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Supermarket Industry Analysis

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Question:

Discuss aboout the Supermarket Industry Analysis.
 
 

Answer:

Introduction

The report would discuss the supermarket industry of Australia through Porter’s Five Forces analysis. An overview of supermarket industry would present the current market situation of the industry and the major players of the industry. Porter’s five forces would help to analyze the environmental factors of the industry.  Further, profitability of the industry would be assessed by construing results from the analysis of Porter’s five forces. The driving factors of profitability would also be evaluated to understand their impact on the industry in future.

Supermarket Industry Overview

The supermarket industry of Australia has been under constant pressure due to fierce competition among the players. The major players of the industry are Woolworths, Coles, Aldi, and IGA. Woolworths is the market leader of retail market by occupying the market share of 36.3% being followed by Coles and Aldi with the market share of 33.2% and 12.5% respectively (Roy Morgan Research, 2016). Woolworths and Coles are Australian based company and have been competing with each other to increase their number of customers.

(Source: Roy Morgan Research, 2016).

Aldi being a German based chain entered the market in 2001 with its low price strategy and acquired a significant market share through its extensive marketing campaigns (Tay, 2014). Thus, due to tough market competition the supermarket industry has very low margins and the companies consistently struggle to optimize their logistics and operations to reduce their overall cost and increase their profitability. The entrance of Aldi in the Australian market has added fuel to the competition through its low price strategy that supported its exponential growth in the market (Low, 2017). The company acquired a market share of 12.5% by bringing down the market position of Woolworths and Coles supermarket (Roy Morgan Research, 2016). Thus, the supermarket industry has high competition with low margins.  

 

External Environment Analysis

As discussed above, supermarket industry has been under constant pressure due fierce market competition. An external environment analysis would make an attempt to understand the five forces of the industry called Porter’s Five Forces.

Porter’s Five Forces

Porter’s five forces analysis would help to evaluate the attractiveness of supermarket industry in Australia by analyzing five factors of an industry (Hill, Jones and Schilling, 2014).

Bargaining Power of Buyers

Bargaining power of buyers determine the pressure exerted by the consumers on the companies. The determining factors are switching costs, price sensitivity and customer loyalty.

The consumers can easily shop from the supermarket that appeals to them through lucrative prices and offers. The consumers were easily attracted by the low pricing strategy of Aldi that boosted the company’s market share and Woolworths and Coles witnessed a slump in their market share (Murphy, 2015). Since the number of options for the consumers is increasing with every new entrant, thus, switching costs for the consumers is very low (Blut et al, 2014). They are more likely to get attracted by company’s prices, attractive offers and discounts, satisfactory customer services, quality of the product and ease of shopping (AFN, 2015). Further, with every new entrant, there is a decline in the prices by the competitors so as to make their strategic move against the new entrant. For instance, when Aldi entered the market through its low pricing strategy, Coles and Woolworths also slashed their prices to retain their existing market share (News, 2015). Thus, the prices are highly sensitive.

Customer loyalty is another factor affecting buyer’s bargaining power. With low switching cost and highly sensitive prices, the most loyal customer of a brand is very likely to get move towards the competitor. Customer loyalty is driven by the factors product quality, satisfactory customer services, low prices and lucrative offers and discounts (Orel and Kara, 2014). In the process of competing with each other, every retail chain is compelled to offer the highest standards of services to the customers that give them wider options to shop from.

 


Thus, with low switching cost, highly sensitive prices low customer loyalty, the industry faces an intense pressure from the buyers due to which the companies have been consistently struggling to offer the highest standards of customer service.

Bargaining Power of Suppliers

The bargaining power of the suppliers determines the pressure exerted by the food producers, labor and other suppliers on the supermarket companies (Sutton-Brady, Kamvounias and Taylor, 2015). With increasing number of supermarket players in the country and their surging market share gives them an authority to exert pressure on the food and local suppliers of Australia (Schleper, Blome and Wuttke, 2015). The giant players such as Coles and Woolworth with combined market share of around 70% are able to compel the suppliers to offer food products at low prices because of their bulk purchase (Ma, 2014). Further, with their increasing market share they have also entered into production and processing sectors that again give them an authority and power over the suppliers (Bariacto and Nunzio, 2014).    

Further, the pressure exerted by the employees on the companies is moderate because of abundance of labor availability in the market. With the increasing number of stores of top three retailers increases the opportunity for employees.

Thus, bargaining power of suppliers can be considered to be moderate.

Threat of New Entrants

The threat of new entrants would be determined by entry supported factors and entry barriers to the industry. A new entrant firm would have to make a huge investment to set up the physical infrastructure and the entire process. Economies of scale would be another barrier for the new entrant that is very difficult to attain with low margins and breakeven point can only be achieved after a long period of time.

Though, the new entrant would benefit from the low switching cost of consumers and the government supported competition in the market of Australia.

Thus, a firm with strong financial background with its running operations in some other market (probably an international retail chain) could easily impose threat on the industry. 

Rivalry Among Existing Firm

The supermarket is dominated by only few major players namely Woolworth, Coles and Aldi. The three retail chains dominate over around 82% of the market. There is an intense competition in the market among these three players and they have consistently fighting over the market share through their strategic moves in the market (Hawthorn, and Low, 2017). Aldi entered the market with its unbeatable low prices that surged its market share to 12.5% within a short span of time. In order to respond to Aldi’ strategic move the other two players started a price war by slashing their prices. The competition is due to the fact that all the firms are equal in terms of their services and resources. Thus, in spite of few market players, there is a fierce competition among the existing firms.

Threat of Substitute

The threat could be determined by availability of substitutable products in the industry or purchasing from local farmers and food producers. Since the products offered by the retail chains are grocery and highly essential products due to which they are irreplaceable by any of the substitute. Thus, the threat of substitute is very low because of unavailability of substitute products.

 

Profitability of Industry

From Porter’s five forces analysis, there are many aspects of retail industry that can be construed. The bargaining power of suppliers was found to be moderate because of increasing number of stores of supermarket store outlets in the country that has given significant authority and power in the hands of the players. The threat of substitutes was found to be negligible that is an added advantage to the industry. Though bargaining power of buyers was evaluated to be extremely high and the demands of consumers have been consistently increasing as they get wider choices and options. This affects the attractiveness and profitability of the industry because with the increasing demand of consumers, the companies have to reduce product prices and offer higher standards of services that reduce the profits of the companies. Further, existing competition was also evaluated to be fierce and intense and entrance of new firm would fuel the competition.

Thus, the analysis suggests that the industry has huge profitability because of low bargaining power of suppliers and negligible threats of substitutes. A large firm can easily negotiate with the suppliers to offer products at lowest possible prices because of their power and authority that they have gained with the dominating market position. Further, some companies have also set up their own production houses to reduce their costs further. Thus, the supermarket industry has great profitability as can be inferred from analysis.

In order to drive profitability, there are few factors as discussed below that must be recognized by the companies:

Supply Chain Management

An effective supply chain management system is the key to profitability for supermarket companies. Maintaining inventory levels in the stock shelves is an essential component of supply chain management (Ernst & Young, 2013). It is required because extra stock would add to the cost of the company and low inventory level would incur potential revenue loss to the company. Further, effective use of technology should also be there to ensure optimum levels of stock in warehouses (Ernst & Young, 2013).

Simple Operating Model

A complicated model adds on to the cost of the company by introducing unnecessary processes and stock keeping units (SKUs) (Ernst & Young, 2013). Though large number of stock keeping units facilitates distribution on large scale level through large number of distribution centers and suppliers, but it makes the process more complicated and adds to the cost of the company. It has been found that reducing SKUs to half, the companies have reduced their cost to half. Thus, a simple operating model would drive the profits for the industry.

Product Mix

The supermarkets such as Aldi offer single variety of product due to which it is likely to be affected by the price hike of the particular product. When supermarket offers them variety of products in form of product mix, they could attract more number of customers (Hernant, 2009). This would also protect them from fluctuating prices of products.

Staff

Many retailers have reduced their costs by properly regulating their staff members. This has been achieved by distributing the total working hours over the entire week and ensuring that at any time required staff is available (Ernst & Young, 2013).

New Channels

With the increasing trend of technology and internet, online channel has acquired the retail industry (Schmid, Schmutz and Axhausen, 2016). Customers prefer to shop online because of convenient factor (Jiang, Yang and Jun, 2013). The companies could easily boost up their sales by adopting new channels such as online shopping and mobile application based shopping (O’Niell, 2015). Many supermarket companies also offer home delivery services to their privileged customers (Coles, 2014).

 

Impact on Industry Profitability

With the increasing use of technology the supply chain management methods are likely to change such as method of demand forecasting. This is likely to increase the profitability of the industry because of higher accuracy and prediction levels for food and other products.

In future, the companies are likely to adopt simpler model by eliminating all forms of redundancies that would lead to higher profitability.

The product mix strategy is likely to shield the fluctuating prices of the companies.

In future, the trend of online shopping is going to increase and consumers are more likely to prefer online shopping over traditional shopping that would again increase the profitability of the industry (Zrim, 2016). Thus, the changes are likely to increase the profitability of the industry.

Conclusion

The report has analyzed the five forces of retail industry in Australia using Porter’s five forces analysis. Bargaining power of buyers was evaluated as high enough to impose threat on the companies in terms of high service standards and product quality. Further, in spite of few competitors in the market, there was very intense competition in the market. Bargaining power of suppliers was low because of power and authority of the supermarket chains. Since the supermarket offers essential products therefore, threat of substitutes was analyzed to be low.

Further, profitability and its driving factors were discussed. The supermarket industry is profitable because of low bargaining power of suppliers and nonexistent threat of substitutes. The major driving factors of the profitability were evaluated as supply chain management, staff, simple operating model, product mix, store layout, strategic supplier relationship and new channels. Supply chain has been found to be the key aspect of driving profitability because an effective supply chain would ensure optimum levels of inventory in the stores and warehouse.

 

References

AFN. (2015). Woolworths announces new strategies to win over grocery shoppers, AFN reveals full detail. Australian Food for Thought. Available at: https://www.ausfoodnews.com.au/2015/05/06/woolworths-announces-new-strategies-to-win-over-grocery-shoppers-afn-reveals-full-detail.html [Accessed Online 3 April 2017].

Bariacto, N., and Nunzio, J. (2014). Market Power in the Australian Food System. Future Directions. Available at: https://www.futuredirections.org.au/publication/market-power-in-the-australian-food-system/ [Accessed Online 3 April 2017].

Blut, M., Beatty, S.E., Evanschitzky, H. and Brock, C. (2014). The impact of service characteristics on the switching costs–customer loyalty link. Journal of Retailing, 90(2), pp.275-290.

Coles. (2014). Home delivery – delivered to your kitchen bench. Coles. Available at: https://shop.coles.com.au/online/mobile/national/info/home-delivery [Accessed Online 5 April 2017].

Ernst & Young. (2013). Retail Operations: Six success factors for a tough market. Ernst & Young. Available at: https://www.ey.com/Publication/vwLUAssets/Retail_Operations_-_Six_success_factors_for_a_tough_market/$FILE/EY_Retail_Operations_-_Six_success_factors_for_a_tough_market.pdf  [Accessed Online 3 April 2017].Hawthorn,
 
M., and Low, C. (2017). Coles, Woolworths, Aldi in battle for diminishing shopper dollars. The Sidney Morning Herald. Available at: https://www.smh.com.au/business/retail/coles-woolworth-aldi-in-battle-for-diminishing-shopper-dollars-20170124-gtxwgq.html [Accessed Online 3 April 2017].Hernant, M. (2009). Profitability Performance of Supermarkets. The Economics Research Institute. Available at: https://ex.hhs.se/dissertations/220464-FULLTEXT01.pdf [Accessed Online 3 April 2017].

Hill, C.W., Jones, G.R. and Schilling, M.A. (2014). Strategic management: theory: an integrated approach. Australia: Cengage Learning.

Jiang, L., Yang, Z. and Jun, M. (2013). Measuring consumer perceptions of online shopping convenience. Journal of Service Management, 24(2), pp.191-214.

Low, C. (2017). Aldi to spend hundreds of millions to revitalise east coast market. The Sidney Morning Herald. Available at: https://www.smh.com.au/business/retail/aldi-to-spend-hundreds-of-millions-to-revitalise-east-coast-market-20170404-gvd9a8.html [Accessed Online 5 April 2017].

Ma, W. (2014). Woolworths and Coles have taken over Australians’ lives. News. Available at: https://www.news.com.au/finance/business/retail/woolworths-and-coles-have-taken-over-australians-lives/news-story/344d02196373c4f960a0d0014613ac1c [Accessed Online 3 April 2017].

Murphy, J. (2015). What are the secrets to Aldi’s super low prices?. The New Daily. Available at: https://thenewdaily.com.au/money/finance-news/2015/05/24/secret-aldis-super-low-prices/ [Accessed Online 3 April 2017].


News. (2015). How Coles and Woolworths are fighting Aldi. News. Available at: https://www.news.com.au/finance/money/costs/how-coles-and-woolworths-are-fighting-aldi/news-story/5bab025981335a4857acf9d5cb0c87d4 [Accessed Online 5 April 2017].

News. (2016). Woolworths’ ‘defensive’ move against Aldi won’t work: expert claims. News. Available at: https://www.news.com.au/finance/business/retail/woolworths-defensive-move-against-aldi-wont-work-expert-claims/news-story/4085d99a93dbf783787a199bef9f3875 [Accessed Online 3 April 2017].

O’Niell, S. (2015). The future of shopping in Australia. The Australian. Available at: https://www.theaustralian.com.au/business/business-spectator/the-future-of-shopping-in-australia-/news-story/0cd2d46c8b2bd5f3fa37c214169cc89a [Accessed Online 3 April 2017].

Orel, F.D. and Kara, A. (2014). Supermarket self-checkout service quality, customer satisfaction, and loyalty: Empirical evidence from an emerging market. Journal of Retailing and Consumer Services, 21(2), pp.118-129.

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