Supermarket Price Wars – Who wins & who loses?

Written by Nina Kraskov & Sandra Salomon 

It all started on Australia Day 2011. Coles fired the first shot at its arch rival Woolworths, announcing that it was cutting the price of its private label milk to a $1 a litre. Of course Woolworths followed suit, as did all the other supermarkets.

Supermarket shoppers were ecstatic!  Especially mothers of children who drank gallons, (or litres) of the stuff.  So while consumers were the winners who were the losers?

The Supermarkets have been focusing their marketing campaigns on lower prices, which at the end could be a risky move. The psychology of pricing suggests the direct relationship that customers make with price and quality, having more expectations for products with higher prices.

The enormous amount of publicity that has been generated during the last year with lower prices, are in effect giving results to these companies. They are approaching customers with offers that impact directly on their psychological make up, showing for example, attractive numbers or great discounts.

Aldi started with a different way of informing customers about the lower prices, comparing some of the products and their prices. This plan has generated a price war and now these three giants have to work hard in the way they communicate, since there are not really clear differentiation.

Back to where it all began.  Did anyone stop to consider the farmers? We did. However, we did not give a thought to the companies who bottled and distributed milk. According to Hawthorne (2015), retail prices hit a 20 year low, and processors and farmers were espousing the death of the industry.

So what are the consequences for years into the milk wars? At a grassroots level, its tangible. Just ask the 50 Queensland dairy farmers who walked away, most for good (Hawthorne 2015).  And the milk processors?  Lion (Pura and Dairy Farmers) and Parmalat (Pauls), have had the sales of their key domestic brands dive by $175 million a year.  Can you believe milk is now cheaper than bottled water?  In 2008, Lion and Parmalat controlled almost half of Australian milk sales, sharing the combined $660 million share of the $1.44 billion fresh milk industry in Australia (Hawthorne 2015). Given that they also produced the private labels, this was a nice little duopoly, back then.

At the end of last year Pauls share of the market had dropped from  20 to 17.2 per cent, Pura went from 14.4 to 6.4 per cent and Dairy Farmers from 11.5 to 10 per cent.

So what has happened since?

The price wars continue, and have expanded to bread and sausages, 85 cents and $6.99 for 2kg tray respectively.  This shot was fired by Woolies, in an attempt to try and win back customers, and thus its dwindling market share.  Of course, everyone plays follow the leader and joins the fray.  According to McCrann (2013), the price wars are great news for consumers and not so great for suppliers.  Some one has to pay for the savings, and McCrann (2013) and Robb (2013) both say that Coles and Woolies are putting the squeeze on suppliers.  Whilst both Coles and Woolies have lost some of their market share, they are still able to report an increase in dollar sales and revenue (McCrann 2013) and their profit margin (Reid 2014).  Aldi’s arrival in 2001 has probably had the biggest impact on market share, largely at the expense of the “other” supermarkets.  The graph shows just where consumers are doing their supermarket shopping.

Image

Source: Roy Morgan Single Source (Australia), January 2005 – December 2013, latest 12 months to December 2013 n= 14,006. Base: Grocery Buyers 14+

Don’t forget that Woolies has more supermarkets in Australia than any other chain.  Robb (2013) suggests that whilst Coles and Woolworths are two of the most profitable supermarkets in the world, their profit margin will begin to drop, especially as competition hots up, with Aldi planning to expand into South and West Australia.  According to the ACCC, Woolworths has the highest profit margin of any supermarket chain in the world.  So while consumers pocket the savings, what happens to the suppliers? Have the price wars changed the way or where you shop?

In the end, is this  really `safe` competition between these companies in which the customers are actually receiving benefits? Or is it just a strategy to retain market share and profitability?

Reference List 

Robb, K(2013),Supermarket wars: Aldi takes on market share as Woolworths drops prices Smart Company  Monday, 09 March.  Retrieved 30/04/15 at 0845 hours

http://www.smartcompany.com, .au/growth/45992-supermarket-wars-aldi-takes-on-market-share-as-woolworths-drops-prices.html#

Reid, W (2014), Market share narrows between Coles and Woolworths, while ALDI makes important gains Roy Morgan Research February 12 2014.  Retrieved 30/04/15 0850 hours

http://www.roymorgan.com/findings/5427-market-share-narrows-between-coles-woolworths-while-aldi-makes-gains-201402120013

Hawthorne, M, (2015), Milk wars likely to claim more victims yet, The Sydney Morning Herald, Business Day, January 24, 2015. Retrieved 30/04/15 0853 hours

http://www.smh.com.au/business/milk-wars-likely-to-claim-more-victims-yet-20150124-12wirn.html

McCrann, T, (2013), Who pays for the Coles and Woolworths price war? Sunday Herald Sun, Business, 1st September 2013.  Retrieved 29/04/15

http://www.heraldsun.com.au/business/terry-mccrann/who-pays-for-the-coles-and-woolworths-price-war/story-fni0d8gi-1226708164906

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13 thoughts on “Supermarket Price Wars – Who wins & who loses?

  1. Great blog guys, this is of particular interest to me, as I work within this industry. The great price wars are in the short term great for the consumer. But in the long term all it is doing is hurting the suppliers and associated industries, which has a flow on effect to a much wider portion of the population. Does anyone really think about how the retail industry works, the average shopper has no real idea what is going on. The big supermarket companies in their ongoing desire to gain market share are constantly squeezing the supplier. They hold such power that to a certain extent dictate to the supplier what they will pay for their products, and as has been publicised and proven recently, are doing so outside of regulatory guidelines.

    The unfortunate part of all this is that the supplier employs Australians, and in turn relies on other local businesses to supply many of the raw ingredients to make their products. So you can see the flow on effect that can occur when supermarkets have price wars, reduction in profit for the supplier means pressure on their suppliers and cooperative businesses. Then the general public complains that all our manufacturing is being moved overseas. This is one of the few ways suppliers can reduce costs in order to keep the product price down. But it in turn will mean a reduction in jobs in the local market.

    How do we solve this problem? Do we accept the fact that sooner or later manufacturing in Australia wont exist? or do we address the pricing war and try to steam the pressure being placed on suppliers? I’m not sure exactly which way it will go, but I am sure of one thing, and that is the big supermarket companies wont want to give up their main method of attracting customers and maintain profits. And customers wont be happy to pay higher prices unless it is substantiated and regulated.

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  2. Thank you for your insightful reponse! One thing we didn’t mention in the original blog is Robb (2013) mentioned that the recently introduced voluntary Food and Grocery Code of Conduct may need to be made mandatory if the supermarket giants keep putting the squeeze on suppliers to maintain thier profits. How come we have to resort to regulating when it comes to doing the right thing? I would have thought that it was pretty obvious really.

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  3. This was an interesting article, I must admit I am conscious of the cost of groceries and enjoy the cheaper prices and (I’m loathe to admit it but,) I don’t often pause to think about its impact on the supplier. I do wonder though, if the ‘big two’ will ever start buying up dairies or shares in them? I know it may be a little far fetched, but, there is potential for it-to essentially cut out the ‘middle man’.

    For example, a decade or so ago, grape farmers in the Sunraysia area (north-western VIC) were supplying wineries with grapes and receiving premium prices for their products. Then the wineries began to buy up land and plant their own vines. These days, there are too many grapes and suppliers are being offered a pittance or simply turned away, as the wine producers have their fill of their own grown produce for their wines. More and more grape vines are being ripped up from farming land as there is very little market for it in the area. What if Woolworths or Coles had their own dairy? It’s a scary though, perhaps not practical, but a thought no less.

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  4. For the consumer the price wars have to be good. Economists would say that what the free market is all about. I see the big issue is the supermarkets not really fighting on margin but on how hard they can squeeze the suppliers. That’s the injustice and probably only possible in Australia with the large majority of supermarket retailing controlled by two supermarket chains. If they didn’t have such extensive market power and market share their impact on supplier wouldn’t be so great.

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  5. The demand for these products are elastic. By reducing a price, a supermarket chain can potentially increase sales greatly. However, an action of one supermarket clain will always affect other supermarket chains. They will need to make decisions whether to also cut their prices to maintain their competitiveness in the market. If Coles can do it, why can’t Woolworths do it? This will send negative messages to Woolworths customers. Their customers may ended up flocking to Coles instead. This is a pricing strategy that companies can use. The weakness in the industry appears to be a lack of regulations between these supermarket chains and their suppliers as mentioned in the other comments. However, cutting prices is a fair marketing strategy. Companies have also been using ‘price matching’ technique in order to pick up sales.

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  6. A friend of mine owns a dairy in Queensland and it was incredible the impact the price war on milk had on them. They are a family owned dairy, and have been in the industry for a couple of generations. When Coles & Woolworths started this price war, the price change was immediately passed on to the farmer. They had no come back against the change. And as there are very few independent milk producers, decisions had to be made on if they stayed in the industry or left. My friends were lucky and picked up a contract with an independent milk producer. And I’ve never purchased Coles or Woolworths branded milk since. But I know I am fortunate and I can afford the $2.99 / 2L of milk for other Australian manufactured brands where the farmer is paid a fair price.
    I think the consumers are very much involved with this price war. We have the choice to purchase SPC canned fruits at the higher price or the imported canned fruits at the lower price. We have the choice to buy meat from the local butcher or Aldi. We have the choice to buy fruit and vegetables from the local farmers market instead of the supermarket.
    The price war is on groceries is beneficial for consumers when all it feels like every year is prices go up. But if we have the ability to support the suppliers – we should.

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  7. Interesting article, for me personally, I believe this war has its drawbacks even on the retailers themselves who issued the war, I can see people going to all three retailers getting the benefits of all offers available every week ,the meat from one, Laundry liquid from the other , and milk from the third ! So ,not sure if it’s truly worth it for them.

    Another concerning part for the consumer , the quality of the products , are they jeopardize to be able to reduce cost a maintain revenue?

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    • I agree with what you say about the price wars having some negative impacts even on the supermarkets themselves because it is true that where as we consumers are benefitting from the price wars, they are losing out on making profits because we shop around and buy the cheaper products from their rivals. Much as I enjoy buying cheaper products, I feel for the suppliers who have to bear the brunt of selling their products at a cheaper price just so the big supermarkets can continue their price wars.

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  8. This blog and all the comments were an education for me, I know Woolworths and Coles have pricing wars, but not for Milk. When I go to buy Milk from Woolworths or Coles, after trekking to the far reaches of the store (now I know why), I’ve been programmed to buy Pauls Skinny Milk, the milk with the purple label. Apparently it’s fat free, cholesterol free and has more calcium than regular milk, is also low GI to help me stay fuller for longer and is 100% Australian milk. Buying another milk would possibly cause a riot in my household.

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  9. A good analysis of supermarkets pricing in consumer perspective . People buy higher price which signifies them it is better product . In the end, is this really `safe` competition between these companies in which the customers are actually receiving benefits? Or is it just a strategy to retain market share and profitability?.

    Only customers will feel happy for this price wars. But if there is small difference in few products like bread or milk t doesn’t matter to the customers in changing their supermarkets . Yes all these price strategies is to increase there market share only . And quality and service is diminishing by this effect .Although they try giving same but it gradually decreases . In my experience, i used to buy Woolworth Multi-grain bread from last 2 years ,and now after reducing the price to 1.50$ for 650g of same bread the quality has totally changed which disappointed me to buy other good quality brands . So these pricing offers effects in this way and now have to spend few more dollars on other breads . . I have tried some of Aldi products but was unhappy because of its quality .. And these prices will help families who are regular buyers from these store for extra savings .

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  10. A good analysis of supermarkets pricing in consumer perspective .
    Only customers will feel happy for this price wars. But if there is small difference in few products like bread or milk t doesn’t matter to the customers in changing their supermarkets . Yes all these price strategies is to increase there market share only . And quality and service is diminishing by this effect .Although they try giving same but it gradually decreases . In my experience, i used to buy Woolworth Multi-grain bread from last 2 years ,and now after reducing the price to 1.50$ for 650g of same bread the quality has totally changed which disappointed me to buy other good quality brands . So these pricing offers effects in this way and now have to spend few more dollars on other breads . . I have tried some of Aldi products but was unhappy because of its quality .. And these prices will help families who are regular buyers from these store for extra savings .

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  11. Great issue to bring up- thank-you.

    On the supermarket side, the pricing strategy of bread and milk is very clever in my opinion. I doubt they make any money on these items but it hasn’t escaped me that at my local Woolworths I must walk the entire length of the store to get to the milk. I image most stores are the same, using these ‘loss leaders’ to coax price sensitive customers into the store and to purchase higher profit margin items on the way.

    On the supplier side, some clever marketing has also occurred. I always pay the extra dollar for my 2L of milk due to the guilt ads that I was exposed to when the price war began. If many more diary farmers walk away or diversify, the supermarket chains may be forced to farm the milk themselves or lose their clever pricing strategy.

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  12. Its a little easier for me to see the future here as I have seen it happening in India with the sugar industry.
    Till a decade back it was booming industry in India with farmers making decent profits. Then Government brought regulations on bringing the price down of sugar to the consumers. As the price of sugar began to fall (or was not increased as was the demand of the time) eventually the whole burden went onto sugar mills and they began to close down. There was excess of sugar canes everywhere and thus farmers started getting way less for their crops and were not even able to recover their investments. Scenario is so bleak and with Government apathy everyday we hear farmers not able to pay their debts and committing suicide.
    I am sure things will never fall this low in Australia but before saving our 5 cents we should make sure that its not happening at expense of somebody’s hard work and livelihood.

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