Economics for Managers: Coles' Profit Decline and Market Analysis

This report provides an economic analysis of Coles' profit decline in the Australian supermarket industry, focusing on the competitive landscape dominated by Woolworths and Aldi. It applies economic theories such as income elasticity of demand and the concept of oligopoly to understand the market structure. The report examines the impact of price competition, illustrated by the kinked demand curve, and how Coles is responding with customer-led strategies. The analysis highlights investments in services, technology, and fresh food to counter declining profits and maintain market share. The report concludes that Coles' strategic adjustments, including a focus on customer needs, are crucial for its growth and sustained market position amidst intense competition. References to relevant economic literature are included to support the analysis.

Running head: ECONOMICS FOR MANAGERS
Economics for Managers
Name of the Student
Name of the University
Author note

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Table of Contents
Introduction......................................................................................................................................2
Income elasticity of demand............................................................................................................2
Oligopoly.........................................................................................................................................3
Price competition and kinked demand curve...................................................................................4
Customer led strategy......................................................................................................................6
Conclusion.......................................................................................................................................6
References........................................................................................................................................8

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Introduction
The grocery supermarket structure in Australia is oligopolistic in nature. The market is
concentrated among few large retailers. Woolworths and Coles are two big retailers in the
market. Intense competition prevails between Woolworths and Coles to for retaining market
share. Recently rising big player in the supermarket is Aldi. However, with increasing
competition from Woolworths and new competitor Aldi, Coles has accounted a decline in its
profit margin. Wesfamer, the parent company has recorded an increase in earning. In the present
report, an economic analysis is made on a news report stating the recent status of Coles in
Australian supermarket. Relevant economic theories and concept are used to understand the
scenario.
Income elasticity of demand
Income elasticity expresses the change in demand quantity with a change in income. Both
the changes in income and demand are represented in percentage term. Goods, for which demand
changes in the same direction of income is known as normal goods. Income elasticity is positive
for these goods. Within normal goods, for luxury items demand changes at a higher proportion
than income. Reverse is the case for necessary goods. The relation between income and demand
for different types of good is expressed by the Engel curve (Higgs and Worthington 2014).

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Figure 1: Engel curve
(Source: As created by the Author)
As mentioned in the article, though there is an overall 13.5 percent fall Coles profit but
the profit share for food and liquor has declined by only one percent. Income elasticity for food
is relatively inelastic whereas liquor falls in the category of luxury good and thus has a relatively
income elastic demand.
Oligopoly
Oligopoly is a concentrated form of market structure. This type of market is characterized
as of having few sellers and comparatively larger pool of buyers. There is intense competition
among the sellers to capture a greater share of market by undercutting rival’s share (Carlton and
Perloff 2015). The seller adapts different strategies to leave its rival far behind. Product

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differentiation is a common strategy used by sellers in the oligopoly market. Here, the same
product is sold with slight external changes like changing the packaging, offering some extra
benefit or improving service delivery. Another feature of oligopoly is that strategies of different
sellers are interconnected. Rival firms before taking its own decision consider the strategic
reaction function of rival firms (Edelman and Singer 2015).
Coles facing such a competitive environment from existing rival Woolworths and new
comer Aldi makes significant investments improving its services. In order to recover revive
declining profit in food and liquor in 2016, Coles has increased investment focusing on a range
of services, improving value and more importantly increasing availability of fresh food
(powerretail.com.au 2017). The liquor sales experiences a growth trend in two consecutive years
because of investment in cost effective technology to reduce the price and increase range of
stocks and improve storage network quality. As a result of investment in food and beverages
growth in sales of these irtems decline only one percent in contrast to a sharp 4.1% previously.
Price competition and kinked demand curve
Competition among few large sellers is an inherent feature of oligopoly market.
Competition through product differentiation or launching a new product or improving quality of
service is not harmful. The situation worsens when the sellers engage in price competition
(Brander and Spencer 2015). This if termed as price war among the oligopoly sellers. This is
explained in figure 2 with the help of kinked demand curve prevailed in the oligopoly market.

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Figure 2: Kinked demand curve and Price War
(Source: As created by the Author)
Kinked shape of market demand curve is a distinguishing feature of oligopoly
market. The reason for the kinked shape is demand has different price elasticity in two different
parts of the demand curve. Equilibrium price and quantity is determined by the general condition
of profit maximization (Klenow and Willis 2016). Respective profit maximizing price and output
are P* and Q*. Now above the equilibrium price the demand curve is flatter, meaning higher
elasticity and below it the demand curve is steeper meaning lower elasticity. Therefore, price
cannot be increased above P*. To increase market share prices are pushed below P*. Because of
strategic interdependence all the seller do the same thing and a price war starts.

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Coles in facing a price competition from German originated Aldi. Price war results in
reduction in profits because each offers good cat a very low price. This is the main reason for a
rapid fall in Coles profit. As stated in the article Coles profit has declined to a well below 13.5%
(news.com.au 2017).
Customer led strategy
Now a day businesses are increasing relied on Customer led strategy. The strategy
stresses on designing business keeping sole focus on customer needs. A detail analysis of market
trend is required. Based on this trend the company determines the goods and services to be
offered in the marker that can best serve the consumer purpose (Sushko 2013).
Coles cannot sustain in the price war with Aldi and Woolworth for a very long time if the
declining profit trend continues. To counter price competition and maintain its sales growth
Coles is following customer led strategy. The customer led strategy is expected to help Coles in
its growth revival efforts by providing a sustainable platform of sales. When sales increase then
return on capital investment increases making business more sustainable.
Conclusion
The report summarizes a news article having headline news of a rapid declination in
profit of one of major players in Australian supermarket. Profit is declined because of increasing
competition from its close rivals. To explain the price competition in the supermarket structure,
the concept of kinked demand curve is used. Coles is making investment for improving its
services and win over the rivals. Food and beverage sales are already revived. Coles adapts

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customer led strategy to maintain its market position and growth share. The investments and
strategies followed by Coles is expect to recover its lost profit soon.

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References
Brander, J.A. and Spencer, B.J., 2015. Intra-industry trade with Bertrand and Cournot oligopoly:
The role of endogenous horizontal product differentiation. Research in Economics, 69(2),
pp.157-165.
Carlton, D.W. and Perloff, J.M., 2015. Modern industrial organization. Pearson Higher Ed.
Edelman, D.C. and Singer, M., 2015. Competing on customer journeys. Harvard Business
Review, 93(11), pp.88-100.
Govender, P. and Govender, P. (2017). Coles Using Uber for Home Delivery - Power Retail.
[online] Power Retail. Available at: http://www.powerretail.com.au/news/coles-using-uber-
home-delivery/ [Accessed 3 Sep. 2017].
Higgs, H. and Worthington, A.C., 2014. Price and income elasticity of Australian retail finance:
An autoregressive distributed lag (ARDL) approach. Australasian Accounting, Business and
Finance Journal, 8(1), pp.114-126.
Klenow, P.J. and Willis, J.L., 2016. Real rigidities and nominal price
changes. Economica, 83(331), pp.443-472.
NewsComAu. (2017). ‘Coles continued to execute its customer-led strategy’. [online] Available
at: http://www.news.com.au/finance/business/retail/coles-profit-falls-135-per-cent-to-16-
billion/news-story/3ab5ec55c22f92f7829b86ed8e18e6ba [Accessed 3 Sep. 2017].
Sushko, I. ed., 2013. Oligopoly dynamics: Models and tools. Springer Science & Business
Media.

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