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Current events exercises

Article/Source Details: Competition well hidden at grocers, by Daniella Miletic, The Age, Tuesday June 3, 2008, http://smallbusiness.theage.com.au/growing/management/competit ion-well-hidden-at-grocers-906012879.html

Chapter/s in text article related to: Chapter 8, Chapter 1.

Article Summary: Graeme Samuel, head of the Australian Competition and Consumer Commission, advised the national inquiry into grocery prices that he was unable to determine if there was any competitive pressure on the two national supermarket chains, Coles and Woolworths.

Mr Samuel indicated that evidence from a previous enquiry suggested there was little difference between the pricing of dry goods at Coles or Woolworths, and that independent grocers were not creating any competitive pressure as they tended to match rather than compete with the two big chains.

Outside the hearing, Mr John Cummings, chairman of the National Association of Retail Grocers said his evidence at the previous hearing regarding price matching had been taken out of context, and suggested that there was little profit for any of the industry players in packaged goods, and that other products such as fresh produce and meat were important contributors to profit.

Andrew Reitzer, CEO of Metcash, a major supplier of packaged grocery goods to the independent grocers, said the company passed on fair prices to independent retailers, providing a third competitive force in the highly concentrated grocery market.

Critical Thinking Questions:

Question 1. Why would so little competition be evident in the Australian retail grocery industry?

Question 2. Describe the principle of oligopoly and explain how it might apply to retail grocery in Australia.

1. If consideration is given to the way in which economies in smaller countries affect the competitive and strategic landscape, some understanding of this situation can be gained. Where there are only two major players in the industry, it is unlikely that they will threaten profitability by entering into a price war. The retail grocery industry has undergone major structural changes over the last few decades. Instead of competing with each other, Coles and Woolworths have been accused of using unfair competitive tactics to neutralise the competition offered by the small green grocers and butchers. It could therefore be argued that Coles and Woolworths have either purposively or accidentally eliminated much of the competition in those areas, whilst avoiding direct head-to-head competition with each other.

2. An oligopoly is a situation in a market or industry where there are only a limited number of sellers. In the case of the retail grocery industry in Australia, there are two main national chains and many small, independents. As Coles and Woolworths are the dominant players, they control the industry. Thus, despite the existence of small independent retailers, the competitive landscape of the industry is controlled by the two major firms. An oligopolistic market situation can in effect reduce competition, and in some instances, encourage collusion. For instance, in the cardboard box industry, Visy Board agreed with Amcor not to compete in certain product areas (The Age, October 9, 2007). As they were the two main players in the industry, competition was severely curtailed.

3. Market theory suggests that competition exists between players. If, however, the market is controlled by a limited number of suppliers, then natural market forces do not operate effectively. In most countries, corporate law is designed to encourage competition and discourage collusion between participants. An oligopolistic market can be seen as a market failure, because little or no competition is evident.