Does everyone hate Woollies?

I had a brief email exchange with a journalism student last week, and I thought I would share my views with you (my verrrrry patient readers).

The background is that market research had been recently released indicating 72% of Australians don’t trust Coles or Woolworths and these levels of distrust have gone up since last year.

Q. How do you think Woolworths are faring in the Retail sector/Stock market?

Me:  Woolworths had been a darling of the stockmarket until quite recently.  Their main rival, Coles Myer performed poorly for many years, and Woolworths was much quicker in adopting and adapting ‘best practice’ from offshore (most notably through a close alliance with Wal-Mart).  Much of these practices are on the warehousing/stock management side of things.  Woolworths grew faster than Coles Myer and had better margins.  It made some strong moves in the non-supermarket space – with alcohol sales being particularly strong.

The split up of Coles Myer and the acquisition of the non-Department business by Wesfarmers has negatively affected Woolworths. The revamp of both the Coles supermarket business and K-Mart variety stores have put pressure on Woolworths’ (and Big W’s) margins and curbed their growth.  At the same time, Woolworths has been burnt by the poor performance of the Dick Smith business, and the large investments in a rival to Wesfarmers’ Bunnings are a long way from paying off.

Q. What implications might these figures of the survey have for the company and it’s competitors?

Me: As for the distrust aspect, this is far from surprising.  The supermarket sector in Australia is one of the most concentrated in the world.  The attempts by both Coles and Woolworths to further squeeze suppliers (as part of the drive to improve margins) have coincided with a period of perceived price inflation (although I’m not convinced the latter is actually occurring).

Consumers have apparently resigned themselves to the idea that these two duopolists are not really competing too hard. Stories of struggling suppliers seem to have fuelled this animosity.

But like the big banks, I’m not sure customer dissatisfaction will genuinely translate into consumer action.  There is a strong tendency to ‘stick around’ while grumbling.  Any incursion by Aldi (or to a much lesser extent Costco) is unlikely to have a big impact given the sheer weight of numbers (in terms of stores and ease of accessibility).

What do you lot think?

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Dueling Duopolists, or, who should we cheer for when bullies battle?

The Aussie news headlines have been buzzing in recent days with the competing cries of our embattled brewers and the ‘on the side of the consumer’ supermarket giants, over an alleged effort by the latter to sell the majors’ beers as ‘loss leaders’.  See here and here for a reasonable summary.

This is the latest staple product to get this sort of a run (after milk and petrol) as Woolworths and the revitalised Coles (as part of Wesfarmers) engage in some much-missed competition.  Of course, it isn’t competition via ‘across the board’ price cuts, but, rather, through trying to switch buying preferences from one chain to the other (utilising the grocer’s associated liquor chains).

And poor old Foster’s (and presumably the much quieter Lion Nathan) are worried that this (alleged) predatory pricing will hurt their margins, and those of independent liquor retailers.

The reality of all this is that we’re talking about two pairs of behemoths locking horns, and competition here is a very different beast to that envisaged in perfect markets.  Look at the numbers:

– Foster’s (48% market share) and Lion Nathan (44%) amount to 92 percent of the Aussie beer market

– Woolworths and Coles/Wesfarmers amount to roughly 50% of the Aussie liquor retailing market (with most other sales through small, independent retailers)

– Woolworths (around 40%) and Coles/Wesfarmers  (around 35%) amount to roughly 75% of the Aussie grocery market

Those are the sort of market shares we called oligopolistic, or indeed duopolistic, with competition often reaching a calm equilibrium through effective price signalling and/or maintenance of market share.

Foster’s are kicking and screaming, however, due to concerns about the buying power of the two retail giants. Now, if Foster’s had a significant retail arm it might be able to curb such a threat (and earn more of those nice rents from the duopoly power).

But back in 2003 the brewer sold off Australian Liquor and Hospitality Group (ALH), which operated 131 hotels and 109 bottle shops. ALH now runs 285 licensed venues and over 450 retail liquor outlets.  And guess who now owns 75% ALH… Woolworths.  It seems Foster’s handed Woolworths the stick it is now being beaten with.

There’s talk that this behaviour will all come under the scrutiny of some eagle-eyed politicians in Canberra in the coming weeks.  Now, we’d hope they know a lot about duopolies (i.e. systems with two powerful parties)…

Competition isn’t always black (and decker) and white (goods)

As more rumours spread about what exactly Woolworths’ new hardware business will look like, we can see that perhaps it isn’t just Bunnings (and therefore Coles’ parent Wesfarmers) who should be worried about a shift in their competitive environment.

According to this story, the new entrant (which might be called Masters) –  a joint venture between Woolies and US giant Lowes – may not just be selling the usual hardware merchandise.  Also on the cards are whitegoods (i.e. fridges, washing machines, dishwashers etc).  That would certainly be a challenge to some of the big players in that retail segment, such as Harvey Norman and The Good Guys.

This isn’t just a random diversification choice either, as Lowes has extensive experience with this market, and presumably can suitably integrate the offerings into the retail mix.  It will be intriguing to see whether this upsets the likely co-located store mix for the firm, as some homemaker-type centres may find this new challenger upsets their tenant mix.

Another interesting titbit in the story is the possibility that WooliesWareHouse (I’ve decided to grant them that brandname) will go down an explicit ‘Do It For You’ path, which would be a neat differentiation position in the hardware space.

This case in progress serves to demonstrate the blurry lines between markets and the scope for competitors to slip across from adjacent markets (among many other strategic lessons).

The power of Aussie retail giants

I blabber on here regularly about the strategic decisions of Australia’s two biggest retailers – Coles (now part of the Wesfarmers empire) & Woolworths. The sheer size and breadth of these two firms’ operations warrant considerable attention.

The folks at ABC TV’s Hungry Beast have done a great job of bringing together the relevant stats and information about strategic agenda (and outcomes) for these two giants in a very neat, short presentation:

As their graphics show (although not explicitly), there is a lot going on in terms of Porter’s Five Forces.  Coles/Wesfarmers and Woolies have affected the economic structure of their industry(s) substantially so as to:

– reduce Rivalry (by acquiring competitors, and by building strength across retail markets so as to reduce the likelihood of competitive attacks)

– increase their Bargaining Power vis-a-vis Suppliers

– reduce Buyer’s choices of store operators (and thus their Bargaining Power)

– build substantial Barriers to Entry (although I would argue the Hungry Beast folks have misused the term greenfield).

The result is two firms that a massively oversized for the relatively small economy in which they operate.  Australia accounts for roughly 1.1% of the global economy (in terms of GDP).  Adding NZ (where these firms have much smaller coverage) only raises that figure to 1.26%.

Nevertheless, these firms come in at #26 and #28 on the Deloitte rankings of Global retailers by revenue. They are larger than all but 3-4 of the US’s supermarket chains, and of the British chains only Tesco is larger. Other than the US’s Kroger, Safeway and Supervalu, and Germany’s Edeka, no other large grocery chains operate in anywhere near as few countries (the rest are in 8-36 countries).

Seems like more evidence why I should be shopping at Aldi, my local farmers’ market and independent liquor outlet…

And thanks to Sakshi for bringing this clip to my attention.

More mutual forbearance

Hot on the heels of Woolworth’s announced entrance into the Australian hardware retailing space, it would seem that fellow grocery player Metcash wants to follow suit.

Metcash, who run all the back-office (and sales and marketing) for the independent supermarkets group IGA has launched a bid for Mitre 10, a cooperative group of over 400 hardware stores.

This would mean the three largest supermarket brands, Coles, Woolworths and IGA would now be the dominant players in the Australian hardware market.

In a strategic sense, this opens a significant likelihood of an outcome referred to as mutual forbearance. This has been defined as

“tacit collusion as a consequence of firms competing in many markets and the resulting increase in their interdependence” (Jayachandran, Gimeno & Varadarajan, 1999: 51 as cited here)

Put simply, operating in to parallel competitive spaces means these firms may well realise the futility of excessive competition and seek some stable détente (a.k.a. a Mexican standoff).

It will be interesting to what the Australian Competition and Consumer Commission have to say about this one (although it is hard once the horse has bolted).