HC1072: Economics and International Trade - Retail Industry Report

This report provides a comprehensive analysis of the Australian retail industry, examining its background, market structure (specifically oligopoly), and major players like Woolworths and Coles. It delves into factors affecting the supply of grocery products, including distribution, labor, and resource scarcity, as well as demand factors such as disposable income and consumer preferences. The report also explores the concept of elasticity in the context of supermarket pricing and analyzes a recent event impacting the industry. The study highlights the industry's contribution to the Australian economy, its workforce characteristics, and the impact of technological changes. The report concludes with a discussion on the industry's challenges and future outlook.

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Economics and International Trade
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Table of Contents
1.0 Introduction.........................................................................................................................................3
2.0 Industry Background..........................................................................................................................3
3.0 Market structure of the industry........................................................................................................4
3.1 Major players........................................................................................................................................5
4.0 Factors affecting the supply of grocery products..............................................................................6
4.1Distribution and labour.......................................................................................................................6
4.2 Scarcity of resources..........................................................................................................................7
5.0 Factors affecting demand....................................................................................................................8
5.1 Disposable income.............................................................................................................................8
5.2 Changes in tastes and preferences......................................................................................................8
6.0 Elasticity...............................................................................................................................................8
7.0 An analysis of a recent event...............................................................................................................9
8.0 Conclusion..........................................................................................................................................10
References.................................................................................................................................................11

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1.0 Introduction
The Australia retail industry was reported to have grown by 3.7% as of September 2018
compared to August 2018 where it had increased by 3.7% (Mordor Intelligence, 2019). The retail
industry is based on the commodity category, distribution channel and the dynamics associated
with the market. Australia communities are described as one of the few communities in the
world that are urbanized with more than 24 million people (Euro Monitor, 2019) which is
approximately 90% of the population dwelling in urban centres of Sydney, Melbourne, Adelaide,
Perth and Brisbane. Also, others dwell in small cities and centres situated within the radius of
about 100 miles from the Ocean. Australian according to statistics recorded a substantially high
GDP per capita estimated at the value of approximately US$50,000. Also, Australia reported the
second highest wealth with regards to adults. The retail sector experienced positive growth
despite substantially marginal increases in wages and increasing household debt. Robust growth
was reported in the housing market characterized by low-interest rates and increase in credit
regarding households which affected the consumer spending habit.
2.0 Industry Background
In a report released in 2014, it was anticipated that there would be an increase in
employment by 8.9% particularly in the retail industry and this would transcend to 2017. This
was a projection of growth of about 1.7% annually over five years and contributed to more than
100,000 occupations annually. This compared with the annual growth rate of about 1% over the
past ten years and 0.2% over the last five years. The Australian retail industry contributes
substantially to the Australian economy. For instance, in 2012/13 the retail industry contributed
roughly 4.5% equivalent to US$68.5 billion to Australia’s GDP. The retail sector was composed
of more than 140,000 businesses employing more than 1.2 million employees which are

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approximately 10% of the Australian labour force and has been ranked as the second-largest
sector in Australia.
The retail workforce is characterized by several features that mark it as unique compared
to other sectors laborforce. The retail industry has some of the youngest profiles with regards to
age compared to all other sectors (Trojan Recruitment, 2014). It is reported that more than three-
quarters of the workers are below the age of 45 years and another more than a third are aged 24
years or even younger with more proportion of females, part-time and casual employees. More
than 56% of the retail employees are women in comparison to all the industries as they have an
average of 46% with 49% employed as part-timers compared to other industries that have an
average of about 30%. The retail industry is also reported to be one that is highly diversified with
more than 14 sectors that entail electrical appliances, specialized food retailing, buying and
selling that is commissioned-based, supermarket and grocery stores. This has vital repercussions
for a coordinated framework for the development of a workforce.
The retail industry is being transformed and changing due to the effect of technology
which is changing the expectations and behaviours of consumers. The main hurdle is to adopt
such changes in a manner that will trickle profits for businesses and create rewarding jobs for
employees.
3.0 Market structure of the industry
The retail industry in Australia is that of oligopoly (Chander, 2015). According to the
oligopoly market structure few groups of players restrict the market, and for this, it is known as
an imperfect form of competition. Distinct features such as few players characterize oligopoly
market structure are few; there is selling of identical products that only differ in small terms.
Oligopoly structure may also impose restrictions for entry of other firms. Oligopoly entails large
market players attempting to mitigate competition by commanding a large share of the market. In

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this market, structure firms try to exercise fair pricing of identical products accessible in the
market. The players in oligopoly do not only compete based on prices but also compete based on
the magnitude of the sales made.
Duopoly is a type of oligopoly market structure where the number of participants based
on the name are just two. A good illustration is the grocery sector which for a long time had been
a duopoly market structure until there were new entrants from the German market. Commanding
a market share of approximately 79% Australian based Woolworths and Coles have dominated
this sector for many decades (Global Credit Research, 2015). Unfortunately, currently, it has
been recognized that the oligopoly market structure seems to be fading in the grocery sector. The
grocery leaders are facing a tiff from other small players such as Aldi, Costco and Spar which are
all companies from Germany. Oligopoly has been the market structure characterizing the retail
industry particularly the grocery sector for decades however due to competition and challenges
in such an industry, the oligopoly market structure may be wiped out from the grocery sector.
3.1 Major players
The grocery industry was anticipated to grow by more than 2% in the 2017-18 fiscal year,
and this was attributed mostly by the rising demand for premium food commodities, for instance,
organic fruits and vegetables (IBIS World, 2018). However, this followed a decline in 2016-17
of 0.6% following a moment of heavy discounting by primary supermarket chains. However,
stiff price competition consistently defined the industry.
Woolworths following the sale and closure of some of its hardware business reported to
be underperforming in 2016, has put more emphasis on its Australian Food division. It is since
then that Woolworths cut prices for its grocery products to enable it to compete it better with
other rivals such as Coles and ALDI as Woolworths’ average prices declined by 2.1% in the
2016/17 fiscal year. Such a trend continued since the beginning of 2017/18 as the average prices

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fell by 2.4% in the first quarter of 2017/18. Woolworths also invested heavily in all its customer
service department and even in renovating and refurbishing some of its old stores to enable the
giant to boost its demand.
Thus, due to the resurgence of Woolworths’ business with regards to the supermarket
segment, Woolworths gained a substantial market share historically since 2016-2017. Such a
trend continued in 2017-2018 as the company was projected to contribute about 37% to the
industry at the end of 2018.
On the other hand, Coles recorded one of the weakest performances in 2016/17 fiscal
year as Coles was under immense pressure originating from the buoyant Woolworths and also
from the expansion of ALDI (Farfan, 2018). Such pressure went on into 2017/18 as Coles only
recorded growth of its sales by only 0.3% in the first quarter of 2017/18. It was anticipated that
Coles’ half-year results would be the same as Coles was facing hardships with Bunnings a UK
based enterprise and also from its Target group of retail outlets (Jahshan, 2019). However, the
market share of Coles was anticipated to reach 30% at the end of 2018.
4.0 Factors affecting the supply of grocery products
4.1Distribution and labour
The growing urbanized populations have repercussions particularly for distribution in the
agricultural sector due to the increase in the food miles and this places constraints on the current
problems associated with the rural-transport framework. The increased price of energy products
continues raising the costs of the national food framework impacting the exporters negatively.
This facilitates the need to have the agricultural supply chain improved since the prevailing
inefficiencies strain productivity, and this is on the rise mainly due to rural-urban migration and
the preferences by international migrants to urban centres leaving the rural areas and agricultural
enterprises with substantial diminishing workforce pools. The impact of labour reduction is

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exacerbated by high average incomes in Australia impacting the competitiveness of Australian
agriculture in the international market.
The need for food production commanding substantial expansion in the future, limited
workforce in rural areas poses the problem of food security and Australian food production.
Thus, to attain the set targets in anticipating domestic demand while sustaining export targets, it
is vital that core resources such as labour be in abundance.
4.2 Scarcity of resources
According to the Department of Agriculture, the agricultural segment can only expand if
it can produce agricultural products with constant or fewer natural resources at hand. The
availability of land which historically was an added advantage for Australian agriculture is
scarce posing constraints (Di Nunzio, 2014). The gross area where crops get sown in Australia
remains constant at 25 million hectares annually in the past two decades. Also, if Australia is to
increase the supply of its grocery products, there is a need for development schemes that
prioritize food security and lobby more moral support from the state and regional governments.
Scarcities associated with water, energy and land limit the capacity for expansion and
growth of the agricultural sector in Australia. The rising international costs related to agricultural
raw materials such as pesticides and fertilizers are impacting the profit margins of local
producers negatively. Also, instances of soil acidification spanning from misuse of inputs could
lead to long-term impacts on sustainability. The diminish pools of water have for a long time
posed a challenge for Australian farmers who have gone beyond a reasonable doubt to prove that
they indeed they are the most resilient to drought globally. The level of irrigation in some of the
places considered to be the most productive in Australia such as the Murray-Darlin region have
been cupped for more than two decades. It is reported that pressure on water resources may

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prove to be insurmountable by 2050 if the government fails to construct primary infrastructural
projects such as the dams.
The use of research and technical adjustment is crucial for the growth of the sector. There
is need to develop new breeding methods and drought-resistant crops and improve the irrigation
systems as these are some of the ways that could enable Australian farmers to increase supply
while maximizing the current resources to boost agricultural production.
5.0 Factors affecting demand
5.1 Disposable income
Disposable income, an increase in disposable income due to the revision of wage bill in
Australia would lead to an increase in shopping habits by consumers which will translate to an
increase in quantity demanded supermarket products.
5.2 Changes in tastes and preferences
Consumers have been associated with choosing particular brands that they feel proud of,
in this context if consumers prefer shopping at Woolworths, then it means that they will buy
there which will increase the demand for commodities purchased at Woolworths. Conversely,
those that prefer shopping at Coles will mean that they will shop at Coles thus increasing the
demand for products at Coles.
6.0 Elasticity
An important question is considering how the short-term and possibly longer-term effects
of supermarkets’ pricing decisions is the responsiveness of consumers regarding price cuts
following changes in the number of commodities demanded (King, 2011). This method is known
as the price elasticity of demand and is imperative for comprehending about any changes with
regards to the volume of milk consumed and any changes with regards to the value of the
commodity throughout the supply chain.

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According to National Foods, milk consumption is pretty inelastic (Mentiplay, 2011);
however, Coles refuted such claims asserting that milk is not inelastic. Coles believes that there
is a high demand for drinking milk as it carries a higher premium for the farmers. According to
Coles, the growth in the consumption of drinking milk plus the increments given to Coles
processors should be sufficient to offset any changes evident in the mix. Australia’s per capita
milk consumption has been steady in the past two decades despite the emergence of lower-priced
private label milk. According to an observation made, in the short-run, the demand for milk is
relatively inelastic for only about six to 12 months. In the case of Coles, it needed more fresh
milk as the sales for milk in its supermarkets were anticipated to go up. The demand for milk
was surging, and its sales would go up with price cuts.
7.0 An analysis of a recent event
Recently, with the entrance of companies such as Costco and Spar in the market the
demand for grocery products for Woolworths and Coles is expected to decrease. The supply of
grocery products will increase amidst competition and prices will be expected to reduce enabling
consumers to enjoy shopping discounts from such supermarkets.

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8.0 Conclusion
In conclusion, it is evident that the Australian retail industry is highly competitive with
significant players dominating grocery sectors. However, the demand for grocery products
continues to increase due to the reduced prices offered by such prices as they compete for
consumers through price cuts and trade discounts.

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References
Chander, S., 2015. Market Structure : Meaning, Characteristics and Forms Economics. [Online]
Available at: https://www.yourarticlelibrary.com/economics/market/market-structure-meaning-
characteristics-and-forms-economics/28736/
[Accessed 3 May 2019].
Di Nunzio, J., 2014. Consumption Patterns and Food Demand in Australia to 2050. [Online]
Available at: http://www.futuredirections.org.au/publication/consumption-patterns-and-food-
demand-in-australia-to-2050/
[Accessed 3 May 2019].
Euro Monitor, 2019. Retailing in Australia. [Online]
Available at: https://www.euromonitor.com/retailing-in-australia/report
[Accessed 3 May 2019].
Farfan, B., 2018. The Largest Australian Retailers. [Online]
Available at: https://www.thebalancesmb.com/largest-australian-retailers-2892105
[Accessed 3 May 2019].
Global Credit Research, 2015. Moody’s : Australian Grocery market’s duopoly faces shake up.
[Online]
Available at: https://www.moodys.com/research/Moodys-Australian-grocery-markets-duopoly-
faces-shake-up--PR_332437
[Accessed 3 May 2019].

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IBIS World, 2018. IBISWorld reveals state of the supermarkets and grocery industry. [Online]
Available at: https://www.ibisworld.com/industry-insider/press-releases/checkout-update-q1-
2018-ibisworld-reveals-the-state-of-play-in-the-supermarkets-and-grocery-stores-industry/
[Accessed 3 May 2019].
Jahshan, E., 2019. Market snapshot: Australia. [Online]
Available at: https://www.retailgazette.co.uk/blog/2019/01/market-snapshot-australia/
[Accessed 3 May 2019].
King, S., 2011. Committee Hansard. s.l., s.n.
Mentiplay, K., 2011. Technical and Business Development: National Foods. s.l., Committee
Hansard.
Mordor Intelligence, 2019. Australia Retail Sector-Growth,Trends and Forecast(2019-2024).
[Online]
Available at: https://www.mordorintelligence.com/industry-reports/retail-industry-in-australia
[Accessed 3 May 2019].
Trojan Recruitment, 2014. Australian Retail Sector Set for Growth. [Online]
Available at: https://www.trojanrecruit.com.au/news/australian-retail-sector-set-for-growth/2734/
[Accessed 3 May 2019].