Economics of Australian Retail Industry: Woolworths

This paper discusses the economics of the Australian retail industry, focusing on Woolworths. It covers the market structure, factors influencing demand and supply, elasticity, and the impact of recent events on the industry.

Running head: ECONOMICS
Economics
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Table of Contents
Executive summary....................................................................................................................3
Introduction of company............................................................................................................3
Industry background...................................................................................................................5
The market structure of the company.........................................................................................6
Factors that influence demand for the company’s products.......................................................7
Factors that influence supply for the company’s products.........................................................8
Elasticity.....................................................................................................................................9
Impacts of an event on the industry/company............................................................................9
Conclusion................................................................................................................................10
Reference list............................................................................................................................12

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Australian retail industry: Woolworths
Executive summary
The following paper states about Woolworth, which is one of the famous retail
industries in Australia and is known to operate in an oligopoly market. The first part of the
paper consists of introduction which states the background of Woolworths and how does it
operate. The second part consist of the background of the industry in Woolworths fit into
which is the supermarket retail. This part states that the retail industry of Australia is very
famous all over the world. The third and the fourth part states the demand and supply factors
of the products sold by Woolworths. The fifth part of the paper states an event recently
affecting the company which is the introduction of AASB 16 Leases. Lastly, the conclusion
summarizes the paper in a brief manner.
Introduction of company
Woolworths supermarkets are the Australian supermarket store chain which is known
to been owned by Woolworths Group which is known to founded in 1924. Both Coles and
Woolworths are known to form duopoly of the Australian supermarkets which are known to
account for more than eighty percent of the Australian market. The headquarters of
Woolworths are in Bella Vista, Australia. This particular company is known to specialize in
selling groceries, magazines, health and beauty products, pet and baby supplies and stationary
items. Woolworths presently operates in more than 1000 stores across Australia
(Woolworths.com.au. 2019). In the year 1997, Woolworths opened its very first metro
convenience store in Sydney. There are more than 100,000 employees working under
Woolworths.

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The company is known to earn a revenue of $56.726 billion in the year 2008. In the
year, 2012, Woolworths Limited is known place 70 shopping centres into a real estate
investment trust which is known as shopping centres Australian Property Group. In the
present year. The main vision of Woolworths is known to provide the quality products as well
as services to the customers all the time through the price strategies and human resource
strategies. The main goal of this particular retail company is to increase its efficiency and also
become cost effective in nature. On the other hand, the main mission of Woolworths is to
deliver the customers the right shopping experience every time. In the year 2008,
Woolworths was known to launch a new identity plan in order to replace the Safeway brand
of Victoria for uniting all the common brands under Woolworths.
Figure 1 Retail industry turnover in Australia

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Figure 2 Retail sales in Australia
Industry background
Over the last fifty years, Australia is known to enjoy a fine business environment with
a large population where the developers of the shopping centres were becoming the centre of
attraction in the world. The evolution of the supermarkets came with a huge impact on the
retail sector of Australia. As the retail market kept on increasing, Woolworths at that time
prepared their way to become one of the largest retailers in the world. Woolworths, along
with its competitor, Coles known to have dominated the retail industry of Australia. Though
Australia is known to hit the bottom in the list of continental population, it is known to rank
quite high in the list of world’s largest retailers. Although the retailers of Australia do not
have prominence in the other continents, but retailing had been the largest employer within
its own borders. More than 50 percent of the population known to have worked in the retail
sector of Australia at some point of time.

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The report produces by Deloitte Touché Tohmatsu of “Global Powers of Retailing”,
each year includes the name of Australian retail giants with annual revenue huge enough to
be ranked as the largest retail companies in the world. When compared with the global retail
industry, it has been found out that the Australian retail industry is quite large enough and
also holds a significant part in the retail economy of Australia (Berg and Farbenblum 2017).
A worth of $120 billion economic activity in the retail sectors take place in Australia where
there is presence of more than 5500 number of retail companies. One of the features of the
Australian supermarket and grocery retailer is known to highly concentrated with some of the
largest operators which are known to account for more than 80 percent of the total industry
revenue.
The market structure of the company
The market structure of the supermarket chains in Australia is known to be
oligopolistic in nature. Woolworths is known to operate in an oligopolistic market structure.
There are specially two supermarkets giants in Australia which are Coles and Woolworths
which mostly dominates the supermarket industry in Australia. The firms in this kind of retail
industry have some powers of price setting since there is a presence of product differentiation
when these supermarkets are known to import dissimilar goods for the society. There is
presence of certain barriers while entering the market since both Woolworths and Coles
known to have solidified their position in the supermarkets as giants, however, presently,
Aldi have known to have entered the market through the cost cutting strategies. The
oligopoly market structure is the one which is dominated by more than one but is restricted to
a very small group of players in the market. For this reason, the oligopoly market structure is
known to be an imperfect form of competition in the market. In case oligopolistic market
structure there are only few sellers who sell quite similar products which differs minutely.

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In this type of market structure, there are some magnificent players like Coles, Aldi,
Woolworths who are known to sell similar products and they also try to mitigate the
competition by owning a larger piece of shared in the market. In this kind of market structure,
the firms are known to do equitable pricing of similar products available in the market. The
participants of the oligopoly market do not usually compete on the basis of prices, but they
compete basically on the amount of sales they have actually made.
Factors that influence demand for the company’s products
The demand for the goods of Woolworths are known to get influenced by several
factors. One of the factors is price of the products. The products sold by Woolworths are
quite competitive in nature. tis company is known to sell its products at quite cheap prices in
all over Australia. The huge brand name also acts a strength for Woolworths. The various
brand loyalty schemes of Woolworths also act as an important factor for the increase in
demand of the goods. The another most important factor which is known to affect the growth
of the product of this particular supermarket is the taste and preference of the consumer.
Woolworths is known to sell products which match the taste and preference of the consumer.
Persuasive advertisement is also designed for resulting to a change in the taste and preference
of the consumer which helps in creating an increase in demand (Parker Carey and Scrinis
2018). Therefore, it can bee said that the taste and preference of the consumer is known to
have a significant effect on the demand of the products. The fourth most important factor
which affects the demand of the products sold by Woolworths is that the products sold are
mostly necessities like groceries, fresh fruits, milk, vegetables, clothes and many more. These
are needed in daily life of the people. As the products are mostly necessities, therefore, there
is always a high demand of the products sold by Woolworths.

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One of the very important factors which affects the demand of the products of
Woolworths is the loyalty programmes offered by it. The Woolworths rewards and credit
cards and the frequent shopper club are known to provide various benefits to the customer.
The retail loyalty is mostly based in the promotional features and the customers also
sometimes can even pay less with the help of loyalty cards. These consumers are known to
perceive much bigger value in the loyalty programme. Another loyalty program like easy
parking facilities also drives in customers.
Another major factor is the store facility and the in-store advertising. Consumers will
be visiting the stores where the stores maintain its cleanliness, all prices are labelled, they are
of low price, convenient store location and also have accurate and pleasant clerks. In store
marketing is one of the famous factors which is known to drive the consumers to the grocery
stores. The in-store marketing is known as the strategic process for satisfying the needs of the
consumers. The instore marketing should include the factors like potentially presenting the
products, maximizing the number of packages in the store and also potentially using the
products. Therefore, the retailers should be optimizing the in-store opportunity.
Factors that influence supply for the company’s products
The stock price stability and the strength of the economy is known to have a huge
impact of the supply of goods of the grocery stores. When the demand of the products
increases, the supermarkets will also then increase their supply of the products. The supply
off the products in supermarkets also gets affected by the seasonal changes. When there is
change in seasons, various kind of products are brought into the market according to the
seasons. The financial crisis can also affect the supply of the products in supermarkets. When
there is a problem in the supply chain distribution system, at that time also the supply of the

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products gets affected. The supply o the products gets reduced when the cost of production of
the goods increases.
Elasticity
In case of inelastic demand, people are known to buy the similar amount of goods
whether the price are known to drop or increase in nature. Woolworths is known to sell
mostly the grocery items like fresh fruits, packaged foods, meat, fish along with health
products beauty products, magazines, household products, stationary products, pet foods,
baby foods and lot more. Now coming to the grocery items, these commodities are known to
inelastic demand since everyone needs to eat and these products are mostly necessities in
nature.
The price elasticity of demand is a measure that issued in economics for showing the
responsiveness or elasticity of the quantity demanded of the good or a service to a change in
its price when there is change in price. In case of inelastic demand, people are known to buy
the similar amount of goods whether the price are known to drop or increase in nature.
similarly, in case of the groceries like vegetables, milk and fruits known to have quite similar
price everywhere and there for are known to inelastic in nature. Although, when Woolworths
will be charging high prices of these groceries, people will be moving to other supermarkets
where they will get similar kinds of goods at much cheaper price. The agricultural items are
also mostly competitive in nature where they cannot be much differentiated. Coming to the
DVDS, magazines and other similar products are known to be highly elastic in nature. Since
these products are not at all necessary goods and therefore if they are charged higher in
Woolworths, the consumers will be moving towards the cheaper brands.

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Impacts of an event on the industry/company
The new leases standard introduced in Australia have affected the retail industry. The
changes introduced by IFRS 16 Leases known to have a significant effect on the financial
statements of the retailers as a result of operating leases in the retail industry. The new
standard will be putting almost all leases on the balance sheet and change the profile of the
lease expenses every year. The new standard will be affecting all the pre existing leases and
therefore the retailers will now need to consider both the existing long dated leases as well as
new agreements. The two type of leases are the short-term leases and leases of small assets.
The new accounting treatment will be affecting the retail industry of Australia in many ways.
Thee net debt and the gearing will be increasing since the reported debt will be increasing
(Pwc.com.au. 2019). The EBITDA will also be increasing since there will be no operating
lease expense included.
The EBIT will be increasing since part of the lease cost will become interest expense.
Since the PBT of the lease will be neutral since the profit will be lower in the initial part of
the lease. Therefore, the liabilities of the famous retailers like Woolworths and Wes farmers
will be doubling under changes in lease accounting. Under AASB 16 Leases, the retail
companies will be forced for brining to bring operating leases in to the balance sheets from
2019 (Pwc.com.au. 2019). The new standard will be improving transparency and will be
removing the guesswork which is known to be associated with estimation of lease liabilities.
Conclusion
In order to conclude it can be said that the retail industry in Australia will be earning
more profits in the coming future. The main vision of Woolworths is known to provide the
quality products as well as services to the customers all the time through the price strategies
and human resource strategies. The main goal of this particular retail company is to increase
its efficiency and also become cost effective in nature. The changes introduced by IFRS 16

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Leases known to have a significant effect on the financial statements of the retailers as a
result of operating leases in the retail industry. The new standard will be putting almost all
leases on the balance sheet and change the profile of the lease expenses every year. The new
standard will be affecting all the pre-existing leases. Woolworths is known to operate in an
oligopolistic market structure. There are specially two supermarkets giants in Australia which
are Coles and Woolworths which mostly dominates the supermarket industry in Australia.
The various brand loyalty schemes of Woolworths also act as an important factor for the
increase in demand of the goods. The another most important factor which is known to affect
the growth of the product of this particular supermarket is the taste and preference of the
consumer. Woolworths is known to sell products which match the taste and preference of the
consumer.

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