Analysis Of The Australian Grocery Industry Economics Essay

Harmonizing to Hubbard et. Al. , ( 2010 ) perfect competitions takes topographic point in markets where no concerns in an industry have market laterality as there are many Sellerss and purchasers and there are no barriers to come in that peculiar market as a free flow of information exists.

Harmonizing to the Australian Competitions and Consumer Council ( ACCC ) the Australian food market industry is dominated by two key participants, Coles and Woolworths, who together have about 80 % market portion. While there are other rivals in the market such as independent jobbers and retail merchants including a assortment of forte retail merchants such as independent food market associations ( IGA ) and Aldi ; Coles and Woolworths have a major influence to command monetary values which in the long-run would see these smaller retail merchants either merge through acquisitions to vie or shut their doors as they ca n’t vie. In the short term there are benefits to consumers with lower monetary values and better value for money. However if this laterality were to go on the Australian food market industry may see the effects of a duopoly which could hold some serious deductions to consumers as there would be no other picks available in the market and the chance costs would be minimised.

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Kales and Frank winfield woolworths have more retail merchant store foreparts than their rivals ( Bonn, 2004 ) they ‘re in more towns than their rivals and show better handiness of food market merchandises in the Australian food market industry. Hubbard et Al ( 2010 ) addresses that in economic footings, a perfect market indicates many purchasers and Sellerss, all merchandises sold by all houses must be indistinguishable and there are no barriers to come in the market. Given Coles and Woolworths market laterality many rivals are unable to vie on monetary value. While absolutely competitory markets are established by the relationship of demand and provide any rival or consumer within this market would hold no inauspicious consequence on the market monetary value as they would necessitate to accept and admit the market monetary value. The current retail food market market does n’t bespeak this type of behavior as Coles and Woolworths do non accept the market monetary value as they set their ain monetary value relation to non merely competition but besides to the tendency of purchasing behavior and to derive net incomes which in the long-run merely these retail merchants would profit from cost decreases hence the laterality in market portion.

It should be noted that the more a merchandise sells at a food market outlet the cheaper that merchandise will be at that peculiar mercantile establishment ( Smith, 2006 ) . As the costs associated in purchasing merchandises from the jobber the more bargaining power they will hold. This can be said for Coles and Woolworths as the market leaders more people will be given to purchase merchandises at these shops instead than rivals as the clients willingness to pay is driven by satisfaction for lower monetary values each clip they buy ensuing in a fringy benefit.

Smith ( 2004 ) indicates that Coles and Woolworths have used engineering as a method to entice in possible consumers. Banking installations can be found at all of these shops which give consumers convenience to carry on banking minutess before or after they conduct their shopping. Strategic confederations with certain Bankss give Kales and Woolworths the ability to buy goods with their specific trade name of recognition card/s such as the Woolworths maestro card which gives consumers added benefits such as frequent circular points. This can increase the sum of purchases as consumers may be influenced to buy more to derive points at their shops as opposed to purchases made at other rival locations. An extra wagess plan card shops information so clients can acquire price reductions when shopping at their other shops and gives these major participants marketing informations to analyze what merchandises are popular at certain monetary values. This is apparent in gasoline ingestion ( Smith, 2004 ) . Coles and Woolworths have affiliated themselves with Shell and Caltex, severally, which allows purchasers to salvage an sum of fuel if they shop at their shops. In economic theory a alteration in engineering will either do a supply curve to switch. These inducements can do an addition of demand for goods which in bend would diminish the degree of supply doing monetary values to increase. If the food market industry is a absolutely competitory market these companies would non be able to impact the market monetary value. ( Hubbard, et. al. , 2010 )

The ACCC suggested that cut downing barriers to new entrants for retail food market shops could potentially better the competitory landscape in Australia. In this respect some barriers can be identified. In a perfect market there are no barriers to entry ( Hubbard, et. Al, 2010 ) . In the Australian retail food market market barriers of entry are apparent. For illustration the scarceness of land for new entrants into these markets is limited by the deficiency of appropriate sites as the top shop sites are largely all taken by these big participants. Generally rentals are signed for long periods of clip and in order to discontinue these understandings high punishments are normally enforced doing rivals to hold a hapless market place ( Smith, 2004 ) . With mention to the Trade Practices Act 1974 ( Smith, 2006 ) ) these rental limitations could foreground concerns of significantly decreasing competition in a relevant geographic country. The ACCC suggests this will set a strain on independent retail merchants as these big supermarkets are given rights to go on to efficaciously as a monopolistic concern. Perfect market conditions do non be in this industry and barriers to entry are evident.

In a perfect market, merchandises can be compared every bit ( Hubbard, et. al. , 2010 ) . The retail food market industry does n’t let this to be easy. Unit pricing can ensue in a addition for the retail merchant and a disadvantage for the consumer. For illustration when comparing a vegetable such as beans at different retail merchants they each may hold unusual weights and usual pricing mechanism. Harmonizing to Bowen ( 2009 ) unit pricing can understate monetary values to a per gm or per litre comparative value, depending on the suited value for the good. Perfect market conditions reveal that a alteration in higher monetary value will do consumers to shop around for a cheaper option ( chance cost ) . While in an imperfect market a alteration in higher monetary value will non needfully alter the sum of measure demanded. As there is no other option ( i.e. rivals ) consumers frequently pay for the monetary value addition. However, the client may hold a pick to replace this merchandise with a cheaper option at the same shop as opposed to a rival which would restrict competition and later increase gross at that peculiar retail merchant.

Imperatively, the ACCC suggested that the degree of competition in food market retailing has non been a significant subscriber to nutrient monetary value rising prices in Australia ( ACCC, 2008 ) . While nutrient monetary values were reported to hold increased a scope of other factors including high international demand, increased costs of production and inauspicious domestic conditions conditions besides participated to high monetary value rising prices.

Such findings are consistent with a ‘workably competitory ‘ industry ( Smith, 2004 ) . This means that there are several houses selling closely related merchandises ; the houses are non conspiring ; and incumbent houses do non confront significant long-term cost advantages. On the other manus, consumers are able and willing to exchange between alternate providers. This is the type of competition that exists is most Australian industries. It is to be contrasted with the theoretical construct of ‘perfect competition ‘ , where many manufacturers sell homogenous goods to many indistinguishable consumers. Such a construct can be a utile analytical tool, but it will seldom ( if of all time ) lucifer existent universe markets where houses are able to lawfully distinguish themselves and gain economic net incomes.

Smith ( 2004 ) refers to feasible competition as a market state of affairs where a high grade of monopolistic power exists and there is sufficient competition between near-monopolies to protect the purchasers from monopolistic maltreatment. Furthermore, efficient production exists without accomplishing the rigorous criterions of perfect competition. The construct of feasible competition is frequently applied by governmental governments in steering regulative policy for competition policy.

A recent survey by the ACCC in 2008 revealed that supermarket retailing in Australia is ‘workably competitory ‘ . The analysis makes reference that consumers are given a pick when they conduct their food market shopping. Consumers are non limited to these larger retail merchants as there is a pick of other food market shops, convenience shops and forte retail merchants such as bakers, fruit and vegetable retail merchants and meatmans etc.

An ACCC question into the fight of retail monetary values for standard food markets concluded that shop shift is a world for consumers as 85 % of consumers visited more than one shop in a monthly period. More so, over a 3rd of these shoppers visited forte fresh shop mercantile establishments to purchase fresh green goods. This provides some grounds that consumers are doing a pick when make up one’s minding what they will devour particularly when it comes to fresh green goods and that non-supermarket mercantile establishments show marks of strength when viing ( ACCC, 2008 ) . However, depending on the sum of people researched will bespeak whether the analysis concludes a valuable statement.

Differentiated merchandises and services that reflect invention on the portion of Sellerss in response to the penchant of clients, and monetary values that reflect the efficient costs of those merchandises and services are apparent in the food market market. Smith ( 2004 ) argues that the figure of offers in any market will alter from clip to clip depending upon the success of the offer. Kales and Woolworths on a regular basis monitor their rivals pricing and respond to monetary value fiting. This may bespeak marks of allocative efficiency ( Hubbard, et. al. , 2010 ) . Resources such as monetary value matching have been used to reflect demand by consumers. Competition therefore additions allocative efficiency because these retail merchants use certain resources ( monetary value fiting ) more expeditiously act uponing consumers off from their rivals by method of monetary value. This demonstrates that the construct of feasible competition exists, as this can supply consumers with a satisfactory degree of competition ( ACCC, 2008 ) .

Specifically, feasible competition can be measured by microeconomic indexs such as net incomes, grosss, measures, qualities, information, belongings and rights ( Batey and Friederich, 2000 ) . For illustration where Coles and Woolworth retail merchants exists, particularly in shopping promenades, there is grounds that other grocery forte shops surround them ( ACCC, 2008 ) . There is a demand for certain merchandises as reference antecedently fresh green goods. The mean shelf life of some fruits can be stored for upwards of a twelvemonth in these big retail merchants while forte grocers pride themselves on presenting quality fruits late obtain by the primary manufacturers ( Smith, 2006 ) . However, a turning tendency for administrations such as Kales and Woolworths indicates a method of perpendicular integrating ( Stiegert and Kim, 2009 ) , as their show of laterality when negociating monetary values from manufacturers is forcing smaller concerns or new entrants off from the retail food market industry which poses a menace to consumers.

Stiegert and Kim ( 2009 ) argue that perpendicular integrating is a construction of some concerns which all phases of the production of a good, from the skill of natural stuffs to the retailing of the concluding merchandise, are controlled by one company.

The Australian food market industry indicates that Coles and Woolworths have a concern theoretical account that displays a vertically incorporate construction. This may do a barrier for new entrants come ining into the market. Given the big market laterality ( Coles and Woolworths 80 % market portion ) of these retail merchants their bargaining power can act upon a lessening in procurance monetary values which would diminish costs incurred by primary manufacturers. This places the larger retail merchants to act upon and order understandings to nutrient industries who later push these alterations back to the primary manufacturer degree ( Stiegert and Kim, 2009 ) . Smaller participants in the market would hold to vie against lower procurance costs by bring downing higher monetary values to the consumer which can do a deficiency of consumer ‘s involvement in purchasing their merchandises in comparing to a cheaper, indistinguishable merchandise at the larger retail merchants.

While productive efficiency may happen in the retail food market industry for certain merchandises such as staple points like flour and sugar, where a figure of goods/services is produced utilizing the least sum of inputs possible for cost minimization other merchandises such as fruits/vegetables may hold dire value for consumers in the long tally. Normally fruits/vegetables are bought at low monetary values by Coles and Woolworths who so add a border to sell to consumers. These points may take upwards of a twelvemonth to hit the consumers one time they have been picked by the husbandmans so the quality of the goods is normally non every bit good as those bought by rivals at local fruit/vegetable markets. So in the long tally while consumers may acquire a better monetary value the chance cost is an inferior merchandise. This non merely poses a menace to the quality of fresh nutrients but besides indicates that the retail purchasing power of these big retail merchants manipulates members of the supply concatenation i.e. primary manufacturers and consumers ( Hubbard, et. al. , 2010 ) to profit, largely their ain involvements.

The Australian food market market is so a challenging industry to acquire into given the market laterality of Coles and Woolworths and, at a smaller graduated table, IGA ‘s. However, new entrants into the market, such as ALDI in 2001, indicated that this can be done. ALDI identified a spread in this industry and developed a niche market demand to consumers who wanted to salvage money by buying points without the accretion of in shop advertisement or the usage of plastic bags, less check-outs etc. This scheme was developed to cut down procurance costs and give value to possible consumers ( Bonn, 2001 ) .

For a new entrant to be successful at that place would be a demand to carefully analyze the specific market they wanted to provide for i.e. the ability to understand what degree of demographics that are present in that country to find purchasing behavior of possible consumers. Apart from the demand to develop a sound selling program new entrants would necessitate to see an economic position to understand the market. At a microeconomics flat houses and persons are motivated by cost and benefit considerations. Costss can be either in footings of fiscal costs such as mean fixed costs and entire variable costs or they can be in footings of chance costs, which consider options foregone ( Hubbard, et. al. , 2010 ) .

A new entrant may see that there is a demand for a fresh green goods shop in a market dominated by Woolworths where a niche chance would be present. Suppose these big retail merchants obtain information that a new entrant will be opening their doors in following to Woolworths. A scheme for the bing retail merchants may be to integrate a monetary value war by offering a monetary value lucifer for fresh green goods. The counter statement is that the new entrant may publicize that there is no replacement for quality and that their merchandises are of superior quality when comparing to Woolworths. The new entrants opening specials advertises that if clients spend over $ 30 they will have 10 % price reduction. Frank winfield woolworths have advertised that for every $ 30 clients spend they ‘ll have 10 % off bespeaking a monetary value lucifer. The final payment matrix illustrates scheme A: where both concerns give a price reduction while scheme B: shows that both concerns do nil. At the opening weekend of the new shop consumers have a pick where to shop, many are enticed by the price reductions of both retail merchants, some may take to go on to carry on there shopping through Woolworths while other believe the quality at the new topographic point will be better than Frank winfield woolworths.

The new entrant and Woolworths have a pick, and can take to offer the price reduction or non. For illustration, with a final payment matrix 100 peers Woolworths and 0 peers the new entrant. The followers is a final payment matrix to exemplify the scheme created by the new entrant in comparing to the big retail merchants Woolworths.

New Entrant Adopts scheme A: i.e. Advertises 10 % off purchases of $ 30 or more

New Entrant Adopts scheme B: i.e. Does nil

Woolworths adopts scheme A: i.e. Advertises 10 % off purchases of $ 30 or more

100,0

0,0

Woolworths adopts scheme B: i.e. Does nil

0,0

100,100

In this instance there are two schemes where both choose to offer the price reduction or non offer any price reductions. If we admit assorted schemes ( where a pure scheme is chosen at random, capable to some fixed chance ) , so there are three schemes. The first two indicate two where the chances are ( 0 % , 100 % ) for new entrant, ( 0 % , 100 % ) for Woolworths ; and ( 100 % , 0 % ) new entrant, ( 100 % , 0 % ) for Woolworths, severally. Another scheme is the chance for each participant is ( 50 % , 50 % ) .

While the ACCC has investigated astonishing monetary value additions with mention to Coles and Woolworths the findings indicated that there was no influence on monetary value rises due to miss of competition and that a feasible environment is present. The grounds in this paper suggest otherwise. While some facets of feasible competition are present the purchasing power of Coles and Woolworths is influencing monetary value within the market place. Smaller rivals can non vie adequately adequate with these concerns. The scarceness of land nowadayss a barrier for new entrants into the market topographic point. The usage of new engineerings are being bought by Coles and Woolworths are forcing smaller participants aside as consumers clip values are of import so a quicker, more efficient processing shop is more attractive. As Coles and Woolworths are in direct competition with each other it is more good for each of these rivals to increase their monetary values in sync as a monetary value war will merely discourage consumers to smaller participants ( as monetary value war indicates feasible competition to value consumers ) . In the long tally these methods would do higher monetary values for merchandises finally at the consumer ‘s disbursal.