Consumer is king of the supermarket

There is growing concern amongst suppliers, competitors and food producers that Safeway and Coles Supermarkets are too powerful.

If looked at strictly on a structural basis, there appears to be cause for concern.

The Australia grocery industry is highly concentrated.  The two largest firms -- Safeway and Coles -- account for over 75 per cent of retail turnover of packaged food.  In contrast the top ten firms in the US and Canada account for just 35 per cent of turnover in their combined market and concentration is even lower in Europe.

Moreover, Safeway and Coles have developed highly strategic positions in virtually all major shopping centres around the country.  This makes it exceeding costly and difficult for competitors to gain comparable scale and scope to compete with them.  However, entry is hardly impossible, as proven by Aldi, the giant German food retail firm, which has in less than four years developed a network of 86 stores on the eastern seaboard (26 in Victoria).

There are some clear reasons for the high concentration in the Australia grocery sector.  First, Australian tastes and buying patterns are relatively homogenous when compared to other countries.  This provides scope for a successful retailing approach, such as that adopted by Safeway and Coles, to be develop across the country.  Second, Australia is a highly suburban country with a high level of purchases at shopping malls.  Third, Australian governments are generally less protective of smaller shops and shopping centres than other countries particularly in Europe

Level of concentration, is not, however, a very accurate measure of the level of competition.  After all the airline industry, soft drink sector, cigarette industry, and stevedoring are all dominated by two players and are highly competitive.

How the industry conducts business is more important than structure.  And here there are clear signs of strong competition.  One of the best indicators of the intensity of competition is the level of investment in new technology and facilities and productivity growth.  Over the last decade and half, the retail sector has been at the forefront of investment in new warehouse, logistics and ICT investment and has generated large sustained improvements in productivity.

The sector also very customer focused.  For example the recent decision of both Safeway and Coles to replace second tier brand names goods with their own generic brands, is a response to customer demands and the desire to get lower prices for a given quality.  The idea is that there is in little to no difference between their generic and many brand products;  that consumer know this;  and that they will respond by the buying lower price generic product.  This is back by hard market research.

Of course the manufactures of the second tier brand products and smaller store do not like this trend, but the consumers do.

As a Recent Federal Parliamentary Inquiry into the supermarket sector concluded:  "High levels of efficiency, superior technology and buying power has lead the Committee to conclude that consumers are voting with their feet, deciding to frequent the [large] supermarkets because of their price, range of products, extended trading hours, and the convenience of one-stop-shopping.

The message is that it's a competitive world in the consumer is king.

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