The Grocery Market in Australia - Example

Executive Summary The grocery market in Australia is oligopolistic in nature with a few players like Woolworth and Cole’s group dominating the market and having around 75% share. It shows that the market for groceries is oligopolistic and there is completion among the few players as the players try to imitate others. The report looks into the manner the grocery market in Australia is oligopolistic. It looks into Woolworth which is a super market and deals in grocery markets having a 40% market share. The report looks into the seller concentration ratio which stands at 80% signalling that the market is oligopolistic. It then looks into the competition among firms and the demand curve for the firms. The report then looks into price sensitivity and the interdependence firms have among themselves. Finally the report looks into the barriers that exist in the grocery market. The overall findings suggest that the grocery market in Australia is oligopolistic and it meets all the characteristics of the oligopoly. Table of Contents Introduction 3 Purpose of the report 3 Overview of oligopoly 3 Woolworth Limited 4 Oligopoly in grocery market 4 Competition & product differentiation 5 Firms’ interdependence 5 Substitutes and price sensitivity 7 Barriers to entry & exit 8 Conclusion 9 Recommendations 10 References 11 Introduction Economists have identified different type of market structures like monopoly, monopolistic competition, perfect competition and oligopoly. All the market structures provide a different framework in which business is carried. The report looks into the oligopolistic nature of the grocery market in Australia and the manner in which Woolworth Limited conducts its business by selling products. Purpose of the report To identify whether the grocery market in Australia is oligopolistic or not To find whether the grocery markets in Australia adheres to the characteristics of the oligopoly market To identify whether the grocery markets has collusion, super normal profits and barriers to entry and exit Overview of oligopoly Oligopoly is a market structure where there are few sellers who control the market. The competitors have good control over the market and know the strategies of each other. Each player has a good control over the market and can influence the decision of each other and the market on a whole. The players consider all the players while entering into a strategic agreement. Woolworth Limited Woolworths is in the grocery market and deals in variety of products. The company has also expanded its business by investing into other areas like shops, hotels, consumer durables, and others (Burch & Lawrence 2007, pg 160) When we look at the market capitalization and revenues then Woolworth is the largest. (Freeman, 2003) The company had started in 1990 by entering into the grocery segment and has then grown on to become the largest retailer. (Symons, 2007, pg 212) The company deals in various products some of which are oligopolistic. (Burch & Lawrence 2007, pg 161) The report thereby focuses on the oligopolistic nature of the grocery market in Australia. Oligopoly in grocery market The grocery market in Australia is oligopolistic. Oligopoly requires that a few players dominate the market and has the highest percentage share in revenues. (Council of Australian Food Technology Associations, 2007; Perloff, 2008; McKenzie, 1989) The grocery market in Australia satisfies it. The Australian grocery market is dominated by Woolworths Limited and Coles Group. There are a few other players like Franklin’s and Davids. When we look at the seller concentration ratio which economist says should be around 80% is seen to be matched by the above mentioned four market players. (Carson, 2007) A further breakdown shows that Coles Group makes around 35% of the grocery market and Woolworth controls around 40% making it an oligopolistic market as the seller concentration ratio is around 75%. The other players have relatively low market share to influence the market. Competition & product differentiation The competition level in the grocery market in Australia is stiff as the major players are trying to influence the market. The players look towards differentiation through advertising and promotion. Stiffness in competition among major players forces players to ensure that all steps are taken to gain maximum leverage. The grocery market in Australia dominated by Cole’s group and Woolworth spends huge amounts on marketing and it forms around one percent of their revenues in only advertisement. (Ramaseshan 1990) The manner in which the companies are spending on marketing highlights the competition level the major players have among themselves. The competition level is such high that Cole’s group spent nearly $30 million in advertisements. (Young, 2003) This highlights that the major players even after controlling majority of market takes every step to stay ahead of others and capture maximum market size. Firms’ interdependence The interdependence among the firms is a criterion for the oligopoly market where there are few sellers and the strategies of each player is easily imitated and while making strategies are discussed so that it can result towards benefits for each other. (Perloff, 2008) The grocery market in Australia is seen to match this as players imitate each other. It is seen that Woolworth which started the “rollback program” (Meyers, 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) The concept was the same and was done with the intention to capture a good market size. This shows that the interdependence among firms is high and strategies get copied easily. Another important aspect to note here is that as firms sometimes enter into strategic alliances to charge the customers higher prices for the goods and sometimes compete on the basis of price to gather a good market size but it happens till the point the revenue earned from selling one more good is more than the marginal cost associated with it. (Vives, 2001) This is seen in the oligopoly structure of the grocery market in Australia. The diagram below shows the manner in which total revenue is more than cost for the grocery market. The interdependence of firms is also seen from private branding strategy where both Woolworth and Cole’s group have launched their private labels to ensure a much bigger market. The labels are available only in their stores and provide the firm interdependence. This is seen from the label “Natura” (Myers, 2010) available only in Woolworth. The private labels are available exclusively in the stores and control about 75% of the grocery market. This highlights the firms’ interdependence in the grocery market in Australia. Substitutes and price sensitivity Oligopolistic markets require that goods which are sold should be close substitutes and the difference among them should be little. (Vives, 2001) This is seen in the grocery market in Australia where both Woolworth & Cole’s group sell organic products which are similar to each other. The only difference is the private labels through which the stores market the goods and ensure that they are able to target maximum customers. (Freman, 2003) The grocery market in Australia is price sensitive. Woolworth and Cole’s group both has taken steps to ensure that they ensure that their prices are such where sensitivity is taken care of. The supermarkets have laid emphasis on low prices by having different schemes which attract customers. Woolworth uses “the fresh food people” and Cole’s group uses “something better everyday”. (Myers, 2010) Bothe the giants here try to ensure that customers visit their stores and they provide the lowest price for their goods. There are no supernormal profits which exist as players are looking towards capturing a large chunk of the market. This also gives direction that there is no collusion in the grocery market in Australia as the players are competing by drafting counter strategies to fight against the competitors. The demand curve as a result looks as follows It is seen from the above that the curve is kinked. This signals that the grocery market is oligopolistic and competitors replicate the strategy very fast. This leaves little room for the players to charge more hence no super normal profits exist. Non collusion can also be seen from the fact that both Woolworth & Cole’s group indulges in price skimming techniques so that they are able to gather more market share. This also highlights that super normal profits doesn’t exist in the grocery market in Australia. (Symons, 2007, pg 211) Barriers to entry & exit The grocery market in Australia has various barriers for entry and exit for the players. The barriers includes in the form of economies of scale, capital required is high, product differentiations, branding, distribution and suppliers network, availability of raw materials, and others. (Vives, 2001) The grocery market which is dominated by Woolworth and Cole’s group has ensured that there remains barrier to entry as they have kept prices low. This makes new entrant stay away as Woolworth and Cole’s group already has an established supplier’s network. (Young, 2003) The low profits and huge capital required is keeping new players stay away from the grocery market. Another factor which is acting as a barrier for other players is that Woolworth and Cole’s group has been able to develop a strong network and ensure that they are able to bargain with their suppliers regarding the goods they want and the price that will be offered. (Freeman, 2003) This is difficult for a new entrant to develop. Thus, the grocery market in Australia has a high barrier to entry and exit thereby enabling the grocery market to perform in the oligopolistic market structure. Conclusion The report thus presents the oligopolistic nature of the grocery market in Australia where Woolworth and Cole’s group controls a major market. It also highlights the manner in which the characteristics are met. It is evident that the seller concentration ratio is high, there are barriers to entry and exit, the market exhibits price sensitivity and there is stiff competition as players imitate each other. It also shows that there is collusion and super normal profits aren’t present as players are looking towards price skimming to capture a good chunk on the market. Recommendations The grocery market in Australia is oligopolistic and it is difficult for new entrants to enter it as the older players already have an advantage. Also the oligopolistic nature of the grocery market reveals that the players are looking towards consolidating their market size making it more difficult for the new players. This makes it a serious concern and new players will have to be very active to garner a market else they won’t be able to succeed and the market will continue to be dominated by a few players. 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 Carson V, 2007, “Red spot special: Coles up for sale”, retrieved on November 2, 2010 fromhttp://www.smh.com.au/news/business/red-spot-special-coles-up-for-sale/2007/02/23/1171734017312.html Freeman M, 2003, “The current state of online supermarket usability in Australia”, ACIS 2003 Proceedings, Paper 102, retrieved on November 2 2010, from http://aisel.aisnet.org/acis2003/102 Perloff J, 2008, “Microeconomics Theory & Applications with Calculus”, pg 445, Pearson McKenzie P, 1989, “Asia-Pacific Trading Developments and Relationships”, Asia Pacific Journal of Marketing and Logistics, Volume 1, No 2, pg 5 - 14 Meyers M, 2010, “Grocery shopping patterns in Melbourne, Australia”, Allied Academies International Conference: Proceedings of the Academy of Marketing Studies, Volume 15, Number 1 Ramaseshan B, 1990, “Research Note: Marketing Budgeting Practices of Retailers”, European Journal of Marketing, Volume 24, No 8, Pg 40 – 45 Symons M, 2007, “One continuous picnic: a gastronomic history of Australia”, Melbourne University Publishing Vives X, 2001, “Oligopoly pricing: old ideas and new tools”, MIT Press, Cambridge Young S, 2003, “Killing competition: Restricting Access to Political Communication Channels in Australia”, Journal of Contemporary Analysis, volume 75, No 3, pg 14 Read More