Supermarket wars – a tale of the Australian duopoly

Consumers do not automatically consider the Australian grocery duopoly as an industry at all. Its stores play a part in most Australians’ everyday lives, whether it’s dropping into the local supermarket on the way home from work, or being exposed to blasts of push media in the form of fresh promises or revised jingles on TV, radio and billboards.

Australia is the most concentrated grocery market in the developed world: our top two retailers hold 78 percent of total grocery market share collectively, according to the Australian Food and Grocery Council (AFGC). This compares to 48 percent in the UK, 44 percent in France and only 24 percent combined market share of the top two grocery retailers in the USA. As an industry, the Australian grocery scene reads like a twisted schoolyard rivalry. It’s a high school scene with a fierce tension between ‘cool groups’. There’s never room for two. Let me explain.

Regarding industry leadership, the helm of Australian grocery was largely uncontested until 2007 when Wesfarmers bought Coles for $20 billion. This acquisition saw a brand new managerial board from the “Tesco school of grocery leadership” reshape the frumpy bridesmaid of grocery retail into a real threat for Woolworths. They initiated a flurry of revised consumer marketing, celebrity chef endorsements, Tesco-inspired business strategy, fierce price discounting and an emergent pride and equity associated with private label products.

The complacent Woolworths had been around forever, with a strong heritage (‘Safeway’ street cred) and a relative trend setting reputation on their side. They were the first to ‘liven up’ the consumer experience by draping their staff in green shirts and installing self-service checkouts.

To the tune of promotional renditions of Status Quo’s greatest hits played on big-red-hand guitars, Coles continued to challenge for leadership. The red they’d always worn was brighter (and damn, that’s a food colour), their jingles catchier and their pricing promotions more memorable. The mothership from the UK had been flying under the radar whilst gathering information about the local turf. Before 2008, 70-80 percent of Coles’ staff were employed on a casual basis. They instantly transferred as many employees as they could onto permanent part-time basis’ to gather camaraderie and champion the shopper’s in-store experience in their quest for a supermarket shake up.

Despite all of this action, the Australian Food and Grocery Council reported a 2.2 percent Compound Annual Growth Rate (CAGR) food and grocery industry decline in 2009-2011. Of course other school yard factions made moves, but none have made any real threat to the throne. Metcash, whose primary grocery channel is IGA, is trying to cling to its second tier status while playing a strong ‘locals’ card and capitalising on its ability to customise stores as needed. A recent Roy Morgan report identified Metcash had officially been knocked off its third place perch by German retailer Aldi, which now accounts for over 10 percent grocery sales. 

As the country’s largest manufacturing sector, Australian food and beverage manufacturing employs a quarter of a million people. Grant Thornton’s survey of industry CEOs revealed that manufacturers are feeling the impact of private label competition and anticipate further negative impact on profits.

From primary producers to suppliers, everyone is now fighting for their share of scarce profits and competitive advantage. The implications of this rivalry reach far and wide into the Australian economy. Supermarket shelves are the culmination of Australia’s  $110 billion food and grocery manufacturing industry’s supply chain.

Manufacturers face constraints on shelf space and therefore opportunities to reach their consumers. Their products are often sacrificed to make way for competitive copy-cat private label offers, trade margins and the ‘cost of doing business’, as well as retailer demands for deep promotional pricing (either fully or partly funded by the manufacturer). This is additional to the external, non-grocery factors impacting Australian food manufacturing’s business such as the high Australian dollar, ever changing regulatory compliance initiatives, commodity pricing and increasing costs of energy and labour.

In order to increase competition, the Australian government should appoint a supermarket ombudsman responsible for assessing the trade margin implications of both Coles and Woolworths on the greater supply chain. The ombudsman should also hold responsibility for monitoring private label market share across all categories. As per the AFGC’s 2011 recommendation, such an ombudsman should ensure that branded products continue to have access to supermarket shelf space on a fair and equitable basis. Without such an authority, the anti-competitiveness of the industry will continue to rise, and both the industry and consumers will suffer.

Alexandra Wall is a student at RMIT University and was a Global Voices Delegate to the OECD Forum in May this year.

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