Industryoverviewandcharacteristics

TheAustraliansupermarketindustry,definedasbusinessesretailing
groceriesandfoodlines,isclassifiedasamatureindustry.Organisations
competinginmatureindustriesemployaggressivecostreduction
initiatives,withcompetitiveadvantageevolvingfromcostbased,rather
thandifferentiationbased,factors.Theintroductionofprivatelabel
merchandiseisonesuchcostreductioninitiative.IntroducedbyAldi
duringitsmarketforayin2001,privatelabelmerchandiseevolvedto
becomeapopularcostreductiontacticadoptedbytheindustrys
foremostcompetitors.Expandingmarketpopularityofprivatelabel
merchandise(productsmanufacturedandsoldunderaretailersown
brand)offerscomparablequalityandvalueformoney,growingfrom
13.5percentoftotalsupermarketsalesin200708to25.5percentin
201213.1
Slowingindustrygrowthisacommoncharacteristicofmature
industries.2TheAustraliansupermarketindustryachievedaverage
annualindustrygrowthof3.4percentbetween2007and2012,and
forecastedgrowthisestimatedtoreduceto2.4percentperannum
between2012and2017,escalatingcostbasedcompetition.3Continued
offeringsofprivatelabelmerchandiseisforeseeable,andsoproduct
basedpricewarsareinevitable.
TheAustraliansupermarketindustryessentiallyacompetitive
duopolybetweenWoolworthsandColes,comprisingacollectivemarket
shareofover70percent4isnostrangertoproductbasedpricewars.
Bytargetingeverydayhouseholdcommodityitems(e.g.milk,bread,
fruitandvegetables),withtheintenttobooksalesrevenue,aggressive
pricewarshaveeruptedbetweenWoolworthsandColes.However,price
warsonitems,suchasmilkandbread,leadtoproductsbecomingloss
leadersthatis,productssoldatorbelowcost.Lossleadersare
designedtoincreasestorefoottrafficandstimulatesales,notnecessarily
ofcommodityproducts,butofmoreprofitableproductlines,duringa
supermarketvisit.5Inaddition,tobothprivatelabelmerchandiseand
pricewars,Coleslauncheditsdown,downcampaigninJanuary2011,

reducingthepricesofover6000productsbyanaverageof10percent.6
Inasimilarapproach,Woolworthslauncheditspriceknockdown
campaign,resultinginincreasedsalesof4.7percentfortheyeartoJune
2011.AccordingtoformerWoolworthsCEOMichaelLuscombe,a
numberofinitiativescontributedtothisresultincludingcustomer
acceptanceofthenew2015storeformatandoverallprice
competitivenesswithourpriceknockdowncampaign.7
ThefollowinganalysisoftheAustraliansupermarketindustrywill
examinethemacroenvironmentaltrendsinfluencingindustry
competitivenessandexploreindustryconditions,viewedthrough
Portersfiveforcescompetitionframework.
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Macroenvironmentalinfluences
Reducedconsumersentimentanddisposablehouseholdincomehavean
effectonsupermarketspend.Consequencesoftheglobalfinancialcrisis
havealteredpurchasingbehaviour,andconsumershavenowadopted
moreconservativespendingpatternsinthefaceofrisinglivingcostsand
continuedeconomicuncertainty.8WhileAustraliansupermarketsare
partlyinsulatedagainstreduceddisposableincome,itisplausiblethata
reducedspendonluxury/gourmetproductlineswillresult.9Responding
tothedeclineincustomerspend,Woolworthsexpandedtheiroverall
rangeofprivatelabelbrands,offeringcomparablequalityatreduced
prices,settinga2011targettodoubleitssalesofprivatelabel
groceries.10
Changingageandpopulationdemographicsinfluencenotonly
locationdecisionsfortheestablishmentofnewsupermarkets,butalso
affecttherangeofproductsofferedbetweensupermarkets.Furthermore,
populationgrowthwilldriveconstructionofnewsupermarkets11as
sustainingincreasedfoottraffictoexistingstoresbecomesuntenable.
Changingsocietalvaluestowardhealthylivinghavealtered
purchasingbehaviourofconsumers,reflectedinincreasingdemandfor
organicproduce.A2010reportproducedbytheUniversityofNew
EnglandonbehalfofBiologicalFarmersofAustralia(BFA)indicated

thatsixoutoftenAustralianhouseholdspurchaseorganicproduceon
occasion,anincreaseof40percentsince2008.Inaddition,organic
domesticretailsaleshavegrownover50percentintwoyearsfrom
$623millionto$947million.12Availabilityanddistributionoforganic
produceisincreasinglyfacilitatedthroughAustraliansupermarkets.13
Indeed,buyinghabitsofconsumerswishingtopurchaseorganicproduce
havealteredconsiderably,withsupermarketsrespondingtoincreased
demand.14Woolworths,ColesandAldisupermarketsthroughout
Australiastockarangeofprivatelabelorganicproducts,and
WoolworthsandColesalsostockabroadrangeofbrandnameorganic
products.Colessupermarketsstockover170productsintheColes
Organicrange,andWoolworthsacquisitionofMacroWholefoodsin
2009ledtotheirexpansioninretailingorganicproduce.15
TechnologicaldevelopmentshaveledWoolworthstotrialtwovirtual
supermarketsinMelbourneandSydney.16Thesetrialvirtual
supermarkets,accordingtoTjeerdJegen,Woolworthsdirectorof
supermarkets,arejustoneideatomakeourcustomersliveseasier.17
Nottobebeatenintheracefortechnologyledcustomerconvenience,
bothColesandAldihavereleasediphoneapplications.Furthermore,in
late2011,Colesintroducedcontactlesscardpaymentsystemsto
streamlinecustomerpurchases18,hencecustomerscannowpurchase
itemsupto$100withouttheneedforPINsorsignatures.

Portersfiveforcescompetitionframeworkandthe
Australiansupermarketindustry
Manyindustryconditionsinfluencethelevelofindustryattractiveness,
yetPortersfiveforcescompetitionframeworksuggestsindustry
attractivenesscanbedeterminedthroughapplicationoffiveinterrelated
factors:(1)threatofentry,(2)powerofbuyers,(3)powerofsuppliers,
(3)threatofsubstitutesand(5)rivalrybetweenestablishedcompetitors.

Threatofentry
Industriespresentinggoodinvestmentreturnsandlowentrybarriersare

attractive targets for potential entrants. As previously indicated, the

Australiansupermarketindustryexperiencedmodestannualgrowthof
3.4percentforsixyearsto2012.Forecastsestimateaverageannual
growthwilldiminishto2.4percentthroughto201719,continuingwhat
former Woolworths CEO and managing director Michael Luscombe
calledaverychallengingclimate.20Combinedwithdecliningrevenue
growth,potentialentrants
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facesignificantentrybarriers.Thesebarriersincludelimitedsitesfor
developmentpurposes,restrictivezoningandplanningregimes,foreign
investmentrulesnecessitatingdevelopmentofvacantlandwithin12
monthsofacquisitionbyforeigncompanies21andsignificantcapital
outlay.22Despitesubstantialentrybarriers,twointernationalcompetitors
Aldi,aGermansupermarketchain,andCostco,anAmericanmass
merchandiserhaveenteredtheAustralianmarketplace,suggesting
thatdespitesubstantialentrybarriers,returnsavailableintheAustralian
retailgroceryindustryareattractivetoforeigncompanies.23

Powerofbuyers
The power of buyers can be conceived as either the inherent power
exercisedbysupermarketsoversuppliersorasthegeneralpurchasing
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 sellers sales. 24
Indeed, suppliers have little alternative but to yield to supermarket
marketpowersincethesesupermarketstypicallyaccountfor40to60
per cent of revenue of any key food processor in Australia. 25
Supermarkets are also powerful buyers when they pose a credible
backwardintegrationthreat. Historically,Woolworthshasengagedin
backward integration via acquisition activity. In 2009, Woolworths
acquireda25percentstakeinGageRoads,anexistingWoolworths
beersupplier.26Indeed,thereisatrendamongthemajorAustralianretail
supermarketchainstoincreasinglyreplacetheirsuppliersbrandswith

theirown.

Powerofsuppliers
Australiasfoodsupplychainhasexperiencedastructuralpowershift
overthepast30years,accordingtoagrifoodexpert,DavidMcKinna.
Whilesupplierstraditionallyheldmarketpowerthroughoutthe1970s,
exercisedthroughstatutorymarketingauthoritiesandproducerowned
cooperatives, corporatisation was required to gain access to capital.27
Consequently, almost all of these organisations were taken over by
multinational corporations and the agenda shifted from maximising
farmgatereturnstodeliveringbottomlineprofitstoprocessers. 28Asa
result, multinational manufacturers exercised significant control since
supermarketsdidnotwishtobewithoutpowerbrands 29,astherewas
consumer demand for them. However, with the introduction and
expansionofprivatelabelmerchandise,anadditionalstructuralpower
shiftoccurred;thistimeinfavourofthesupermarkets.KimCarr,former
Labour Minister for Innovation, Industry, Science and Research,
indicated that for most grocery manufacturers, supermarkets are the
maindistributionchanneltocustomers.Thatleavesmanytothemercy
ofthebigtwoandreliantonthetermsandconditionstheychooseto
offer.30Indeed,theconcernregardingsupermarketsistheirdominance
andjustwhatimpactthishasonsuppliers.31Increasinguneaseaboutthe
dominanceofsupermarketsoverlocalandinternationalsuppliershas
resulted in calls from the Australian Food and Grocery Council to
establishasupermarketombudsman.32

Threatofsubstitutes
Withconveniencebeingofupmostimportancetotimepoorcustomers,
supermarketscontinuetoofferaonestopshopforthosewhowishto
purchaseabroadrangeoffreshfruitandvegetablesandotherhousehold
groceryitems.Conveniencestores,suchas7Eleven,areasubstituteto
supermarketsfromaconvenienceperspective,buttheycontinuetooffer
onlyalimitedrangeofstockeditemscomparedtoWoolworths,Coles

andAldisupermarkets.Fromacompetitiveperspective,supermarkets
attempttogainalargershareoftheconveniencemarketbyintroducing
private labels, installing selfcheckouts and repositioning traditional
conveniencestoremerchandisetomoreaccessible[instore]locations. 33
ArecentUSstudyindicatedthatconsumerssoughtconvenienceover
price,andthatdatashowsashiftinconsumermindsetfromshopping
aroundtosavemoney,
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tospendingmoremoneyinordertosavetime.34Thistrendismirrored
intheAustraliansettingwithtimepoorcashrichconsumersbeingthe
traditionaldrivingforcebehindconveniencestores.35However,the
perceptionofconveniencestoresbeingarealisticsubstituteistempered
byaggressivepricecampaignsinitiatedbysupermarketstodrive
consumerspendawayfromconveniencestoresandtowardsmajor
supermarkets.36

Rivalrybetweenestablishedcompetitors
While the industry comprises over 3500 competitors, with combined
profits of $3.3 billion on $83.7 billion sales revenue in 201112
financial year, the Australian supermarket industry is still highly
concentrated as Woolworths and Coles, the industrys two dominant
competitors, amassed a combined 71 per cent market share. 37. In
addition,theseconcentrationlevelshavebeenboostedbyindependent
supermarketsjoiningtogethertoformbuyinggroupssuchastheIGA
network.38Thelevelofindustryconcentrationinfluencestheintensityof
competitiverivalry.Asthenumberofdominantorganisationsincrease,
sotoodoestheprobabilityofaggressivecompetitortactics,including
commoditybased price wars as evidenced by the number of
commoditybased price wars in 201112, as discussed earlier.
Supermarketsprimarilycompeteonthebasisofprice,withcustomers
beingpriceconsciousandwishingtoexperiencevalueformoney.39

ENDNOTES
1.PTrute,Privatelabelswillcutconsumerchoice,2August2012,
www.news.com.au.
2.JBBarney&WSHesterly,(2012).Strategicmanagementand
competitiveadvantage:Conceptsandcases.4thedn,UpperSaddle
River:NewYork.PearsonEducation,2012,p.54.
3.IBISWorld,IBISWorldindustryreportG511:Supermarketsand
othergrocerystoresinAustralia,2012:11,www.ibisworld.com.
4.ibid.,p.32.
5.ibid.
6.ColesSupermarketsLimited,Colescommunityreport,2011a,
www.coles.com.au.
7.RStockdill,Woolworthsposts4percentsalesrise,InsideRetail,20
July2011,www.insideretailing.com.au.
8.SMitchell,Woolworthshitsasalesrecord,TheAustralian
FinancialReview,21July2011,p.17.
9.IBISWorld,op.cit.,p.5.
10.BSpeedy,HomebrandpushtocostjobsatHeinz,TheAustralian,
7January2012,www.theaustralian.com.au.
11.IBISWorld,loc.cit.
12.BiologicalFarmersofAustralia,Australianorganicindustrytohit
$1billionretailin2010,mediarelease,2010,www.bfa.com.au.
444

13.NRoocke,Organicfarmingthrives,withdemandfrom
supermarkets,ABCRural,6July2011,www.abc.net.au.
14.MSmith,OrganicproduceinAustraliasmajorsupermarkets,
AustralianOrganicJournal,Spring2006,p.20,www.bfa.com.au.
15.Speedy,loc.cit.
16.HPolites,Woolworthstrialsvirtualsupermarket,Technology
Spectator,20February2012,www.technologyspectator.com.au.
17.ibid.
18.ColesSupermarketsLimited,Coleslaunchescontactlesspayment
forgroceries,mediarelease,6December,2011b,

www.coles.com.au.
19.IBISWorld,op.cit.,p.3.
20.WoolworthsLimited,Halfyearsalesresultsforthe27weeksto2nd
January2011,mediarelease,24January2011,
www.woolworthslimited.com.au
21.AustralianCompetitionandConsumerCommission,Reportofthe
ACCCinquiryintothecompetitivenessofretailpricesfor
standardgroceries,July,Canberra:CommonwealthofAustralia,
2008,p.177.
22.IBISWorld,op.cit.,p.29.
23.AustralianCompetitionandConsumerCommission,op.cit.,p.213.
24.MACarpenter,WMGSanders,JRice&NMartin,Strategic
management:Adynamicperspective,conceptsandcases.Frenchs
Forest,NSW:PearsonAustralia,2010.
25.DMcKinna,Supermarketsgrowtoostrong,TheAustralian
FinancialReview,20July2011,p.59.
26.MStevens,Wooliestakesstrategicstakeinbrewer,The
Australian,16May2009,www.theaustralian.com.au.
27.McKinna,loc.cit.
28.ibid.
29.ibid.
30.KCarr,Trendtoprivatelabelgroceriesisnobargainfor
manufacturers,SydneyMorningHerald,28November2011.
www.smh.com.au.
31.JDurie,ACCCchiefRoadSimsdeclareswaronWoolworthsand
Coles,TheAustralian,15June2012,www.theaustralian.com.au.
32.EGreenblat,Wesfarmersbossfiresbackatsupermarketsuppliers,
SydneyMorningHerald,16February2012,www.smh.com.au.
33.DBowling,Competingfortheconveniencedollar,Franchising,10
April2012,www.franchise.net.au.
34.DDrake,Shopperstudyshowsconsumerswillingtopayfor
convenience,AustralianFoodNews,2September2009,
www.ausfoodnews.com.au.

35.IBISWorld,IndustryReportG5112ConvenienceStoresinAustralia,
2012:5,www.ibisworld.com.
36.Nielsen,NielsenConvenienceOutlook2012:2,http://nielsen.com.
37.IBISWorld,op.cit.,p.32.
38.TOsegowitsch,&MGoelz,AldiinAustralia.Case3120021,
ECCH,2012,p.14.
39.IBISWorld,op.cit.,p.27.