Key products of the industry
1. A supermarket is the large form of traditional grocery stores. The supermarket and grocery stores industry is one of the largest retail industries of Australia. This industry retail a wide range of food products and groceries, which include fresh and frozen foods, prepared foods, fresh fruits and vegetables, canned foods, breads, various dairy products, delicatessen foods, toiletries and cleaning goods, beverages, cigarettes, seafood and poultry items. The specialist retailers, convenient stores and niche retailers are excluded from this industry (Tonkin 2016).
2. This supermarket and grocery markets industry mainly comprise of food selling stores. Groceries are sellers of bulk amount of foods. They also keep nonperishable foods in cans along with fresh fruits and vegetables, delis and bakery products, meats and seafood. The large grocery stores keep apparels and other items such as, cleaning products, toiletries, other household items and these stores are called supermarkets. Some supermarkets also include a pharmacy and medicine isles, electronics etc. The big supercentres and grocery stores together form the supermarkets and grocery industry (Orhun 2013). Sometimes these stores sell specialty products such as Middle Eastern, Mexican, Italian or Polish foods. Generally, in the supermarkets, there is huge variety of sections and that include International foods also. In Australia, Coles, Woolworths are big supermarkets of this industry.
3. The key products of this industry are fresh fruits and vegetables, dry and packages foods, various dairy products, meat products, seafood, frozen foods, beverages, delis, bread and bakery products, toiletries and health products, cigarettes and general merchandise. In Australia, it contributes around $88.1 billion (Tonkin 2016). All the products include a home label and other private labeled products. For example, the dry and packaged foods include household staple foods, such as, cereals, flour, sugar, salt, spices, rice, pasta, noodles, eggs, edible oils, tea, coffee, prepared, canned and frozen meals, fats such as shortenings, confectioneries. This section accounts for the largest portion of revenue for this industry.
Another important product section is the milk and dairy products. This section keeps wide variety of milk, fresh creams, variety of cheese, cheesespreads, yoghurts and ice creams. Despite of the lower prices, this section also earns a huge amount or revenue.
Fresh fruits and vegetables section also contributes a big amount of revenue. It is a regular and most visited section of the supermarkets. People buy their required fruits and vegetables regularly as it is very convenient to pick up from the selves In the last 5 years, the shares of this section have increased leaps and bounds due to increased health consciousness of people.
Top players in the industry
4. The examples of a key factor ‘Land’ are the spaces that has been acquired or rented by the supermarket company, the lands of agricultural produce, farmlands, which provides supplies of meats, and other lands which hold the supplier factories of packages products.
This industry is moderately capital intensive. Capital mostly comes in the form of infrastructures, such as, fixtures and fitting of the shelves, the hoardings above the aisles, billion counters, building the restrooms. Over the past few years, the industry has spent capital on installing self-checkout counters, which is estimated to outnumber the cashier assisted counters in the next few years (Orel and Kara 2014).
This industry is highly labor intensive. It is the most important factor for conducting the daily operations. Skilled and unskilled laborers are required in the industry. Skilled labor is required to handle the technical equipments and customer assistance, while unskilled labor does the manual work of carrying loads and arranging the shelves. Examples of ‘Labor’ are the workers who works in the market as salespersons or managers. Skilled labor is very important, as the technical equipments require knowledge for handling; also, the customer service desk requires skilled labor, who has got the training for handling various types of customer queries. In this industry, unskilled labor portion is higher, compared to skilled labor. These markets tend to hire teenagers and students on a casual and part-time basis. However, they mostly hire part time employees, which helps to keep their wages low (Tonkin 2016).
This idea of self-service grocery store was first introduced by entrepreneur Clarence Saunders in 1916. In Australia, the supermarkets were established by entrepreneurs and now they are run by the managers. The owners monitor the businesses closely but those are managed by the managers (Escaron 2013).
5. This industry is most concentrated in Australia. The top players are Woolworths, Wesfarmers, Aldi and Metcash. The four companies has market share of around 90.6% in 2015-2016. Among them, Wesfarmers and Woolworths account for over 70%. After the entrance of Aldi, the German-owned firm, in this industry in 2001, the concentration has increased. Costco and Metcash have expanded too, thus increasing the concentration. There are around 25 supermarket firms in the industry. Other than the top five, the firms are of moderate size and mostly regional, unlike the supermarket chains (Dwivedi et al. 2012).
As per the diagram, the top firms in terms of market share are Woolworths, Wesfarmers, Aldi and Metcash. A normal firm in this industry has a large customer base and operates only in the domestic market. Although it keeps some imported products, but the global reach is quite small.
Major buyers of the industry
6. The major buyers (demanders) of this industry are the local household consumers. These customers can be divided into 5 groups depending on the quintiles of income distribution. The inequality in income between the highest and lowest quintiles shows the difference in consumption pattern. The fifth quintile shows the highest 20% of households with a highest contribution in the revenue. This group spends the maximum income in this markets and this groups contributes 35% of the total revenue in 2015-16 (Tonkin 2016).
The products in this industry are mostly traded locally. Very few items are shipped overseas. Since, most of the products are food items and perishable, exporting is difficult. Thus, this industry has a domestic and local customer base.
7. In this industry, the goods are exchanged or traded in the marketplace, that is, in the grocery stores and supermarkets. In these stores, suppliers or the firms keep huge variety of food products, sometimes drugs and healthcare products alongside the food. Consumers from the neighborhood come to these markets for purchasing their daily needs. These are all self-service stores. The customers pick up the products from the shelves as per their requirements, and go to the cashier or to the self-checkout counters for checkout (Sutton-Brady, Kamvounias and Taylor 2015).
8. Five non-price factors of demand of this industry are:
Quality of the products: People would go that store which keeps high quality products. The promotion strategy is also essential for this industry.
Promotion: Stores with attractive fliers and discount offers tend to pull more crowds
Differentiation in features: The store, which keeps more differentiated products, will experience more footfalls. The kids will drag their parents to that store; where there are more kids friendly packaged products are available.
Location of the store: People always look for convenience. They would prefer to drive less for their daily needs, than to drive to a far away store.
Tastes and preferences: The stores must consider the fact that preferences of the customers play a key role in this non-price competition. Variety in products is a significant factor in such type of competition. The more the wide range of products, the more is the number of customers (Shepherd 2015).
In this industry, quality of the products and consumers tastes and preferences are the 2 most important factors.
9. The supermarkets industry is an oligopoly industry in Australia. There are few big firms selling almost homogeneous but differentiated products, to a large number of buyers. The demand curve for an oligopoly is a kinked demand curve. When the price level of the industry changes, other things remaining the same, then there is a movement along the demand curve. On the other hand, if the any factor, other than price, changes, then there is a shift of the demand curve.
Non-price factors of demand
As price fell from P1 to P2, quantity demanded increased from Q1 to Q2. There is a downward movement along the demand curve from A to B. Figure 3(b) shows the shift in demand curve. When other things, say, income of the consumers increases, there is a rise in demand; hence, demand curve shifts rightwards from D1 to D2. Hence, for price P1, quantity demanded for any particular product increases from Q1 to Q2.
10. Five non-price factors of supply are:
Population: if the population of a certain region increases, the supply of food also increases and vice versa.
Tastes and preferences: these play a key role in the supply of foods. When customers want to try out a new cuisine, they look for other global foods than their local food.
Changes in income: this leads to change in the consumption pattern of the customers and that results in changes in supplies.
Volume of crop production: if the volume of crop production is low, the supply of foods that year will be reduced.
Future price expectations: if the production of a particular product falls, the suppliers would hold back the stocks of the current year for the speculation of price rise in the future. This leads to a fall in current year’s supply (Shepherd 2015).
The two most important factors are changes in income of the consumers and future price expectations.
11. If the cost of inputs are increased for fresh vegetables, then the price of the vegetables would increase too. The demand for vegetables will fall and consequently supply will be reduced too.
Due to the raise in the price of the inputs of production of vegetables, the price of the vegetables increased from P* to P1. The equilibrium shifted upwards from E* to E1. There is a movement along the demand curve for the vegetables. Due to the fall in demand, the supply curve shifted upwards. This leads to an upward shift of the supply curve from S1 to S2 and a fall in supply from Q* to Q1.
12. Price elasticity of demand is defined as the proportion change in quantity demanded of a product due to one percent change in its price. It depends on many factors such as, nature of the product, price level, income level, tastes and preferences and availability of substitutes (Rios, McConnell and Brue 2013). In this example, the author discusses the factors of price elasticity for a staple food like salt. Salt has no substitutes. There are different brands of the product. It has an inelastic demand. If the price for salt increases or consumers’ incomes increases, the demand for salt will not be affected much as the consumption level would not be changed. People spend a very small amount of their income on salt, hence, changes in the price or consumers’ income will not affect the demand for salt. Since it is a staple food, salt will not have an elastic demand.
Oligopoly industry in Australia
1) The demand for frozen vegetables is rising all across the globes. Many companies have entered into this profitable business of preparing and selling of frozen vegetables. According to the CEO of Industry Association, prices of frozen vegetables should be increased to increase the profit of the industry. It is a suitable decision due to the following facts. Vegetables are a staple food for all. Hence, it has inelastic demand. The demand for frozen vegetables is rising due to convenience of cooking in short time. The substitutes of frozen vegetables is the fresh vegetables which nowadays working people tend to avoid for the time and effort of cleaning, cutting, and cooking those, hence, the price rise will not affect the demand in a large scale. Therefore, to increase the revenue of this industry, it is a suitable action to increase the price of frozen vegetables (Thomas, Lubinda and Angula 2015).
13. Price elasticity of demand = % change in quantity demanded / % change in price
or, -1.2 = % change in quantity demanded/ (- 10)
% change in quantity demanded = 12
Hence, demand for the product increases by 12%
Since absolute value of elasticity is >1, the product is elastic in nature. Hence, a decline in price leads to a rise in total revenue.
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14. Income elasticity of demand =
The formula says that income elasticity of demand is the proportion of change in the quantity demanded of a product due to one percent change in the income level of the consumers (Baumol and Blinder 2015).
The frozen vegetables have a positive income elasticity of demand, but the number is small. That implies that, due to one percent increase in the income of the consumers, the demand for frozen vegetables will increase. However, the quantity demanded will not change very significantly, as people will not buy much and store it in the freezer, hence, the value will be a small number.
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15. Cross price elasticity of demand =
For cross price elasticity for frozen vegetables against Grocery and Supermarkets Stores industry products and restaurant meals, the value will be negative and closer to zero, as the price change in the industry and restaurants will not affect the quantity demanded of frozen vegetables, since it is mostly consumed by households (Varian 2014).
16. Consumer surplus refers to the variation between the price that the consumers are ready to pay and that they are able to pay. In the supermarket industry, the consumer surplus is likely to happen in small amount. Consumers generally are not willing to pay more than the market price of the groceries, however, for deriving some extra utility they might be willing to pay a higher price for a particular products (Dixon et al. 2012).
Non-price factors of supply
Producer surplus refers to the difference between the price that the producers actually get and the price that they are ready to accept. The surplus is the benefit that the producers enjoy by selling that product in the market. In this industry, there are producer surplus, as the producers generally asks more price than their actual production cost for profit maximization. In this industry, some amount of producer surplus is generated due to higher market price for the groceries (Hall and Lieberman 2012).
17. Since demand for frozen vegetables is relatively inelastic and it does not have too many close substitutes, sellers might be tempted to sell it for very high prices, which would invariably mean a higher price paid for the raw materials (Bulow and Klemperer 2012). To prevent a price competition for vegetables, which could lead to higher and higher prices paid to farmers, Government could possibly choose to set a price ceiling, thus defining a maximum price, which must be paid for frozen vegetables (Consumerpsychologist.com. 2014)
18. As price has increased from P1 to P2, quantity demanded of the frozen vegetables gets reduced to Q2 to from Q1. However, the rise in price is much larger than the fall in quantity demanded. Hence, it can be concluded that due a rise in the price of frozen vegetables would lead to small declined in the quantity demanded.
19. Economic surplus is the combination of producer surplus and consumer surplus. Change in the price level or taxation policy can lead to a change in the economic surplus (Sushko 2013).
The economic surplus of this industry. The total combined area of consumer surplus and producer surplus is the economic surplus. This is referred to the area of ABE*. The equilibrium price is P* and quantity is Q*. Changes in taxation would shift the supply curve, or changes in price level would shift the demand curve. Then, the volume of economic surplus changes.
References:
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage Learning.
Bulow, J. and Klemperer, P., 2012. Regulated prices, rent seeking, and consumer surplus. Journal of Political Economy, 120(1), pp.160-186.
Consumerpsychologist.com., 2014. Price and Competition in Food Markets. [online] Available at: https://www.consumerpsychologist.com/food_Price_and_Competition.html.
Dixon, P.B., Bowles, S., Kendrick, D., Taylor, L. and Roberts, M., 2012. Notes and problems in microeconomic theory (Vol. 15). Elsevier.
Dwivedi, A., Merrilees, B., Miller, D. and Herington, C., 2012. Brand, value and relationship equities and loyalty-intentions in the Australian supermarket industry. Journal of Retailing and Consumer Services, 19(5), pp.526-536.
Escaron, A.L., 2013. Supermarket and grocery store–based interventions to promote healthful food choices and eating practices: a systematic review. Preventing chronic disease, 10.
Hall, R.E. and Lieberman, M., 2012. Microeconomics: Principles and applications. Cengage Learning.
Orel, F.D. and Kara, A., 2014. Supermarket self-checkout service quality, customer satisfaction, and loyalty: Empirical evidence from an emerging market. Journal of Retailing and Consumer Services, 21(2), pp.118-129.
Orhun, A.Y., 2013. Spatial differentiation in the supermarket industry: The role of common information. Quantitative Marketing and Economics, 11(1), pp.3-37.
Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.
Shepherd, R.W., 2015. Theory of cost and production functions. Princeton University Press.
Sushko, I. ed., 2013. Oligopoly dynamics: Models and tools. Springer Science & Business Media.
Sutton-Brady, C., Kamvounias, P. and Taylor, T., 2015. A model of supplier–retailer power asymmetry in the Australian retail industry. Industrial Marketing Management, 51, pp.122-130.
Thomas, B., Lubinda, M. and Angula, M., 2015. Principles of microeconomics.
Tonkin, B. , 2016. Supermarkets and Grocery Stores in Australia. IBIS World.
Varian, H.R., 2014. Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton & Company.
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