The Australian retail grocery market is composed of the most purchased commodities. This is similar to grocery business in other nations around the globe like the United States and United Kingdom. In Australia, the grocery market has a high number of customers who either purchase these products from chain stores or supermarkets. However, the biggest market shares in the grocery retail market of Australia are held by a few firms.
This has brought about competitiveness problems in the market in spite of the government carrying out market regulation (Gans, 2011). This paper thus discusses the grocery retail market of Australia by looking into the problem of market dominance and unhealthy competition in the market. The causes of these problems and measures of addressing the problem are also discussed.
Competition in the Grocery Market of Australia
The grocery market of Australia has regular customers as it is composed of goods which are consumed by the population each day. In Australia, there are two grocery market sectors, the independent grocery sector and the other sector that is composed of few dominant firms.
The biggest share of the grocery market is controlled by the non-independent sector which according to the business statistics of 2010 holds an 80 per cent share while the independent sector holds the remaining 20% market share (Wardle and Baranovic, 2009).
For any market system to be flexible in a liberalised market economy, there has to be competition as the main driving force in the economy and or market(s). When the Australian Grocery retail market is looked at, many questions remain pending on whether the market embraces competition. This is so because of the imbalance that is prevalent in that market.
The grocery market of Australia is dominated by a few firms, majorly two firms that control more than half of the market share. When there are a few firms controlling the market, that market cannot be termed as fairly or perfectly competitive. (2004). Therefore, with a good basis in economics, the Australian retail grocery market cannot be termed as a perfectly competitive market.
Perfect competition exists where the market power is left open and no firms hinder others from acquiring the market power. Obliteration of market power is usually prevalent in a perfectly competitive market.
Independent firms in such a market are free to participate in the market and help in bringing favourable commodity prices. The market is bigger than any single business firms in that market (Delforce, Dickson & Hogan, 2005).
Independent grocery stores in Australia are controlled by the National Association of Retail Grocers of Australia, and they only control 20% share of the market. By the year 2010, there were about five hundred independent grocer firms registered by the association. These firms employ slightly over two hundred thousand workers. The two firms that dominate the grocer retail market are Woolworths and Coles.
These firms hold about 50 per cent of the grocer market. The growth of these major firms in the grocer market has been as a result of acquisition of small, independent firms, and expansion of new sites. This has taken place rapidly form the year 1975 to date (National Association of Retail Grocers of Australia, 2010).
Being small as it is, the independent grocer market of Australia does distribute essential products to thousands of people in the remote regions and communities who are ignored by the major grocery chain stores.
Despite the role that is being played by the independent firms, the two dominant firms have continued to overpower the independent stores in the market.
According to a survey done by the Price Waterhouse Coopers in the year 2007 titled “the economic contribution of small to [the] medium-sized grocery retailers to the Australian economy”, it was found that approximately eighty per cent of the packaged groceries in the market are sold by the two firms.
A big change in market concentration levels of the retail grocery sector of Australia has not been observed since 1975. The entry of new firms, Aldi and Costco, has not evened market concentration. This is in contrast with the United States grocer market that can be cited as a good example of a perfectly competitive market (Ellickson, 2012). The US grocer retail market has two dominant firms which are WalMart and Kroger.
However, unlike the case in Australia where dominant firms hold more than 50 per cent of the market share; the firms in the US only hold a 20 per cent share of the grocery retail market. Market concentration in the grocer market of Australia has resulted in the reduction of competition in the grocery market. In a concentrated market like in the case of the grocer market in Australia, the room for competition is closed.
This is because very little space is left for the many small firms to compete, and this kills the spirit of competition. In the event there is competition, it is likely to be very unhealthy (Australian Competition and Consumer Commission, 2008).
The retail grocer market of Australia befits the definition of an oligopoly market. This is a market whereby a few firms dominate a certain industry as opposed to the view that it is perfectly competitive. With the dominance of the grocer market by two retailers, a number of economists have categorised grocer market of Australia as an oligopolistic market.
The highest percentage in terms of total market revenues is produced by the dominant firms which are Coles Group and Woolworths Limited. Being the biggest shareholders in the market, these two firms do determine most of the market decisions and actions including the setting and determination of market prices.
The four dominant companies in the Australian Grocer Market: Coles Group, Woolworths Limited, David’s and Franklins contribute approximately 80 per cent of the total sales that are made in the grocer industry (Jones, 2006).
Workable Competition in the Australian Retail Grocer Market
Having noted that the grocer retail market in Australia has failed to meet the qualities of a market that has perfect competition; therefore, being equated to an imperfectly competitive market or an oligopoly market, the concept of workable competition can be employed to streamline this market.
This concept asserts that in economies that embrace technology and other propellers of development; and where principles of perfect competition cannot be easily and sufficiently attained; then it becomes crucial for policy makers to identify the competitive behaviour as it exists in the imperfect markets.
They should also draw up conclusions, which will be important in streamlining the behaviour. This is meant to make the market compatible with other economic structures like capitalism so as to promote economic development and welfare (Stiegert & Kim, 2009).
Various factors determine competition in a market.
These include the number of sellers and distributors in the market, differentiation degree of products in the market, market formation character, market structure and geography, distribution channels, market conditions in the sense of entry and exit conditions for firms, the prevailing degree of individual firm output and distribution channels and pricing methods among others (Ellickson, 2012).
Most economists have argued that it is hard to achieve a perfectly, competitive market. Also, in working to achieve a perfectly competitive market, only monopoly or oligopoly is reached. This is the case with the grocer retail market of Australia.
Workable competition can be used to ensure the survival and sustainability of even the smallest firms in the market and the general sustainability of customers through favourable price setting for the commodities. The oligopolistic oriented structure of the Australian grocer retail market has for a long time been the major cause of high prices of commodities. This has put a lot of financial pressure on the consumers.
This has been critiqued by many consumer protection groups (Beaton-Wells, 2003). Workable competition can be adopted through the reviewing of the microeconomic policies and principles in the country.
Though there is an argument that the rise in prices of grocer goods has not resulted from the dominant firms in the industry, it is important to control the level of dominance that these firms have by way of economic legislation in that a firm should hold up to a certain market share in the industry.
This will encourage the growth of other firms in the industry thus help pull down the price of goods. The prices at which the dominant firms buy fresh goods from consumers should also be regulated to prevent exploitation of the farmers by the firms as they aim to make outrageous profits (Delforce, Dickson & Hogan, 2005).
Vertical Integration of Major Grocer Retail Stores in Australia
Vertical integration is a concept in business and management control. In a chain of firms in a similar industry, this term implies that these firms attain unity by virtue of having a common owner. Firms can engage themselves during the production process, and at different stages.
This can be achieved through affiliations with other firms that are operating in the same line of production of the goods and services. Each of the smaller firms within the main firm produces different products or services which together works to meet the need of the consumer (Wessels, 2006).
This is the same style of management control in the grocer industry within Australia. This has been achieved through acquisitions which have been done by the giants in the industry. These firms have acquired several chain stores in the country and grown to the level that they exert control over the grocer market.
This has been argued to be the reason behind the control of the large portion of sales in the grocer retail market by the two companies in reference to a survey carried out by the Australian Competition and Consumer Commission (Wardle and Baranovic, 2009).
The government of Australia has had a lengthy development of its retail market. This is especially during the industrialization period in the 1950s and 1960s, which has led to the predominance of supermarkets in food retailing.
Rapid urbanization and economic policies that accompanied it brought into play conditions that favoured the supermarkets as dominant food stores in the country. This worked negatively in that it narrowed the number and variety of food stores in Australia. The traditional food markets were overpowered; therefore, their significance in the market faded (Richardson & Williams, 1995).
This is very different when a comparison is made between the retail market of Australia and those of other industrialised nations of the world. The industrialised nations such as the UK had a diversified retail grocer market that allows for the participation of many firms including the traditional firms.
The characteristic of the Australian market was thus behind the merging activities of firms in the market which led to the emergent of dominant firms (Jones, 2006).
The dominance of the market by the firms and the impact of the actions of the firms necessitated the government of Australia to come up with economic measures. These measures were meant to encourage new entrants into the grocer market to help eliminate the economic flaws resulting from the oligopoly grocer market.
These strategies include the reduction of barriers both tariff and nontariff which hindered the entry of foreign supermarkets into the Australian market. These barriers have been lifted in order to allow the new firms to enter the Australian market and bring competitiveness. This was intended to help regulate the market in a better way as opposed to market control by dominance.
These firms include Franklin’s, Pick’ n Pay and Aldi (Jones, 2006). With this, a considerable amount of success has been reached. The government has to mould its policies that will ensure a more open and level playing field for all the firms in the grocer industry.
When more firms are able to access that retail grocer market, inflation in the market is likely to come down. This will also move the market towards a monopolistic, competitive spectrum. This is significantly liberal and encourages competition as the chief determinant of the prices of commodities in a given industry.
Application of the Game Theory in Analysis of Entry of New Firms in the Australian Grocer Retail Market
It is quite easy to analyse the entry of the new firms in the grocer retail market of Australia. This has been made possible by using the payoff matrix that is part of game theory. The pay-off matrix analyses the possible mix of scenarios and actions in the market and displays the results in a simple form (Shelton, 1997).
In this pay off matrix, we consider the Woolworth Limited and Coles as the oligopolistic firms that have, for quite some time, been dominant in the market. The new firms in the market can be Franklin’s and Pick’ n Pay. Basing on the price that comes with each of the four firms in the market, the payoff will be as indicated in the matrix below:
|New Retailer: High Price||New retailer: Low price.|
|Current Retailer : |
|Better, Better||Best, Worst|
|Current Retailer : |
|Worst, Best||Worst, Worst|
Figure 1.0: The pay off matrix for the new entrants into grocer retail market of Australia.
The bets case will be attained when both the new and old market entrants set prices that will be beneficial to the firm and affordable to the consumer. The pay-off is most preferred in such a scenario thus favouring competition.
However, when both firms set low prices in order to attract customers, a worst case will be attained. This is because many aspects will be compromised, including the quality of products. Therefore, this will affect the consumer and the firms as they will make either very low profits or losses.
The Grocery retail market of Australia has come under criticisms in the recent years due to the reducing competitiveness in that market. This has been due to market domination by two firms, which has brought about an oligopolistic market situation.
However, in the current times, efforts are being made to avert the situation. This is by giving significant room for other firms in order to encourage competition that would help in the regulation of prices of commodities in the industry.
Australian Competition and Consumer Commission. (2008). ACCC inquiry into the competitiveness of retail prices for standard groceries. Web.
Beaton-Wells, C. (2003). Proof of antitrust markets in Australia. Sydney: Federation Press.
Delforce, R., Dickson, A., & Hogan, J. (2005). “Australia’s Food Industry Groceries.’ Australian commodities. Vol.12, no. 2. Web.
Ellickson, P. B. (2012). Density versus Differentiation: The Impact of Wal-Mart on the Grocery Industry. Web.
Gans, J. (2011). Principles of economics. South Melbourne, Vic: Cengage Learning.
Jones, E. (2006). The Australian retail duopoly as contrary to the public interest: Report for the Fair Trading Coalition. Web.
National Association of Retail Grocers of Australia. (2010). Competition and Consumer Legislation Amendment Bill 2010. Web.
Organisation for Economic Co-operation and Development. (2004). Australia: 2004. Paris: OECD.
Richardson, M., & Williams, P. L. (1995). The law and the market. Sydney: Federation Press.
Shelton, R. B. (1997). Gaming the market: Applying game theory to create winning trading strategies. New York: John Wiley.
Stiegert, K. W., and Kim, D. H. (2009). Structural Changes in Food Retailing: Six Country Case Studies. Madison: FSRG Publication.
Wardle, J., and Baranovic, M. (2009). Is lack of retail competition in the in the grocery sector a public health issue? Australian and New Zealand Journal of Public Health, 33(5): 477-481.
Wessels, W. J. (2006). Economics. Hauppauge, N.Y: Barron’s.