External Analysis of Australian Supermarkets

Introduction:

Coles and Woolworths have been the two giants in Australian supermarket industry
for a long time. Woolworths did better ten years ago, however, Coles grew generally
after acquired by Wesfarmers. Nowadays, small supermarket like Aldi captures a
considerable amount of market share rapidly by its low-price products. Woolworths
developed strategies to face those challengers as well. This assignment is about to
explore the Australian supermarket industry and find out who would win in the
complex competition.

Background:

According to the public academic references, the Australian supermarket landscape

is currently complex and in a period of great potential change. For instance, the
Woolworth and Coles strategies are challenging the IGA’s system on various of
aspects such as supplier control, price, digital reach, coverage of markets and
marketing power. Meanwhile, Aldi is expanding into the market share of all other
parties. In the industry, Coles and Woolworth dominate Australian supermarkets with
appropriate 80 percent market share, and since Coles has grown rapidly since its
acquisition by Wesfarmers, it has now surpassed woolworth, which means Coles as
the vital supermarket company containing the most spot in the market. On the other
hand, Aldi as similar operating system supermarket also provide their specific
services to the consumers. Obviously, Aldi has lower price at lots of products than
other supermarket that are very welcomed by low income residents and international
students. However, Woolworth, Coles and Aldi have their own different strengths and
weaknesses and their target consumer group is slightly different.

PESTEL Analysis

Political : Coles and Woolworths being the duopoly in the retail industry in Australia and the
Australian Federal Government has taken in action to control this nature by introducing a
competition policy which creates opportunities for the new players and small business to
perform and operate in the industry.(Hoy, 2014).

Economic :

A decline in the economic market across the Australia makes the customers a very price
sensitive. Besides, the German Company, Aldi entering the Australia market with low cost
strategy becomes Coles and Woolworths as customer friendly and they introduced a wide
range of home brand products with the lowest margins possible.

Social :
With the increasing consciousness towards health and well-being, Coles and Woolworths
offer an opportunity for customers by offering organic foods and healthy alternatives such
as labelling the products with the Daily Intake Guide(DIG) and offering healthy pre-packaged
food. It can be a potential threat in the farmer’s markets environment.
Technological:
Both firms have introduced online shopping functions with convenient alternative pick up,
home delivery options, contact less payment and self-check out facilities.

Environmental :
Both Coles and Woolworths have been implementing new environmental and sustainability
targets. They announced a program to phase out plastic bags and plastic straws. Planning to
home brand products recyclable in the future and reduce plastic wrapping on fruit and
vegetables. Installing solar panels to reduce the energy use.

Legal :

The Australian Competition and Consumer Commission took action against Coles in 2014
and Woolworths in late 2015 alleging it engaged in unconscionable conduct with suppliers.

https://www.abc.net.au/news/2014-04-30/independent-retailers-call-for-stronger-
supermarket-regulation/5422200
https://retailsector-woolworths.weebly.com/impact-on-society.html ( social )
https://www.ukessays.com/essays/marketing/macro-environmental-factors-affecting-the-
industry-marketing-essay.php
https://www.weeklytimesnow.com.au/agribusiness/technology-changes-grocery-market/
news-story/b3a7781ea8504d4c6e0c716a572ee3bb (technology)

https://www.afr.com/business/retail/woolworths-and-coles-vying-for-leadership-in-
sustainability-20180601-h10vio (enviornmental)

https://www.smh.com.au/business/companies/accc-chairman-rod-sims-takes-swipe-at-
coles-and-woolworths-20160928-grqb8l.html (legal)

Five Forces

Bargaining power of buyers

The bargaining power of buyers in Australian market is high due to the existence of
alternatives and rivals. Customers can freely choose between their rivals with very low
switching cost(Mills 2003).

Bargaining power of suppliers

The power dynamic of supermarkets in Australia over suppliers has grown stronger
(Australian Institute of Food Safety 2018). As Coles has embarked on a price war with
Woolworths, both supermarkets have been using a cost-cutting strategy (Keating 2015). The
suppliers become powerless as they are not willing to lose their main client.
Threat of new entrants
The Australian retail market welcomes any new firm to enter the industry. ALDI has become
as a serious competitor for both Coles and Woolworths store. Roy Morgan conducted a
research of market share of those supermarkets (King, 2015) (Appendix). The new firm has
come with advanced technologies and new customer relation tools to win over the existing
firms.

Threat of substitutes
New companies or retail services have to implement new modes to compete. All firms have
a unique business model. Both of Coles and Woolworths own various related business,
petrol stations and financial services(Coles Group)(Woolworths Group). Therefore, the
threat of substitutes is relatively small.

Rivalry

Australia’s supermarket and grocery industry are fiercely competitive. The primary strategy
that all supermarkets in Australia appear to be Price Wars and they have been using the low
cost label to outmanoeuvre their competitors and to drive consumers instore. According to
IBIS world, both Coles and Woolworths are predicted to suffer falling profitability because of
their strategy in cost-cutting(Pash 2017). Small competitors lose their business because they
cannot compete with their low-cost strategy.
http://press-files.anu.edu.au/downloads/press/p84141/pdf/10-2-A-4.pdf (buyer)
https://www.foodsafety.com.au/news/the-great-supermarket-debate-suppliers-fight-for-
their-rights
https://www.smartcompany.com.au/growth/supermarket-monsters-seven-insights-into-
how-coles-and-woolworths-came-to-dominate-australian-groceries/
https://www.fool.com.au/2016/04/15/aldi-is-stealing-market-share-from-woolworths-
limited/
https://www.colesgroup.com.au/about-us/?page=about-us
https://www.woolworthsgroup.com.au/page/about-us/our-brands/
https://www.businessinsider.com.au/hot-competition-is-back-in-australian-supermarkets-
2017-10

Appendix
Annual Reports
Year Coles Supermarkets’ Annual Net Profit Woolworths’ Net Profit
2010/2011 $1.922 billion $2.124 billion
2011/2012 $2.126 billion $2.18 billion
2012/2013 $2.26 billion $2.3 billion
2013/2014 $1.76 billion $2.45 billion
2014/2015 $2.44 billion $1.3 billion

Woolworth has lost some market share because its market size has dropped from 38.5% in
March 2015 to the current 37.3% whereas Coles increased its market share to 31.8% to the
current 32.5% (King, 2015). On the other hand, ALDI has grown its market share to 12.1% up
from 11.6% in March 2015 while IGA had retained its share of 9.7% (King, 2015).

Competition dynamics:
Overall, all supermarkets uses low cost leadership strategy to cut their cost as all their goods
are similar (Wada, 2018). Yet large supermarket can offer better shopping experience as
they have more resources and that could be kind of differentiation strategy (Anwar, 2016).
So large supermarkets are using integrated cost leadership strategy (Stefanovic, 2012). Small
supermarkets cannot cover all target thus they will also use focused low cost leadership
strategy as they do not have enough resources.
Coles and Woolworths have the similar resources and market share. They strive to establish
stores in all areas of increasing population area to compete for more customers with their
large resources (Hanson, 2016). They also close very late everyday to get the most profit
from time. These can be the applications of a special tactics.
The small supermarkets like Aldi are growing stronger and stronger at the moment. IGA
focus on a niche market of local contact and local ownership. However, it offers similar
product lines to Coles using similar price, which leads to a loss of 70 percent of its market
(Hanson, 2016). That could be a failure of using focused cost leadership strategy as IGA does
not have huge resources and market share as Coles and Woolworths do. Aldi on the other
hand, uses focused cost leadership strategy as “low-price offering” to gain more market
share (Hanson, 2016).
The competition is intense in supermarket industry as it is a fast-cycle market.

Competition advantages:
For large supermarkets like Coles, they have huge amount of resources and large market
share. As they cannot compete by low price they will use their resources to offer better
shopping experience. Customers can shop conveniently in with huge variety of choices of
freshness of goods. They also focus on innovation as well. To save customers time, large
supermarkets also start to apply self-check counters so that customers would not have to
wait in a long line for half an hour only to buy a bottle of milk.
Smaller supermarkets still have their own advantages. They have lower cost. Aldi offers
almost all its products in the form of home brand. It cuts down all the non-essential cost
(Hanson, 2016). Aldi sells most products as home brands to cut down the supply cost.
Customers also have to pack their goods themselves as Aldi does not offer any package at
all. Aldi would save the money from unnecessary employee expense. It also chooses the
location wisely by next to big supermarkets like Coles and Woolworths so that they would
not have to maintain a large variety range of products thus saving a large amount of
maintaining fee. Overall the price in Aldi would be 25 percent less than the one in Coles and
Woolworths (Hanson, 2016).
The supermarket industry is a fast-cycle market and these competitive advantages would be
in short-term and need reverse enginerring.

Reference
Anwar, K. (2016). ‘Comparison between cost leadership and differentiation strategy in
agricultural businesses’, Custos e Agronegocio, 12(2), pp. 212–231.
Hanson, D., Hitt, M., Ireland, R.D., Hoskisson, R. (2016). Strategic Management:
Competitiveness and Globalization (6th edition). Melbourne: Cengage Australia, pp. 436-
441.
Stefanovic, I. and Milosevic, D. (2012) ‘On conceptual differentiation and integration of
strategy and business model’, Zbornik Radova Ekonomskog Fakultet au Rijeci, 30(1), pp.
141–161.
WADA, T. (2018). ‘Capability-based Cost Leadership Strategy of Japanese Firms’, Annals of
Business Administrative Science, 17(1), pp. 1–10. doi: 10.7880/abas.0171018a.

Strategies: Anika

The Australian supermarket industry consists of two major players, Coles and Woolworths
dominating approximately 80% of the overall market (Hanson et al., 2017). Coles is a part of
Wesfamers Group which is conglomerate of a number of related and unrelated businesses
ranging from supermarkets to liquor stores to mining and hardware stores etc (Hanson et
al., 2017). In comparison, Woolworths group is also diversified via operating a mixture of
other related and non-related businesses like liquor stores, small sized grocery stores,
departmental stores and service stations (Hanson et al., 2017).

From the case study, we can observe that all the competitors in this industry have adopted
an integrated low-cost differentiation strategy for their pricing models. This model is
supported by continuous promotion & marketing campaigns followed by effective cost
management. The supermarket chains lock their suppliers into contract and negotiates
beneficial deals to reduce costs (Hanson et al., 2017). As mentioned, Coles wants to
establish a point of differentiation with a range of unique goods to attract more customers
for example establishing strict contract with suppliers to deliver within 7 days to increase
freshness (Hanson et al., 2017). This supports their business-level pricing model strategy of
differentiation by catering to a wider audience on average but also offer unique products
targeting different market segments.
Coles, Woolworths, Aldi can look into expanding into new emerging suburbs capturing the
smaller towns which were previously dominated by local supermarkets and IGA conducting
a market development strategy (Hanson et al., 2017). Being a large-scale business owned
by highly diversified parent companies, they have the opportunity to take advantage of
economies of scale allowing them to offer lower prices to consumers and sustain their
competitive advantage and/or drive out existing competition. Supermarkets are adopting a
more customer-focused approach by appropriately acting on feedback received from their
valued customers for example providing smaller sized trolleys (Hanson et al., 2017).

Another corporate strategy implemented by these supermarket chains are acquisitions in

the form of backwards-vertical integration. In the case study, this is apparent when
Woolworths acquired Macro Organics (a supplier for organic products) to combat
“delicatessen” threats from independent small sized stores (Hanson et al., 2017). This helps
to gain control over supplies and maintain costs & quality.

The supermarket industry is an unique industry providing necessities to customers of all

income groups, age, gender and other demographic factors. The target market in question is
broad and the industry highly competitive. Coles and Woolworths can take further
advantage of providing higher quality ‘homebrand’ products to compete with Aldi and it will
also provide higher margins of return. These major players will have to identify and play on
their strengths, improve their weaknesses and exploit potential opportunities to successfully
develop a competitive advantage and continuously conduct market research to help sustain
it for future growth and increased profitability.

Reference:
· Hanson, D., Hitt, M., Ireland, R. and Hoskisson, R. (n.d.). Strategic management. 6th ed.
pp.436-441.

4.3. INTERNAL ANALYSIS Shivani

Internal analysis of supermarkets in Australia specially Woollies, Coles and Aldi can be done
by two main approaches. First is the SWOT analysis and second is the profit analysis. Since,
we are dealing with the internal factors we will only focus on Strength and Weakness as
Opportunities and Threats are the external factors.
Internal analysis helps to evaluate and audit major strengths and weakness in functional
areas of business and develop relationships between them. With the help of internal
analysis, the company can develop strategic planning objectives to sustain and grow the
business (William, 2019).
The strengths and weakness chart comparing Woollies, Aldi and Coles are shown in the
table below:

Woolworths Coles Aldi

 · It is the oldest · It is the second · Customer support
supermarket in biggest supermarket in due to low price and
Australia Australia. variety of options

· It is the marker · High share of the · Relatively new in the

leader with 80% of the domestic liquor market market but is gaining
market share popularity due to low
and discounted prices

· Well stocked · Attractive pricing · Low pricing

products and well strategies strategies
displayed items.

· Well trained · Effective online · Provide great

employee and offers delivery and shopping savings to the
good salary, bonuses experience customers
and perks

· Aggressive strategy · Provides different · Strong Product mix

for promotion generic brands to suit all
types of customers

Weakness:

Woolworths Coles Aldi

· Due to price wars Price war between woollies · Operate on low

between coles and and ALDI causes problems margins and are
woollies, there has in retaining customers dependent on high sales
been major losses and volume
pricing mistakes.
 · They target Negative publicity due to · Discount stores are
multiple income group the issues with suppliers usually visited by low-
people so it is difficult and management (Barakat and middle-income
to determine whether Consulting, 2018) group customers so it
the price offered is hard for them to
valued penetrate high income
group customers.

· Hard to retain loyal Hard to retain loyal There is no self-checkout

customers as they can customers as they can services which sometime
easily switch brands easily switch brands and leads to long wait for
and shops shops checkouts

Products sold are

comparatively low quality
and of generic brands

Profit Analysis
Profit model/ analysis makes companies more profitable and viable. It can be analyses on
the basis of tangible resources and intangible resources. The profit model for Australian
Supermarket based on tangible and intangible resources are discussed below
Tangible resources are the physical, financial and technical resources. The Woolworths
tangible resources include its 995 stores, 807 stores for Coles and 450 stores for ALDI.
Also, all the inventories and products form part of the tangible resources. The cash
generated from sales ad services along with their trained and valued employees and all
other physical resources are part of tangible asset.
An intangible asset or resources does not have a physical form but has great value to a
company. Some companies disclose brand and goodwill while others include software and
company trademarks as intangible resources (Loftus et al. 2012). For all the three
supermarkets their brand names and their slogan are the intangible assets. Also, the
software that they use for providing customer service and self-checkout services are part
of this asset.

References:
Topics, Sample Papers & Articles Online for Free. (2016). Intangible Assets – Woolworths limited.
[Online]. Available at: https://studymoose.com/intangible-assets-woolworths-limited-essay[Accessed:
18 May. 2019]
Barakaat Consulting (May 2018), Woolworths Limited SWOT AND PESTLE Analysis.
Accessed on 23 August 2018 https://www.swotandpestle.com/coles/

William R., 2019. Chron. Why is an internal analysis important? Accessed on 18/05/19
https://smallbusiness.chron.com/internal-analysis-important-80513.html