Woolworths & the Supermarket Industry

EXTERNAL ANALYSIS

To determine the profitability of an industry, both the external environment and the internal environment must be considered. The external environment is assessed using Porter’s competitive forces and macro‐environmental forces frameworks. These analyses are likely to overlap as they are interrelated.

Porter’s Competitive Forces

o Low Threat of New Entrants

Economies of scale, controlled access to distribution channels, and capital requirements are three significant barriers to entry into the supermarket retailing industry.

Operating for nigh on a century, Woolworths and Coles have grown to dominate what is now an oligopoly, and have built economies of scale through sizeable operations. This places the existing players in a position of cost leadership, applying margins that are not viable without economies of scale. This enables overheads to be shared across a greater number of revenue‐generating business activities, yet Woolworths and Coles have continued to maintain the customization of their stores in accordance with varying geographic and demographic factors (IBISWorld, 2009a).

The concentration of competitors also confers to these existing players a great deal of power and control over distribution channels and the ability to tie up resources sought by potential entrants (Smith, 2006). Vertical integration, whereby Woolworths and Coles are increasingly producing and distributing under private labels (Palmer, 2009), is one such source of control. In areas that are not vertically integrated, long‐standing relationships still enable the major players to negotiate favourable outcomes with distributive partners relative to competitors.

Supermarket retailing also requires a high amount of start‐up capital for the necessary plant and machinery. As Woolworths and Coles continue to expand and purchase real estate, this becomes an increasingly higher impediment for new entrants. Thus, such high barriers to entry result in a low threat of new entrants.

o Medium Bargaining Power of Suppliers

Three key determinants of suppliers’ bargaining power are the improbability of forward integration, the

pulling power of certain brands, and the pressure to buy from Australian producers.

High barriers to entry prevent suppliers from forwardly integrating to take on the retailing role, forcing most to rely on Woolworths and Coles for access to the market. Nevertheless, strong multi‐national brands such as Nestle and Kraft are able to use the pull of customer demand to exercise bargaining power.

An increasing consumer trend to “buy Australian” (IBISWorld, 2009a) also transfers a degree of power to local suppliers, enabling them to negotiate more favourable agreements.