Determinants of Demand and Supply in the Supermarket Industry

This article discusses the key determinants of demand and supply in the supermarket industry, focusing on Coles in Australia. It explores the impact of macroeconomic conditions and competition prices on demand, as well as the influence of natural disasters and exclusive tie-ups with suppliers on supply.

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The organisation selected is Coles. It is one of the leading supermarkets in Australia and
forms a virtual duopoly with Woolworths. However, in the recent times, other players
particularly belonging to the discount retailer segment have been able to make their presence
felt in the supermarket space (Kirby, 2014). With regards to demand, the following two
determinants are the most relevant.
 Macroeconomic conditions in Australia – For any retail business, the demand would
be primarily driven by the consumer spending. It has been empirically observed that
consumer spending tends to be higher in phases when robust economic growth is
witnessed (Mankiw,Mankiw and Taylor, 2016). On the contrary during phases of
economic contraction or slower growth, there is a decrease in consumer confidence
owing to which the spending reduces due to economic uncertainty. As a result, the
demand for the various products offered by Coles would be dependent on the
underlying economic growth and economic stability witnessed in Australia (Arnold,
2017)
 Competition Prices – The supermarket industry in Australia is highly competitive
owing to the price sensitive nature since there is little loyalty amongst consumers, As
a result, they tend to shift between Coles and Woolworths based on the underlying
price advantage (Pash, 2017). Thus, if Woolworths would reduce price to such an
extent which cannot be matched by Coles, then the demand would be adversely
impacted. With the coming of discount retailers such as Aldi and Costco in the
Australian market, this factor has assumed even more significance with regards to
demand. Pricing has become a significant source of competitive advantage in the
supermarket space owing to which players such as Coles are losing market share to
discount retailers. Therefore, the demand of products at Coles is a significant function
of prices being offered at other supermarkets (Mankiw,Mankiw and Taylor,2016).
Two determinants of supply with regards to products sold by Coles are as follows.
 Natural disasters – Since one of the major segments of products sold at the
supermarket is grocery, hence the supply is dependent on the presence or absence of
any natural disasters which have become quite common in the recent times. The
incidence of drought and floods tend to have an adverse influence of specific products
owing to which their supply is disrupted which tends to impact the overall prices and
sale of that particular product. This is also true globally since some of these products

are imported and any shocks in the global supply chain would have implications for
the company (Arnold, 2017).
 Exclusive tie up with suppliers – Owing to the amount of competition in the industry,
the big retailers tend to enter into exclusive arrangements with suppliers which means
that a given supplier could enter into contract with only one of the supermarkets. As a
result, the robustness of the supply chain is determined by the prudence of these
supplier partnerships that the company has with suppliers not only based in Australia
but also globally (Mankiw,Mankiw and Taylor, 2016). Any significant change in this
aspect can potentially be disruptive for the company.

References
Arnold, A.R. (2017) Microeconomics. 9th edn. Sydney: Cengage Learning, pp. 101,135
Kirby, J. (2014) Discounters Aldi and Costco challenge supermarket giants Coles, Woolies,
[Online] Available at https://www.theaustralian.com.au/business/wealth/discounters-aldi-and-
costco-challenge-supermarket-giants-coles-woolies/news-story/
ddcd23e84c1f947c412d817ec470afba [ Assessed April 28 2019]
Mankiw, G.N., Mankiw, G.N. and Taylor, P. (2016) Microeconomics. 5th edn. Sydney:
Cengage Learning, pp. 154,187
Pash, C. (2017) Hot competition is back in Australian supermarkets,[Online] Available at
https://www.businessinsider.com.au/hot-competition-is-back-in-australian-supermarkets-
2017-10 [ Assessed April 28 2019]