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Australian Supermarket Industry Duopoly

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Question:

Discuss about the Australian Supermarket Industry Duopoly.
 
 

Answer:

Introduction

The Australian free market is characterized by the existence of various duopolies. One of the major industries with a duopoly market structure is the supermarket industry. Characteristically, a duopoly market is one in which two companies control nearly all of the market share. More specifically, the two competing business units control the majority of the market sector for a given commodity. In Australia, Coles and Woolworths dominate a high proportion of the supermarket industry’s market share. Notably, the two firms have controlled the Australian supermarket industry for a long time. However, in the article “Aldi boosts range to win a bigger share of $90 billion grocery shop”, Catie Low narrates how Aldi is trying to climb the ladder and attain a greater market share in the industry.

Firstly, the Aldi seeks to increase the level of competition in the Coles and Woolworths dominated market. According to the article, Aldi plans to boost its grocery selection by approximately 20 percent in a bid to capture a significant proportion of Australia’s $90 billion grocery market (Low, 2017). Also, it aims at increasing its products by about 250 products to its range of 1450 items (Low, 2017). In turn, this will expand its stake by around 10 percent in the industry. Consequently, this will increase the level of competition to the existing supermarket duopolies in the country.

Discussion

Essentially, duopoly market structures exist where two sellers have control over the entire industry. It is a form of oligopoly, composed of mainly two large sellers who collude to keep other competitors out of the industry. Additionally, there is the presence of monopolistic characteristics in such markets brought about by the fact that most products are differentiated (Kumar, n.d.). Likewise, the customer loyalty between the two major supermarkets has guaranteed Coles and Woolworths a high market power.  Notably, over the past few years, Woolworths and Coles have differentiated their products by integrating own branding techniques, thereby capturing the needs of its consumers (Jones, 2015). The differentiated products have also ensured that consumers believe that the products offered by one company have no direct substitutes. In turn, this has killed the level of competition in the market.

Besides, the market concentration of the two markets allows them to set their prices. Cumulatively, the two firms own about 70 percent of the grocery market in the country. In this regard, they can influence the price levels for the products they offer (Leigh & Triggs, 2017). On various occasions, Coles and Woolworths have been involved in price undercutting games, thereby reducing the prices of their goods and services. Furthermore, the two firms have many retailer shop fronts all over the country. Therefore, they have been able to cover a wider client area as compared to their competitors. Mainly, this is attributed to the fact their presence in various regions demonstrates the availability and reliability of grocery products in the Australian grocery industry in the country.  Consequently, this has led to unfair competition, especially among small retailers in the country who cannot afford to lower their prices to the level set by the two duopolies. In turn, this causes them to make losses, thereby withdraw from the market

 

Source: (Roy Morgan Research, 2016).

Furthermore, Woolworths and Coles incorporate technology as a means to attract potential customers to their store. More specifically, the two firms have initiated banking facilities, fuel retail, and insurance in their product list. In turn, this has captured a wide array of customers who can now shop at one stop (Colvin, 2015). There are also additional rewards programs where the retailer stored information so that clients can earn discounts whenever they shop at Woolies and Coles stores. Subsequently, the two firms have substantially increased their market power and dominance, making it difficult for other small companies to compete effectively in the market.

 


In this regard, the efforts initiated by Aldi in a bid to increase its market share and power will be a hard task. As such, the degree and level of competition instigated by Coles and Woolworths may smother the company’s profits in the grocery industry, thereby forcing it to leave the market. Most predominantly, the price undercutting mechanism is a notorious strategy that the two duopolies use to drive out competition from the market (Knox, 2014). The proposed increase in its product range to around 1,700 will still be a small fraction of the size of the major supermarket’s selection. On average, Coles and Woolworth's store's selection is about 25,000 lines (Low, 2017). For this reason, Aldi may be unable to achieve a substantial proportion of the market share, making it a price taker. In turn, this may result in high losses, following competitive strategies by the two largest retailers.

Graphical presentation of market share over time as at 2016

Source: (Roy Morgan Research, 2016).

Even so, there is hope for Aldi. Predominantly, one can attribute this to the fact that the company intends to open at least 25 stores every year in the eastern states and continue to expand into new territories of WA and South Australia (Low, 2017). By and large, this will broaden its market share, thus earning a bigger market share. Consequently, this will reinvigorate its sales growth in the mature markets and attract new shoppers with a larger selection of frozen lines and fresh produce. Most importantly, the timing of this changes is perfect. Recently, Cole’s boss announced that the retailer plans to cut its product lines. For this reason, Aldi will be able to capture Cole’s customers by offering them a variety of its product lines. It is imperative to note that the continued efforts by Aldi may eventually reap off, thereby accumulate a sizeable market share. Eventually, it may become one of the leading grocery retail stores in the Australian market competing back to back with Woolworths and Coles.

Supermarket customer penetration over time

Source: (Roy Morgan Research, 2016),

Conclusion

Woolworths and Coles have dominated the Australian supermarket industry for a long time. The two duopolies control the retail sector through various mechanisms such as price undercutting and product differentiation. However, Aldi, a major retailer in the Supermarket industry is working its way up the top of the industry to attain a bigger market share in the sector. Essentially, this will be achieved through a continued increase in the number of product lines as well as an expansion in the number of stores. To an extent, this will expand the company’s dominance in the market. Over time, Aldi will compete on level ground with Coles and Woolworths.

 

References

Colvin, M. (2015). Courts should be empowered to address Coles/Woolworths duopoly: Malcolm Knox. [Online] ABC. Available at: https://www.abc.net.au/pm/content/2015/s4255287.htm [Accessed 16 Apr. 2017].

Harper Review: a mixed basket for Coles and Woolworths. (2015). [Online] The Conversation. Available at: https://theconversation.com/harper-review-a-mixed-basket-for-coles-and-woolworths-39640 [Accessed 16 Apr. 2017].

Jones, E. (2011). Coles and Woolworths duopoly hard to swallow. [Online] The Conversation. Available at: https://theconversation.com/coles-and-woolworths-duopoly-hard-to-swallow-533 [Accessed 16 Apr. 2017].

Knox, M. (2015). Supermarket monsters. [Online] the Monthly. Available at: https://www.themonthly.com.au/issue/2014/august/1406815200/malcolm-knox/supermarket-monsters [Accessed 16 Apr. 2017].

Kumar, E. (2011). Top 8 Characteristics of an Oligopoly Market. [Online] Economics Discussions. Available at: https://www.economicsdiscussion.net/oligopoly/top-8-characteristics-of-a-oligopoly-market/7110 [Accessed 16 Apr. 2017].

Leigh, A., and Triggs, A.  (2017). It's Time To Put Markets Ahead Of Monopolies. [Online] The Huffington Post. Available at: https://www.huffingtonpost.com.au/andrew-leigh/its-time-to-put-markets-ahead-of-monopolies/ [Accessed 16 Apr. 2017].

Low, C. (2017). Aldi boosts range to win a bigger share of $90 billion grocery shop. [Online] The Sydney Morning Herald. Available at https://www.smh.com.au/business/retail/aldi-boosts-range-to-win-bigger-share-of-90-billion-grocery-shop-20170412-gvj8x7.html [Accessed 16 Apr. 2017].

Market Structures: Duopolies. (2015). [Online] Policonomics. Available at: https://www.policonomics.com/lp-market-structures-duopoly/ [Accessed 16 Apr. 2017].

Supermarket Sweep: ALDI’s share of the Aussie market still rising. (2016). [Online] Roy Morgan Research. Available at: https://www.roymorgan.com/findings/6762-supermarket-sweep-aldis-share-of-aussie-market-still-rising-201604142258 [Accessed 16 Apr. 2017].

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