Australian Grocery Retail Industry

Subject Code: 316-660

Subject Name: Managerial Economics

Student ID Number: 310224

Student Name: Kamran Pervaiz

Tutorial Day/Time: Wed

Tutor Name: Gareth James


The grocery retail industry in Australia has undergone drastic changes over the
last 70 years. The industry, which at the beginning was characterized by small
and independently owned grocery retail stores, began to witness the
introduction and the later expansion of self-service supermarkets during the
1950s, consequently to the urbanization of Australia. During the 1960s,
Woolworths and Coles emerged as the two major grocery retailers and along
the years, the concentration of the industry continued to increase rapidly,
pushing small players out of the market (e.g. Franklin) and further
consolidating the position of major mainly through creeping acquisitions and
mergers (Parliament of Australia, 1999). Over time, Coles and Woolworths
have emerged to be the two main players in the industry with an outstanding
80% of the market share (Price Water House Coopers, 2007). This high
concentration suggests that a duopoly/oligopoly exists in the Australian food
industry (Jacenko, and Gunasekera, 2005). Today, it is amongst the highest
concentrated grocery retail industries of the world (Jacenko, et al. 2005; Refer
Graph 1).

The presence of economies of scale and scope determine the structure of the
industry. The grocery retailing industry is divided into the major grocery
retailers (MGRs) and the small and medium business enterprises (SMEs),
which make up the rest of the 20% of the market share.

What is interesting to observe is that amongst the 6183 grocery stores in
Australia, the MGRs control only 27% of stores while generating revenues of
79% of the total sales revenue (Price Water House Coopers, 2007; Refer


Graph 2, 3). In economic terms this means that the average floor area of
MGRs has risen considerably.

The reasons behind changing consumer preference to MGRs include wider
product choices, cheaper pricing, the convenience of the expansive store
locations and the lower opportunity cost of consumers’ time of going to a ‘one
stop shop’ instead of running to several smaller stores for their shopping
errands (Charter Keck Cramer, 2003).

The Major Players:

The mentionable grocery retailers in this industry are:




Pick ‘n Pay (still known as ‘Franklin’ stores)

Woolworths retains 44% of the market share, and is the largest grocery retailer
in Australia. Its retail brands include Woolworths Supermarkets and Safeway.

Coles and Bi-Lo supermarkets belong to the group Coles Myer, which retains
the second largest market share of 34% (Refer Graph 4).


It is also worth mentioning numerous independent retailers operating at a
much smaller scale and caters to niche markets. Some operate under banner
groups (IGA) and try to create economies of scale to compete directly with
MGRs (Price Water House Coopers, 2007).

Sales Activities and Products:

The sales activities involve purchasing an assortment of goods from a
wholesaler or supplier and re-selling it to the end-customer for a profit.
Grocery retailers supply a variety of goods ranging from fresh produce to dry
goods to non-grocery products (Refer Graph 5). During the last few years new
categories of products such as newspapers, pharmaceutical products and lastly
fuel have started being offered in supermarkets and convenience stores.

In addition to this, the retailer also supplies a range of associated services
including location, parking, and in-store amenities such as lighting, checkout
facilities, banking and customer assistance. Thus, grocery retailers supply a
bundle of goods and services in varying compositions depending on demands
and needs of the customer (Smith, 2004).

MGRs purchase goods directly from producers at cheaper prices and store
them as inventory in massive warehouses. This cannot be carried out at the
scale of MGRs by SMEs, who on the other hand, rely on wholesalers for
supplies. This affects the prices at which MGRs sell their goods, which are


relatively lower, thus giving them a cost advantage (Parliament of Australia,
1999; Refer graph 6).

Bigger chains as Coles and Woolworths can offer a wider range of products,
having a product line of over 30,000 items. On the other hand, SMEs tend to
have a more limited choice of products, in order to be able to maintain
competitive prices and cater to niche segments by either offering staple foods
or ethnic products (Price Water House Coopers, 2007).

Percentage of Sales:

In 2006 the revenue of supermarkets and of the grocery sector was close to
$63 billion, although, this figure goes up to $74 billion if including specialist
As the retail industry is in its maturity phase, margins are generally stable, but
low. According to IBIS World, the Industry Gross Product will grow at an
annual rate of 1.5%, far behind the Australian economic Growth of 3.2%. It is
mainly for this reason that MGRs are entering other markets (Price Water
House Coopers, 2007).


Economic Characteristics of the Grocery Industry:

Analysing the economies of scale and scope of an industry can explain how it
is structured in different markets of the world. It cannot only affect the size of
firms and the structure of markets but it is also central to many issues in
business strategy. Economies of scale are present whenever large-scale
production and distribution have a cost-advantage over small processes.
Pricing strategies and barriers of entry can be influenced through economies of
scale. This can be clearly seen in the grocery retail industry in Australia
(Besanko, Dranove, and Shaefer 2003).

The grocery retail industry is characterised at the functional level by high
fixed costs relative to variable costs that are typically high as well (Smith,
2004). There are many sources of economies of scale in the operation of
integrated chains. Fixed costs are costs that the firm needs to invest into a
business initially. Major fixed costs include inventory, warehouses, retail
outlets, technology (inventory management systems), employee training
programs and transportation costs.

The variable costs are costs that can be constantly varied according to the
desired production outputs by the firms to remain competitive over time. The
main variable costs for grocery retailers are service costs, quantity and price of
merchandise stocked which varies constantly (Besanko, et al. 2003).


The industry besides being capital intensive can also be defined as labour
intensive as it provides service along with its products. Hence labour is one of
the variable costs for major firms. Although economies of scale are not usually
present in labour intensive industries, in this particular industry it can still be
obtained as marginal costs decrease with the increase in output, bringing down
the average total cost (Besanko, et al. 2003).

The Australian grocery retail market is characterised by a relatively small,
low-growth population with a wide geographic spread. This has created
unique issues of distribution and logistics for the Australian grocery sector,
including limited access to food stores and higher cost of transporting goods.
Hence, sufficient generation of economies of scale is required for national
retailers to deliver food and other grocery items to consumers across this
distinctive market in a consistent manner (Lu, Swatman, and Daly, 2005). For
the vertically and horizontally integrated chains like Woolworths and Coles,
economies of scale come from purchasing directly from producers, expanding
store sizes and operating through multiple outlets across the country (Smith,

The grocery industry is also a low profit-margin sector. Some groups of items
may carry above average margins (fresh fruit and vegetables), while staple
items (flour and sugar) and specials carry smaller margins. The overall effect
that MGRs try to achieve is to collect enough revenue to cover all costs and
contribute to profit, as well as covering all merchandise costs, while using
price to maximise the appeal to consumers (Smith, 2004).


Another way that MGRs are responding to slender profit margins is by
eliminating intermediary wholesalers. Due to the sheer volume of purchases
that big firms make directly from the producers, the cost prices realized are
significantly lower compared to independent retailers who need to go through
a third party (Parliament, 1999; Besanko, et al. 2003). Another way is by
managing their own distribution centres, thus achieving economies of scale
through purchasing power.

Hence, the bigger firms gain a cost advantage, which allows them to price
their products very competitively and appeal to the mass market. This means
that small operators find it difficult to compete on price with MGRs. For the
independent retailer, merchandise costs depend on the wholesaler’s ability to
match the bargaining power of the integrated chains, the scale of orders and
economies of scale and scope in receiving and distributing goods to retail
customers (Smith, 2004).

MGRs also reduce costs through an integrated supply chain management. This
has been achieved through several stages over time (Refer Figure 1).

Inventory is another major driver of economies of scale in the industry. Firms
carry inventories in order to minimize stock-outs, which might potentially lose
the firm its customers due to non-reliability. But, there are carrying costs in
order to store and maintain large inventories for firms. Hence, inventory costs
drive up the average costs to carrying inventory, thus affecting price decisions.


Technological change has had an important impact on recent developments in
the retailing sector, as both retailers and wholesalers exploit new means of
achieving lower inventories, a wider range of goods, higher product turnover
and faster receipt of goods.

At the retail level, one of the most significant changes has been the
introduction of bar coding and checkout scanning. This has enabled improved
efficiency in store operation and enabled large firms to effectively bring down
their average costs of goods sold, by maintaining a lower ratio of inventory
through high volumes of business while not affecting their levels of stock-outs
(Smith, 2004; Besanko, et al. 2003).

The drive by MGRs across the world, for increased efficiencies in their
logistics and distribution systems, has meant that those retailers willing to
invest in these areas benefit from a lower cost structure, enabling them to
continually ‘invest’ these cost savings in lower retail prices, thus increasing
competition that SMEs cannot commit to (Lu, et al. 2005). These factors have
contributed to the decline in market share and in the number of outlets for

Economies of scale are also generated in advertising, which constitutes high
fixed costs for companies. Woolworths and Coles are able to spread these
costs over a very large number of consumers, and hence the price they are
paying in order to reach each consumer is relatively low.


Economies of scale in advertising are also reached through umbrella branding.
For instance home brand products do not require special advertising, because
relevant information can be inferred by consumers through regular
advertisements of MGRs (Besanko, Dranove, and Shaefer 2003).

The significance of common costs means that economies of scope are also
important in shaping the grocery industry. Limited shelf space is much less of
a constraint for the grocery retailer than it is for individual manufacturers.

Within the limits of this constraint, the more products offered for sale through
a grocery outlet, the lower the costs associated with supplying any one product
group. Thus, grocery retailers, particularly the supermarket chains,
increasingly have expanded their product range to include products
traditionally sold by specialty retailers (fresh fruit, bread, meat and fish) and
other items such as paper products, newspapers and magazines, and plants
(Smith, 2004).

Additional Inferences

Given the high concentration ratio of the industry, one would tend to think that
there is little competition among big players, resulting in higher prices for
consumers. However, the reality is that big players do compete against each


other. In fact, MGRs try to gain market power by attracting consumers with
lower prices.

The industry has become highly price competitive for a limited number of
high volume headline products (but often with minimal discounting of lower
volume products), effectively ‘training’ consumers be to price conscious.
(Smith, 2004)

This has implications especially for the independent retailers, who are forced
to exit the market because of their inability to compete with such prices.

A few doubts about fair competition could also arise when considering
barriers of entry and exit. Barriers can be considered low if single stores are
considered. Barriers of entry are not proactively created by big competitors;
however they do arise in the integrated chain, given the presence of economies
of scale and scope (Smith, 2004).

In summary, the Australian grocery industry is very unique and characteristic
to this region. The economies of scale and scope that has risen from activities
of all players involved is that of a competitive duopoly and it has been
suggested that the competition is only going to become more intense in the


Reference List

Besanko, D., Dranove, D. S.M, and Shaefer S. 2003, ‘The Horizontal
Boundaries of the Firm: Economies of Scale and Scope’, in Economics of
Strategy, Ch.2, (3rd edn, eds Wiley J. and Sons), NY, pp. 72-101.
‘Fair market or market failure?’ August 1999, Commonwealth of Australia,
[Online]; Available at;
retrieved on 5/5/2008.
Jacenko, A., and Gunasekera, D. 2005, ‘Australia’s retail food sector. Some
preliminary observations’, Paper presented to The Pacific Food System
Outlook, Kunming, 11-13 May.
Lu, N., Swatman, P., and Daly, P. 2005, ‘Extending the Integrated Grocery
Supply Chain: connecting with Australian primary producers via
mCommerce’ Proceedings of CollECTeR Europe 2005 Collaborative
Business, Furtwangen, Germany, 12-13 June 2005; [Online] Available at; retrieved on 5/5/2008.
‘Retail Activity Centres, Performance, Function and Future Directions’ March
2003, Charter Keck Cramer, [Online] Available at
%20activity%20report.asp; retrieved on 5/5/2008.
Smith, R.L. 2004, ‘The Australian Grocery Industry’, Australian Economic
Review, vol. 37 (3), pp.304-310.
‘The economic contribution of small to medium-sized grocery retailers to the
Australian economy, with a particular focus on Western Australia’ 27 June
2007, Price Water House Coopers, [Online] Available at; retrieved on 5/5/2008.



Graph 1 (Jacenko, and Gunasekera, 2005)


Graph 2: (Price Water House Coopers, 2007)

Graph 3: (Price Water House Coopers, 2007)


Graph 4: (Price Water House Coopers, 2007)

Graph 5: (Price Water House Coopers, 2007)


Graph 6: (Parliament, 1999)

Figure 1: (Lu, Swatman, Daly, 2005


Calculate the price
Make an order in advance and get the best price
Pages (550 words)
*Price with a welcome 15% discount applied.
Pro tip: If you want to save more money and pay the lowest price, you need to set a more extended deadline.
We know how difficult it is to be a student these days. That's why our prices are one of the most affordable on the market, and there are no hidden fees.

Instead, we offer bonuses, discounts, and free services to make your experience outstanding.
How it works
Receive a 100% original paper that will pass Turnitin from a top essay writing service
step 1
Upload your instructions
Fill out the order form and provide paper details. You can even attach screenshots or add additional instructions later. If something is not clear or missing, the writer will contact you for clarification.
Pro service tips
How to get the most out of your experience with
One writer throughout the entire course
If you like the writer, you can hire them again. Just copy & paste their ID on the order form ("Preferred Writer's ID" field). This way, your vocabulary will be uniform, and the writer will be aware of your needs.
The same paper from different writers
You can order essay or any other work from two different writers to choose the best one or give another version to a friend. This can be done through the add-on "Same paper from another writer."
Copy of sources used by the writer
Our college essay writers work with ScienceDirect and other databases. They can send you articles or materials used in PDF or through screenshots. Just tick the "Copy of sources" field on the order form.
See why 20k+ students have chosen us as their sole writing assistance provider
Check out the latest reviews and opinions submitted by real customers worldwide and make an informed decision.
Customer reviews in total
Current satisfaction rate
3 pages
Average paper length
Customers referred by a friend
15% OFF your first order
Use a coupon FIRST15 and enjoy expert help with any task at the most affordable price.
Claim my 15% OFF Order in Chat