Market Structure Sample Assignment

An Investigation on Market Structure, Growth, Pricing and Non-Pricing Strategies

Abstract

The report investigates Australia’s grocery business by identifying and analyzing the market structure, growth, pricing and non-pricing strategies applied by major grocery retailers. ALDI and Coles are two different companies operating in the same market structure. They deal in the same commodities. However, their pricing and non-pricing policies interchangeably differ which makes the two counter-competing retailers the point of focus in this context. Australian grocery business is hit with the competition. This is backed by the price wars between the major grocery retailers such as ALDI, Cole, and Woolworth who in-turn pressure suppliers to cut prices for them in order to sustain the low prices. The report contains both primary and secondary data collection methods that are used to analyze and evaluate the study. This involves articulating online peer-reviewed journals and articles, newspapers among others. The findings show that Australia is engulfed in an unhealthy competition which comes with various price cuts. All companies seem to know that cutting prices is a more viable strategy for winning clients as compared to non-pricing strategies such as branding and aisle advertising.

1. Introduction

Understanding Australia’s retail and grocery industry require a brief consideration of the market structure, pricing, and non-pricing strategies as well as growth (Ellickson & Grieco, 2013). The grocery retail industry of the country is characterized by bottleneck competition between different grocery companies such as ALDI and Coles. But first, it is important to take an insight into what market structure means. Market structure is best understood as the attributes of the market and how it is organized. In this case, the focus is placed on those factors that potentially impact on the competition prevailing in a given market (Campbell et al., 2015). Growth in any market setting involves a comparative benchmark for evaluating a company’s success as opposed to its competitors. Pricing may be perceived as a business strategy that involves the determination of prices at which customers will buy the company commodities. This is usually done by the companies that lead in the market and it is meant for others to follow. Non-pricing strategies include those strategies that do not need to manipulate prices in order to win over clients for the company (Blank, 2013). An example of such strategies includes advertising, packaging, branding among others. The report, in this case, puts focus on the Australian grocery retail business. Australia is known to hold the most dramatic industry when it comes to grocery retail business. It is noted that there are many new market entries and yet the major players are fighting to outplay each other by offering the cheapest prices for the most qualified and well-branded items. The report seeks to give a comprehensive overview with regard to how major companies like ALDI and Coles have managed to counter-compete, majorly putting the focus on the market structure, the pricing and non-pricing strategies used by these companies including growth. In this report, the data collected is both primary and secondary. It is obtained from peer reviewed journals and articles, government websites as well as visiting sites.

2. Pricing and Non-pricing Strategies Observed at Coles and ALDI

2.1 Pricing Strategies

After assessing Coles and ALDI, the most applied pricing strategies identified included the multiple quantity pricing strategies. In this case, the retailer issues reduced and attractive prices to the customers. This is usually given at a discounted price different from that of one single item. In this case, both companies are said to engage in this strategy in order to win over clients and take over or rule the market. This is said to have earlier been started by Coles as it captured a greater market share of 26 percent. Later, many other major players in the grocery business fraternity embraced and adopted the strategy. For example, ALDI and other competitors decided to cut prices on roasted chicken. This was meant to dismantle Coles’ solid customer base. This resulted in the price war (Hendershott & Menkveld, 2014).

2.2 Non-pricing Strategies

Considering the non-pricing strategy as applied by the two major companies, Branding of products is one strategy that has been used by both companies. ALDI considers that its brand is better than that of Coles yet Coles also claims otherwise. As a non-pricing strategy, every grocery retailer struggles to maintain the market share (Norris, 2015). Therefore Branding is considered as the best strategy to win over clients without reducing prices. ALDI swore to adjust its class to that of Coles. In this matter, the ALDI vowed to alter its supermarket structure and arrangement to an attractive one. For example, more signs of advertisement to replace the normal price stickers. Here, clients are able to make their own decisions with regard to the value of the product

3. Pricing and Non-pricing Strategies: A Comparison and Discussion

The most common yet interesting pricing and non-pricing strategies applied in Australian grocery industry include price reduction, multi-unit price reduction, branding, aisle advertisement, as well as low supplier prices. This is focused on all items traded in the grocery business as they are put forth for sale (Akhtar & Akhtar, 2016). It seems every retailer in the grocery business understands that customers prefer lower prices for quality products. Therefore, in a competitive environment like the supermarket business, ALDI and Coles have established a price war intended to win clients to each side. Researchers explain that Cole went ahead to cut prices on toothpaste, rice as well as tissues. The motive was to merely prevent clients from going for ALDI’s products. In this case, the two grocery giants have been forcefully inserting pressure on their suppliers to reduce the prices in order to sustain the ever growing competition (Hübner et al., 2013). The enables them to cut or reduce the cost of production as well as maintain a reasonable margin of profits despite price reductions. This is also applicable in the case of the multi-unit price reductions.

ALDI has dominated the market overtime against its major competitors like Coles (Norris, 2015). It has been analyzed that it always controlled the pricing power which placed it at the helm of the Australian market with regard to grocery sells. At this point in time, the entity had created more stores that were meant to serve customers more easily and diligently with the best pricing policy. As a result, the company won itself more clients at the expense of its competitors such as Cole and Woolworth. Thirty basis points were forecasted to be the range by which ALDI would lead its competitors in the entire market that was price competitive. To be more strategic, the company further explained that the proceeds resulting from the extra sells would be channeled into a back strategy for the company to use as a cut-pricing method against its competitors such as Coles. In this case, therefore, other companies would be struggling with operational costs yet ALDI would be merely tapping into its supplementary financial savings (Cubbin, 2013). This eventually places it at the top of the market. Research experts note that there was once a negative perception with regard to Cole’s supermarket and its achievements. This was followed by an analysis explaining how the prices were going down due to the price war with its major competitors like ALDI.  Many advisors seem to understand that Coles would better off stop playing the price war but rather embark on quality and service for each and every item they successfully sell off. In such a market structure with high competition, it is quite inevitable to face a stagnant growth (Jinping, 2017). This is not only experienced by Coles supermarket but also other players such as ALDI, Coles, and Woolworths among others. Every grocery shop or supermarket has implemented strategic ways of beating the Hazard’s involved in the structure of the market. Coles has taken a step to sell its grocery products on a feel-good note while waiting for the budgets of the household to recover. In a continuous analysis of Cole’s pricing power, the Australian parliament raised concern as to why the top companies were dominating the market by determining the prices that customers had to but at. This meant that the smaller companies had to follow the prices set despite the high costs of operation. The implication was that Coles and other major players enjoyed the market profits while the smaller grocery supermarkets suffered. However, in a recent study carried out by the Australian Council for Small Business, the matter has been addressed. ALDI had started earlier on registered a nine percent market value as a result of its pricing. In fact, it had been assessed to be moving towards a fifteen percent record mark as it tried to expand its operations throughout the South and Western Australia. However, things a quite different now as the duopoly power of pricing seems to expire or get over. As Cole and ALDI try to competitively run on a basis of quality being offered instead of the price, yet with ALDI trying to restore most of its major store across the country with the aim of selling fresh foods to the general public, the entire act could seem like a triopoly. This is after considering other market players to be a constant factor. Cole seemed to have had more strategic approaches when it comes to pricing. It is noted that when ADLI decided to cut its prices that seemed lower than those of Coles, Coles decided to put discounts on all of its major items which included the Sunrise, Colgate as well as Kleenex (Hatch, 2017). This saw the prices of groceries get back to those of the dry grocery aisles thus lowering the prices of the fresh food favorite chicken. Both chicken prices were observed to have gone low when the price war was underway. This was in a bid to win more clients to them at a slight cost of operation

4. The State of Competition in Australia’s Grocery Industry: Cole and ALDI

The main competitors in Australia’s major supermarket business have been identified as Cole and ALDI (Australian Federal Government, 2018). It is noted that the major challenges faced by both entities is competition and the rapid entry of other cheap pricing grocery retailers. In Australia, the grocery and supermarket business is one of the most booming ventures in the country.  As a result, it has registered the highest number of the new companies or rather business entries over time which has resulted into high competition. ALDI’s growth and expansion has drastically changed the way grocery business is done in the country of Australia. It is noted that ALDI had managed to grow and expand as a result of its policies on the structure of the market. For example, it has been able to become popular due to its strategic discount issuance. As a result, the market and grocery industry in Australia has witnessed major competitors such as Coles and Woolworth considers a reduction in prices for grocery products so as to stay relevant in the market as well as sustain customers. In this case, smaller players in the grocery business have noticed hardships in terms of competition with the major players which makes the market structure more complicated to operate in (Elfenbein et al., 2015). This has been evidenced by the fall in profits to all market players as a result of competition. For example, it is noted that ALDI holds 8 percent of the local market share yet Coles has 26 percent. This leaves other struggling grocery retail players with an 18 percent only as a whole (Norris, 2015). This implies that no business has accepted to leave the market but rather decided to cut prices and bear with the outcomes. This is done in a bid to lure and sustain customer. This, therefore, defined the market structure as a competitive one with many big and small contributors who yawn for the market share (Trump, 2018). ALDI’s recent expansion and growth in both south and Western Australia have encouraged other business players into the market. The expansion is said to have been worth 700 million dollars. This was meant to add an approximated one hundred and thirty more stores to the already existing 300 plus grocery stores (Ford & Håkansson, 2013). The expansion came as a result of an increase in population in the eastern part of New South Wales. It is also noted that the supermarkets were initially positioned in the shopping centers or shopping strips. However, the occurrence of such business is noted to have increased over time especially in the Central Business District of Australia. This presents an analysis with regard to the countries market structure and policing. Research experts note that there are various major factors for a business to operate especially in an Australian market setting. These include the potential of controlling the stock on hand, presenting the product in a more attractive manner, as well as employing the most skillful and experienced team of workers who understand the market and tactfully take advantage of other players in the market.

In a business set up such as the Australian grocery retail industry, where the returns on profits are low due to strict competition, it implies that the risks will also be many (Bieber, 2018). In case of little sales registration, Coles and ALDI may not be able to lower or rather cut their prices further. Associating this fact to the new entrants joining the market share at equally lower prices, it only submits speculation of a possible closure of business (Beyonce, 2017). It is noted that ALDI is a smaller player in the business as compared to its counterparts Coles and Woolworth. This implies that Cole could work hand in hand with Woolworth in order to outplay ALDI. This is meant to reduce on competitors as well as threaten new entrants. However, ALDI seems to be committed and ready to battle by applying the same strategies such as those of the bigger players like Coles.

5. Conclusion

To conclude, market structure is explained to be the business concept that contains the nature of the market as well as its characteristics such as pricing, marketing strategies, and many others. There are factors that constitute a market structure. These are hereby listed and briefly explained. In order for any business to grow, they have to lay out strategies especially in a competitive environment where both companies deal in the same commodity like in the case of ALDI and Coles.  Considering Australia and the grocery supermarket business, it is considered to be one of the most successful and lucrative space of business in the country. This has been evidenced by the competitive nature of pricing and non-pricing strategies that have been applied so as to stay relevant in business.  The data collection methods herein are two. The first is the primary data collection criteria and the second is the secondary one. However, these are evaluated in details. Findings from the study show that the competition is bottleneck as many other entries are registered. This is evidenced by the inter-changing market leadership for both ALDI and Coles especially with the counter existence of Woolworth that leaves the industry under threat.

References

Akhtar, S. & Akhtar, F. (2016). Retail outlook: big retailers feel the pressure of new challengers. The Conversation, Retrieved from http://theconversation.com/retail-outlook-big-retailers-feel-the-pressure-of-new-challengers-54745

Australian Federal Government (2018). A review of the competition between Woolworths, Coles, ALDI and IGA. Competition Committee Investigation. Available from: www.gov.au/competitioninvestigation. Accessed 4 March 2018.

Beyonce, B. (2017). Australia’s Supermarket Industry: Terrible Business. New York: Jay-Z Press.

Bieber, J. (2018). Glamourzon’s entry into the Australian supermarket industry is making CEOs eat more Panadol (too much headache). Sydney Morning Herald, February 31. Available from: www.smh.com.au/1223_badnewsforaustraliansupermarkets. Accessed 10 April 2018.

Blank, S. (2013). The four steps to the epiphany: successful strategies for products that win. BookBaby.

Campbell, J., Goldfarb, A., & Tucker, C. (2015). Privacy regulation and market structure. Journal of Economics & Management Strategy, 24(1), 47-73.

Cubbin, J. (2013). Market structure and performance: the empirical research. Taylor & Francis.

Elfenbein, D. W., Fisman, R., & McManus, B. (2015). Market structure, reputation, and the value of quality certification. American Economic Journal: Microeconomics, 7(4), 83-108.

Ellickson, P. B., & Grieco, P. L. (2013). Wal-Mart and the geography of grocery retailing. Journal of Urban Economics75, 1-14.

Ford, D., & Håkansson, H. (2013). Competition in business networks. Industrial Marketing Management42(7), 1017-1024.

Hatch, P. (2017). Aldi's fresh food offer puts heat on Woolworths and Coles. The Sydney Morning Gerald.

Hendershott, T., &Menkveld, A. J. (2014). Price pressures. Journal of Financial Economics, 114(3), 405-423

Hübner, A. H., Kuhn, H., & Sternbeck, M. G. (2013). Demand and supply chain planning in grocery retail: an operations planning framework. International Journal of Retail & Distribution Management41(7), 512-530.

Jinping, X. (2017). China, My Homeland… and the Supermarkets There… and In Australia. Beijing: CPC Publications.

Norris, G. (2015). Woolworths, Aldi and Coles face off in price war. The Courier Mail, Retrieved from http://www.couriermail.com.au/business/woolworths-coles-and-aldi-face-off-in-price-war/news-story/11485db80cd583c274568f10fb109227

Trump, D. (2018). American supermarkets are greater than Australian ones, and here’s why. Times Magazine, January 1. Available from: www.times.com/trumpthinksheknowsaboutsupermarkets123. Accessed 11 February 2018.