Impacts On Market Equilibrium And Profitability Of The Supermarket And Grocery Industry In Australia

Uber Rides Market

The figure above demonstrates the market for Uber rides. The demand function of rides is given as DD. The corresponding supply function of rides is given by the upward sloping line SS.  After storms, lack of subways become troublesome for people. People prefer to switch to car services to escape from storm ravaged areas (Chen, 2012). This increases the demand for Uber rides shifting the demand curve to the right to D1D1. Given the supply, an increase in demand for Uber rides creates a shortage in the market. Shortage in the market is shown as (R2 – R1).

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Uber adapts the strategy of surge pricing to match supply of drivers to the demand for riding service. The surging price helps to accomplish to objectives. Being attracted by high price, more driver would be attracted to offer riding service in the region. Secondly, surging price also helps to allocate the available rides only to those who value the services more than others (Sloman & Jones, 2017). After storms, the demand for Uber rides increases to D1D1. Corresponding to this, the fare of Uber rides increases to P2.  The surged price offers incentives to the drivers and increases supply of rides.

After price surging, people though befitted from the increased availability of rides, consumer availing Uber service at a higher price suffers a welfare loss from a lower consumer surplus.

The initial point of equilibrium is at E. Corresponding to E, consumer pays a price of P1 and enjoys a surplus of EP1A. Now, consider the group of consumers paying a high price for Uber rides at P2. At the higher price surplus to consumers reduces to BP2A (Jiao, 2018). Those who pay a higher fare thus have a lower consumer surplus.

The unique aspect of land according to the article is that scarcity of land is not realized everywhere. The shortage is supply is highly felt in cities. Demand of is increasing. The demand curve for land is thus downward sloping (Economist.com., 2015). With fixed supply of land, the land supply curve is a vertical straight line instead of an upward sloping curve like other factor inputs.

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With passes of time, the dependency on land has increased to support the economic development. Land not only support agriculture but also is one primary factor input for industrial development. With increasing pressure on land use, the land demand curve DD shifts rightward to D1D1. Unlike other factor input, the supply of land is perfectly inelastic as shown by the vertical line SS. The increased demand shifts the demand curve outward (De Rosa, Knudsen & Hermansen, 2016). The supply of land however remained constant creating a shortage of supply. The supply shortage increases the price of land. The problem is more severe in cities as more innovative activities take place there.

Land Scarcity and Tax

A tax on land is considered as efficient because such tax results in a decline in price of land but unable to affect the supply (Cowell, 2018). As land is immobile, unlike other factors land cannot move in response to higher price. The impact of a land tax can be understood from the following figure.

Let, a land tax of t s introduced, the total tax revenue of depending on the land value is given as OtAB. Given fixed supply of land, the same amount of land, B is still available even after the tax. The users thus remain unaffected after the imposition of tax (treasury.gov.au, 2018). The owners of land however receive a lower rental return shown as Rt. As the buyers of land have to pay the tax, they tend to reduce their demand to D’D’ (Baumol & Blinder, 2015). With a fixed land supply, decline in land demand causes land price to decline to R1.

Figure 6 demonstrates state of long run equilibrium in a perfectly competitive market. Point corresponding to long run equilibrium is shown as E. The condition for long run equilibrium is P = LAC (min) = LMC (Mankiw, 2015).  At the equilibrium point, only zero profit is earned.

As the firms sign an annual contract for the payment of rent, it is a fixed cost. The subsidy thus reduces fixed cost of competitive firm.

In the short run, a decline in fixed cost reduces average total cost of firms. Lower cost allows firms to supply more. Short run supply in the competitive market thus increases. There is no fixed cost in long run. Therefore, the market in the long run remains unaffected.

Imposition of a subsidy reduces the firms’ cost of rent without reducing the rent received by the landowners. In this case, the rent received by the landowners is given as R2. The rent however paid by competitive firms is R1.

With subsidy, short run supply curve of the firms shifts to the right (Cowell, 2018). The increased supply in the short run reduces price of hawker food price in the market from P1 to P2.

The case study analyzes profitability of Australia’s supermarket and grocery industry. The supermarket and grocery store across the nations compete on prices. The largest supermarket of Australia is currently battling for acquiring a market share in market worth around $100 billion. The large supermarket chains of Australia dominate the industry in terms of earned revenue. In the grocery and supermarket industry, small retailers find it difficult to maintain competitive position in the market. The small retailers having less than 20 employees account only 10.6 percent share in the entire industry (Sutton-Brady, Kamvounias & Taylor, 2015).  In the grocery industry, dry and packaged food products account the highest share with relative share being 28.5 percent. Milk and dairy products accounts 13.3 percent. Other important segments of the industry include Fresh fruits and vegetables, meat products, beverages, bread and bakery products.  The important players of the industry are Woolworths, Coles, Wesfarmers, Metcash, Aldi and some others. There are several affects that affect profitability of the industry (bankwest.com.au, 2018). The major factors influencing supermarket and grocery industry’s profitability are discussed below

Supermarket and Grocery Industry in Australia

One significant factor affecting profitability and strategy of industry players depend on the structure of the market and internal rivalry among the major players. The supermarket and grocery industry in Australia is characterized as being highly competitive and concentrated. In 2012, the accumulated share of Woolworths and Coles are 72.1 percent with Woolworths and Coles having a respective share of 41.1% and 31.0%. The share has been declined from 80 percent in 2010 because of entry of the low cost retailing brand of Aldi (Theconversation.com, 2018). Currently, Woolworth, Coles, Wesfarmers, Metcash and Aldi together account almost 80 percent market share.

This kind of competitive and concentrated market is known as oligopoly market. In this form of market, there is large degree of rivalry among the existing players. Presence of a small number of seller and limited scope of product differentiation result in extensive rivalry among the dominated players. Rapid growth of Aldi since 2001 made a significant influence in the industry by driving away the market shares of two dominating player Woolworths and Coles. The private-label products of Aldi became highly popular in Australian market (ibisworld.com.au, 2018). The shopping trend has been highly influenced by products of Aldi and Costco who offered considerable discount on their products.

The large players often involve in price competition results in a price war. As most of the company sort to the strategy of price discount price lowers and according industry profit has constituted a declining trend in recent years. Industry profit has reduced in the last five year following a considerable price discount by the large players to maintain the competitive position in the market. Industry revenue has been projected to increase by 4.2 percent per annum up to 2016-17, making a total of $105.3 billion (retailworldmagazine.com.au, 2018). Woolworth and Coles have a varying trend of success depending on their way to respond to the increased competition. They mostly focus on reduction in price as part of their competing strategy instead of product differentiation like overseas sellers. The existing players now focus more on maintaining a higher market share instead of raising profit share.

Threat of new entrants play a vital role for business strategy and defining industry profitability. In an oligopolistic market, there is restricted scope new competitors to enter the industry. Several forms of barriers exist in the industry. In Australia, there are different zoning and agreement for leasing land. This creates an artificial shortage of available land for grocery stores. This has prevented many new players especially those operating overseas to enter the grocery industry of Australia. The dominating players like Coles and Woolworth in contrast enjoy a preferential treatment from landlord following their huge power to attract a large pool of customers (Grimmer, 2018). Another factors that has deterred entry is the economies of scale enjoyed by existing large sellers in the industry. The new entrants have to incur a huge cost in the form of infrastructural investment and setting up other facilities and access of necessary expertise.

Given the existing entry barriers not every player is able to make a smooth entry. Amazon already entered the market in 2017. The ecommerce giant of United State is yet to introduce the Amazon Fresh brand in Australia. The grocery supermarket in Australian has never been as crowed like other markets. The rise of Costco, Aldi and potential entry threat of Kaufland and Amazon Fresh is expected to increase crowd in the grocery retailing industry in the next five years (insideretail.com.au, 2018). Another threat to the industry has followed from the announcement of David Jones’ regarding launching of a food store in Melbourne in the next year.

For the grocery retailing industry in Australia, suppliers usually have a low bargaining power. Extreme concentration in the market, makes it hard for small local retailers to enjoy a wide selection option to opt for intermediaries input. As Woolworths and Coles enjoy the lion share in the market, it becomes very difficult for suppliers to have a significant power in the input market. Coles and Woolworth are the major purchaser of the suppliers’ production. Major international sellers like Nestle and Kellogs even do not have the courage to upset either of the two retailers given their dominating share in the market.

The trend however has started to change following the entry of large potential competitors like Aldi and Costco and their expansion in the industry. The Australian Competition and Consumer Commission and Federal Government have taken initiatives to build a competitive environment in the industry (Sutton-Brady, Kamvounias & Taylor, 2015). Following the recent trends, suppliers are likely to enjoy a moderate bargaining power in future.

The dominance of few sellers reduces the bargaining power of buyers. The market price is mostly controlled by the dominating sellers in the market. The bargaining power of Australian consumers however tend to rise in future. The continuous push by ACCC and Federal government have attempted to lower barriers of entry to new entrant and increases available choice of the consumers (bankwest.com.au, 2018). As consumers get more and more option to choose their bargaining power increases. The growing popularity of different websites for price comparison such as grocery.bestpricedirectory.com.au that allows consumer to make an effective price comparison and select the cheapest deal further enhances the bargaining power on the side of buyers. Buyers in future thus will be in a position to enjoy a moderate bargaining power.

References 

Bankwest.com.au. (2018). Bankwest Future of Business: Focus on Supermarkets. Retrieved from https://www.bankwest.com.au/content/dam/bankwest/documents/business/insights/focus-on-supermarkets-2018.pdf

Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Nelson Education.

Chen, B. (2012). Uber Struggles to Get Cars Onto New York’s Streets. Retrieved from https://bits.blogs.nytimes.com/2012/10/31/uber-struggles-to-get-cars-onto-new-yorks-streets/

Cowell, F. (2018). Microeconomics: principles and analysis. Oxford University Press.

De Rosa, M., Knudsen, M. T., & Hermansen, J. E. (2016). A comparison of Land Use Change models: challenges and future developments. Journal of Cleaner Production, 113, 183-193.

Economist.com. (2015). The paradox of soil. Retrieved from https://www.economist.com/briefing/2015/04/04/the-paradox-of-soil

Grimmer, L. (2018). The diminished stakeholder: Examining the relationship between suppliers and supermarkets in the Australian grocery industry. Journal of Consumer Behaviour, 17(1), e13-e20.

Ibisworld.com.au. (2018). Supermarkets and Grocery Stores – Australia Industry Report | IBISWorld. Retrieved from https://www.ibisworld.com.au/industry-trends/market-research-reports/retail-trade/food-retailing/supermarkets-grocery-stores.html

Insideretail.com.au. (2018). New competitors set to test $102 billion grocery sector – Inside Retail. Retrieved from https://www.insideretail.com.au/news/new-competitors-set-to-test-102-billion-grocery-sector-201803

Jiao, J. (2018). Investigating Uber price surges during a special event in Austin, TX. Research in Transportation Business & Management.

Mankiw, N. G. (2015). Principles of Microeconomics, Cengage Learning. Stamford, CT, 213.

Retailworldmagazine.com.au. (2018). Spotlight on Australia’s supermarkets and grocery industry – Retail World Magazine. Retrieved from https://www.retailworldmagazine.com.au/spotlight-australias-supermarkets-grocery-industry/

Sloman, J., & Jones, E. (2017). Essential Economics for Business. Pearson.

Sutton-Brady, C., Kamvounias, P., & Taylor, T. (2015). A model of supplier–retailer power asymmetry in the Australian retail industry. Industrial marketing management, 51, 122-130.

Theconversation.com. (2018). FactCheck: is our grocery market one of the most concentrated in the world?. Retrieved from https://theconversation.com/factcheck-is-our-grocery-market-one-of-the-most-concentrated-in-the-world-16520

Treasury.gov.au. (2018). Part 2: Detailed analysis – Chapter C: Land and resources taxes – C1. Charging for non-renewable resources – Australia’s Future Tax System: Final Report. Retrieved from https://taxreview.treasury.gov.au/content/FinalReport.aspx?doc=html/publications/Papers/Final_Report_Part_2/chapter_c2-1.htm