Competition in the Australian Market for Groceries - Assignment Example

Competition in the Australian Market for Groceries Student’s Name: Course Code: Tutor’s Name: Date of Submission: Question 1 Is the retail grocery market in Australia perfectly competitive? To establish if Australian retail grocery market is a perfectly competitive one, it is imperative that we examine two scenarios. The first scenario would be to examine the concept of perfect competition and then secondly assess the Australian retail grocery market. From here, the paper draws comparison to establish if or if not the Australian retail grocery market is perfectly competitive. Klein (2007, p.2) notes that the perfect market condition is demarcated by a scenario where there are numerous buyers and sellers and that their decisions do not impact on the market price. This therefore implies that businesses that operate under perfect competition are price takers and not price makers. Jain & Khanna (2010, p.3) corroborate the above view by noting that in perfect competition, there are lots of buyers and sellers of homogenous goods. In this regard, price of the commodity traded in the market is not at the disposal of sellers to determine, but it is within the discretion of the larger industry. Therefore, under perfect competitive market, “at the price so determined, all the firms can sell any number of units of the commodity.” The other hallmark characteristic under perfect competition is that, “one price of the commodity tends to prevail in the market’”. Therefore, this is why firms operating in this context are said to be price takers and not price makers. To indulge on this deeply, Jain & Khanna (2010, p.3 & 4) observe that the following characteristics feature prominently. The first is that there a several buyers and sellers, but if compared to the larger market they are small in size and thus sellers can’t influence prices by changing quantity and on the other hand, buyers can’t change price by changing demand. Others include the fact that products traded are homogenous in nature; customers have perfect knowledge and hence are aware of prices; barrier for entry is low and thus there is free entry and exit of firms; free from check since buyers of sellers can’t collude to fix prices; perfect mobility; lack of transport cost; lack of selling cost and existence of the same price. Grocery retailing sector in Australia is highly dominated by two players. These are Coles and Woolworths (Australian Competition & Consumer Commission, 2009; Australian Competition & Consumer Commission, 2008, p.9; Stegert & Kim, 2009, p.2; Gans & King, 2004, p.312). Stegert & Kim (2009, p.2) notes that Coles and Woolworths controls 80% of food retailing sector in Australia. On the other hand, Australian Competition & Consumer Commission (2009) indicate that Coles and Woolworths each control 30% of stores nationally. For instance, Coles has over 700 supermarkets dealing with groceries while Woolworths have over 780. Jacenko & Gunasekera (2005, p.2 citing Australian Competition and Consumer Commission, 1999) while corroborating the same information notes that the market share of Woolworths, Coles and Franlins has broadened from 45% since 1975 to 80% in 1998. Moreover, National Association of Retail Grocers of Australia (2002) cited in the same literature notes that Woolworths and Coles has a combined 76% market share of grocery. Therefore, this qualifies Australia as one of those with most concentrated retail food sector in the developed nations. Thus, the food industry in Australia can be termed as duopoly/ oligopoly where barrier to entry is higher (Jacenko & Gunasekera, 2005, p.3; Gans & King, 2004, p.312). Duopoly/ oligopoly can be said to be a type of market form where two or more small groups of sellers control the market in terms of price and supply control (Gans & King, 2004). It is observed that this domination has allowed the two to control market prices in Australia. For instance, Australian Competition & Consumer Commission (2009) indicates that the inflation rate of food prices in Australia has been rising at a higher rate that the general inflation rate in the country. They note that by June 30 2009, inflation rate of food price had hit 4.7% while the general inflation was 1.5%. Stegert & Kim (2009, p.28) equally observes that in the last decade the nominal food prices in Australia have increased more rapidly than farm prices. From the above, then it is open that the grocery sector is not perfectly competitive. The rationale behind this is based on the fact that there are few players with the sector being majorly dominated by Coles and Woolworths that accounts for 80% of market share. Moreover, the market is less competitive because barrier to new entrants is higher. Likely implications of this for consumers The next question then is what the likely implication of this on consumers? O’Connor (2004, p.118) observes that under perfect market condition, firms have no market power to control the prices and hence they are forced to adhere to the market prices for the identical prices they produce. Moreover, he notes that this is the exact opposite where in imperfect condition which is monopoly. Under duopoly/oligopoly where we have one or few sellers dealing with a product and controlling it, they are able to fix the retail prices as they wish. This is the exact situation that Australia has been experiencing as a result of few players and domination by Coles and Woolworths in grocery segment, hence it can be stated that Australia grocery market is under duopoly/oligopoly state. As noted earlier, by June 30 2009, the inflation rate of food price had hit 4.7% while the general inflation of Australia was 1.5%. Question 2 Workable competition There has been realisation that the normative expectations of economic theories at time might not reflect the practical situation on the ground as result of the complex economic situations (Dabbah, 2004, p.5). In this regard, there is need to make competition working thus giving rise to the concept of workable competition. In this regard, there is the paradigm shift so as to make competition realistic as result of several circumstances and hence this concept falls short of perfect competition expectations which are over vigorous (Dabbah, 2010, p.25; Hildebrand, 2009, p.115). According to Brunt (2003, p.58), workable/fair competition or effective competition is conceptualised as “a situation in which there is sufficient market rivalry to compel firms to produce with internal efficiency, to price in accordance with costs, to meet the consumers demand for variety and to strive for product & process improvement.” Subsequently, in workable competition, firms are cajoled to be efficient and progressive and secondly, this efficiency and progressiveness is achieved through impersonal market pressure. Relevance of workable competition to this market The next question is why it might be relevant to this market (Australian retail grocery market). This concern is best answered by the rationale offered by (Hildebrand, 2009, p.115) where she notes that workable competition is a bridged version that balances the extremes of pure oligopoly and the possible negative effects of low prices. This argument is anchored on the fact that perfect competition is not attainable in various sectors of industry and workable competition aims at developing suitable environment forms of competition. Based on this short analogy, this concept might be relevant to Australian retail grocery market because it will offer a harmonised version between the extremes of oligopoly that the sector is currently experiencing while equally avoiding scenario where there are low prices that is not healthy for the sector. Thus, it will lead to creation of forms of competition that is desirable. Indicators in assessing workable competition Barthwal (2004, p.88) while reviewing various literatures opines that an industry can be considered to be workably competitive when there are significantly several sellers who are dealing with dealing with closely related products, these firms do not engage in underhand tactics so as to collude or coerce, the long-run average cost curve for a new firm is not materially higher, several buyers, profit motives and free entry/ reduced barrier of entry for new competitors. Thus, these parameters outlaid earlier can be used to justify if workable competition exists in the retail grocery market. Question 3 Vertical integration Major retail grocery chains in Australia are vertically integrated. Wholesalers who re-package, transport, market and distribute products are critical in supplying retailers who have the last contact with consumers. According to Australian Competition & Consumer Commission (2008, p.9), most supermarkets dealing with groceries have significant holding of grocery retailing. Moreover, in certain scenarios, the wholesaling activity is bypassed and goods delivered directly to retailers. It is a common nowadays, to see firms engaging in more than one activity along the distribution chain within the same industry. This concept has attracted a huge debate between the opponents of vertical integration seeing it as a breach to antitrust laws. On the other hand, economists see this approach as means of enhancing efficiency of a firm (Wessels, 2006, p.470). Wessels (2006, p.469) notes that vertical integration occurs when a firm combines a downstream or upstream activity in its operation. For instance, if farmer who is a producer decides to engage in retail selling without engaging wholesalers then that would be downstream integration. Implications for any competitors in the industry The implication of vertical integration to possible competitors is higher barrier of entry to the market. Since these few firms control the whole process in the chain of distribution, the new entrants who find it difficult to enter the new market unless there financial might can match those of the existing ones. Jain & Khanna (2010, p.3 & 4) indicates that under duopoly/ oligopoly, the entry barriers are higher for new competitors because the existing firms are able to lock in customers by locking out competitors. For existing competitors who are not vertically integrated, they are locked out of the market because the switching cost is high and thus, customers would not wish to move out of the existing system. The rationale behind this observation is pegged on the fact that vertical integration reduces transaction and agency costs which can then be transferred to customers (Wessels, 2006, p.470). Entry strategy for a new competitor Entry decision Before outlining the entry strategies, it is prudent to determine if it is worth entering the said market. This segment employs the payoff matrix concept to establish if it is worth by comparing two markets then it provides a road map of countering competition. A case example is say when the new entrant has an opportunity in venturing in grocery industry or say textile industry. However, due to the company’s limited capacity and capital constraints, their prospect is restricted to only one market. The managers feel that either grocery or textile would present the best market opportunity. With regard to rational decision making approach, whichever of these two markets destinations the managers choose the sales for their products will turn to be either low or high. In textile, the chance that the new entrant will experience high sales is 80 per cent while the chance of low sales is 20 per cent. In grocery, the chance of experiencing high sales is 60 per cent and the chance of experiencing low sales is 40 per cent. The anticipated payoffs for the situations in textile are predicted to be $20 million for high sales and $3 million for low sales. In grocery, the associated payoffs are predicted to be $25 million for high sales and $6 million for low sales. Additionally, the expected values stand at $16.6 million for textiles and $17.4 million for grocery. Investing in groceries proves to be a better investment than investing in textiles for the new entrant. This is because investing in groceries will generate a higher expected value at $17.4 million as compared to the expected value in textiles at $16.6 million. Decision 1 Alternatives Events and Probabilities Anticipated Payoffs Expected values Decision 2 Alternatives Invest in textiles High Sales in textiles (0.8) $20,000,000 (20,000,000*0.8) + (3,000,000*0.2) = $16,600,000 Low Sales in textiles (0.2) $3,000,000 Invest in grocery Low sales in grocery (0.4) $6,000,000 (6,000,000*0.4) + (25,000,000*0.6) = $17,400,000 Invest in groceries High Sales in grocery (0.6) $25,000,000 Strategies Since this industry is dominated by two major players who are highly integrated vertically, the entry barrier is high. Strasser (2011, p.17) opines that competitive edge comes from differentiation and cost advantage. To curve a niche for new entrant calls for effective utilisation of marketing mix/product, price, promotion and place concept. For product, the focus of the new firm will be on differentiation. For price, the focus would be on the fourth strategic position on Bowman’s strategy clock. The fourth strategic position is the differentiation strategy position. Business organizations employ this strategy when they need to offer highly differentiated products and services. This strategy enables businesses to acquire the trust of the customers while promising high value products at very competitive and unbeatable lower prices, which other industry players find difficult to compete (Rapp, & Nilson, 2005, p.653). For place/ distribution, the strategy of the new firm would be demand driven instead of supply driven that has been pushed for by Coles and Woolworths. In this regard branding and differentiation would be integral. Branding in this case is the creation of a special name and image of a product in the mind of a consumer through methods like advertising or campaigns (Rapp, & Nilson, 2005). References Australian Competition & Consumer Commission (2008). ACCC inquiry into the competitiveness of retail prices for standard groceries. Available at: http://www.accc.gov.au/system/files/Issues%20paper%2011%20Feb%2008.pdf. Australian Competition & Consumer Commission (2009). ACCC focuses on lasting change in the supermarket sector. Available at: http://www.accc.gov.au/media-release/accc- focuses-on-lasting-change-in-the-supermarket-sector. Barthwal, R. R. (2004). Industrial economics: an introductory text book. New Delhi: New Age International Publishers. Brunt, M. (2003). Economic essays on Australian and New Zealand competition law. The Hague: Kluwer Law International. Dabbah, M. M. (2004). EC and UK competition law: commentary, cases and materials. Cambridge: Cambridge University Press. Dabbah, M. M. (2010). International and comparative competition law. Cambridge: Cambridge University Press. Gans, J. S., & King, S. P. (2004). Supermarkets and shopper dockets: The Australian experience. Australian Economic Review, 37(3), 311-316. Hildebrand, D. (2009). The role of economic analysis in the EC competition rules. The Hague: Kluwer Law International. Jacenko, A., & Gunasekera, D. (2005). Australia's retail food sector. In ABARE Conference Paper (Vol. 5). Jain, T. R. & Khanna, O. P. (2010). Business economics. New Delhi: V. K. Publications. Klein, A. (2007). Comparison of the models of perfect competition and monopoly under special consideration of innovation. Bradford: University of Bradford. O’ Connor, D. E. (2004).The basics of economics. West Port, CT: Greenwood Press. Rapp, B. & Nilson, F. (2005). Understanding Competitive Advantage. New York: Harvard Business Press. Stegert, K. W. & Kim, D. H. (2009). Structural changes in food retailing: six countries case studies. Food System Research Group Publication. Available at: http://www.aae.wisc.edu/fsrg/publications/Monographs/!food_retailing2009.pdf. Wessels, W. (2006). Economics. Barron’s Educational series. Read More