Discuss about the Supermarket Industry for Coles and Woolworths.
For a long time now, Coles and Woolworths have been dominating the Australian supermarket industry. The two supermarket giants have spread their tentacles into almost every aspect of the Australian economy. Their products range from grocery products, petrol, liquor, insurance, and even finance services. By and large, the prevailing supermarket industry has failed to provide level playing field for small supermarkets. Woolworths and Coles pose a significant threat to competition in the sector (Greenblat 2014). It is for this reason that most individuals argue that both supermarkets have excessive market power.
Today, Australia has one of the most saturated supermarket industries globally. As at 2013, Woolworths and Coles controlled approximately 2 percent of the country’s sales of packaged groceries (Samuel & King 2013). Metcash-supplied stores only accounted for around 20 percent of the sales. Thus, in this year, the country’s big three supermarkets accounted for almost 95 percent of the market share. In the same year, the two giant retailers had a total market share of over 80 percent of the industry’s total market share (Ryan 2013). Still, the two supermarkets remain adamant and reject claims that they have too much market power.
How Much Does Woolworths and Cole Own?
According to a 2014 analysis, Woolworths and Coles had a market share of around 72.5 percent of the country’s $82 billion worth grocery sector. Individually, Coles’ market share was estimated at 33.5 percent while that of Woolworths was 39 percent of the total market share (Ma 2014). Cole’s increased market shares are predominantly attributed to the retailer’s momentous advertising over the past few years. Besides, Woolworths owns the only grocery distributor in Tasmania (Knox 2013).
It is imperative to note that the two firms have a colossal interest in liquor sales within the country. A report by the McCusker Center for Action on Alcohol and youth indicates that Woolies accounts for about 40 percent of the total alcohol retail sales in the country. As at 2013, the retailer had more than 1355 liquor outlets all over the country. What is more, the company owns a 75 percent stake in the country’s Leisure and Hospitality Group (Ma 2014). The group controls a myriad of liquor outlets within the region, including pubs, clubs and bottle shops. In turn, the great sales avenue offered by the institution ensures profits for Woolworths.
In the same way, Coles has a preferential interest in the sector. Particularly, its parent company, Wesfarmers controls about 20 percent stake of the national liquor market. In 2013, the company had almost 630 liquor stores (Ma 2014). In addition to this, both Coles and Woolies own numerous private label beer and wine products. These brands include Bay estates, South Island, Oak Lane, and Cradle Bay. Markedly, the supermarkets do not display their private label on these products. Thus, consumers are induced into buying them without the knowledge that the goods are products of the Coles and Woolies (Keith 2012).
The ACCC reports that Coles and Woolworths own almost half of the petrol stations in the petrol retail market. In 2013, each supermarket owned about 24 percent of the total market share. Primarily, this occurrence can be traced back to 2003 when Coles bought out almost all Shell retail outlet stores (Ma 2014). Woolworths followed suit and entered into a joint venture with Caltex. Other supermarkets also started buying out petrol outlets. Typically, the success of Woolies and Coles in this sector is linked to the supermarkets’ ability to offer large discounts to their clients, something that initial petrol retailers could not afford. Consequently, this has led to the face out of most petrol retail outlets in the country. In this regard, the ACC warns that the petrol market in Australia may suffer greatly over the long term (Cohen 2013).
It is worth noting that the two supermarkets also offer insurance services to the clients. While Coles ventured into the sector in 2010, Woolworths dived into the industry in 2011. In 2013, Coles had around 35000 clients (Ma 2014). The supermarket utilizes data collected from their customers through their loyalty rewards program and approach them with insurance offers. In turn, they are able to tailor insurance offers that target the specific requirements of their clients. As a result, they have been able to attract many clients to subscribe to their insurance packages over the years.
Today, Woolworths offers a range of financial products to its customers. The financial products comprise of credit cards and loans (Greenblat 2014). Likewise, Coles entered into a joint venture with GE Capital in 2015. As a result, it is able to offer its clients an array of financial products. In addition, its banking clients have access to additional rewards such as discounted groceries.
Too Much Market Power
It is worth pointing out that the two supermarkets have saturated almost all aspects of the Australian economy. The big market shares held by Woolworths and Coles and their high concentration in almost every retail sector indicates the lack of competition in the market. As such, the companies only face competition at the periphery. All its competitors are relatively small to offer significant competition to the two retailers. It is thus rational to say that the only real competitive problem faced by Coles and Woolworths in Australia is Woolworths and Coles (Samuel & King).
In addition, Woolies and Coles have created high barriers to entry and expansion of small retailers in the supermarket industry. Both firms have massively differentiated their products from those of competitors’. They also tend to play a game of copycat. As such, they copy each other in terms of price discounts to customers, development of home brands, and discounts on petrol products. Thus, when one company makes a move, the other also simultaneously changes the strategy to maintain its customers. Regardless, these price wars are often associated with reduced profits for the supermarkets. Particularly, this is because the consumers perceive the two supermarkets as similar. Thus, there is limited loyalty. Hence, the price wars largely benefit consumers through lower prices but limit their choices.
In addition, the high market power possessed by Coles and Woolworths enable them to influence the overall market prices for products and services in the market. Primarily, when the two firms engage in price wars and offer discounts on products, the other competitors are also forced to reduce their prices. Otherwise, they risk losing their clients. Often, clients move to the cheaper alternative. Thus, the small retailers are forced to offer large discounts to maintain their clients. Such discounts reduce their profits significantly (Edwards 2012). Over the long term, these small retailers are forced out of the market, leaving Coles and Woolworths to serve the Australian population.
According to a survey conducted in 2015 by independent grocery retailers in the country, many Australians are in favor of stringent regulations to enhance the degree of competition in the market. The survey also discovered that about 72 percent of the respondents regard the grocery market in the country as being too dominated by the ‘Coleworths’ (Mitchell 2015). On the other hand, only 22 percent of the respondents believe that the competition level is healthy in the sector (Mitchell 2015). In this regard, an increase in the level of competition in the supermarket industry would be beneficial for Australians now and in the future. In the same way, an increased level of competition between Woolworths and Coles may be beneficial to the Australians, but only to a certain degree.
Benefits of Increased Competition Between Coles and Woolworths
It is imperative to note that the two supermarkets have contributed substantially to the economic wealth of the country. The companies operate almost 1000 supermarkets in the country. For this reason, they offer great employment opportunities for the Australian populace. Coles and Woolworths are among the nation’s biggest employers. In total, they have employed approximately 400,000 employees in their various outlets (Bariacto & Nunzio 2014). In this regard, the increase in competition between the country’s largest supermarkets is beneficial to Australians.
Affordable Products for Consumers
In 2012, Coles initiated a price war on its fruits and vegetable products. During this time, the company slashed the prices of fresh produce by approximately 50 percent (Edwards 2012). The price discount by Coles forced Woolworths and other competitors also to reduce their prices or risk losing their business. By and large, the price war is beneficial to the consumers as they are able to purchase relatively more products with the same amount of income (Edwards 2012). Besides, they are able to satisfy consumer needs with a variety of goods. Therefore, the price competition strategies used by the supermarkets enhances the diversity of product choices offered to Australians at affordable prices.
Disadvantages of Increased Competition Between Coles and Woolworths
Unfair Competition to Smaller Retailers
When Coles initiated the discounts in 2012, the prices of fresh produce reduced significantly. In turn, a decline in the price of vegetables and fruits increased the risk of driving small retailers out of business (Edwards 2012). Mainly, this is because they are also forced to sell their products cheaply to maintain their customers. As a result, this leads to a significant reduction in their profits. In the long run, the small retailers are unable to keep up with the competition and are thus faced out of the market entirely. Thus, an increased competition level between Coles and Woolworths creates stiff competition for small firms (McCartney 2015). Thus it is disadvantageous to small retailers in the economy.
The standards and specifications imposed by Woolworths and Coles have a significant influence on the supply chain (Bariacto & Nunzio 2014). The retailers determine the methods of production, size, color and shape of the products that are supplied to the market. Subsequently, this has put pressure on farmers and other suppliers to produce the ideal product or face the risk of being weeded out from the market. Given the importance of Coles and Woolies in the market for consumer access, the suppliers are forced to meet the demands (LaFrenz 2014). Normally, these standardization demands burden the suppliers who are forced to engage in capital-intensive production processes (Knox 2014). Thus, the competition between the two supermarkets is constricting to the operation of its suppliers in Australia.
When the suppliers’ products do not meet the standards laid out by the two supermarkets, it results in rejection of the products. In turn, this leads to wastage. Typically, this occurs in the supply of products that are perishable in nature. It is worth pointing out that continued food wastage in the country is detrimental to the overall economy and is not sustainable for the country’s food security future (Bariacto & Nunzio 2014). In addition, these standards may end up killing off productivity among local suppliers within Australia (Keating 2015). What is more, the competition is disadvantageous to farmers who supply their fresh produce to the supermarkets. They are forced to produce and supply more products to the company at relatively lower prices. This has mainly affected vegetable, dairy and fruit farmers (Cohen 2013). In the long run, the low prices will force small farmers to close down their operations.
Is Increased Competition Advantageous or Disadvantageous?
The existence of Coles and Woolworths in the Australian economy has significant advantages. By and large, the competition between the two firms in the supermarket industry has brought about significant benefits to the country. Predominantly, the wide array of products and services in the economy has generated economic wealth for Australia. Consumers are also able to access affordable goods and services (Edwards 2012). It has also created employment opportunities for many Australians. It is worth noting, however, that while the increased competition between the two supermarkets may be beneficial to the consumers, negative effects accrue to other sectors of the economy (Jones 2011).
The massive competition by the two retailers has brought about significant problems to the suppliers, small retailers, and the economy as a whole (Chung 2015). The widespread nature of the flaws brought about by the competition warrants for a change in the country’s competition laws. Particularly, restrictive policies should be instigated to control the degree of competition within the economy to limit the competitive pressures brought about by the two supermarkets at healthy levels. Otherwise, the continued unhealthy competition in the country will be detrimental to the overall economic performance in the long run.
Coles and Woolworths play a significant role in the Australian economy. Over the years, the two companies have expanded their operations in the country and ventured in a diverse of sectors in the economy. Today, these retailers have large market shares in the grocery sector, fuel, liquor, insurance, and finance. The magnitude of their shares has given them the power to influence the operations in the sectors. As a result, they are able to effectively influence prices and quantity of products and services in the market. While great competition by the two supermarkets may be advantageous to the consumers, these strategies often create negative impacts to small competitors and suppliers in the market. For this reason, the Australian government should take a keen interest in the supermarket industry and offer viable solutions to the existing problems in the sector.
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