Discuss about the Market Power of Super Market Industry.
Supermarkets are the large stores where wide varieties of products are sold under one roof. The wide variety of products includes fresh vegetables, fruits, meats, dairy products and other daily household goods. The present day super-markets are featured with self-service system where customers choose and pick their desired products from the shelves and take them to the billing counter to purchase it (James, 2016). Clarence-Saunders introduced the self-service system within the super-market named Piggly-Wiggly in the year 1916. The supermarkets occupy a large area of floor space and reduce the time required by a consumer in shopping.
This report has been presented to talk about the supermarkets existing within Australia. In Australia, numerous supermarkets capture almost the entire consumer’s demand. Out of them, the top-notch supermarkets namely, Coles, Woolworths, Tesco and Aldi captures almost 80% of the total quantity of goods demanded in the market. High-level competition exists between the supermarket industries of Australia. Coles and Woolworths are the two supermarket giants dominating the entire industry in Australia (Morgan, 2014). In the recent years, Aldi, the supermarket from Germany has gained fame in the industry. It has been able to possess threats to the two giants named Woolworths and Coles.
The report has been presented under two major parts A and B and few sub-parts under them as required. Part A talks about the power of these two giants within their domain. The extent to which these two markets has been able to influence the industry has been shown discussed under this part. Part B discusses about the fierce competition existing in between the Woolworths and Coles within the territory of Australia and the resultant effect of this competition among the consumers. The report ends with a concluding paragraph where the findings of part A and B has been briefly presented.
The power of any firm, company or industry to influence the market and capture a large share of profit from it is known as market power (Curtin, 2016). In this report, the market power of Coles and Woolworths has been analyzed in details. First a brief discussion on these two supermarkets has been provided followed by the ways in which they capture the lion’s share of the market.
Coles Supermarket is among the top-level supermarkets existing in Australia. Mr. George Cole is the founder of this organization. The chain of retail brand is more than 100 years old and is operating is about 776 supermarkets in Australia. According to 2016, statistics more than 100,000 employees work under this retail brand. The total asset of this company is A$ 22.1 billion during 2016 (Devin & Richards, 2016) .
Woolworths is Australia’s one of the biggest supermarket operating in the economy since 1924. It has been providing employment to more than 111,000 people. This is second in terms of its size of operation after Coles. Woolworths along with Coles has successfully retained around 80% of the total market share. At present, there are around 980 stores of Woolworths operating in Australia (Chung, 2016).
This report has already stated the fact that Coles and Woolworths have been taking up the lion’s share of Australia’s total supermarket and retail industry. Hence, it is clearly understood that there are only few firms who operates under this particular industrial domain. Other than these two supermarkets, the name, which can be mentioned to dominate the market force, is that of Aldi, a German based company. Few other supermarkets within Australian domain are IGA, BI-LO and Star-Mart. Since, there is existence of few markets, it can be said that the super market industry in Australia are oligopolistic in nature. The top-notch giants have the power to influence the total price of all the goods sold by the retail chains. As Woolworths and Coles have the supreme power, they always compete between themselves to win over the other. While trying to capture the largest share of market, both these retailers get engaged in price-wars. They always uses the technique of price slash to attract consumers. Their market demand curve and supply curve have been shown below with the help of the diagram.
Coles and Woolworths being engaged in an oligopolistic competition have the power to influence the price of the market (Mankiw, 2014). In the figure above, the Pe is the ideal situation where a competitive firm keeps its price. The price charged by the oligopolistic is at Po. That is the oligopolistic market produces the quantity where MR and MC intersects but charges prices which is equal to the AR. The blue line Pe has showed the extent of power, which these firms can use while pricing their goods, to Po. This pricing nature itself indicates that people are unable to deviate since they have very little other choices available with them.
There has been clear indication that Woolworths and Coles are the superpower as the former has 32.5% and the later have 37.5% of total market share of Australia (Chung, 2016). Other than market share there are several other factors that determine the market power. They are: the total number of employment generate by the organization, the varied range of products available to meet customer’s demand and the total number of consumers of the company. Being involved in price-wars these two retail brands dictate the prices in the market. This again indicates the fact that they possess the powers. The revenue generated by the food and liquor section of Coles during 2016 was around A $ 33 billion. On other hand, the overall revenue of Woolworths in 2016 was A $ 59 billion (www.woolworthsgroup.com.au, 2016). This shows a contrary to the first line of this stanza where it has been stated that Coles market share was greater. This once again proves that these two giants are in constant competition of surpassing one another in their business while leaving no space for any other industry to establish their foot-fall in this domain.
According to the basic economic theory it can be stated that perfect competition is the best possible market structure from consumer’s view point. At the same time the market for perfect competition is a utopian situation. In real world, any consumers mostly prefer the oligopolistic market. Under this market structure, the consumer is able to retain its maximum surplus thereby gaining welfare (Mankiw, 2014). The supermarket in Australia being oligopolistic in nature thus helps consumer in retaining their consumer surplus. The ways in which common people can be benefitted by the rivalry of Coles and Woolworths are shown in details under the following sub-headings.
Pricing policy: The super giants being busy with their price wars have been continuously cutting the price of their products. They are mainly slashing the price of fresh vegetables and food items. According to an article in dailymail, it has been seen that Coles has taken up the vows of slashing their product’s price continuously unless they get back customers from its opponent (mail.co.uk, 2016). The Wesfarmers are also aware of the fact that this strategy is going to hamper their long-term goals and henceforth they are trying to work on it. News in dailymail published on 16th January 2017 declares that Woolworths is going to provide barbeque meat namely scotch fillets, rump steaks and beef burgers at a slashed down rate throughout January (mail.co.uk, 2016). The general people are indeed happy to receive goods at such a low cost. On other hand, this price cut has a negative impact on the suppliers. Big brands are unable to place their products in these retail markets whereas small brand and farmers are forced to give out their entire supplies to these retail giants at a very low cost even below their production cost (heraldsun.com.au., 2017).
Employment generation: The rivalry of Woolworths and Coles also has some serious impact on the level of employment in Australia. Along with the expansion of these supermarket chains and opening up of new outlets there is need of employers as well (Elks, 2017). These two big giants has been providing employment to a large section of Australia’s population. According to one of the leading new channel, Coles has planned to increase its employee base by doubling up the number of indigenous workers in their business. According to the demand of the company, within 2018 the indigenous people employed in Coles are going to be 3% of the total work-force. According to another article published in a journal named The Monthly, it has been observed that Woolworths has come up with ties with its producers who will supply them with their products (www.news.com.au, 2016). In doing so, the company has provided security to those producers and farmers. It is a benefit that has come up with the existence and increasing power of super market giants. On contrary the same report also says that the producers are forced to produce pre-specified goods and are not allowed to produce local indigenous commodities that these giants do not sell. In this way these companies are controlling the taste and preference of consumers by providing them with what they want and not with what they could get otherwise.
Health and Nutrition: The supermarket giants have a large hold on the market for fresh foods. Often the farmers and small scale retailers complain about the fact that they are forced to produce customized food products failing which they have to destroy their own products thereby causing a huge loss in their business. These two retailers try to provide the Australian customer a wide variety of foods throughout the year. In doing so, they have to keep their products in cold-storage which diminishes the quality, freshness and nutritional value of the products (www.dailymail.co.uk, 2016). These forceful productions of crops reduce the nutritional value. Many a times the farmers need to use special fertilizer and hybrid seeds to grow the demanded vegetables and fruits. This instance not only reduces the nutritional value but also diminishes the fertility of soil which then creates a chain-effect in declining production. The customers who were initially happy to get foods at low price now face the consequences of ill health and poor nutrition.
Recent Issues: Consumers can be fooled for a short period of time. In the long run, the consumers rectify their expectations and reacts accordingly. Similar things happened for these two supermarket giants (Chung, 2016). Initially consumers felt very excited and happy to shop from these retailers. Now it has become a compulsion for them due to lack of other opportunities. The customers nowadays are dissatisfied with the quality of products served by Coles and Woolworths. They also doubt the authenticity of the product since it is sold at such cheaper rate. Consumers are also scared of the ill consequences that may happen to their health as a result of poor quality of foods (Keating, 2015). These giants have also compromised the ways in which these foods are packed and transferred. The oligopolistic nature which was suppose to make people better off are now creating problems for the consumers of Australia by making them worse-off. They are remaining unhappy and unsatisfied. They are also ready to pay a higher price for better quality products. This reaction of the consumers clearly indicates the drawbacks of these supermarket giants.
Conclusion:
The report can be wrapped up by stating the findings and analysis of the consumer demand of the entire nation of Australia. The existence of the strong oligopolistic market in Australia’s retail supermarket industry has been clearly observed at every point of the report. The joint impact of Coles and Woolworths in Australia has been felt in many domains. According to Wesfarmers, their method of price slash has been adversely impacting their short-term goals and this cannot make them sustain in the industry for long. Hence, they are trying to find out ways through which they can improve the scenario while keeping the price low for their customers. On other hand while trying to minimize the cost, these companies have been continuously degrading the service provided by them and creating pressure on the farmers. This has resulted in agitation amongst them. At the same time the big brands are also retrieving their products from these retail companies causing a matter of growing concern for them. Through this report it has been found that the supremacy in retail industry in in the hands of Coles and Woolworths. Other than small farmers and small scale retailers, overall the consumers have been benefitted from the constant competition that existed between these two companies. In order to maintain the sustainability in business the company must start prioritizing the needs and requirement of the farmers and small scale producers and also maintain the quality of the products supplied by them.
References:
Chung, F., 2016. Moody’s rings Aldi alarm bell for Coles.
Chung, F., 2016. Woolworths unveils $1.235 billion loss. [Online] Available at: https://www.news.com.au/finance/business/retail/woolworths-unveils-1235-billion-loss/news-story/ [Accessed 18 January 2017].
Curtin, D., 2016. Abuse of Market Power: The End of’Make-Believe’Analysis?.
Devin, B. & Richards, C., 2016. Food Waste, Power, and Corporate Social Responsibility in the Australian Food Supply Chain. Journal of Business Ethics.
Elks, S., 2017. Coles doubles indigenous staff. [Online] Available at: https://www.theaustralian.com.au/national-affairs/indigenous/coles-program-doubles-its-indigenous-workforce-in-a-year/news-story/ [Accessed 19 Jan 2017].
heraldsun.com.au., 2017. Who pays for big two’s price war? [Online] Available at: https://www.heraldsun.com.au/business/terry-mccrann/who-pays-for-the-coles-and-woolworths-price-war/news [Accessed 19 Jan 2017].
James, S.W., 2016. Beyond ‘local’food: how supermarkets and consumer choice affect the economic viability of small?scale family farms in Sydney, Australia. Area,.
Keating, E., 2015. Supermarket Monsters. [Online] Available at: Supermarket Monsters: Seven insights into how Coles and Woolworths came to dominate Australian groceries [Accessed 19 Jan 2017].
mail.co.uk, 2016. Coles vows to continue slashing prices as it tries to win customers. [Online] Available at: https://www.dailymail.co.uk/news/article-3877088/Coles-slashes-prices-supermarket-war-Woolworths-Aldi.html [Accessed 19 Jan 2017].
Mankiw, N.G., 2014. Essentials of economics. Cengage learning.
Morgan, R., 2014. Market share narrows between Coles and Woolworths, while ALDI makes important gains.
www.dailymail.co.uk, 2016. Woolworths and Coles slashing meat prices ahead of Australia Day. [Online] Available at: https://www.dailymail.co.uk/news/article-4124982/Woolworths-Coles-slashing-cost-barbecue-meats.html [Accessed 19 Jan 2017].
www.news.com.au, 2016. [Online] Available at: https://www.news.com.au/finance/business/retail/are-woolworths-and-coles-about-to-give-us-innovation-we-actually-want/news-story/ [Accessed 18 Jan 2017].
www.woolworthsgroup.com.au, 2016. Our Brands – Woolworths Group. [Online] Available at: https://www.woolworthsgroup.com.au/page/about-us/our-brand/ [Accessed 18 Jan 2017].
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