Supermarkets and Agri-Food Supply Chains -Transformations in the Production and Consumption of Foods - Case Study Example

1. The grocery market in Australia doesn’t appear to be perfectly competitive one instead the market appears an oligopolistic form of market structure. The prime requirement for a perfectly competitive market is that all the players in the market should have equal market share and should be relatively low. Instead it is seen that the Australian grocery market is mainly controlled by Coles and Woolworths accounted for about 70% of packaged grocery sales and 50% of fresh food product sales in Australia. The fact that the other players in the market have very little share and the major share is being held by Coles & Woolworths it results in making the market to move away from perfect competitive market. Due to large market share being held by two major players the competition level is high and the bigger players look towards dominating the market and dictate the price that has to be charged. This results in the market moving away from the requirements of being a price taker to one which is more of a price giver. The qualities demonstrated don’t match the criteria that are required for a competitive market and results in the domination of a few players in the market. Further, the strategy taken by one firm is replicated by the other which results in interdependence between firms. This can be seen by the fact that Woolworth which started the “rollback program” (Myers, 2010) where customers were given some products at prices lower than they are usually offered which was copier by the Cole’s group by starting “price reward program” (Myers, 2010). This makes the firm follow each other and look towards acting in a manner which will ensure that the strategy of the firm is dependent on other. This results in increasing interdependence and is one of the characteristics which an oligopolistic market demonstrates making the grocery market to be far away from those of a perfectly competitive one. Another important characteristic of a perfectly competitive market structure is the freedom of entry and exit. This situation is not quite prevalent in the Australian grocery market because of the fact that the major control lies in the hands of a few players. This has thereby increased the cost of entering and leaving the market due to the high infrastructure and other cost which is associated with the entire project. This thereby makes it difficult for the players to entre the market (Burch & Lawrence, 2007). The availability of a few players also results in the firms being able to earn abnormal profits i.e. more profits than the normal profits. This is primarily due to the fact that the few players decide the price that has to be charged in the market and the price is more than the competitive price. Reduced competition provides the required opportunity through which the different players in the market are able to earn abnormal profits. This goes against the characteristics of the perfectly competitive market and shows that the grocery market is not perfectly competitive. The market structure will also have an impact on the consumers as not having a perfectly competitive market structure would mean that the customers will have to pay more for the goods and services that is purchased. The availability of a few players also results in the firms being able to earn abnormal profits i.e. more profits than the normal profits make the customer pay more. This is shown in the diagram below (Carman and Sexton. 2005) The above diagram clearly highlights that the business charges more money to its customers than it should have been the condition in a perfectly competitive market. This makes the customer loose as the perceived value decreases as the utility value reduces because of the fact that the customers have to pay more. This has been aided by the fact that most of the players look towards working in their private labels which has further increased the cost for the customers and they have to pay more for the products and services. Another important aspect that can be considered here is that the grocery market depicts oligopolistic characteristics which have thereby resulted in the exploitation of the customers. This makes the purchasing value of the product to diminish as a result of which the customers have to look. Thus, the market doesn’t demonstrate characteristics of a perfectly competitive market and instead look towards highlighting the manner in which the oligopolistic form of market structure dominates the market. This has made the customer loose and has thereby impacted the manner in which a customer takes decision and will have an impact on the purchasing habit of the customers. 2. The concept of workable competition can be said to be one where there is not perfect competition but a market structure is present which will ensure that the production process is efficient. This concept looks towards more of an oligopolistic market where the government looks towards interfering to a certain limit so that the society is not exploited and at the same time condition prevails through which production is done in the most efficient manner. This process thereby looks towards not following the strict principles of perfect competition but looks towards being very near to that (Perloff, 2008). This thereby ensures that the market is able to perform in a competitive market structure and the society is able to benefit from it. The concept is relevant to the Australian grocery market as the market characteristics reflect that the market is not perfectly competitive but very near to it. Further, the market has ensured that the production process demonstrates efficiency and the entire process helps to improve efficiency through which the process of building resources can be magnified. The factor which shows that workable competition exists are from the fact that government intervenes to keep a check on prices so that the basic necessities which will help an individual to sustain life are provided. This will ensure that the market demonstrates characteristics where there is efficiency in the production process and the customers in the market are not exploited (Council of Australian Food Technology Associations, 2007). In addition to it the market also demonstrates traits where the different players look towards ascertaining the manner in which the prices will be charged. This will ensure that an effective mechanism through which check in prices is possible is generated. This will help towards the generation of an environment which is competitive and will ensure that efficiency is produced. Further, the different players look towards achieving economies of scale and scope to cut down cost which clearly is an indicator that the market looks towards maintaining efficient production process and is aimed at developing the entire system through which the society is able to benefit (Perloff, 2008). Thus, workable competition as a concept is applicable to the Australian grocery market and looks towards ensuring efficiency so that efficiency is achieved in the production process. This will ensure that the market remains near to perfectly competitive market but still demonstrating different characteristics which will differentiate it from the others. 3. The retail chain like Woolworths and Coles in Australia are vertically integrated as they look towards performing a lot of different function by itself. The companies are vertically integrated because they have developed the supply chain in such a manner that most of it has a common owner. For example, Woolworths has developed their own brand Nature and looks towards ensuring that they build and develop the products themselves under the same brand umbrella. This has enabled them to develop and work under the concept of vertical integration by ensuring that most of the activities which will have relevance on the performance are carried out by the company itself. The retail players have looked towards both backward integration and forward integration. In the backward integration aspect the retail players have look towards ensuring that they build and develop the products themselves under the same brand umbrella. This has enabled them to develop and work under the concept of vertical integration by ensuring that most of the activities which will have relevance on the performance are carried out by the company itself. In case of forward integration the retail players have look towards strengthening their supply chain by developing relationship with other players and opening their own stores as chain. This is quite prevalent in case of Woolworth and Coles which thereby highlights that the company have looked towards using the concept of vertical integration and have developed their entire process based on it (Cotterill, 2006). The manner in which vertical integration has intensified the degree of control has made it difficult for a new player to enter the market. The fact that most of the activities are controlled by the organization themselves it has resulted in increased competition and requires that organization develop the pay off matrix and based on the strategy and option that the other player indulges in develop their strategy for entering the market (Richards and Patterson, 2003). The pay off matrix has thereby been drawn for Coles and Woolworths 　 Coles Produce Don’t produce Woolworths Produce -5 for each 100 for Coles; 0 for Woolwoths Don’t produce 0 for Coles; 100 for Woolwoths 0 for each The above chart clearly highlights that the best strategy would be when both the players are able to gain. This will ensure that the other player doesn’t look towards a price war or adopting a strategy which will result for a loss for the players and ensure that other gains. Based on the manner in which the payoff matrix has been demonstrated it is important that the other players which enter the market looks towards determining the strategy of each player and by drawing the manner in which the payoff matrix will benefit should decide the future course of action (Perloff, 2008). This will reduce the chances of loosing and will ensure that the entire process help to multiply effectiveness and will thereby ensure that maximum gains are available for the player. This will also create a situation where all the players gain and no one looses which will thereby ensure that the level of competition is controlled and will thereby ensure that the overall process gains effectiveness. This will thereby ensure that the process of entering into the market will be able to improve efficiency and will thereby ensure that the organization entering the market is able to benefit. Thus, the payoff matrix will help to understand the strategy through which the players have to enter the market so that they don’t loose. This will require that the overall strategy which is developed looks towards ensuring that the process looks towards gaining effectiveness and will help to ensure that the retail players are able to gain from vertical integration. References Burch, D. & Lawrence, G. 2007. Supermarkets and agri-food supply chains: transformations in the production and consumption of foods. Edward Elgar Publishing Council of Australian Food Technology Associations, 2007, Food Australia. official journal of CAFTA and AIFST, Volume 59, Council of Australian Food Technology Associations Carman, H. F. and R. J. Sexton. 2005. Supermarket Fluid Milk Pricing Practices in the Western United States. Agribusiness 21 (4), 509-530 Cotterill, R.W. 2006. Antitrust Analysis of Supermarkets: Global Concerns Playing Out in Local Markets. Australian Journal of Agricultural and Resource Economics 50 (1), 17-32 Meyers, M. 2010. Grocery shopping patterns in Melbourne, Australia”, Allied Academies International Conference: Proceedings of the Academy of Marketing Studies, 15 (1) Perloff, J. 2008. Microeconomics Theory & Applications with Calculus. pg 445, Pearson Peltzman, S. 2000. Prices Rise Faster than They Fall. Journal of Political Economy 108 (3), 466-502 Richards, T. and P. Patterson. 2003. Competition in Fresh Produce Markets: An Empirical Analysis of Channel Performance. USDA, ERS Read More