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Australian Supermarket
and
GDP Contribution

Author
Shanmugavel Rajeevan
Solid Analytics Consulting Group
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Solid Analytics Lanka (PVT) LTD
Colombo, Sri Lanka
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Colombo, Sri Lanka
info@solidanalytics.org

Contents
1. Introduction..............................................................................................................................2
2. Australian GDP and Supermarket Contribution.......................................................................2
3. Government and Supermarkets................................................................................................5
4. Sensitivity Analysis..................................................................................................................5
5. Conclusion................................................................................................................................6
6. References................................................................................................................................8
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1. Introduction1
Australian Competitions and Consumer Council (ACCC) the Australian grocery industry is
dominated by two prominent players, Coles and Woolworths, who together have around 80%
market share. While there are other competitors in the market such as independent wholesalers
and retailers including a variety of specialty retailers such as independent grocery associations
(IGA) and Aldi: Cole and Woolworths have significant influence to control prices which in the
long run would see these smaller retailers either merge through acquisitions to compete or close
their doors as they can’t compete.. In the short term, there are benefits to consumers with lower
prices and better value for money. However if this dominance were to continue the Australian
grocery industry may see the effects of a duopoly which could have some serious implications to
consumers as there would be no other choices available in the market and the opportunity costs
would be minimized. In addition, industry-wide profit margins have fallen over the past five
years as players have reduced prices and accepted lower margins to stay competitive. Industry
revenue is expected to grow at an annualized 3.0%.

Major Players

7.1 % 8.9% 29.3 % 33.6 % 21.1 %

Meta ALDI West farmers Limited Woolworth Ltd Others
cash Stores
Figure 1: Major players market holding
Source: www.IBISworld.com.au

2. Australian GDP and Supermarket Contribution

Australia’s economy has recorded 25 years of continuous economic growth. Having grown on
average by around three percent per year, today’s economy produces more than twice what it did
25 years ago.
At a regional level, this growth has been far from uniform and some regions have benefited more
than others. The resource-intensive states exhibited particularly strong growth, while Tasmania
and South Australia fell behind, with average annual growth rates loser to two percent during this
period.
1
Extracted from - https://www.ibisworld.com.au/industry-trends/market-research-reports/retail-trade/
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It uses regional output per person – Gross Regional Product per capita – to measure regional
performance. There are number of factors that add to or detract from a region’s economic
performance. These factors can add up to significant differences in performance. For example,
in 2014-15, GRP per capita in the Sydney Central Business District was 14 times more than in
the Queensland region of Moreton Bay South.
Household consumption comprises approximately 60% of Australian GDP. Retail trade and
grocery expenditure in particular represent a core feature of this discretionary spending
component. The single largest component of expenditure, food and non-alcoholic beverages,
accounts for approximately 17.1% of total household expenditure. Supermarket and grocery
sector is the largest contributor to retail turnover (accounting for 29%, with constantly growing
over the past two decades). Retail trade plays a vital role in supporting other Australian
industries, including: specialized industries such as road transport, commercial refrigeration and
storage, food and beverage manufacturing (which represents 21% of the total Australian
manufacturing industry) and food wholesaling (which represents 16% total Australian wholesale
trade).Gross Value Added (GVA) of retail trade, food, beverage and alcohol manufacturing, road
transport and transport services and transport services and storage was approximately 11% of
GDP, indicating a strong economic contribution that retailing and its support services make to
the national economy. Western Australia’s Gross State Product (GSP) reached approximately
12% of Australia’s GDP, with only 10% of the population. The Western Australia retail market
has significantly outperformed the national retail over a 10 year period and food retailing has
kept pace with growth in retail turnover. The higher rate of retail market growth in Western
Australia is due to factors including strong commodity prices coupled with population and wages
growth being generally above the national averages.
This greater product choice and cheaper pricing on some core headline products in supermarkets
may be an attempt by grocery retailers to increase market share by becoming a ‘one stop shop’
for both basic and more advanced product needs. This in turn may be acting as a means to
increase the market share of the grocery industry as a component of retail trade.
The economic contribution of the supermarket and grocery retail industry is not confined to the
revenues and employment generated in supermarket stores alone. Its contribution incorporates
the entire value or supply-chain servicing this industry. This is particularly relevant in rural and
regional areas where grocery stores play an even greater role in supporting local producers and
downstream suppliers.
The total market for supermarket and grocery goods including other specialist stores is likely to
be worth over $ 74 billion, in strictly speaking supermarket and grocery stores accounts for 85%
of the supermarket and grocery items, with the remaining 15% derived from sales by other niche
retailers. Industry Value added IVA refers to the revenue generated by the operations of an
industry, less the cost of goods and services used in producing that revenue. Therefore, this
highlights the economic contribution of the supermarket and grocery industry separate from all
supporting inputs that help generate final accumulate turnover.
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The retail grocery industry is at maturity stage in which margins are low and remained stable, the
volume is what generates profits. The Industry Gross Product of the supermarket and grocery
industry will grow at modest average annualized rate of 1.5% per annum in comparison to the
anticipated Australian economic growth of 3.2% per annum, in real terms. Recent trends have
indicated entering into other markets such as liquor, petrol, hotels, pubs and gaming in order to
grow sales and total earnings.
Grocery stores are spread across Australia approximately in proportion with demographic trends
such as geographic distribution and population growth. The general geographic distribution of
retail turnover have dispersed across various states.
New South Wales and Victoria, the two largest states by population, have a lower proportion of
grocery stores in comparison to the level of retail and population they represent. The reverse is
true in Queensland and South Australia. This phenomenon is related to the fact that fewer larger
stores operate in metropolitan areas, whereas a larger number of smaller stores operate in states
with highly dispersed rural and regional centers.
Since the early 20th century, the supermarket industry has undergone significant restructuring.
Australia’s grocery market has become one of the most concentrated industries in the world. The
two major supermarket chains Woolworths and Coles have approximately 79-80% of the market.
The Australian market share growth of these two key major grocery retailers over the past three
decades has been significant. Growing from approximately 35% to around 80%. The market
dominance has created few risks and benefits for the major retail groceries. Benefits such as
including economies of scale and reduced unit cost for businesses evidently transferring into
lower prices for consumers. Risks that such powerful companies might misuse their position
against suppliers and smaller competitors. The Australian grocery market is significantly smaller
market than USA and UK. Therefore, Australian market is more prone to greater concentration.
In the Australian market the top two players hold 80% market share, there is likely to be a
different supplier-retailer competitive positioning than in a market where the top two players
hold 50% of the market share. The nature of the dominance of the top two major retailers in
Australia is stronger. There are suggestions that Coles and Woolworth do not often compete in a
single shopping area and effectively provide a similar offering to consumers (to promote
themselves as providers of fresh grocery products with low prices on a selection of core goods).
This indicates that potentially there should be greater concern and interest in Australia in the
future implications of such high market concentration on competition and consumer welfare in
the supermarket in the supermarket and grocery market. It is anticipated that spending patterns
differ considerably between independent retailers and major grocery retailers. Consumer spend
smaller amounts more frequently at independent local stores; with the average spend being less
than $30. The range of merchandise offers by the supermarket and grocery industry is largely
segmented into two categories:
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Discount retailers offer consumers a narrow merchandise selection of mainly staples to contain
costs and present competitive pricing. Larger operators offer an extensive range of branded
merchandise along with their own private labels and house brands.
Small enterprises alone represented 96.8% of the total retail trade businesses in Australia in 1999
to 2000 period. Demonstrating their strong economic contribution. In addition, small businesses
which tend to be independently and locally owned often play a vital role in generating and
retaining wealth in local economies. Studies show that although the total wealth contribution of
the SMEs in the supermarket and grocery industry is smaller than that of major grocery retailers
on a national aggregate level, the wealth contribution to local economies by small and medium
enterprises can be 2-3 times greater at a local level than that of major grocery retailers. This is
related to the fact that small and medium scale enterprises source a greater proportion of their
goods and services from local producers and local service providers and account for a larger
proportion of grocery employment than the market share they hold, thereby providing relatively
more stimulus to local economies.

3. Government and Supermarkets2

The Australian legislation and legal system has a history of seeking to protect small businesses
from anti-competitive and ‘unconscionable’ conduct through the Trade Practices Act 1974
(TPA), whilst balancing this objective with the aim to promote competition and economic
freedom. The primary objective of the legislation is the ‘protection of competition rather than the
protection of any particular competitor, such as small business, with the aim to prohibit a
dominant market participant from taking advantage of it market power to injure or eliminate it
competitors. The Trade Practices Committee of Law Council of Australia released a submission
in March 2007, which inquired into the effectiveness of the Trade Practice Act to protect small
businesses and discussed potential reforms. The submission generally confirmed that the trade
Practices Act efficiently promotes competition and fair trading among all businesses to provide
Australian consumers with the benefits of competition and adequately protects small businesses
from the misuse of market power. A consortium of small businesses associations in Australia
argued in several submissions to Dawson Committee for Trade Practices Review that dominant
firms often sell products at very low prices with a view to driving out competitors and then
charge higher prices later. This would adversely affect Australian consumers and is believed to
contribute to a significant and measurable increase in inflation due to higher grocery prices. The
problem of market concentration in the retail grocery sector is highly relevant to the operation of
the Trade Protection Act, which contains provisions to prevent mergers that substantially
undermine effective competition. Small businesses argue that the nature of the Trade Protection
Act and its application means that minor or so called ‘creeping acquisition’ by major grocery
retailers are not precluded or actively prevented.

2
Extracted from - https://www.ibisworld.com.au/industry-trends/market-research-reports/retail-trade/
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4. Sensitivity Analysis3
The value of AUS$ decreases by 10%. This means basically the Australian dollar has
depreciated against other currencies. This makes the imports into the Australian market more
expensive and exports cheaper. This will have a negative impact on Supermarket and food
industry as the prices of imported food items becomes expensive due the rise of cost of import.
The increase in cost of import will be passed on to the consumers. This will likely to have a
decrease in the sale level of the imported food items from the consumers. Consumers will likely
switch to cheaper substitutes or similar home made products. Unless the imported products have
an inelastic demand then the price increase will not have a significant decrease in the demand for
the product.
The inflation rate of Australia goes up by 5%. The Overall consumer price index goes up. All the
prices of the products will go up. Not only the prices of imported items and all the items
produced in national level also goes up. The increase in price of goods will be passed on to the
consumer. Again, price elasticity of demand will affect the movement of the demand of the
products. If the prices of price elastic demand product goes up there will be a significant fall in
the demand of that product and when the prices of price inelastic demand goes up then there will
be an insignificant fall in demand of that product.
Global oil prices increases to US$ 100 / per barrel. Oil is one of the significant energy fuel and it
rise will likely to affect many industries. Mainly manufacturing and transport industry will be
most affected by the price hike in fuel. This rise in oil price will be reflected in the price of the
goods, whether it is imported or manufactured in Australia. The price hike would transferred to
the consumer. Again, price elasticity of demand will affect the movement of the demand of the
products. If the prices of price elastic demand product goes up there will be a significant fall in
the demand of that product and when the prices of price inelastic demand goes up then there will
be an insignificant fall in demand of that product.
Unemployment rate goes up 10% in Australia. The inflation and unemployment rate inversely
related. If the unemployment goes up then the general inflation level goes down this will in turn
push the economy towards recession. High unemployment level causes the circulation of money
within the economy less. Sales of the supermarket will fall as consumers have less money to
spend. However, the demand of goods of necessity will unlikely fall as these are required for
human survival. Other good such as luxury item sales will likely to fall. Again, price elasticity of
demand will affect the movement of the demand of the products. If the prices of price elastic
demand product goes up there will be a significant fall in the demand of that product and when
the prices of price inelastic demand goes up then there will be an insignificant fall in demand of
that product.
All the factors considered have a negative consequence to the supermarket industry. The above
analysis have considered only change in one factor at time. All change in the factor had a
negative consequence on the super market industry. In the event if all the factors considered
3
Certain economic information extracted Chiang et al. 2014
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occurred on the same time then it will dampen the super market industry as well the economy as
a whole. Negative consequence of a single factor can cause extensive damage to the industry; in
the even if, all the factors to be occurred then the negative consequences will be magnified
largely creating a significantly worse state for the supermarkets.

5. Conclusion4
In a hypothetical situation, where appointed as a CEO of the major grocery retailer then there is
high duty to safeguard the future and continuity of the supermarket. As noted earlier there are
two strategies; Discount retailers offer consumers a narrow merchandise selection of mainly
staples to contain costs and present competitive pricing. Larger operators offer an extensive
range of branded merchandise along with their own private labels and house brands. As the
CEO, there is need to assure that how long these strategies will be viable and whether there is
any need to revise the said strategies. As noted above Supermarkets are moving into other
markets such hotel, casinos etc. This is because the supermarket industry is in maturity stage and
later on there will some decline in the industry can be witnessed. In order to avoid such decline
stage or to apply an extension strategy, our grocery store also has to move into other lucrative
market to increase profits and sustain growth. Further, in order to mitigate the negative
consequences identified in the above analysis section some risk management procedures and
protocols must be in place otherwise, there will be no means of safeguard from these pitfalls. It is
a fact that these external factors are beyond the control of the entity as these are external
environmental factors to the supermarket industry. However, that does not mean the impact of
these consequences cannot be mitigated to a certain extent. Yes, it is true that negative
consequences cannot be entirely eliminated or eradicated but can be the impact on the industry
can be certainly reduced. Committee of Sponsoring Organization (COSO) enterprise risk
management model or Vulnerability, Uncertainty, Complexity and Ambiguity model (VUCA
Model) can be adopted to the supermarket to identify and eliminate the risks pertaining to the
industry. A separate division or department should be established to manage and handle the risk
related activities and procedures. This department should be responsible for identifying,
foreseeing, formulating suitable strategies and implementing the strategies on time. They should
also act as internal audit for the risk management and carry out periodic checks to ensure all
controls and procedures are working accordingly. Any deviations should be identified on time
and rectified within a short period of time. Other supermarkets are also entering into convenience
store concept such as creating a store within the fuel stations etc. Our supermarket also need to
carry out an assessment of the of the existing convenience stores in the country. There should be
geographical presence in the country. Our supermarkets should establish small retail /
convenience stores in such states and increase the presence of our super market. Develop more
our supermarket-based brands with superior quality. This will increase brand awareness and
brand recognition in the market. Our products should have some uniqueness to it, in order to
differentiate and stand out from the rest of the products in the market. For example, marketing
organic products, natural products and homemade products. Nowadays, consumers are very
4
Certain economic information extracted Chiang et al. 2014
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concern about the traceability of their products. The International Organic Certifying bodies to
ensure the traceability of our products can certify our products. There is increasing trend for
online shopping and shopping through mobile applications. The millennials are showing a great
interest for this ease of convenience and prefer shopping through such web portals and mobile
applications. Our supermarket should also have comprehensive online web portals and mobile
applications to cater the needs of the new millennials and policies, procedures and protocols
should be in place to safeguard the internet and web prone risks.

6. References
Retail Trade - Australia Market Research Report. (n.d.). Retrieved May 28, 2018, from
https://www.ibisworld.com.au/industry-trends/market-research-reports/retail-trade/

Chiang, E. P., Stone, G. W., & Stone, G. W. (2014). Core Macroeconomics. New York, NY:
Worth.