Executive Summary
This report analyses in detail the overall environment in which Woolworth supermarket operates with a view of identifying particular areas where the management needs to put in measures that can enhance growth and performance. Woolworth is a retail chain established in both Australia and New Zealand and which mainly deals in foodstuffs.
The chain has further diversified its operations, venturing into other business areas like dealing in the petroleum industry and food restaurants within its premises. The chain has successfully established itself as a market leader in the retail industry, establishing stores in major cities in both Australia and the New Zealand.
Woolworth’s market leadership was mainly achieved through provision of quality service to its clientele and listening to customer pleas and demands and implementing them appropriately. This report evaluates the strong economic and political environments within which Woolworth operates.
Other factors that contribute immensely to the growth and performance of the supermarket chains include its internal factors and capabilities such as its strong appeal to keep, attract and maintain customers, the market barriers controlled by the chains which keep new entrants at bay as well as the business diversification that ensures profit maximisation for the company.
Introduction
Woolworths Limited is a retail company based in Australia and whose operations spread across the borders to the neighbouring New Zealand. The retailer chain deals in a multiple of goods and services including food, liquor, hotel services, among many others.
Since its formation in 1924, Woolworths has been a success story in the retail industry, expanding very fast to establish subsidiaries and acquiring other retail brands on its growth path. Today, the chain has a huge workforce of over 191,000 and boasts of A$2.14 billion in profits as per the latest figures recorded by close of business in 2011. (Chang, S & Singh, H 2011,p.740).
This paper analyses the company’s business strategy, investigating its macro environment as well as checking its competitive environment and analysing its competencies as far as resources are concerned.
Background information
Woolworths Ltd is a public owned company with its shareholders base exceeding 420,000 people, 40,000 of whom are directly employed by the company (Woolworths Supermarkets 2011). The first Woolworths store was opened in downtown Sydney on December 5th, 1924 with a nominal capital of just £25,000. The company’s initial 11,707 shares were held by 29 people, five of whom were the founders.
Woolworths pioneered the conduction of transactions using cash registers; every purchase was accompanied by a receipted printed via the cash register. The stores opened up the first international branch in New Zealand in 1929 which dealt in general merchandise.
As part of its expansion program, the chains acquired Foodland supermarkets and Progressive Enterprises, bringing the total number of Woolworths’ stores in Australia today to 750. Woolworths brand has today diversified its business into 5 major divisions which includes supermarkets that mainly stocks households and foodstuffs.
The liquor division sells alcohol products through Safeway Liquor, BWS which stands for Beer Wine Spirits, Dan Murphy’s, Woolworth’s liquor and Cellarmasters.
The hotel division is served by ALH Group while the supermarket chains also ventured into the petroleum industry through a partnership deal with Caltex. Other divisions include the consumer electronics, General merchandise and Home improvement (Woolworths Supermarkets 2011).
Macro Environment Analysis for the Industry
The macro environment analysis studies external forces whose influence in one way or the other affects the performance of the retail industry in general and Woolworth supermarkets in particular. Players in any business industry often lack the ability to control these external forces.
Political environment
The closer economic relations between Australia and New Zealand have benefited Woolworth business performance for a long time. The two countries have established Australia-New Zealand Closer Economic Relations Trade Agreement, ANZCERTA, which combines the two economies and thus provides Woolworth with the chance to operate in the enlarged economy (Woolworths Supermarkets 2011).
The two countries also enjoy political stability which is a perfect environment for doing business. This is a good assurance for shareholders, both domestic and foreign, that their investment is safe and it is an incentive to them to add even more.
The 2011 IMD World Competitiveness Yearbook ranked Australia and New Zealand in positions 3 and 5 respectively, which is a good indicator that both economies offer a perfect environment for business activity.
With continued political stability, Woolworth is poised to grow and expand even more as many investors are assured of safety in the event that they decide to put their money into the venture. There are no fears of political wars and uprisings that can affect the company’s business performance
Economic factors
Australia and New Zealand offer economically sound environment that is good for business activity. The two countries, in comparison to other nations, have a high living standard. The World Bank acknowledged Australia as a rich country in 1995 while the country’s GDP hit the $ 1 trillion mark in 2006.
The economy’s growth has been rated at 3.3% per annum with one of the highest Purchasing Power Parity, PPP in the world. In 2004, Australia’s PPP was recorded at $30,700.
The country has very low inflation and interest rates with one of the best infrastructures in the world. Its education facilities are of advanced quality while a majority of the population are rich. The World Health Organization certifies Australia’s crime rates to be among the lowest in the whole world.
New Zealand has an estimated Purchasing Power Parity PPP of US$28,250 which is relatively high. The economy is made up of manufacturing industries as well as a vibrant service sector which together compliment the agricultural sector. The country’s nominal GDP is the 51st in the world at $157.877 with a per capita income of $35,374 (Wright, P.1987, p.93).
New Zealand’s economy has been on the rise since 1984 following rapid restructuring that transformed the economy to a liberalised one. Unemployment has fallen to a record 3.4 percent in 2007 which was the fifth lowest in OECD nations.
The global recession of 2009, however, affected the country’s economy negatively mainly because the country highly depends on international trend. The financial crunch pushed unemployment rates among the youth to very high figures of 17.4% in June 2011.
Australia’s stable economy with the high living standards of her population portends a lucrative market for Woolworth’s business performance. More nationals have a high purchasing power due to the country’s high per capita income and very low unemployment levels. Foreign nationals who visit the country in large numbers also create a huge chunk of the market as they experiment with the unique goods and services offered in Australia.
New Zealand is on the recovery path of her economy following bad economic times between 2008 and 2011. With the recovery plans on course, the country has been experiencing a brain gain as more professionals who had opted to seek better employment in Europe and America troop back.
This implies that the country’s living standards are set to improve in the short term period as the problem of unemployment is tackled. New Zealand’s Purchasing Power Parity is also comparatively high and an improved living standard for the entire population will prove substantial for the overall performance of Woolworth.
Socio-cultural factors
Woolworth has adopted a green lifestyle in its 2007-2015 sustainability strategy. This implies that the company is more aware of practices that harm the environment and has thus adopted environmental friendly practices for the good of its consumers and the society at large.
More consumers are conscious of their environment and would love to purchase and patronize items and goods that are organic. Woolworth further addresses individual needs of its customers by providing efficient and fast services.
The environmental awareness that is carried out by the supermarket chains continues to attract more clients as everyone today would love to be associated with clean environment.
Technological factors
Woolworth continues to invest heavily in information communication technology as it aims at improving service delivery and customer satisfaction. The self-checkout machine is as a result of the company’s initiative and has continued to be emulated by other players in the industry due to its convenience in business performance (Woolworths Supermarkets 2011).
The machines were introduced in 2008 and enable customers to scan, weigh, as well as pay for their acquired goods through debit, credit or cash cards. The Service Oriented Architecture is yet another technological initiative by Woolworth which enables the supermarket management to monitor general trends in performance at a glance and spot out any existing bottlenecks that could be slowing down business.
The speed with which this happens helps the management to put corrective measures into place that eventually averts losses or negative growth. The Visa payWave which is the latest innovation by the stores has helped in reducing average customer waiting time. The frequency at which the checkout queues are being cleared is much faster than was the case in advance.
These technological advances have attracted more customers to the stores due to the improved efficiency with which clients are being attended to. No customer would love to spend longer times at the check out point than the actual time they spent doing their shopping (Tyre & Hauptman, 1992).
Legal factors
Big W is a division of Woolworth and is a registered business entity that is licensed to operating Australia with more than 160 stores spread in Queensland, West Australia, South Australia, New South Wales, Australian Capital Territory, Northern Territory, and Tasmania.
The company remits taxes to both governments as a legal requirement and the funds go a long way to finance activities of the government such as building and improving infrastructure, financing public goods paying salaries and buying necessities such as medicines.
As a legal requirement, the company is expected by the regulatory authorities to be tax compliant (Peng 2004). The taxes are remitted directly to the government. In the Australian laws on commerce, certificate of compliance to taxes is issued to business that remit their returns accurately form which taxes are deducted.
The realisation by customers that Big W contributes immensely in the growth of their economy convinces as many consumers as possible to purchase from their local store and contribute towards building the economy (BIG W: Why shop at BIG W 2007).
Industry Analysis using Porter’s 5 Forces Model
Threat to market entry
It is difficult for any aspiring supermarket chain to enter into the industry in Australia and New Zealand markets and manage to break even easily. In Australia, Big W business magnitude together with that of its main competitors, Wesfarmers, Target, and Kmart stores are well established and would easily enjoy economies of scale to the disadvantage of a new entrant.
The stores have spread across the nation, opening numerous branches in all major cities and centres and it would require massive capital for an aspiring investor to out perform their business prowess. Besides, it serves an estimated 6 million customers in a month (BIG W: Why shop at BIG W 2007).
Given it huge stores, reliable customer base, and a stable market niche, Big W have the capacity to stock a lot of goods at a reduced cost. This eventually affords its stores the power to lower prices below what the market can offer and in the process win more customers than a new entrant could manage (Desarbo, Jedidi & Sinha, 2001).
Thus, the company is well position to survive in the competitive market through gaining form economies of scale, competitive price tags, and strong customer base.
Threat of substitutes
Wesfarmers and Target chains pose the greatest threat to Big W’s existence and business performance. These stores have been in the industry for longer period and are well established than Big W which came into full operation in 2007 after rebranding (Roth 2011). They stock the same products and cloth lines and sometimes offer big discounts to customers.
In this industry, loyalty to a brand plays an important role in customer behaviour. Besides, these companies also offer foodstuffs and electronics same as in Big W. Therefore, Target and Wesfarmers have the ability to offer an alternative perfect substitute to customers who may be unsatisfied with services offered at Big W.
Unsatisfied customers therefore have other alternatives from where they can purchase products and services (Bodily & Allen, 1999). However, in order to remain relevant, the company has established a unique market for its customer tailored optometry services and are still the best in the self serve stores.
Power of suppliers
Suppliers in the supermarket industry have more power owing to the existence of many supermarket chains. As a matter of fact, suppliers may instigate market demand and supply variances. All the chains depend on the suppliers directly for the delivery of their stock and this leaves the suppliers with the power to dictate on proceedings in the industry.
Through the action of the suppliers, commodity prices can be influenced to their own advantage while leaving the Big W together with its clientele base at a disadvantaged position (Cusumano & Takeishi, 1991). However, the company has endeavoured to use both in house and outsourced supplier as a strategy for balancing the supply forces in the fragile market (Roth 2011).
Power of buyers
Reflectively, the amount of output in terms of turn over sales depends on the buyers’ purchasing power. The higher the purchasing power, the better the turnover in total sales realised over a definite period of time. Big W’s performance in the retail industry depends highly on the power of the buyers. On the other hand, unreliable and weak purchasing power translates into losses and underperformance.
The management must therefore do everything within their means to ensure that service delivery and quality meets the expectations of customers. In fact, the purchasing power determines profitability and probability of survival of a business in short and long term.
If buyers will feel dissatisfied because of poor service, they can easily opt to acquire the same goods and services from rival stores thus loosing out on business opportunities (Ehrenberg, 1964).
Rivalry
There are several retail stores operating in the same industry with virtually of them dealing in a variety of products and services. For instance Target stores provide the biggest competition to Big W due to its big market share and expanded network standing at 30% (BIG W: Why shop at BIG W 2007). Other chains that have substantial market share include Wesfarmers and Kmart Supermarkets, Jewel Food Stores.
With many customers looking for good value for their money, quality in service delivery has remained the main basis upon which customers are making their final decision to buy. All the players in the industry are putting measures in place to ensure they attract more customers and therefore expand their market share.
Therefore, the size, in terms of space occupied by business premises, defines the temperature of competition. In line with this, in 2009, Big W Company launched the largest store in Australia measuring 10,000m2 and a $300 million invested in stocks on the same (Roth, 2011, p. 200).
As analysed above, Big W Company has embraced the significance of Porter’s approach to market forces in a business environment.
As discussed, Big W Company has been in a position to swing these forces and manipulate them to their advantage through offering competitive prices, expansion, diversification, and cutting a market niche. However, any slow reaction to addressing these factors can cause business suffering leading to huge losses and reduced market share (Chang & Singh, 2000).
Big W’s Competitive Advantage
Expanded business portfolio
Although Big W has been a household name in the general retail stores industry, the chain has an expanded business portfolio which includes investments in photo processing, self serve check point introduction, parcel pick up, lay-by, and home delivery (BIG W: Why shop at BIG W 2007).
The expanded portfolio provides the business with competitive advantage in the sense that it can still maintain profitable performance even in instances where the retail store business experiences poor performance. Through diversification and portfolio balance, the company is in a position to survive turbulence in the harsh economic environment characterised by stiff competition and inflation (Michael, 2000).
Big W’s Business Strategy
Cost Leadership Strategy
Cost leadership strategy is vital in business management especially in an industry with stiff competition. Reflectively, the concept, as proposed by Porter, is a mean of establishing a sustainable competitive advantage over other player in the industry. Big W Company has adopted the cost leadership strategy to improve its efficiency through streamlining operations.
As a result, this venture has developed a cumulative experience, optimal performance, quality assurance, and is in full control of their operational chains. In order to cut down cost of production and marketing, the company has embraced the modern technology in its online sales, human resource management, purchasing, and dispatch departments (BIG W: Why shop at BIG W 2007).
The company has entered into a partnership with outsourced but competent suppliers rather than engaging its resources in obtaining products. As a result, the general over head cost of operation has been reduced substantially.
In addition, the company has opted for diversification and expansion of stores in order to gain from economies of scale as the overall turnover grows. Through adoption of scientific human resource management, the company has been in a position to track redundancy and monitor employee performance and evaluations done on the basis of contract.
As a result, issues of underperformance has been minimised substantially. At present, this chain produces the best quality packaging of its product at the cheapest price possible since production is done in mass.
In addition, the company has introduced a series of efficiency monitoring systems such as performance valuation, efficiency in production, target management, and electronic purchasing which has greatly reduced labour cost. These ventures aim at enabling the company to optimise profits through efficiency in production, sales, accountability, and use of company resources while maintaining quality (Hambrick, 1983).
Benefits and Suitability of the Cost Leadership Strategy
Efficiency monitoring in distribution, sales, cash flow management, labour, and diversification as employed by Big W is particularly suitable for the firm as it is more of a precautionary measure that shields the firm from effects of redundancy and underutilization of production variables.
Despite rivalry in the retail industry, Big W has been in a position to monitor all its operation chains and periodically evaluate the same as a means of reducing overhead cost due to underutilization, poor balancing, and unaccountability. As a result, Big W has managed to transform its portfolio and capital structure by 18% since most of operation lines is optimally utilized (BIG W: Why shop at BIG W 2007).
Conclusion
Conclusively, it is apparent that Big W is a force in the retail store industry in Australia. Reflectively, the company has successfully managed to establish over 160 stores across Australia. Besides, the chain has remodelled its cost leadership to embrace efficiency in operations through incorporation of technology, monitoring tools, and evaluation systems.
As a result, despite stiff competition, the chain offers competitive prices and substantial discounts since they maximize gains from economies of scale due to large turnover per annum. In 2011, its operating income stabilized at $177 million. Incorporation of the Porters market forces in the management of this successful chain is directly linked to its consistency, profitability, and efficiency.
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