In its report of competitiveness of retail prices for standard groceries, the Australian Competition and Consumer Commission (ACCC, 2008) stated that “Australian food prices have been increasing at a rate greater than the CPI since 1990. Among a number of comparable OECD countries, Australia is the only economy that exhibits that feature”. The criticism is on the competition within this market. In this essay, I will be discussing about Australian imperfect competition in the retail grocery and its implications to the consumers; and the vertically integrated supply chain employed by the Major Supermarket Chains (MSCs) and the entry barriers which these systems bring along. A payoff matrix is also shown in order to develop entry strategy for a new competitor. 1. Is Australian retail grocery market perfectly competitive?
Before determining whether Australian retail grocery market is “perfectly competitive”, a sound understanding of the term should be in place. According to Hubbard et al. (2013), a perfectly competitive market is one that “meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products and (3) no barriers to new firms entering the market”. According to Keith (2012), Australia is one of the most concentrated in the supermarket retail sector in the world. In this case, the two supermarket chains Coles and Woolworths account for about 80% of the packaged groceries sold in Australia (Smith, 2006). The retail grocery market is dominated by these two giants, which eventually creates a duopoly/oligopoly existence, making the whole market not at all “perfectly competitive”. There are many buyers, but there are not too many sellers! Taking a look at the retail market, it is easy to notice that Coles and Woolworths have a lot of different brand extensions. For example, credit cards, liquor, insurance, etc. They even have affiliation with Shell and Caltex respectively, that a customer will get 8 cent discount per litre of fuels if they spend more than $30 for one bill. This has created a marginal benefit for customers, thus encourages them to buy more from these supermarkets. As a result, quantity demanded by customers is increased in these stores, revenues and profits go up, and hence more of the market portions are grabbed in the hands of the two dominants.
Their growth has made it really hard for food specialty stores such as Chickenfeed in Tasmania. Fresh food, milk, cheese and bread were their main produce. However, with the price of $1 per litre of milk offered by Coles, Chickenfeed could not stay in the market, which led to a lot of store closures during 2012 (Kruger, 2012). The explanation for the low prices offered by the big two is that they could obtain products at very cheap price from suppliers. As they order extremely large amount of products, Coles and Woolworths even forced their suppliers to give them the lowest price ever. If suppliers are unwilling to do so, they would lose a giant contract (Pineda, 2012). In addition, it is noticeable that Coles and Woolworths occupy in all town centres. The scale of these stores are often quite large, thus makes it harder for other smaller-scaled supermarkets to afford such kind of leasing. Convenience shops like Seven-Eleven, EzyMart, etc. are often located near residential areas, where they don’t get that many customers, whereas Coles and Woolworths are located in shopping centres, market places, and CBDs, more people can access easily.
Goldberg J (cited in Smith, 2004)suggests that barriers to entry in the Australian grocery market were high. Due to their large economies of scale and scarcity of suitable locations, Coles and Woolworths ultimately create a barrier to entry which slows down the competition, and helps them to enjoy economic profits for longer periods. Implications of this market structure on consumers
The current duopoly market structure is actually going against the public interest (Jones, 2006)....
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