Competition in the Australian Market for Groceries - Essay Example

Competition in the Australian Market for Groceries. By Course Code and Name Professor’s Name University Name City, State Date of Submission Competition in the Australian Market for Groceries. Australian grocery market is predominantly a two businesses entity. Coles and Woolworths being the only big player in the grocery market, command an influential role in determining the demand and supply in the market. Their influence on the market deters new competitors from joining the competition due to the huge bargaining power they possess. The two is indicated that they make up for about 80% of the total market. The dominance commanded by the two make it very difficult for new business entities to survive. Their dominance is further shown by the fact that forty out of every hundred dollars used end up in their cash register. From the business point of view the dominance enjoyed by the two is not healthy. It kills all the others small scale businesses thus leaving the consumers at their mercy (Correy & Watkinson, 1999). For any business to be referred to be competitive, there are some obligations to be met. Competitive business environment is the one that has no market dominance and other businesses can join and leave at will. The current environment is only healthy for duopoly kind of business. The current situation in Australia can’t be said to be competitive although there are no barriers that deter other entities from joining. The reasoning behind this argument is that the two dominant entities can twist any situation to their advantage. The two also have a huge influence on price which in the long run may force other businesses to close down (Datamonitor 2009). However, in the short term the price control is healthy for the consumers as they gets their money’s worth. The fact that Coles and Woolworths have more retail shops all over the country than any other and also have better grocery availability goes against the main features of a competitive market. One of the major features indicates that for any market to be referred to as competitive is that the prices should be uniform. The two do not observe this as a lot of new businesses are made to adopt the market price set or risk losing on the same. It is clear that the two do not accept the market price but rather have their mechanisms that set their prices. The fact that they also offer other services like banking makes it possible for them to command customers in numbers (Datamonitor 2009). It can also be argued that the market situation in Australia is not perfectly competitive as Coles and Woolworths have more customers than the rest. It is a feature of a perfect competitive market to have many buyers and sellers. The ability by the two to set their own prices works in their favour. This helps them command a lot of customers leaving their competitors at extremely harsh condition. Again the ability to buy in bulk reduces the cost thus lowering the prices. Although they are no barriers in place, the two have introduced services that work as barriers. For instance, Woolworths have introduced their master card. The two have also gone on to affiliate them with other businesses (Correy & Watkinson, 1999). This helps their customers to enjoy the extra services at a reduced rate. Such a move would cause the demand of the products to go up and in turn cause supply to reduce thus affecting the prices. If the market was perfectly this situation should affect the prices whatsoever. It was suggested that reducing this barriers the potential competitiveness landscape may improve in the country. Market can be compared equally in a perfect competitive market. The quality of beans for instance may be different thus going contrary to the features of the market. When all is said and dusted, there are several implications for the customer. Due to this kind of market structure, the consumers would enjoy short term benefits such as lower prices and better value for money. However, with this continue dominance, the Australian market may experience the effects of duopoly market structure. Market prices being controlled by these two firms, it gives them the opportunity to kill other businesses. In the long run consumers might be made to accept the market prices. This continued rise in number of customers may cause unnecessary demand for goods thus in return, the supply may go down causing an increase in prices. On the other hand it is not only negative implication that the current market structure have to the consumers. This market structure provides consumers with variety. This is evident in the fact that consumers visited more than one store on a monthly basis. Also they is variety in the products on offers because the firms involved do not sell homogenous products. The bargaining power at the hands of Coles and Woolworths makes it possible to negotiate with the primary producers (Correy & Watkinson, 1999). This in return pushes smaller businesses out of market. These kinds of implication have its shortcomings in the long run. Again they may use their dominance in lowering the procurement prices which will reduce costs incurred by producers. This will again force the smaller businesses to fork more to get the same products thus scaring any potential buyers away. The retail purchasing power of the big retailers manipulates members of the supply chain. This goes a long way in posing threats of the fresh food. Workable competition is an impression which originates from the observation that since perfect competition is non existence; speculations based on it do not provide dependable guides for competition policy. It can also be defined as market structure that results in efficient production without necessarily adhering to the strict rules of perfect competition. Workable competition concept is usually applied by the government in guiding regulatory policies. Workable competition is highly relevant in this situation in that it helps in stabilising the prices of the products on sale. Though the market is predominantly Coles and Woolworths owned, there is room for any other business to come in and stick its claim (Correy & Watkinson, 1999). This goes a long way in helping stabilise the prices as even the two biggest can’t exploit consumers. It also helps in offering variety to consumers. The competition is relevant as businesses come with new ideas and services that help the consumer get his/her money’s value. It is relevant as it offers customers with a range of alternatives in products and places of purchase. It has led to innovations due to consumers’ preference. In Australia, there are indicators that workable competition is in existence. For instance, the fact that both Coles and Woolworths constantly keep monitoring their competitors’ prices can be seen to be simply an example. They keep adjusting prices so as to keep hold of their customers. It is also evident through the fact that where Coles and Woolworths exist there are small grocery stalls that surround them. The workable environment is further shown by a survey conducted ACCC in the year 2008. It shows that customers are given the choice while doing their grocery shopping. It categorically stated that consumers are not under the obligation of shopping from the big malls. They have a choice to shop from the smaller stores (Datamonitor 2009). The survey has further evidence showing that there is workable competition. It shows that eighty five percent of consumers visited more than one store on a monthly basis. Some customers prefer shopping from the small stores as the quality of the products is high. Products from the huge shopping malls can be stored for long thus losing some of their quality over time. Also further supporting the point that there is a workable competition in Australia is that ALDI in 2001 entered the market successfully. It identified a gap and filled it successful. Presence of other small shopping stores shows that even though the big two command a big market margin, it is possible for others to join and be competitive (Correy & Watkinson, 1999). Vertically integrated is a situation where a business or a company operates at more than one level of distribution channel. The origin of a distribution channel starts with the manufacturer of the product. The product from the manufacturer is sold to the wholesaler. In return wholesalers sell the products to the retailers and all the way to the consumer. There are two kinds of vertical integration. One is forward vertical integration. In this kind of integration, the manufacturer sells their products directly to the end consumer. The other one is backward vertical integration. This is when wholesalers and retailers manufacture the product. Some of the implications brought forth by this vertical competition are that it pushes small business. For instance, Coles and Woolworths dominance is pushing small businesses out of market (Correy & Watkinson, 1999). The big businesses have dominated the distribution channels. They command the biggest portion of the produced thus creating an artificial shortage for the small business. The small stores have to pay exorbitant prices to acquire the same products. Most of the farmers and manufacturers are more willing to do business with the big and reputable companies. The big companies control prices thus making it difficult for small businesses to cope with the competition. The big companies can decide to lower the prices if their competitors are attracting a lot attention. Due to the fact that they command the biggest share of customers the response after lowering the prices is profitable. If the chain of distribution is dominated by a few companies, it may lead to a shortage of raw materials. This may force the small businesses losing their customers to the bigger rivals. It may also cause an increase in demand of the product. This will force the prices to go up as the supply will at an all time low (Datamonitor 2009). The companies injunction with the suppliers may create an artificial shortage. They may decide to hold on to the products until the prices are favourable. The demand will increase while the supply will decrease. This will make the small businesses not to afford stocking their stores with all the products in demand. This will make the customers to look for better choices that will offer variety at affordable prices. The vertical competition may also act as a barrier for the newly established businesses (Correy & Watkinson 1999). Few manufacturers will be open to doing business with a no name brand kind of business. The failure to have a reliable source of supply, will act as a hindrance towards the growth of any company. For any company to grow the availability of raw materials is a necessity. Small businesses will struggle against the more established one as the supply will first be availed to them. Lack of sufficient supply will lead to less sales and finally to closure of the business. The bargaining power of the big companies may lead to decrease in procurement prices which will help in reducing the cost of the primary producer. This will go a long way in convincing the producer to supply the company. The quality of the service provided may not be the best. The quality of the products may deteriorate over time as they might be stored for long time. Some of the products may be hard to as their might be seasonal. Some companies may buy in bulk and store them for future purposes. For new businesses willing to enter into the market, adequate research needs to be done. They should have perfect knowledge on the market that they want to cater for (Datamonitor 2009). One should have the ability to know what level of demographics is present in that region to understand the behaviour of potential customers. Apart from developing a sound marketing plan the new investors would need to consider economic perspective to understand the market. For instance, for new entrants they might see a niche opportunity in the need to have fresh fruit in a market dominated by Woolworths. The new entrants should avoid direct competition with the more established firms (Correy & Watkinson, 1999). This should be avoided as the rivals may flex they financial muscle and price them out. They should look for a good location that is within vicinity and that is easier to access. They may decide to advertise their goods as quality. They should also put in efforts to show the consumers that they are no substitute for quality. They should also decide to offer discounts. For instance, they may for every fifty dollars spent, they may give a discount of ten percent. The payoff matrix illustrates strategy A: here both businesses give discounts while strategy B: shows that both businesses do nothing. In the first week of sales most customers may be enticed by the discount offered. Some of the customers may choose to continue shopping at their former place while others may decide to try something new. Payoff matrix New Entrant Adopts Strategy A: New Entrants Adopts Advertises 10% off purchase of $50 strategy B:i.e Does or more. Nothing New Entrant Adopts Strategy A: 100,0 0,0 Advertises 10% off purchase of $50 or more. New Entrants Adopts strategy B:i.e Does 0,0 100,100 nothing References List Datamonitor (Firm). (2009). Australian retail grocery market case study challenging the dominance of Coles and Woolworths. Correy, G., & Watkinson, A. (1999). The Australian grocery industry in 2005: Read More