Price Determination in the Australian Food Industry A Report

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Our purpose in preparing this section of the document was not to enter or inflame the debate about which is the correct way to describe and quantify the market share of major grocery retailers. We wish however to make note of the significant trends over time towards major retailers taking a greater share of the grocery food retail market, as is relevant to this study. Grocery retail – developments There are a number of key developments in the food retail sector which are important in any analysis of the role that food retailers play in determining prices. Customer intimacy Successful retailers focus on the importance of intimacy with the customer – the customer is the greatest asset that a retailer has, not the store itself. Investments in display, storage and technology are made with a strong sense of purpose to enhance the durability of the connection with the customer. Beyond the consistent me-too approach that characterises the behaviour of the Australian majors, the micro-strategies adopted by different groups towards greater customer intimacy are diverse and complex, built around core themes that promote care for food safety, freshness, variety and price consciousness. Loyalty programs have aimed at achieving repeat visitation. Category management Retailers focus on category management strategies in order to generate shopper enthusiasm for a product category. In this way, the retailer can mine the overall retail sales value potential of the product line by effective use of shelf space, promotional support and price competition where necessary. Leverage Price Determination in the Australian Food Industry A Report Recent innovations in Australian retail have followed trends in the European Union and the United States where retailers have sought to expand their retail offer into areas such as liquor, fuel, newsagency, pharmacy and other segments previously the domain of specialty businesses. This has altered the effective wholesale market shares in the grocery food market in certain areas and changed the dynamics for suppliers to certain food sectors. The fuel strategy has the added purpose of enhancing the customer loyalty to each retailer – whilst points of difference remain with different retail offerings. Points of difference Retailers compete on many planes for the loyalty of the consumer. Whilst ‘sales’, ‘specials’ and ‘lowest prices across the store’ are common marketing tools used by all retailers, each also strives for a non-price point of difference based on a combination of service, quality goods, convenience, range and so on. The consumer ultimately makes the shopping decision on these variables. Major chain retailers offer the convenience of a one-stop shop for all food and grocery lines and hence their consumer appeal. Food retailers each seek to offer a fresh product image – illustrated by Woolworths being the ‘Fresh Food People’. For new international entrants such as Aldi, their point of difference is being a low cost, limited range retail outlet characterised by a cheaper supply chain and low store-operating costs. Convenience retailers offer local convenience in shopping for emergency lines or smaller volume shopping needs without the fuss of a major shopping mission – though there is aggressive competition from the majors in this area backed with faster checkouts and front of store access to newsagency lines. 114
Supply chain management Over the years, the major chain retailers have adopted different strategies as to how to manage logistics through their businesses from point of delivery to back of store. Both major retailers in the Australian industry have announced efforts to take control of the logistics costs from the supplier’s factory gate into the back of the retail store, through respective central warehousing systems. These innovations are planned to take significant costs out of the value chain – mostly the costs incurred by suppliers and their distributors in the delivery of orders direct to store and in the cartage from supermarket warehouse to store. Major retailers have indicated that they will seek a sharing of cost savings with suppliers. Figure 123. Grocery retail – what determines prices? There is a set of factors that determine prices of food in the grocery retail sector, at retail and wholesale points. These concepts are discussed in the following pages. • Industry structure – concentrated versus fragmented • Seasonality of availability • Supply chain efficiency • Information volatility and quality • Transparency of cost structures • Rate of supply industry adjustment • Supplier support • Pack sizes and features • Perishability and shelf life • Seasonality of product availability Product attributes • Business factors – Overall return on investment and EBIT contribution – Place in price/quality perception – Product range/sales margin mix needs – Store format • Category factors – Destination, support or convenience – Loyalty, shopping trip – Promotional cost Supply dynamics Retailer strategy Retail prices Competing products • Nature of competition from direct or indirect substitutes • Relative sales activity levels of products • Alternate product formats (fresh versus frozen versus shelf-stable) Consumer demand drivers • Effectiveness of advertising and promotion – Extent of brand loyalty and brand attributes • Consumer product awareness • Consumption trends (how people are eating) • Shopping trends and characteristics (frequency and convenience) Competing retailers • Format of alternate food retailing • Geographic/demographic zones • Growth rates for alternative concepts • Sales sensitivity of the consumer to price, quality and image Price Determination in the Australian Food Industry A Report 115
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Price Determination in the Australi
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© Commonwealth of Australia 2004 T
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FOOD AND AGRICULTURE BUSINESS GROUP
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FIGURES Price Determination in the
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• The current focus of retail cha
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• assertions as to market power i
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Overview - main drivers of prices i
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Food lines The analysis of food pro
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Figure 1. Overview of the approach
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Figure 2. Corporate profitability I
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Figure 4. Major drivers of prices a
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5.3 The greater influence of prevai
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DAIRY - PACKAGED MILK Overview of t
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Figure 10. Whole milk, 2 litre, sup
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Prices through the chain Our analys
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Figure 16. Natural cheddar cheese:
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Farmgate prices Farmgate prices are
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DAIRY - ANALYSIS OF PRICING OF DAIR
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Figure 25. Dairy butter and blend s
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‘Step-ups’ are paid by several
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THE MEAT SECTOR Analysis of the det
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The approach taken The pricing anal
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The changing value chains - various
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The approach taken Assumptions used
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Figure 39. Lamb market sales, ’00
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Figure 41. Lamb: Major drivers of p
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Observations The price comparison s
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Figure 46. Pork products, supply ch
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Figure 48. Value and cost-adding fr
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Supply chain management Wholesale m
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Figure 51. Fresh vegetables: Major
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FRESH HORTICULTURE - WHOLESALE MARK
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FRESH HORTICULTURE - ANALYSIS OF PR
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market access - in the United State
Page 76 and 77: The industry’s product mix The ke
Page 78 and 79: PROCESSED FRUIT AND VEGETABLES Anal
Page 80 and 81: Figure 69. Frozen vegetables, peas,
Page 82 and 83: PROCESSED PINEAPPLES - ANALYSIS OF
Page 84 and 85: Figure 75. Fresh fruit, with juice,
Page 86 and 87: GRAIN AND OILSEED PRODUCTS Analysis
Page 88 and 89: Figure 79. Flour, 1kg, supply chain
Page 90 and 91: Figure 82. Share of retail price of
Page 92 and 93: OILSEEDS - OVERVIEW Background The
Page 94 and 95: Figure 87. Oils and fats, supply ch
Page 96 and 97: The amount represented by the retai
Page 98 and 99: Industry risks The key area of risk
Page 100 and 101: • The major cost faced by egg pro
Page 102 and 103: Figure 96. Consumer price index, fo
Page 104 and 105: • Many such operators have indica
Page 106 and 107: SUGAR PRODUCTS Analysis of the dete
Page 108 and 109: Figure 103. White sugar, 2kg, suppl
Page 110 and 111: Projected export returns for the co
Page 112 and 113: • Export prices are driven by glo
Page 114 and 115: Retail prices • The average retai
Page 116 and 117: Industry risk • The overall retur
Page 118 and 119: 4. The performance of Australian fo
Page 120 and 121: THE PERFORMANCE OF AUSTRALIAN VERSU
Page 122 and 123: THE PERFORMANCE OF GLOBAL BRAND MAN
Page 124 and 125: THE PERFORMANCE OF PRIMARY MANUFACT
Page 128 and 129: GROCERY RETAIL - WHAT DETERMINES PR
Page 130 and 131: The consumer trend towards eating o
Page 132 and 133: GROCERY RETAIL - PERFORMANCE OF GRO
Page 134 and 135: 6. Issues for consideration ISSUES
Page 136 and 137: PRODUCER INTEGRATION Does integrati
Page 138 and 139: Industries have in several cases ta
Page 140 and 141: Examples include: • 1 litre milk
Page 142 and 143: Figure 132. Targeting the stomach H
Page 144 and 145: MAJOR ADJUSTMENT - WHAT’S HAPPENI
Page 146 and 147: THE IMPACT OF DROUGHT The sector Di
Page 148 and 149: Price Determination in the Australi
Page 150 and 151: Oczkowski, E, Murphy, T 1999, Influ
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Price Determination in the Australian Food Industry A Report

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