot of competition among the retailers, suppliers and wholesalers and the competence of the pricing in the supply chain has a momentous role in the prices that consumers are likely to be charged for products they purchase from the retailers. The industry structure is also seen as another principal determinant of the competition. The size, number, market share that is occupied by each of the retailers, suppliers and wholesalers, vertical relations connecting the providers at different stages and the extent of the providers of products to venture into a certain market or expand their operation affect the competition in the industry as well as the outcomes to the consumers (Round 2006, p. 13). The leading retail grocery chains in Australia are said to vertically integrative. The term vertically integrative is commonly used to mean that the organization has a high level of control over in almost all or various levels of production as well as the distribution step that are involved in the creation or the production of the service or product that is to be offered to the main consumer. The retail grocery chain is said to be vertically integrated because they have control over almost all the activities involved in the production and creation of the final product to the customer (Round 2006, p. 23). The vertically integrative nature of the chains has a number of implications the first one is based on the fact that chain has a greater level of control over the value chain. In regard to this the retailers aim at developing the manufacturing business, and thus they get a higher level of control over the production stage of the distribution process. In the same way, when the manufacturer undertakes the retailing and distribution activities , the organization have a higher level of control over the way the product is offered and presented and the price to be charged in the market (The Economist 2010, p. 88). Another implication of vertical integration of the chains is related to cost control. Vertical integration offers an organization with the ability to have control on the cost to be incurred in the distribution process. In conventional distribution process, every stage in the product movement involved mark up so that the other reseller can make some profits. The aspect of selling the final consumer of the product eliminates the middle men thus leading to the removal of one or more mark ups in the way. Also based on the fact that there is only a single entity that is taking care of the distribution process, the entity is able to optimize the utilization of resources and there is also inferior transportation costs (Smith 2006, p. 56). Another implication of vertical integration is related to the aspect of competitive advantage, a number of organizations adopt vertical integration so as to increase their advantages over competition and at the same time to block their competitors from gaining the right to use some scarce resources or at times pertinent markets. In regard to this, the retailers may take up the manufacturing companies in the aim of getting access to resources and patents that may be only available in the organizational local area (Fleisher & Bensoussan 2007, p. 136). The manufacturing organization may venture retailing or distribution to have access to consumers on the competitive market before its competitors venture into that market. The other implication is related to differentiation. Through vertical integration the retail chains are able to have access to distribution resources, product inputs, retail and process channels. All these aspect play a crucial role in to the organization in that it offers a number of opportunities to the organization and it also helps the organization in distinguishing itself from the other competitors in the market by marketing their products effectively (Fleisher & Bensoussan 2007, p. 136) The grocery retail chains can adopt a number of strategies in the aim of gaining a competitive advantage in the market. The best strategy that the firm can adopt is the dominant strategy. This strategy seems to work best in all situations in that despite what the other competitors who are operating in the same market will do or undertake, the strategy earners the organization a larger payoff in relation to the other competitors (Stutely 2003, p. 56). The payoff matrix of the adopted strategy is: In regard to the payoff matrix the first number is of Coles while the second one belongs to Woolworths while A and B stand for the strategies that each of them plans to implement. The two companies will tend to choose strategy ”A” this is based on the fact that the strategy offers both competitors the higher payoff of what the other competitor chooses. Conclusion From the above discussion, it is apparent that the retail grocery market in Australia is an oligopoly market. The imperfect competition has a number of implications to customers and they include pricing of the products, limit of choices to choose from and also in regard to the quality of the products. Workable competition has a lot of relevance to the retail grocery market in Australia since it offers some benefits to consumers in that they are not exploited by the sellers. The indicators of workable competition are the countervailing power that exists between the major players in the industry and the high number of organizations that are involved in the supply of the products and the numerous mode of delivery of groceries to the customers. The principal retail grocery stores in Australia are said to be vertically integrated a new entrant in the market needs to adopt a dominant strategy when entering the Australian market. References Anderson, P & Nesterov, Y 1995, ‘Oligopolistic competition and the optimal provisions of products’, Econometroca Vol. 63, pp. 1281-1301. Beattie, A 2010, False Economy: a surprising economic history of the world, Riverhead Hardcover, New York. Fleisher, C & Bensoussan, B 2007, Business and competitive analysis: effective application of new and classic methods, FT press, Upper Saddle River, NJ. Marshall, A 2006, Principles of economics 9th edition Abridged edition, Cosimo Classics, New York. Menger, C 2011, Principles of economics, Terra Libertas Limited, United Kingdom. Mosteanu, T 2000, Competition and prices, Economica publishing house, Bucharest. O’Brien, A & Hubbard, R 2009, Microeconomics, Prentice hall, Upper Saddle River, NJ. Round, D 2006, ‘The power of two: squaring off with Australia’s supermarket chains,’ Australian Journal of Agricultural and Resource Economics vol. 50, no. 1, pp. 51-64. Smith, R 2006, ‘The Australian grocery industry: a competition perspective,’ Australian Journal of Agricultural and Resource Economics vol. 50, no.1, pp. 33-50. Stutely, R 2003, Numbers Guide: the Essentials of business numeracy, Bloomberg press, United States. The economist & Datta, S 2010, Economics: making sense of the modern economy, Wiley, United States. The Economist 2010, Guide to Economic Indicators: Making Sense of Economics (The Economist), Wiley, United States. Read More