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Transcript of SUPERMARKET
What is Market?
an actual or nominal place where forces of demand and supply operate, and where buyers and sellers interact to trade goods, services, or contracts or barter.
What is Competitive Market?
A competitive market is one in which a large no. of producers compete with each other to satisfy the wants and needs of a large no. of consumers.
OF MARKET POWER
Food retailing in Australia has transformed considerably in the last 40 years. Australia has one of the most concentrated grocery markets in the world. This is due to supermarket giants Woolworths and Coles. They are the best know duopolies in Australia. together they have a market share of about 70%. Whereas the Uk's two biggest chains: Tesco and Sainsbury's are 48% and the USA equivalent is about 20%.
THE BEAST FILE:
WOOLIES AND COLES
The ABC show Hungry Beast took a analytical look at these 2 companies and the industry in which they operate, and this is what they found on how the 2 supermarkets accumulate their large market share:
- Gradually buy out smaller rivals in a process called “Creeping acquisition”
- They also buy land their competitor might be interested in and leave it vacant, this tactic is known as ‘Greenfield Acquisition’
- In 2008 an ACCC inquiry found over 700 restrictive covenants made by Woolworths and Coles with shopping malls to keep out competitors, such as IGA and Aldi. They agreed to phase out this anti-competitive practice but 100s still remain
- They also have been allegations of predatory pricing where they use their huge buying power to push prices down. This drives smaller competitor out of business, which then lets them raise prices once again.
- The National Farmers Federation claims that farmers are getting as little as 5% of what consumers pay at the checkout.
finance commentator Robert Gottliebsen describes this as “one of the greatest scandals even seen in this country
While most of the media attention focuses on the battle between Woolworths and Coles, the larger picture involves muddled consumers, embittered suppliers and squeezed out independents. Coles and Woolworths have been vertically integrating their businesses, which means they are becoming their own supplier by producing their own products i.e. their home Brand. They are misusing their market power to benefit their home brand vs. their branded products.
WHO BENEFITS AND
WHO IS HARMED BY
The battle between the two food giants has been an advantage for consumers. Food prices have gone down over the past few years and shoppers are spending more as a result. Coles and Woolworths would rather not fund their price wars, so they are expecting their suppliers to tolerate the bunt.
DO COLES AND WOOLWORTHS HAVE TOO MUCH MARKET POWER?
Coles and Woolworths supermarkets ensures they build market share against other competitors. Coles and Woolworths' share of the $112 billion grocery market has increased over the last five years from 48 percent to 56 percent.
Coles and Woolworths have come under fire for using their market power to extract favorable conditions from their suppliers. It’s creating a framework for complaints to be handled. The supermarkets have been under pressure to agree to a voluntary code, with a mandatory code hanging over them if they do not.
DO YOU THINK THEIR DOMINANCE WILL BE MAINTAINED OVER TIME?
Do Coles and Woolworths have too much market power?
Who benefits and who is harmed by their market power?
Do you think their dominance will be maintained over time?
TACTICS AND STRATEGIES USED
A firm with total market power can raise prices without losing any customers to competitors. These firms have essentially locked all barriers to entry in that specific market. If they begin to face some other competitors, they will still act like a competitive firm. A firm with market power has the ability to individually affect either the total quantity or the prevailing price in the market. This dominance makes it difficult for start up firms to succeed.
If people are more likely to go there than to anyone else even if prices are raised, so there is low price elasticity of demand, the firm can raise their prices to make a bigger profit.
Firms become anti-competitive, so it becomes very hard for new firms to enter the market and so competition and choice for the consumer is decreased.
If they have a large customer base already, firms may not feel the need for too much innovation as they don't need to get ahead. This could again result in the consumer having less choice and not getting the best products.
What is Perfect competition?
Competitive market in economics is also known as perfect competition where consumers and producers of a product are "price takers".
What is Market Power?
A company's ability to manipulate price by influencing an item's supply, demand or both. A company with market power would be able to affect price to its benefit. Firms with market power are said to be "price makers" as they are able to set the price for an item while maintaining market share. Generally, market power refers to the amount of influence that a firm has on the industry in which it operates.
RETAIL MARKET SHARE
The Australian Competition and Consumer Commission (ACCC) are inspecting both supermarket chains concerning claims of unconscionable conduct. In 2004 a similar investigation led to no findings of misconduct, but suppliers did not cooperate for fear of retaliation. They are now speaking of being forced to cut prices again and again or risk losing buyers that take up to 80 percent of their products. The latest evidence of this pressure on suppliers is the bankruptcy of Windsor Farm Foods, which was the last wholly Australian cannery.
Market demand is related to peoples want for goods and services. The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded
Change in quantity demanded basically arises when the price of goods goes higher or the price of substitute goods falls. The amount of good that buyers purchase at higher price is less because the price of a good goes up, so does the opportunity cost of buying that good.
Supply demonstrates the quantities that will be sold at certain prices. Supply, on the other hand, is limited and depends on the amount of resources and technology available.
Unlike demand, higher the price, higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at higher price increases revenue.
As defined a duopoly is a “situation in which two companies own all or nearly all of the market for a given product/service or industry” (investopedia). It is the most simplest form of oligopoly. A duopoly may have the same impact on a market as a monopoly does if the two main participants/players plan on prices or output. Usually this will result in consumers paying higher prices, although in our case study this is totally the opposite. Supermarket giants Woolworths and Coles have shifted the disadvantage from consumers and put it all on their suppliers.
For food and grocery manufacturers in Australia, the retail environment is expected to remain as challenging and highly concentrated as Coles and Woolworths forecast will have a combined total of over 80% of supermarket shares in many categories. In which both Coles and Woolworths are expected to maintain and possibly increase their profit margins in the future, although the margin pressure on food and grocery manufactures continues, as a result the industry has grown at a slower rate than the demand for food and grocery items.
The possibility for new entrants, like Tesco to enter the Australian retail market is unlikely given the low rates of growth due to market maturity and high barriers to entry. These barriers include cost of land, the limited availability of prime real estate locations and planning and zoning issues. Coles and Woolworths have such power to prevent other firms to compete and enter the market with strategies such as 'predatory pricing', 'creeping acquistion' and 'greenfield acquistion'.
Coles and Woolworths dominate the food retail market in Australia. Coles and Woolworths have a lower share in fruit and vegetables, fresh meat and bakery products. Firstly to the sparse and highly urbanized population that fosters the development of large, metropolitan food retails rather than smaller, locally based retailers. Secondly, the widely dispersed centers of habitation and key food producing areas require effective transportation networks, a difficult feat for smaller producers.
An example is the $1 per litre milk promotion, which in 2011 accounted for 72% of Coles’ milk sales. Woolworths have been exhibiting themselves as being on the side of the dairy farmer despite offering the same $1 deal. This has led to competitors voicing out this unfairness and another investigation by the ACCC.
As long as margins stay healthy, the battle between Coles and Woolworths seems likely to continue. This though is bad news for suppliers and good news for Consumers.