The article “Price war odds rise as Woolworths outpaces Coles” on 3rd May 2017 by Sue Mitchell talks about the price war in Australian supermarket industry. The efforts by Australia’s leading supermarkets, that is, Woolworths and Coles to boost their market share have culminated in a price war. Coles is responding to the price cuts by Woolworths to avoid losing its market share. For example, Coles has reduced the price of 34 San Remo pasta goods by between 20 and 25% and also slashed that of chocolate chip cookies by 25% (Mitchell, 2017). According to the managing director of Coles, John Durkan, the company is prepared to cut prices to retain its market share. His company was going to invest in low price plans to make sure that the price cuts are accomplished.
The battle between Coles and Woolworths is of interest to the clients, suppliers and the analyst groups. The customers are keen to benefit from this competition by getting the products at lower prices than before. On their part, the suppliers are receiving pressure from supermarkets such as Coles to refrain from seeking price rises. Moreover, the analysts from different companies such as Citigroup and Macquarie Equities are providing their predictions about the current situation in Australia’s supermarket sector.
Number of Firms in the Market
Australia’s supermarket industry is made up of a few businesses such as Coles, Woolworths, IGA and Aldi. Although there are a few companies in the marketing, the industry is dominated by two major supermarkets, that is, Coles and Woolworths. Woolworths occupies approximately 35.7% of the market share while that of Coles is nearly 33.2%. Other firms hold a small portion of the market share. This scenario depicts that the Australia’s supermarket industry falls under the type of imperfect competition referred to as oligopoly market structure.
Chart 1: Source: Business Insider
Another important feature of oligopoly market structure evident in Australia’s supermarket sector is competition and price wars. This type of oligopoly is commonly referred to as competitive oligopoly. In oligopoly market, the behaviors of one company instantly impact the rival companies. As a result, every business is often cautious and maintains a close watch over the actions of competitors to have a counter-action when needed. In Australia’s supermarket sector, there is constant rivalry especially between Coles and Woolworths in retaining their customer base. When Woolworths slashes the prices of its products, it draws the clients of Coles. In response, Coles also reduces the prices and in some instances by larger margin compared to Woolworths to have its customers back (Mitchell, 2017). In fact, the competition is sometimes tight to the extent that these companies are willing to forfeit profit expansion to improve their sales and protect their market portion.
Oligopolistic firms are known to make use of adverts to reach new clients as well as maintain the existing customer base. Indeed, advertisement intensifies competition among enterprises in the oligopoly market structure. If a company fails to advertise while others are advertising, then such company is likely to lose customers. In Australia, supermarkets, particularly, Woolworths, Coles, and Aldi use a significant amount of funds for advertising. In their advertisements, they use channels such as magazines, metropolitan radio, regional television, and direct mail. According to the Sydney Morning Herald, supermarkets in Australia spent approximately 200 U.S Dollars on advertisements in 2015/2016 trading period with Coles, Woolworths, and Aldi spending the highest (Heffernan, 2016).
Barriers to Market Entry
The existence of a few firms in Australia’s supermarket industry is clear evidence that there are significant obstacles to market entry. Some of the impediments to potential entrants result from the actions of Woolworths and Coles. For instance, the price wars between Coles and Woolworths that often culminates in price cutting makes it hard for a new entrant to operate profitably. Moreover, these companies enjoy significant economies of scale and hence have an advantage in the market.
Evaluation of Australia’s Supermarket Sector
The firms in this industry are paying close attention to the actions of the competitors. As a result, these companies have adopted a highly competitive practice which is benefiting the consumers. The clients are now in a position to obtain products at a lower price due to the price wars. Moreover, these firms are continually improving the quality of their products and service a scenario which benefits the consumers.
The existing companies in Australia’s supermarket sector have intensified barriers to market entry. The hurdles lock out potential market entrants and hence denying the consumers the benefits of many firms in the industry such as stable prices and improved quality. Furthermore, the companies in this sector are allocative and productively inefficient.
Graph 1: Allocative and Productive inefficiencies
Allocative efficiency takes place when the price equals the marginal cost (Sloman et al., 2015). However, in this industry, the price exceeds the marginal and thus allocative inefficiency. Moreover, these companies are productively inefficient as they do not produce at the minimum point of the average cost curve. On the graph one above, 0A shows the efficient allocative output while 0P the productively efficient production. These productions levels are not attained in oligopoly market structure and hence inefficiencies.
Information is essential for the better operation of any market. Therefore, there is a need for the competition commission of Australia to avail fair, timely and adequate information to both producers and consumers to boost competition. Moreover, oligopolies sometimes resort to collusive arrangements and thus killing competition. The government should closely monitor the behaviors of firms in this industry to reduce or eliminate the chances of collusion as such arrangement will lead to the suffering of consumers due to high prices and poor quality.
Australian supermarket sector is made up of a few firms. Two companies, that is, Woolworths and Coles, dominate the market, and their behaviors have a significant impact on the entire industry. The economies of scale gained by the two key players have intensified barriers to potential market entrants. There is a need for the competition commission to enhance information in this industry and to monitor these companies closely to eliminate the possibilities of collusion.
Heffernan, M., 2016. Woolworths, Coles slow advertising as Aldi ramps up. [Online] Available at: https://www.smh.com.au/business/retail/wooworths-coles-slow-advertising-as-aldi-ramps-up-20161002-grt965.html [Accessed 14th August 2017].
Mitchell, S., 2017. Price war odds rise as Woolworths outpaces Coles. [Online] Available at: https://www.afr.com/business/retail/price-war-odds-rise-as-woolworths-outpaces-coles-20170503-gvy0aa [Accessed 13th August 2017].
Sloman, J., Wride, A. & Garratt, D., 2015. Economics. 9th ed. Harlow : Pearson.
Thomsen, S., 2017. CHART: Here's how big Aldi now is in Australia. [Online] Available at: https://www.businessinsider.com.au/chart-heres-how-big-aldi-now-is-in-australia-2017-5 [Accessed 14th August 2017].