1421103_Agarwal_Mayank_Eco

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Feb 20, 2024

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Part A – Case Study on Supermarket and Grocery Store in Australia Introduction: The Supermarket and Grocery Store sector in Australia is an integral component of the retail landscape, with millions relying on it for their daily necessities. Gannon from IBIS World,2023 (highlights of performance) states that the supermarket revenue in Australia is around $135 billion in size, and earns around $4.9 billion in profit, while employing over 434k people in 2023. A blend of international and domestic entities has sculpted a competitive market, with evolving consumer preferences and digital innovations introducing dynamic shifts. The Australian supermarket have recently been covered by various news channels and social media for Price Hikes and Worker Strikes with articles like, “Here's how Australian supermarkets are making millions during the cost-of-living crisis” (SBS News, 2023) and “Workers Are Striking at Australia’s Supermarket Duopoly”, (Jacobin 2023) This analysis delves into the critical factors affecting the industry's profitability. Factor 1- Barriers to Entry: Barriers to entry refer to the obstacles or hindrances that make it difficult for new companies to enter an industry and compete with established firms. These barriers can include high startup costs, economies of scale enjoyed by current players, strong brand identities, regulatory restrictions, and access to key distribution channels.  High Start-Up Costs: Establishing a supermarket or grocery store involves significant capital expenses. Storefronts, inventory, point of sale systems, and advertising campaigns are capital intensive. According to Reinhardt (2021) from finder.com, “ The initial investment can vary a lot, as there are so many factors at play. Generally, you might have to pay anywhere between $30,000 to $70,000 for a small grocery business.”  Legal Barriers: Compliance with regional food safety standards and adherence to the Food and Grocery Code, overseen by the ACCC, is essential. There are several legal obligations that applies to a supermarket by ACCC like, “ A retailer or wholesaler must negotiate in good faith and take all reasonable steps to resolve negotiations without delay.”, “Retailers and wholesalers must respond to notifications within 30 days.”, “Limits on varying or changing a grocery supply agreement.” (acc.gov.au, 2015)  Brand Loyalty: Consumers often develop loyalty to specific supermarket brands or their private-label products, making it challenging for new entrants to lure away these customers. According to a report published by Statista Research Department (2023) In 2022, Australian consumers primarily engaged with supermarket reward schemes and airline loyalty programs. Coles Flybuys and Woolworths Everyday Rewards stood out as top choices, followed closely by Qantas and Virgin Australia's frequent flyer programs. Most Coles and Woolworths loyalty members used their points for grocery discounts.  Economies of Scale: Established players like Woolworths, Coles, and Aldi benefit from economies of scale, allowing them to achieve cost efficiencies and price competitiveness that new entrants might find challenging. Australian giant retailers use unique ways to achieve economies of scale, one such way is to acquiring other businesses, Wikipedia (2019) cites that “Woolworth acquired 22 Action supermarkets in Western Australia in 2006”, “In August 2020, Woolworths announced a A$552 million deal to purchase a 65 percent stake in foodservice distributor PFD Food Services, along with the entirety of PFD's property

portfolio, as part of the company's push to expand into the business-to-business wholesale market.” Recent Market Entries: Aldi, a brand that originated in Germany, entered the Australian market in the early 2000s and has since been expanding its presence consistently, disrupting the industry with their aggressive pricing. Simultaneously, while Amazon Australia currently holds only a minor market share, its global e-commerce expertise poses a potential shift in the local grocery landscape. In a nutshell, the grocery domain in Australia is characterized by significant entry challenges, stemming from the monetary demands, established market leaders, and consumer preferences. Even though brands like Aldi have broken in, the overarching landscape remains tough for newcomers. Drawing from all these data we can see they’re high barriers to entry which leads to higher pricing power in hands of the firms in the industry which in turn leads to higher profitability. I believe that this trend will continue leading to further consolidation in the market meaning the supply curve would shift left while the demand curve would remain the same (ceterus peribus). Factor 2 - Price Discrimination Firms in Australia frequently engage in price discrimination, there are various methods through which they practice this and these are discussed below along with the factors that enable them to do this-  Loyalty Programs: Supermarkets, like Coles with Flybuys and Woolworths with Everyday Rewards, provide personalized offers to customers based on their purchase histories and membership status. This approximates third-degree price discrimination, selling identical good to groups of customers at different prices. According to woolworthsrewards.com.au (2022), “Members can enjoy 10% off every month on one in-store shop at Woolworths and

one in-store shop at BIG W - that's up to $100 in savings every month and get exclusive subscriber-only free products, offers and promotions, they also collect 2x points˚ on every shop in-store and online at Woolworths and BIG W.”  Bulk Purchases and Promotions: Second-degree price discrimination occurs when prices vary based on the quantity purchased. Supermarkets like Coles and Woolworth frequently offer bulk purchase discounts or “buy one get one free” deals. For example, at the time of making of this assignment, coles.com.au has a “2 for deal” on Ice Break 750ml Coffee in which 2 packs are selling for $8.5 whereas single pack costs $10 each.  Bundling: Similar to second degree price discrimination, bundling is another method used by giant supermarkets to price discriminate amongst buyers. It involves practices like, selling complementary products together at a discounted rate is another form of price discrimination. Supermarkets might offer combo deals where buying items in a bundle is cheaper than purchasing them separately. Enablers for Successful Price Discrimination:  Consumer Data Collection: The ability to gather and analyse customer data, often through loyalty programs, helps supermarkets tailor their offers.  Market Power: Major players like Coles and Woolworths have significant market shares, enabling them to set prices without much fear of competitive undercutting.  Product Differentiation : With private labels and exclusive products, supermarkets can set different price points without direct competition. Importance for Profits: Price discrimination allows supermarkets to capture a larger portion of the consumer surplus. By targeting specific segments with tailored offers, supermarkets can maximize revenue, making it a crucial strategy for profitability. Changes Affecting Price Discrimination:  Recent Past: With the rise of data analytics, supermarkets have had an enhanced ability to engage in price discrimination, especially of the first-degree variety. Tailored offers have become more precise.  Future Expectations: As privacy concerns grow and regulations on data usage potentially become stricter, the ability to offer tailored prices might be impacted. If this happens, supermarkets might have to revert to broader, more general forms of price discrimination or find innovative ways to segment the market. In conclusion, price discrimination plays a pivotal role in the pricing strategies of the Australian supermarket industry. Its importance for profitability cannot be understated, and ongoing changes in technology, consumer behaviour, and regulation will continue to shape its application. Factor 3 - Internal rivalry and the market structure: Internal Rivalry refers to the competition between firms in a particular industry. It includes strategies and activities companies use to outperform their competitors whereas, Market Structure describes how an industry is organized, based on the number of competing firms, product differentiation, and ease of entry or exit. Common types include perfect competition, monopoly, monopolistic competition, and oligopoly.

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Market Structure: The Australian supermarket industry can be described as an oligopoly. This is characterized by a small number of large firms dominating the market, (Coles, Woolworths, Aldi) with each firm being aware of the actions of the others. 1. Dominance by Few Major Players:  Limited Competition: Primarily, Coles and Woolworths dominate the market, with 28.3% and 37.2% market shares respectively, followed by Aldi with 10.3%. (p. 46 Ganon, IBIS World 2023). Together, they significantly influence market prices, product availability, and overall industry trends.  Collective Market Power: These firms hold substantial combined market share, allowing them considerable influence over prices and product choices, often at the expense of smaller retailers. Dominant firms like Coles, Woolworths, and Aldi can negotiate better terms with suppliers, leading to lower costs and higher profit margins. Their large scale allows for cost savings due to economies of scale. 2. Interdependence:  Pricing: The supermarket industry in Australia is interdependent on each other due to their pricing. This can be understood by a simple side by side comparison of the prices of common

consumer goods like Pasta costing $1 each for 500gm on both Coles and Woolworth online website.  Stable Pricing and Market Dynamics: In oligopolistic markets, one firm's pricing affects others, often leading to stable prices rather than price wars, ensuring industry profitability. This stability, along with knowledge of competitors' actions, facilitates better strategy planning and profit forecasting. 3. Non-Price Competition:  Loyalty Programs: As highlighted, Coles' Flybuys and Woolworths' Everyday Rewards are significant strategies to retain customers without directly influencing product prices.  Store Placement and Layout: Store positioning in high footfall areas and an appealing store layout play a crucial role in attracting and retaining customers. As per the article by news.com.au by Bedo (2018),” Aldi has revealed the secrets behind why their stores are laid out, and Coles and Woolworths do much the same, incorporating softer colours to make aisles feel bigger, grouping the “heroes” of the meals together or using vertical freezers and shallow shelves.”  Innovative Product Ranges: Offering exclusive in-house product ranges or partnerships with popular brands is another strategy to differentiate without changing prices. Additionally, exclusive product ranges can command higher prices, directly boosting profits. 4. Nature of Firms’ Output:  Homogenous Products: Items such as flour, sugar, rice, milk, and other staple foods are essentially homogeneous across various brands. Even if supermarkets have their in-house brands for these staples, the products themselves do not differ significantly in quality or characteristics from one supermarket to another. Products that are standardized and undifferentiated, no matter where you buy them. For instance, a particular brand and model of a kitchen appliance would be the same whether purchased at Coles or Woolworths. For many of these homogeneous products, prices might be relatively consistent across major players due to the competitive nature of the market. Significant price variations for staple products can drive customers to shop with competitors.  Heterogeneous Products : Supermarkets like Coles and Woolworths have been increasingly developing and promoting their in-house brands. These brands offer products that are exclusive to each supermarket, differentiating them from competitors. For instance, Woolworths' "Macro" range, which focuses on organic and health-conscious products, is a differentiation strategy and caters to a niche segment of consumers. Different supermarkets might focus on importing varied international products, catering to the diverse multicultural population of Australia. For instance, Frooti, an Indian Mango flavoured drink is only imported by Woolworths. Overall Impact on Profitability: In the oligopolistic Australian supermarket industry, firms strike a balance between competitive pricing and profit margins. Their dominant positions, combined with non-price competitive strategies, ensure they remain profitable despite intense rivalry.

Conclusion: Our examination of the Australian supermarket industry illuminated its oligopolistic nature, characterized by a few dominant players like Woolworths and Coles. The industry's market structure is evident from the homogeneous nature of products offered, where differentiation often comes in the form of branding and customer service rather than the products themselves. Barriers to entry, like high setup costs, brand loyalty, further cement the dominance of these key players. Intriguingly, the industry showcased various forms of price discrimination strategies, from loyalty programs to targeted promotions, indicating a sophisticated understanding of diverse consumer segments. With these dominant firms holding approximately 75% of the market share in 2022, the competitive landscape is shaped more by non-price competition tactics such as product placement, store layout, and marketing campaigns rather than outright price wars. As the industry continues to evolve, monitoring these dynamics will be crucial for both new entrants and established players to navigate their strategies effectively. References: Abbondanza, J. (2023, August). Here’s how Australian supermarkets are making millions during the cost of living crisis . SBS News. https://www.sbs.com.au/news/article/heres-how-australian- supermarkets-are-making-millions-during-the-cost-of-living-crisis/96h8rr4eb Australia: what brand loyalty means to consumers 2022 . (2023, August). Statista. https://www.statista.com/statistics/1400149/australia-what-brand-loyalty-means-to-consumers/ Australian Competition and Consumer Commission. (2015, February 25). Food and Grocery Code of Conduct . Australian Competition and Consumer Commission. https://www.accc.gov.au/business/industry-codes/food-and-grocery-code-of-conduct Everyday Extra . (2022). Woolworthsrewards.com.au. https://www.woolworthsrewards.com.au/extra.html Gannon, D. (2023, August). Login . Services.ibisworld.com. https://my.ibisworld.com/au/en/industry/g4111/at-a-glance

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Reinhardt, L. (2021, February 2). How To Open a Small Grocery Shop in Australia . Finder.com.au. https://www.finder.com.au/open-a-small-grocery-store#:~:text=The%20initial%20investment %20can%20vary Wikipedia Contributors. (2019, April 14). Woolworths Group (Australia) . Wikipedia; Wikimedia Foundation. https://en.wikipedia.org/wiki/Woolworths_Group_(Australia) Workers Are Striking at Australia’s Supermarket Duopoly . (n.d.). Jacobin.com. Retrieved October 8, 2023, from https://jacobin.com/2023/10/workers-strike-woolworths-coles-australia-raffwu-union- organizing-supermarkets

Part B- Essay Why Do Some High-end Australian Restaurants Embrace the "No-tip" Policy and Pay Their Staff a Higher Wage Instead? Tipping has long been a tradition, in parts of the world, where it is seen as a way to show appreciation for service. However, Australia has taken an approach. While tipping is not completely absent it is not deeply ingrained in culture like it is in the United States for example. In fact, there is a trend emerging in dining establishments in Australia. These restaurants are not avoiding the practice of tipping. Actively promoting a "no tip" policy. Of relying on customer tips to supplement their income these restaurants are choosing to pay their staff wages. So, what's behind this shift? Let’s explore the stability that this change provides for employees. Those working in the hospitality industry often face uncertainty when it comes to income in environments where tips play a role. Everyone deserves the peace of mind that comes with knowing they will earn money in bustling and expensive cities like Sydney and Melbourne. Australia already has a minimum wage that serves as a safety net, for workers. By committing to paying above this threshold high end restaurants position themselves as top tier employers. A skilled server or chef who is trying to find their way, in a job market would find a restaurant that provides a substantial salary very appealing. It's, like a guiding light that shines through the uncertainty. This change also aligns with the sentiment, in Australia regarding transparency. Most Australians prefer transactions in their interactions even when dining out. The mental calculations required to determine a tip based on the quality of service can sometimes dampen the dining experience. By implementing “no tip” policy restaurants simplify things. Allow diners to fully enjoy their meal without worrying about fees. Additionally, we must consider the dynamics of restaurant operations. Those familiar with the gastronomy world know that while the front of house staff represent the restaurants face it is the behind-the-scenes team – including chefs, kitchen assistants and cleaners – that truly form the heart and soul of operations. Traditional tipping practices unintentionally create wage disparities that favour servers over those working in the kitchen. Eliminating tipping and ensuring wages helps promote a balanced, equitable and harmonious work environment for all. Consistently providing high quality service is essential, for any reputable restaurant. Offering assured and competitive compensation without relying on tips ensures that staff members remain motivated and focused on delivering experiences to customers. They no longer focus on pursuing tips. Instead prioritize ensuring that every diner has an experience. Lastly in this era of consumerism a restaurants policies and practices can greatly influence its brand image. Implementing a "no tip" policy goes beyond wages; it reflects the values that the restaurant upholds. Transparency fairness and the well-being of its employees. These values align with the preferences of today’s discerning customers who consider not product quality but ethical factors when making choices. In conclusion Australia’s upscale restaurants embracing the "no tip" movement bring together elements of economics, culture and brand strategy. It serves as evidence of how the Australian hospitality industry is evolving. Redefining traditions to be, in line, with values and economic realities. This emerging trend could be the beginning. It will be fascinating to witness how it shapes the future dining experiences down under.

1421103_Agarwal_Mayank_Eco

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