Introduction

The Australian grocery retail markets are among the most notable food retailing markets in the world. For the past few years, the market has received a lot of criticism from various quarters due to the escalating prices of the retailed goods. As a result of the ever increasing prices, consumers in this market have suffered immensely. Competition in the market has been an area of concern from majority of stakeholders including consumer commission among other interested parties.  The major players in this grocery sector include Woolworths which has 43%, Coles with 37%, IGA 15% Aldi 3% while other grocers are estimated to have 2% of the total stake. Australian grocery market is one of the most concentrated sectors in the worldACCC (2008).

Competitiveness of the market

Perfectly competitive market is in other words referred to as a price taker. This is because there existence of several players in the market who have perfect knowledge of the market. The products sold in a perfectly competitive market are homogeneous and none of the players in the market has an upper hand than the other. In a perfectly competitive market, all the sellers must take the existing price as the market price. Any attempt to charge more than the market price will force consumers to turn to other sellers while charging a lower price will only lower the profits. Under this market conditions there is free entry or exit of the players(Barthwal, 2007).

However, it is important to note that the Australian grocery market does not completely exhibit characteristics of a perfect competitive market. According to the Australian consumer commission report, the grocery market in Australia had two major players namely Woolworths and Coles which have almost 80% stake of the market. The two holdings are the major suppliers of fresh products(Stiegert& Kim, 2009). The presence of other supermarkets that distributes breads, meat and green grocers provided other alternatives for the consumers.  The heavy concentration of the Woolworths and Coles in the grocery market does not qualify the market to be a perfect competitive market. For a market to be perfectly competitive, all the players must be on the same level. The only level of competition under this market can be on price, quality and range of products offered.

Another and equally important condition that makes this market not to be a perfect competitive market is the barrier to entry and exit in the Australian market. According to consumer reports in Australia, the grocery market has had numerous barriers especially in terms of new supermarkets.  Most notable barrios to entry include lack of prime sites for situating new supermarkets. This is because the major and established retailers have chains which are preferred rather than new supermarkets. Prime sites tend to be quite expensive thus making tenants to have faith with established chains of supermarkets rather than new institutions(Morandin, 2011). This is contrary to characteristic of perfect competition where there I s free entry and exit of players in the market.

Another barrier to free entry in the Australian grocery market is the large economies of scale required by large supermarkets. These economies of scale are essential in providing a level competing ground. The Australian grocery market had great interference from Metcash pricing arrangement which has adverse effects on new supermarkets.  This has disadvantaged the new supermarkets since they are unable to charge the same prices with the established chains of supermarkets. This again is in contradiction with perfect competition whereby all the sellers in the market are required to charge the same prices for their products. It is also noteworthy to note that all the retailers in the Australian market offer differentiated products. Perfectly competitive market requires that products in the market shouldbe homogeneous(Rakowski, 2008).

In essence, the above outlined conditions are clear indication that the Australian grocery market is not a perfectly competitive market. The high concentration of Woolworths and Coles chains of supermarkets and presence of barriers to entry of new participants in the market emphasize the condition. It is for this reason that this condition may have differing implications to the welfare of consumers(Hildebrand, 2009).

By the Australian grocery market being a non-perfect competitive, there would be economically effective leading to dead weight loss. This would be beneficial to consumers since the major suppliers would benefit from the economies of scale thus resulting to charging lower prices. In case of perfect competitive market, deadweight loss is not possible since the market prices are determined through forces of demand and supply which is achieved through the equilibrium. Under this condition, the consumers are likely to pay high prices for the products since all the players are charging the same prices(Wells, 2003). Consumer reports in Australia also indicated that consumer bargaining power also increased immensely thus forcing major suppliers to sell their products at lower prices. This would otherwise be impractical under a perfect competitive market.

Workable competition

Workable competition is a concept mainly applied by various federal governments in attempts to neutralize the effects of perfect competition or situations of pure oligopolists or monopolist. It is usually practiced under market situations where high degree of monopoly powers are experienced but sufficient levels of competition are introduced to protect consumers from monopoly abuse. Under workable competition, the competitors are supposed to be active in the market and hold a reasonable and sustainable market position (Hubbard, Garnett, Lewis&O’Brien, 2013). Price under this condition should be determined by the costs of production rather than the existence of market power. There should also be meaningful barriers to entry and the rivalry in terms of price, product and quality should be highly entertained. Presence of market power should not be a threat to free competition both now and in future. Under workable competitive market, there may be between 5-10 effective rivals and the largest market share should not exceed 30% of the total market share.

The Australian grocery market can be a special type of workable competition. This is because even though there is high concentration of major supermarket chains namely Woolworths and Coles, other independent retail grocers such as butchers, bakeries, fruits and vegetables shops are also abundant i8n the Australian marketACCC (2008). The presence of these shops is a clear indication of sufficient competition. The entry of Aldi in the Australian grocery market forced the major supermarkets (Woolworth and Coles) to reduce their prices especially on those prices that they offered. This was a major development as it initiated price competition in the industry which is a major characteristic of workable competition.

It is also of great important to note that price competition was hindered to a certain extent. This was more intense on the part of independent retailers who found it cumbersome to compete with established chains. This was as result of the regulations by the Metcash who were usually the pace setters in terms of price(Mills, 2002). This offered great hindrance in price competition. Nevertheless, there are still other avenues to compete such as prime business locations, better shopping experience, quality of products, specialty of products just to mention a few. Under such conditions, heavy promotional and advertising costs must be incurred.

Vertical Integration

Vertical integration is a common phenomenon in macroeconomics and management. It is a style of management control usually employed by companies in their daily affairs. It is a process that usually describes the process through which the producers ensures that the products reach consumers.  In essence, vertical integration refers to a process through which a firm is in control of the different production and distribution stages. The different participants in the vertical integration are aimed at ensuring utmost consumer satisfaction. Under vertical integration, the supply chain is brought under one ownership and it is essential in ensuring that the hold-up problem is dealt with perfectly. It is an important management style as it increases efficiency and reduces costs to significant levels. However, it is important for the management to ensure that the system is used expertly or else immense losses are suffered.

In Australian grocery retail market, vertical integration is a common phenomenon. As it is evident from the two leading players (Woolworths and Coles) have maintained vertical integration in their whole operation from wholesale to retail levels. These major suppliers undertake their wholesaling as well as the retailing process which also includes production of their own private label products. This is in contrast with other independent retailers whose operations mainly rely on the Metcash who acts as their own wholesaler(Hubbard, Garnett,  Lewis& O’Brien, 2013).

Vertical integration has very positive implications in the operations of the large scale wholesalers such as Woolworth and Coles. This is because the major outlets will enjoy economies of scale which enables them spread distribution cost over greater volumes, thus reducing the overall production cost. This translates to increased profitability of the major players in this market. Proper coordination different production stages sums up to increased efficiency as well as minimize transaction costs. Price competitiveness is also likely to increase as a result of vertical integration. This is because it ensures lower input price in the wholesale level is passed to retail level. This would otherwise not be realized in absence of vertical integration. It is for this reason that the other minor players in the market will not enjoy such efficiencies(Lawrence & Burch, 2007).

According to ACCC report of 2008, it is asserted that presence of vertical integration of the major grocery chain may lead to increase in consumer bargaining power. Increase in consumer bargaining power will result to decrease inprices under more favorable conditions to the buyers.

It is also important to note that these benefits of vertical integration may have adverse effects on competitors. This is because vertical integration promotes efficiency and effectiveness in major grocery outlets than to those of the competitors. Vertical integration is vital in controlling and promoting distribution from wholesale to retail level which is enhanced by their large size and geographical coverage. Secondly, price competitiveness is more to the major suppliers as opposed to the competitors which poses another disadvantageACCC (2008).

Due to the current condition of the Australian grocery market, new entrants must come with a mega entry strategy that will ensure its survival in the highly competitive market. For instance, a new competitor should start with small stores in order to be cost effective. This is a wise step since it would require low set up cost as well as overhead costs. Small stores will have fewer employees thus lower remuneration, less utility bills as well as rent (Hubbard, Garnett, Lewis& O’Brien, 2013).

It is also important for the new competitors in Australia to note that there are several barriers to entry. One of the most notable barriers is the lack of prime land in cities and other major capitals which is already occupied by the major supermarket chains. This prime land is also very expensive for new entrants. It is for such reasons that the new competitor should establish stores in the suburbs targeting the suburb population to be their customers.

It would also be very vital for the new competitors to have a wide variety of high quality products. They should also tirelessly work towards distributing private label products with competitive prices which can give the more established suppliers a run for their money. The new competitor could base competition on quality and price of the fresh products especially those sourced from the suppliers directly.

The payoff matrix below describes how a new competitor will set the price for a refreshing juice as compared to an established supermarket like Woolworths. The possible profits are also described.

Tropical juice price of new competitor

1 ltr can                                                                        5litre can

1ltr can

5ltr can

The above pay off matrix shows the dominant strategy that will maximize profits for the new entrant in the market.

References

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Australian Market – Stuart Alexander & Co: Premium FMCG Specialist Marketers, Distributors and Importers. (n.d.). Home – Stuart Alexander & Co: Premium FMCG Specialist Marketers, Distributors and Importers. Retrieved September 25, 2013, from http://www.stuartalexander.com.au/aust_grocery_market_woolworths_coles_wholesale.php

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