{"id":851,"date":"2016-02-05T16:55:26","date_gmt":"2016-02-05T05:55:26","guid":{"rendered":"http:\/\/casestudyhelp.com\/sample-questions\/?p=851"},"modified":"2018-01-24T20:52:46","modified_gmt":"2018-01-24T09:52:46","slug":"the-australian-supermarket-industry-case-study-help","status":"publish","type":"post","link":"https:\/\/casestudyhelp.com\/sample-questions\/the-australian-supermarket-industry-case-study-help\/","title":{"rendered":"The Australian Supermarket Industry Case Study Help"},"content":{"rendered":"

Case Study
\nThe Australian Supermarket Industry<\/strong><\/p>\n

Industry overview and characteristics<\/strong><\/p>\n

The Australian supermarket industry, defined as businesses retailing groceries and food lines, is classified as a mature industry. Organisations competing in mature industries employ aggressive cost-reduction initiatives, with competitive advantage evolving from cost-based, rather than differentiation-based, factors. The introduction of private-label merchandise is one such cost-reduction initiative. Introduced by Aldi during its market foray in 2001, private-label merchandise evolved to become a popular cost-reduction tactic adopted by the industry\u2019s foremost competitors. Expanding market popularity of private-label merchandise (products manufactured and sold under a retailer\u2019s own brand) offers comparable quality and value for money, growing from 13.5 per cent of total supermarket sales in 2007\u201308 to 25.5 per cent in 2012\u201313.1<\/p>\n

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Slowing industry growth is a common characteristic of mature industries.2 The Australian supermarket industry achieved average annual industry growth of 3.4 per cent between 2007 and 2012, and forecasted growth is estimated to reduce to 2.4 per cent per annum between 2012 and 2017, escalating cost-based competition.3 Continued offerings of private-label merchandise is foreseeable, and so product-based price wars are inevitable.<\/p>\n

The Australian supermarket industry \u2014 essentially a competitive duopoly between Woolworths and Coles, comprising a collective market share of over 70 per cent4 \u2014 is no stranger to product-based price wars. By targeting everyday household commodity items (e.g. milk, bread, fruit and vegetables), with the intent to book sales revenue, aggressive price wars have erupted between Woolworth’s and Coles. However, price wars on items, such as milk and bread, lead to products becoming \u2018loss-leaders\u2019 \u2014 that is, products sold at or below cost. Loss leaders are designed to increase store foot traffic and stimulate sales, not necessarily of commodity products, but of more profitable product lines, during a supermarket visit.5 In addition, to both private-label merchandise and price wars, Coles launched its \u2018down, down\u2019 campaign in January 2011, reducing the prices of over 6000 products by an average of 10 per cent.6 In a similar approach, Woolworth’s launched its \u2018price knockdown\u2019 campaign, resulting in increased sales of 4.7 per cent for the year to June 2011. According to former Woolworth’s CEO Michael Luscombe, \u2018a number of initiatives contributed to this result including customer acceptance of the new 2015 store format and overall price competitiveness with our price knockdown campaign\u2019.7<\/p>\n

The following analysis of the Australian supermarket industry will examine the macro environmental trends influencing industry competitiveness and explore industry conditions, viewed through Porter\u2019s five forces competition framework.<\/p>\n

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Macro environmental influences<\/strong><\/p>\n

Reduced consumer sentiment and disposable household income have an effect on supermarket spend. Consequences of the global financial crisis have altered purchasing behaviour, and consumers have now adopted more conservative spending patterns in the face of rising living costs and continued economic uncertainty.8 While Australian supermarkets are partly insulated against reduced disposable income, it is plausible that a reduced spend on luxury\/gourmet product lines will result.9 Responding to the decline in customer spend, Woolworth’s expanded their overall range of private-label brands, offering comparable quality at reduced prices, setting a 2011 target to double its sales of private-label groceries.10<\/p>\n

Changing age and population demographics influence not only location decisions for the establishment of new supermarkets, but also affect the range of products offered between supermarkets. Furthermore, population growth will drive construction of new supermarkets11 as sustaining increased foot traffic to existing stores becomes untenable.<\/p>\n

Changing societal values toward healthy living have altered purchasing behaviour of consumers, reflected in increasing demand for organic produce. A 2010 report produced by the University of New England on behalf of Biological Farmers of Australia (BFA) indicated that six out of ten Australian households purchase organic produce on occasion, an increase of 40 per cent since 2008. In addition, organic domestic retail sales have grown over 50 per cent in two years from $623 million to $947 million.12 Availability and distribution of organic produce is increasingly facilitated through Australian supermarkets.13 Indeed, buying habits of consumers wishing to purchase organic produce have altered considerably, with supermarkets responding to increased demand.14 Woolworth’s, Coles and Aldi supermarkets throughout Australia stock a range of private-label organic products, and Woolworth’s and Coles also stock a broad range of brand-name organic products. Coles supermarkets stock over 170 products in the Coles Organic range, and Woolworth’s\u2019 acquisition of Macro Wholefoods in 2009 led to their expansion in retailing organic produce.15<\/p>\n

Technological developments have led Woolworth’s to trial two virtual supermarkets in Melbourne and Sydney.16 These trial virtual supermarkets, according to Tjeerd Jegen, Woolworth’s\u2019 director of supermarkets, are \u2018just one idea to make our customers\u2019 lives easier\u2019.17 Not to be beaten in the race for technology-led customer convenience, both Coles and Aldi have released iPhone applications. Furthermore, in late 2011, Coles introduced contact less card payment systems to streamline customer purchases18, hence customers can now purchase items up to $100 without the need for PINs or signatures.<\/p>\n

Porter\u2019s five forces competition framework and the Australian supermarket industry<\/strong><\/p>\n

Many industry conditions influence the level of industry attractiveness, yet Porter\u2019s five forces competition framework suggests industry attractiveness can be determined through application of five interrelated factors: (1) threat of entry, (2) power of buyers, (3) power of suppliers, (3) threat of substitutes and (5) rivalry between established competitors.<\/p>\n

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Threat of entry<\/em><\/p>\n

Industries presenting good investment returns and low entry barriers are attractive targets for potential entrants. As previously indicated, the Australian supermarket industry experienced modest annual growth of 3.4 per cent for six years to 2012. Forecasts estimate average annual growth will diminish to 2.4 per cent through to 201719, continuing what former Woolworth’s CEO and managing director Michael Luscombe called \u2018a very challenging climate\u2019.20 Combined with declining revenue growth, potential entrants<\/p>\n

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face significant entry barriers. These barriers include limited sites for development purposes, restrictive zoning and planning regimes, foreign investment rules necessitating development of vacant land within 12 months of acquisition by foreign companies21 and significant capital outlay.22 Despite substantial entry barriers, two international competitors \u2014 Aldi, a German supermarket chain, and Costco, an American mass merchandiser \u2014 have entered the Australian marketplace, suggesting that despite substantial entry barriers, \u2018returns available in the Australian retail grocery industry are attractive to foreign companies\u2019.23<\/p>\n

Power of buyers<\/em><\/strong><\/p>\n

The power of buyers can be conceived as either the inherent power exercised by supermarkets over suppliers or as the general purchasing public, being the end consumers of supermarket produce. Buyers exercise considerable power over the exchange relationship, when purchases made represent a substantial portion of the seller\u2019s sales.24 Indeed, suppliers have little alternative but to yield to supermarket market power since these supermarkets \u2018typically account for 40 to 60 per cent of revenue of any key food processor in Australia\u2019.25 Supermarkets are also powerful buyers when they pose a credible backward integration threat. Historically, Woolworth’s has engaged in backward integration via acquisition activity. In 2009, Woolworth’s acquired a 25 per cent stake in Gage Roads, an existing Woolworth’s beer supplier.26 Indeed, there is a trend among the major Australian retail supermarket chains to increasingly replace their suppliers\u2019 brands with their own.<\/p>\n

Power of suppliers<\/em><\/strong><\/p>\n

Australia\u2019s food supply chain has experienced a structural power shift over the past 30\u00a0years, according to agrifood expert, David McKinna. While suppliers traditionally held market power throughout the 1970s, exercised through statutory marketing authorities and producer-owned cooperatives, corporation was required to gain access to capital.27 Consequently, almost all of these organisations were taken over by multinational corporations and \u2018the agenda shifted from maximizing farm-gate returns to delivering bottom line profits to processes\u2019.28 As a result, multinational manufacturers exercised significant control since \u2018supermarkets did not wish to be without power brands\u201929, as there was consumer demand for them. However, with the introduction and expansion of private-label merchandise, an additional structural power shift occurred; this time in favor of the supermarkets. Kim Carr, former Labour Minister for Innovation, Industry, Science and Research, indicated that \u2018for most grocery manufacturers, supermarkets are the main distribution channel to customers. That leaves many to the mercy of the big two \u2014 and reliant on the terms and conditions they choose to offer.\u201930 Indeed, the concern regarding supermarkets is \u2018their dominance and just what impact this has on suppliers\u2019.31 Increasing unease about the dominance of supermarkets over local and international suppliers has resulted in calls from the Australian Food and Grocery Council to establish a supermarket ombudsman.32<\/p>\n

Threat of substitutes<\/em><\/strong><\/p>\n

With convenience being of up most importance to time-poor customers, supermarkets continue to offer a \u2018one-stop shop\u2019 for those who wish to purchase a broad range of fresh fruit and vegetables and other household grocery items. Convenience stores, such as 7-Eleven, are a substitute to supermarkets from a convenience perspective, but they continue to offer only a limited range of stocked items compared to Woolworth’s, Coles and Aldi supermarkets. From a competitive perspective, supermarkets attempt to \u2018gain a larger share of the convenience market by introducing private labels, installing self-checkouts and re positioning traditional convenience store merchandise to more accessible [in store] locations\u2019.33 A recent US study indicated that consumers sought convenience over price, and that \u2018data shows a shift in consumer mindset from shopping around to save money,<\/p>\n

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to spending more money in order to save time\u2019.34 This trend is mirrored in the Australian setting with time-poor cash-rich consumers being the traditional driving force behind convenience stores.35 However, the perception of convenience stores being a realistic substitute is tempered by \u2018aggressive price campaigns\u2019 initiated by supermarkets to drive consumer spend away from convenience stores and towards major supermarkets.36<\/p>\n

Rivalry between established competitors<\/em><\/strong><\/p>\n

While the industry comprises over 3500 competitors, with combined profits of $3.3 billion on $83.7 billion sales revenue in 2011\u201312 financial year, the Australian supermarket industry is still highly concentrated as Woolworth and Coles, the industry\u2019s two dominant competitors, amassed a combined 71 per cent market share.37. In addition, these concentration levels have been boosted by \u2018independent supermarkets joining together to form buying groups such as the IGA network\u2019.38 The level of industry concentration influences the intensity of competitive rivalry. As the number of dominant organisations increase, so too does the probability of aggressive competitor tactics, including commodity-based price wars \u2014 as evidenced by the number of commodity-based price wars in 2011\u201312, as discussed earlier. Supermarkets primarily compete on the basis of price, with customers being price-conscious and wishing to experience value for money.39<\/p>\n

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