Supermarket Giant’s Super Power and Super Challenge

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A report on abc.net.au said the ACCC has taken court action against Woolworths alleging it had engaged in unconscionable conduct by using its substantially stronger bargaining position to ask more than 800 of its second-tier suppliers for $60 million to cover its profit gap in 2014. This follows a similar case with Coles one year ago that Coles was found guilty of misusing its bargaining power and ordered to pay $10 million in fines as well as refund $12 million to affected suppliers .

Why can these two supermarket chains be so powerful to demand extra money from their suppliers?

The duopoly has ruled over Australia’s grocery distribution channels

Woolworths and Coles, through implementing their intensive distribution strategy, have built up the largest distribution networks in Australia by each operating nearly 1000 supermarkets, hundreds of petrol stations and other retail outlets, which are supported by their highly effective logistics and supply chain consisting of their regional distribution centres, self-owned transport fleet, and the widest range of product offerings with the lowest cost from their suppliers. The supermarket giants also heavily spent on their marketing promotion campaigns such as using pull marketing strategies to attract consumers as below example:

The fact of more than 70 cents of every Australian grocery dollar are spent in Woolworths and Coles indicates that Woolworths and Coles have controlled most of the Australian grocery retail distribution channels, making grocery manufacturers have no other choices but beg Woolworths and Coles to sell their products. Grocery manufacturers usually do not have capability and experience to use manufacturer–consumer direct distribution model. So they have to use manufacturer-retailer-consumer distribution model to sell their products.

Woolworths-Coles duopoly’s status has given them coercive power in channel relationship when dealing with their suppliers. They can easily squeeze suppliers by asking rebates, compensation and marketing contributions, stretching supplier payments, implementing private labelling strategy to pressure branded products for lower prices, and requiring manufacturers to pay 100% promotion discount instead of previous split and share model.

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Supermarket monster squeezed its suppliers for more money. Source: smh.com.au

Can the supermarket duopoly’s bullying be stopped? Maybe online grocery sales will bring a hope to the grocery manufacturers.

Will the duopoly’s biggest strength become its biggest burden?

E-commerce has re-shaped traditional grocery distribution model. Australia online grocery sales has recorded annual growth15.3% from 2011 to 2016. Even Wesfarmers (Coles owner) CEO Richard Goyder recognised that the main competitive threat Coles faces is online retailer Amazon rather than rival grocery player Woolworths.

In online grocery distribution model, you will find Woolworths-Coles duopoly’s biggest strength – bricks and mortar stores may become their biggest burden.

A report on news.com.au says that Coles and Woolworths are struggling to convert physical presence in the $90 billion grocery sector into online sales because online grocery sales really cannibalise their biggest strength – bricks and mortar stores.

The online prices of Woolworths and Coles products must include their costs of running bricks and mortar stores. But online grocery retailers do not have these costs, which help them offer much lower prices online.

iTWire reported Kogan launched Kogan Pantry for online non-perishable grocery sales promising much lower prices to fight with Woolworths and Coles. As Australia’s largest online retailer, Kogan has some competitive advantages that Woolworths and Coles’s physical stores do not have such as pricing and online experience and capability, which can be used to track and analyse consumer’s purchasing behaviours to more effectively generate sales.

What will be Australia’s grocery distribution landscape in ten years?

Will clicks replace bricks? Online shopping is still in its infancy and may need time to grow. But online shopping’s inherent advantage of lower distribution costs will definitely be the most powerful driver to re-shape the traditional grocery distribution model. Will the duopoly be able to figure out the inherent conflict between the “down down” prices and the high costs of running their large amount of bricks and mortar stores? In ten years, will people still buy most of their groceries from bricks and mortar stores or from online retailers?

 

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