MANF6860 STRATEGIC MANUFACTURING MANAGEMENT

ASSIGNMENT 1

Semester 1 - 2015

Submitted by,
Naveen Arumugam Thirunavkarasu (z3493524)

1) Who are the main customer groups (or potential customer groups) within the industry? In what
ways might they exercise their influence? How would you describe their bargaining power?
The main customers in the supermarket industry are the families living in that particular locality and
to some extent small businesses, eateries and restaurants. This customer base is huge with 21.1
million customers shopping in Woolworths every week [1].
The customers have an immense influence on how the industry operates. Each and every product
sold in the supermarkets depend on the eating habits and the lifestyle of the customers, for example
nowadays people have become more conscious in what they eat and the customers are willing to
pay more for healthy and fresh food. So, the supermarkets have started to focus more on low fat
foods, fresh vegetables and meat.
Even the location of the stores need to planned in such a way that it is easily accessible by all means
of transport and good infrastructure should be available. There are some customers who are willing
to spend more at convenience stores closer to them so they dont have to travel to get to the
supermarkets. To cover these customers the supermarket chains have started to deliver groceries to
their doorstep. This is a very big change on how the supermarket have operated in the past and
presents a lot of challenges like need for a new infrastructure and a large capital investment .
Woolworths supermarkets have an Everyday Rewards Program[2] to reward regular buyers with
discounts and special offers. This program provides the supermarkets with valuable information on
customer preferences. This market research and focus groups held around the country try to predict
the needs and wants of customers, so they stock their shelves with the right products and at the
right times and prices. Thus supermarkets need to fine tune their product mix and prices
continuously according to customer preference to build a sustainable competitive advantage, which
will allow them to stay in business. This shows that customers have a huge influence on the way
supermarkets decide their strategies.
Even though the potential customers of supermarkets are highly fragmented; each customer
represents a large group of buyers with similar objectives and expectations. The customers (buyers)
of this industry do not have a lot of bargaining power when it comes to the prices, because at most
instances the product pricing in supermarkets is based on competitive pricing and the customers
dont know the actual production costs. But the customers have an extremely high bargaining power
on the service levels offered by the supermarkets.
The supermarket chains in Australia offer somewhat similar products (with the exception of some
speciality stores), so the customers have a lot of choices as to where they shop. At most instances
where a customer shops depends on his/her convenience to the outlet (closer to their homes and
parking facilities). There is fierce competition as it is a mature industry and market growth can be
achieved only at the expense of the competitors. The industry depends on brand loyalty and good
customer service to sustain customers; this means that one bad experience for a customer in an y
outlet will result in that customer switching over to the competitor (as the cos t of switching is
negligible with the loss of Flybuys or Everyday Reward Points being the largest loss).

2) Who are the main supplier groups (or potential supplier groups) within the industry? In what
ways might they exercise their influence? How would you describe their bargaining power?
The main suppliers to this industry are the local farmers, food producers and many more small and
large businesses throughout Australia and from overseas in case of some products (for example,
seasonal fruits from New Zealand and home brand products from Thailand [2]).
The suppliers can dictate terms to the supermarkets if they have a competitive advantage over
similar products produced by other local suppliers and imports from overseas. The advantage can be
of quality, taste and brand loyalty of customers or if the availability of the product is scarce. In such
cases there will be heavy competition among the supermarket chains to acquire those products. The
local suppliers will have an edge when there is some government legislation that limits the amount
of imported products. In any of the above cases where demand is greater than supply, the suppliers
will have the ability to decide the price of the product. Such brands will have lot of bargaining power
over the supermarkets. They can specify the terms of the contract with the buyers (supermarkets)
and they can even reserve the premium places (topmost shelves) in supermarkets and they can
afford to keep a high profit margin (depending on the exclusivity of the product). An example of such
brands is Arnotts Biscuits Ltd, Coca-Cola and Nestle. Arnotts Tim Tams are very famous and can be
found in any supermarket or convenience store across Australia. Even though there are similar home
brand products available at a cheaper price, customers still prefer to buy Arnotts because of the
image that brand has among customers and its taste.
But, in most cases the suppliers do not have such advantages and their products are not
differentiated much and could be substituted easily by cheap overseas imports (home brand
products). And the suppliers of most products in Australia are scattered and do not have any trade
unions to unite them. And the possibility of suppliers doing a forward integration is very remote as
they could not compete with the scale of economies and the brand image the big supermarket
chains have. The supermarkets often have multiple suppliers for a single item, so the switching cost
of only one supplier will negligible in the grand scheme of things. Thus, the suppliers have extremely
low bargaining power.
The suppliers are in such a situation where they do not have much choice other than to accept the
terms and conditions of supermarkets and sell to them, who are their biggest customer and in some
cases they are the only. There have been many reports of supermarkets abusing their buyer power
like listing fees, De-listing, Slotting fees, late payments, below cost selling (unscheduled promotions),
etc [3]. The suppliers have no other choice but to accept this as they have the economic security in
the form of contract with the supermarkets. Without the contract they will not be able to sell their
products to anyone else.

3) Who are the principal competitors in the industry? What strategy do they employ to compete
with Woolworths?
The principal competitors of Woolworths are other supermarket chains like Coles, Aldi and IGA. Out
of which, Coles is the major competitor of Woolworths with neck to neck sales and service levels
over the past few years.
Woolworths vs Coles: Both supermarket chains employ very similar business strategies. Coles
competes with Woolworths mainly on price, service levels and availability. Both supermarkets
operate at similar times and in most cases at similar locations (easily accessible to the customers).
There is not much product differentiation between them. Both of them try to increase the
percentage of home brand products every year, this has resulted in some products vanishing from
their shelves. Both of them play a huge part in everyday life of Australians like petrol outlets,
insurance, finance etc. They use this influence to sustain customers in the supermarket industry and
increase the switching costs to move to the competitor.
The competition is so intense in all aspects of their businesses and it is very difficu lt to point out a
clear winner. But there are minor differences in the way both of them operate.

Coles has a slightly wider product range, but offers less choices (brand s for a particular
product) compared to Wollworths. Thus, Coles can satisfy the needs of more diverse
customers.
Home delivery Both supermarkets target different customers. Woolworths charges
customers based on the cost of purchase. If you are a customer buying and stocking large
amount of groceries, you will pay less delivery charge [2]. But, Coles charges the customers
more for delivery during peak hours and less during other times irrespective of the cost of
purchase. This gives an opportunity for customers who shop regularly for small quantities.
Sustaining customers- Coles gives special offers for customers who have a Coles credit card
and Flybuys card. So, if a customer wants to switch to Woolworths they might lose all
accumulated points and will not be able to get the same offers. This is one of the main things
Coles uses to sustain its customers.

Woolworths vs Aldi: However the German supermarket chain Aldi uses a completely different
strategy to compete with Woolworths. With a current market share of 10.3% [4], it is growing rapidly
every year opening more stores throughout Australia.

Efficiency Aldi stores are open only during peak shopping hours (8:30 am to 8 pm) unlike
Woolworths (6am to 12 pm). So, Aldi has more customers shopping per hour on average.
It has less number of check-out counters and packaging of purchased goods is done by
customers itself, thus saving a lot on labour. Aldi is predicted to be 60% more efficient than
competitors [4].
Space utilization Aldi stores are much smaller compared to Wollies with standardized store
layouts and they stock only limited brands for a particular product. This enables them to
achieve better economies of scale per SKU (Stock Keeping Unit). Aldis strategy is to become
specialised in a small range of products. Thus, Aldi is able to provide the best prices for a
particular quality product compared to Wollworths and Coles.

Most of the products in Aldi supermarkets come with ready to shelf packaging. So, it saves a
lot of labour in stocking products regularly in shelves.

4) Indicate any current or potential substitutes or new entrants that might fulfil the same basic
functions as the principal products and services of Woolworths?
With the number of customers shopping online increasing each year, there is a huge opportunity for
online sales websites like eBay and amazon to enter into the online grocery market. Although
current players in the industry have the option of online shopping and home deliveries, it is a
relatively new business area for them. But for the online sales giants it is their area of expertise and
they have the necessary infrastructure required to enter the online groceries business.
With the recent partnership of Woolworths with eBay [5] that enables customers of eBay to pick up
their online purchases from selected Woolworths and Big W stores, eBay has got a very good
opportunity to expand their business into the groceries market. If this happens in the future, then
eBay will pose a huge threat to the businesses of current players in the supermarket industry.
Woolworths can avoid this threat by forming strategic alliances or partnership with the online sales
giants. This new venture will allow Woolworths to sustain and may even increase market share and
dominate the online groceries market. This partnership is very essential because eBay by itself
cannot source all the products, because they do not have any relations with suppliers of this
industry. At the same time it will be beneficial for Woolworths as well, as this eBay has the necessary
infrastructure to do home deliveries more efficiently than Wool worths. Thus the cost for shipping
will go down and at the same time service levels will go up. Thus, there is a chance of increasing the
online sales and become a dominating player in the market.
5) What barriers might exist to prevent companies from entering this industry?
The competition in this industry is intense which creates a space for new entrants. But, there are
many barriers that have to be overcome to enter this industry.

Brand loyalty of customers This is a huge barrier for new entrants as the existing playe rs
have been in the industry for many decades and they have good customer relationships.
Economies of scale The new entrants need to have large scale operations to achieve the
necessary economies of scale to match the price levels of the existing players.
Access to raw materials Most of the large suppliers of groceries will have long term
contracts with the existing players. So, it will be difficult to source cheap raw materials. This
can be overcome by buying the suppliers. But, it requires high initial investments. However,
for packaged and processed foods it wont be much of a problem as the companies can
increase production easily.
The existing players would have already achieved the break-even costs for all the initial
investments on infrastructure. So, they will have a high profit margin on the products they
sell and they can easily reduce prices to kill the competitors.
Infrastructure It is difficult to find locations for the stores with easy access for customers.
Legislation and government action The local city councils have some mandatory rules like
enough parking spaces and other basic facilities should be available at the stores.

It is possible to overcome these barriers and enter the industry. But, it is not possible for new
entrants to be good at everything. So, they need to have a good strategy and need to focus on a
particular area as their specialisation. For example Green Grocers supermarkets is a new entrant to
this industry and their focus is on vegetables and fruits. They have opened a few stores in Sydney
and they are able to achieve lower prices for some products compared to the existing players.

References:
[1] MANF6860 Assignment 1.pdf
[2] http://www.woolworths.com.au/wps/wcm/connect/fc024b3a-b184-41f9-9a816ec74db24549/Australia%27s+Fresh+Food+Farmers.pdf?MOD=AJPERES
[3] http://www.smh.com.au/business/retail/woolworths-accused-of-bullying-suppliers-into-payingmillions-for-cheap-cheap-campaign-20141217-1293tt.html
[4] http://rogermontgomery.com/is-aldi-a-real-threat-to-woolworths-coles/
[5] http://ausfoodnews.com.au/2015/03/04/woolworths-partnership-with-ebay-attracts-bigcriticism.html
[6] http://competitionpolicyreview.gov.au/files/2014/06/Woolworths.pdf
[7]http://www.consumersinternational.org/media/1035301/consumer%20detriment%20briefing%2
0paper%20sept2012.pdf