Determinants And Policy Implications Of Australian Supermarket Industry

Findings

Discuss about the Determinants and Policy Implications.

A supermarket is a huge form of self-served shop providing diverse varieties of household commodities including food, medicines, clothes etc. The difficulty of certain factors across the food industry and its magnitude of competition lead to the insight that the link between farm and retail prices is meaningless. So between the local farming retailers these supermarket giants must co-exist to create greater diversity and allow a fair amount of competition. The Australian supermarket industry is essentially dominated by certain entities like Coles, Woolworths and ALDI with around 1000 supermarkets and other malls and retail outlets.

Over few decades, though the development of the Australian agricultural sector is largely led by the supermarket industry, at the same time, one must always keep in mind that there has to exist some level of protection which would allow the operation of small agricultural businesses unaffected. This will inject competition in the agriculture market. They are diverse entities. Woolworths owns a conglomerate of retail businesses across general discount retail, groceries, electronics, hardware, liquor and hospitality. Coles also operates in the same businesses and extends in insurance products, industrial safety, coal mining, chemical and fertilizer operations.

There has been substantial contribution of Coles and Woolworths on the Australian economy via huge employment and other opportunities that facilitate local farmers by providing broader access to end-customers. Australian customers have also gained substantial benefits from the growth of Coles and Woolworths because bigger range of products is accessible to them at affordable prices now. This is mainly due to large size of their operations that helps them to negotiate with manufacturers a substantial amount of production at low cost. In spite of all these advantages it is observed that the rising operation of these entities in the retail sector has resulted in some drastic negative externalities.

There exist immense competition between Coles and Woolworths has bipolar effects. It lowers the prices charged on consumers and promotes innovation of their product base. On the other hand, forces the suppliers to find efficient techniques of production. But it is observed that the highest-growing products in Australian grocery sector are cigarettes, pharmaceutical commodities, nicotine and certain stimulants like caffeine (IRI-Aztec research report 2014). This reflects the fact why Australians are having growing obesity and declining health due to bad non-nutritious diet.

Market power means a disproportionate effect on the terms of trade. As the market share of retailers increases, their participation becomes gradually important in market supply. This comprises of expansion in manufacture, distribution etc. Both Coles’ and Woolworths’ are expanding their duopoly throughout the country. This is pressurizing smaller businesses in rural areas as they are not capable to compete with these giants. Hence there is a loss of income and employment of the family-owned businesses. In order to avoid competition, both these entities are practicing Bargain-price marketing by decreasing the prices of commodities substantially lower than the ongoing market rate. This increases their sales enormously at the expense of the livelihood of numerous small farmers. This is mainly because the favorable effects that farmers experience from larger market exposure, may not be enough to generate their expenses and re-investment in their businesses. In the long run, if the cost of advertisements of these entities increases then it may threaten complete non existence of small farming class in the agricultural sector.

Recommendations

The Australian agri-businesses are already facing the problems of high debt levels and climate change. In addition to it, the strategies of Coles and Woolworths on the food market is imposing drastic effects on small farmers, as they realize enormous reduction in margin of profit. Lowering cost and typical manufacture demands from Coles and Woolworths, force farmers to decrease their prices. In order to survive in this market, the farmers will install economies of scale to decrease cost of production. This gives rise to centralization of food production which in turn diminishes bio-diversity among cultivated crops. This further leads to loss of food quality, water stresses, diseases etc. This makes the food supply highly prone to environmental shocks.

Distributional network of supermarkets also imposes risks on the economy. Concentration of stock in certain warehouses is prone to security risks. It may also result in lack of fresh and nutritious food supply in the rural areas. All these things create an unstable food supply with increased vulnerable to price and supply shocks. Both Coles and Woolworths are using celebrity chefs to broadcast their slogan of “fresh and local food” to consumers which in turn increases their costs. But this cost burden is passed mostly to the cultivators thus decreasing their farm gate profits.

The significant importance of Coles and Woolworths in consumer accessibility is forcing the domestic suppliers to produce some ‘ideal’ commodity which matches their specifications and standards. This pressurizes them to use capital-intensive production technology. When these commodities fail to meet the particulars stated by Coles and Woolworths, it leads to substantial amount of food wastage due to its perishable nature. Predominant continuation of this process may drastically affect the economies food security in the future (Food Waste in Australia – Future Directions International, 2012).

Coles and Woolworths are increasing their range of ‘Home-brand’ items (‘RSPCA-approved’ chicken and eggs products), produced joint venture with certain manufacturers. Huge amount of these products are produced and sold at cheap rates. As these goods are cheaper than ‘branded’ merchandise, it is making extremely critical for independent brands to obtain market exposure and compete with these ‘home brands’. These privately-labeled goods have also decreased the product range offered by the conglomerates (Deloitte Research Report, 2013). The trend in standardization is moving towards banning food supply from certain farming systems (Victorian Farmers Federation). The Australian Farm Institute argued that these strategies will kill the Australian productivity and will incur new costs in the society. All these practices actually restrict the capability of small domestic farmers to make their decisions diverse and diminish the competitiveness in the domestic food market.

In order to enrich the survival of small businesses where these imperfect market conditions, the government should step in. The courts should be assigned the power to enforce divestiture in required fields. At the same time there must be prevention of the influence of bureaucrats over the industry for bribes. This requires strict financial audits by the government. The small independent farmers should be empowered and protected financially such that market control is more evenly allocated, so that local farmers gets more space to access consumers.

Though privatization is an easy ladder to technological growth and commercializing higher proportion of output and input gives higher returns but all these favours the large supermarket entities at the expense of the small farmers. It is evident that investment on agricultural research and development has given immense returns all over the world. Therefore these small farmers require more space to compete with the large players in terms of input, irrigation, technology, finance and marketing. So the Australian government authorities should emphasize more on the construction of rural roads knowledge generation and other infrastructure because sustainable agriculture growth and food security in Australia depends on the performance of small and marginal farmers.

Contract farming is a crucial proponent that would help marginal cultivators to overpower the problems of finance, marketing and inputs. The agricultural sector being the most trade-exposed component of the Australian economy should be protected from currency fluctuations and volatile prices. To hedge the risks of climatic change and low soil fertility, the agricultural lands should be well irrigated. The government should launch various competition policies that would keep up the competitive nature of the market. The models of self help groups and co-operative societies can also be used as promising tools to help the marginal farmers. The gap between the consumers prices can also reduced through these processes.

Conclusion

Market power is the main concern in Australian domestic food market. Intense duopoly power of Coles and Woolworths possess tremendous challenges to small local farmers, which forces them to struggle hard to exist among these giant entities. Due to the persistence of deflation and higher demand for production makes the small food businesses non-sustainable and possess potential threat to domestic food security. Though in the short run, these market conditions benefits consumers but in the long run the situation may differ.

Government should take actions to ensure that retail market does not crash the market power balance between the economic agents of the food chain. If the growth of these giant retailers is unrestrained, then it may destabilize the food sector and damage the food security of Australia. However, it should also see that the interests of the shareholders of these companies are also served because they are the employers to more than 400000 people in Australia. Thus the government should optimize its priorities over both the dimensions by preventing price wars in the economy and expanding the economic pie simultaneously.

But in recent time we see that ALDI’s growth in enormously increasing. This is even a bigger threat to the Australian economy because in either way it will offer no positive impact on the domestic farmers. This is because ALDI being a foreign (German) brand will promote its own domestic products in the market. This will lead to huge flow of profit from the Australian economy thus drastically effecting potential to invest in the future. The domestic investment will wither away and imported commodities will thrive in the market.

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