Australian supermarket - Essay Example

Introduction: The objective of the paper is to market analysis of an Australian supermarket. The paper will delve on all the economic and business aspects of the supermarket industry. The paper contains a detailed review of the current market structure in this sector of business, encompassing a study about the pricing power policies and the demand, supply factors. The paper will include a report of the chosen business with data and statistics about the industry's growth and competitors in the business. The purpose of the paper is to work on a detailed business review report touching on topics like price, income and cross elasticity, Input prices and cost of production, substitute services available in the market, products and services that complement this service, and a complete SWOT analysis. Industry Overview and Market structure. The paper under all subheadings will explain the microeconomic theory behind the heading in correlation to the supermarket industry. The Australian supermarket and the grocery store industry accounted for $69.5b as industry revenue in the year 2008. With an annual industry growth of 4.7%, the industry has 4300 establishments providing employment to 259,200 people. The two major players in the Australian market are the Woolworths and the Wesfarmers formerly known as the Coles. The Woolworths and Coles feature in the 22nd and 29th place respectively in the list of top 50 retailers around the world. In a report by Blake Dawson named 'Rising Grocery Prices and Australia's Anti-trust laws', Woolworths leads the supermarket industry with 750 stores holding a market share of 44% and Coles with 500 stores holding a market share of 34%. The New entry Germany's Aldi has 300 stores holding a market share of 4%. The supermarket industry like all other industries is under heavy pressure due to the current global turmoil and Dr. Ira Kalish, Deloitte Research's Director of Consumer Business, advised, "We are seeing this already with consumers shifting to more price focused retailers. For all retailers, this environment will require added attention to keeping costs under control." The paper will report a detailed analysis on the Wesfarmers Super Market. Find below and in the forthcoming pages the History, market share , pricing , competitors, costs, market forces and a SWOT analysis of the Coles the now Wesfarmers Supermarket. Body: The Coles opened its first store in the year 1914 by George Coles. Over years the company has grown and spread its wings far and wide and today Coles has over 740 stores in both New Zealand and Australia. The Supermarket caters to a whole range of customers and stands out remarkably for its services and is the number two chain of supermarket in Australia next to Woolworths. Employing more than 92000 people the Coles has specialized departments for Health, baby food, Health and Beauty Department, Meat Department Fruits and Vegetables Department, Deli (Pizza Bar) and the international and specialty Department. The Coles was acquired by Wesfarmers Ltd in the end of the year 2007. Pricing Power and Policies: The pricing power or market power of a firm is the power exerted by the firm to determine or influence the price of the products sold or the services provided. In other words, the freedom of Coles to set prices for their own products. Pricing power of a firm largely depends on the demand for its goods and services. A firm enjoys the maximum pricing power depending upon the price elasticity if its product or service. Price Elasticity according to Mulhearn and Vane in the book 'Economics' is "measures the responsiveness of the quantity demanded of a particular good or service to changes in its price ." Coles being the second largest supermarket chain in Australia to a certain extent does dictate prices and enjoys an edge over smaller retail stores. However in a Public submission report to the ACCA (Australian Competition and Consumer Commission) Coles has stated "Coles is committed to delivering value to customers every day. As well as seeking to offer our customers competitive grocery prices, Coles also offers customers a range of ways to help them reduce their cost of living: Each week, Coles provides a range of weekly specials on everyday items that help make a real difference to shopping bills. Over the past two years, Coles has revitalized its own brand or housebrands1 to introduce a new three-tiered range of products that offer customers quality products at a low price. Strong growth is being experienced in the sales of these products as more customers choose them to increase the value of their shopping budget. Housebrands together with traditional branded products give consumers more choice. The Coles fuel discount program, available to all customers who spend $30 or more in our supermarkets and liquor outlets, continues to be extremely popular, with millions of customers choosing to redeem their fuel discount offer every month. Since its inception in 2005, the fuel discount has delivered tens of millions of dollars of fuel savings to Coles' customers. Coles' customers also benefit from an extensive range of rewards through the Fly Buys program, Australia's most popular shopper loyalty program - there is no cost to this program and it is available to all who wish to participate." The report highlights the customer centric policy Coles intends to follow in terms of pricing. Demand, Supply, Substitute and Complement Services: Lipsey and Chrystal in their book 'Principles of Economics define demand as "The amount of a product that consumers wish to purchase is called the quantity demanded." Supply is defined as "The amount of a product that firms are willing to offer for sale is called the quantity supplied." The Coles and the Woolworths with their omnipresence as a supermarket all over Australia have together created a duopoly or an oligopoly market. Many Australian consumers have had increasing disposable incomes over the last several years and this has heavily benefited the retail food industry (Supermarkets). The demand for a wider range of food products and better quality has for sure enhanced the growth of Supermarkets and Coles has quickly capitalized over the same, spreading its wings far and wide. A report on the Australian Retail food sector by the Australian Bureau of Agricultural and Resource economics explains the growth of the demand and supply side economics as follows "Food safety concerns have also ensured that the standard of food quality and handling practices at the retail level have improved and assisted in the vertical integration of food supply chains. Food safety and quality concerns have resulted in the development of effective supply chains to deliver the high standards that consumers have demanded. Both Woolworths and Coles have extensively used supply chains to source fresh produce from agricultural producers. The development of supply chains has improved the traceability of produce and any contamination or similar food quality and safety issues can be traced back to the source or origin more efficiently. Coupled with the food safety and quality benefits derived from the use of supply chains, the biggest driver of supply chains has been the supermarkets' objective of achieving cost savings and efficiency gains from economies of scale and economies of scope. Large supermarket chains have the ability to benefit from large purchase volumes and can achieve lower per unit costs because of the scale of their operations. Economies of scope have been possible due to the related nature of some of the goods and services sold by supermarkets. For example, by supplying fresh chickens it is possible to also provide cooked chickens at a lower cost than if both tasks were performed separately. Supermarket transport and distribution plants also create economies of scope, where it is cheaper to transport and distribute many products jointly than on a single product basis. Substitutes to these large supermarkets and its scale of operations are the smaller retailers or smaller retail chains that can offer value only through proximity or price. Aldi the German retailer is a serious competitor for Coles. Elasticities of Demand for the Coles Supermarket Chain. As explained in the above pages the price elasticity of demand for Coles or the market power that Coles is able to inject is evident in the market share held by the company. Looking at Income elasticity of demand, Income elasticity is the change in the quantity of goods and services demanded when there is an increase in the income level of the consumer. As we have seen, the growth of the food retail sector in Australia has been mainly due to the increasing disposable income available to the Australian consumers over the years. A retail report from the state of Victoria states "Real disposable income is expected to average at 3% per annum over the five years of 2011-2012. It is expected that this will result in an increase in retail sales." Cross elasticity of demand is where the demand for the product increases or decreases based on the demand for the substitute. In this case substitutes are the competitors of Coles. Cross Elasticity for Coles is the increase in the sales volume of Woolworths, Aldi or any other small retailer who can make a difference in the value of the goods or service in any given geography. Cross elasticity of demand for a supermarket simply means the increased business competitors are making at the expense of Coles. Market Competition, Size and Growth. Read More