How a business can grow it’s customer base Essay
How a business can grow it’s customer base
Coles Group Limited
The Grocery industry is one of the most important industries in the Australian economy. The industry employs a big proportion of the workforce and is connected to many other industries in the economy environment. Supermarkets are one of the key players in the grocery industry providing around 70% of the value of the retail market for food and groceries. The two major grocery chains – Woolworths and Coles – dominate with almost 70% market share of an industry valued at A$80+ billion. Over the past 5 years the sector has been witness of some significant developments. Dynamics were changed after new players like Costco entered the market and ALDI verified a rapid growth since its first appearance in 2001, making colossal to chase market shares by reviewing their campaigns. Some key statistics for the participants in the industry are presented in the Table 1
Table 1.1: Players in the grocery industry
Retailer Market Share Woolworths 41.1% Coles / Bi-Lo 31.0% Other supermarkets ALDI 14.0% Speciality Foods / Franklin 7.1% Source: Coles Data, 2012
Coles is one of the two major supermarkets operating in Australia. In 1927 became property company and was launched on the Melbourne Stock Exchange; in 1985, Coles Myer Ltd.was established after a A$918 transaction. Myer was divided from the Coles Group to private equity interests in 2005, it has therefor not been part of the group since then. Westfarmers was founded in 1914, and in 1985 has been restructured to a public company and was listed on the ASX. Coles Supermarket is part of the Coles Group and subsidiary of Westfarmers for a total of: 749 full service supermarket retailer stores
792 liquor stores and 92 hotels
627 national fuel and convenience stores
The reaserch conducted shows that Cole’s market share of 31% has not moved materially in recent years; is one of the successful supermarkets in Australia in terms of customer satisfaction, innovation in product strategy, marketing strategy, financial capability and strong work culture. To analyze the Global segmentation, we can consider the presence of Westfarmers in New Zealand, but the nation largest employer remains committed to providing a satisfactory return to shareholders. The management of Coles supermarkets has not had many political barriers except the adherence to the sector’s rule and regulations. The slow growth uncertainity in the Australian economy poses a threat for thr retail players.
The links between supermarket and fuel industries have been normalised. In response to concerns that cost of living pressures were affecting families, in 2008, the Australian Government commissioned the Australian Competition and Consumer Commission to review of the industry. In 2010, the Trade Practices Act was recast as the Competition and Consumer Act, with several competition policy amendments in recent years. Supermarkets themselves have developed new pricing and marketing strategies. In 2011 Coles partenered with WWF-Australia to improve the sustainability of the seafood supply chain and to educate consumers about sustainable choices. Coles has also adopted new technologies developing its online shopping facilities. It also invested to improve its supply chain and distribution system with significant impact in cost savings.
Coles’s commitment to their Ethical Sourcing Policy, a wide range of products, great logistics and a strong brand image among its internal Strengths. Being an important presence in the market, its operating cost is overall high and its management presents Weaknesses. The possibility to seek new sales opportunity and cut cost through technology and the potential to increase the customer base presents only a few of the Opportunities that Coles may have. The uncertainity that Australian economy presents, the vulnerability to attack by the key competitors of the market are to be seen as external Threats. From 2012, Coles has a new pricing and marketing strategy called ‘Down Down’. This has been a high profile campaign designed to increase its company performance. Other supermarkets have their own pricing strategies to compete, including IGA’s with “Locked Down Low Prices” from July 2012 and Woolworths’s “everyday low prices”. Over the last four years, Coles sales have increased by $4.8 billion to around $24 billion.
Coles have out-performed the supermarket sector overall over the last four years, market share has gone up slightly. Growth in revenue reflects changes in prices and volumes. On the face of it, a campaign like ‘Down Down’ should have the effect of lowering prices and increasing volumes. To obtain an overall picture of the savings to consumers we aggregate the price movement during this period and calculate a savings figure – based on both old volumes and current volumes. We find that in 2011-12, the one-year savings of the price reductions during the ‘Down Down’ campaign (i.e. over the 18 months from January 2011) is between $1.05 billion and $1.19 billion. The midpoint is $1.12 billion. The benefits of scale are generated due to the large average store size and the ability centralise their procurement so that they obtain better terms.
Overall, Coles finds that the larger its stores, the more efficient they are, as measured by costs per store size. On average, a store that is 1000m2 larger has costs that are 3% lower – reflecting the spread of a number of fixed or standard costs for a store that are incurred regardless of store size. Over the past four years, Coles have also increased the productivity of assets, part of these improvements come for the fact that Coles operates larger stores whilst keeping the number of stores relatively constant. In this period Coles have divested or closed almost 90 smaller and underperforming stores and has acquired or built almost 90 larger, more productive stores. Sales generated from every square metre of selling floor area have increased almost 20%. While sales revenue has increased by 25%, total selling floor area has increased by 4.5%. Private labels are unbranded products purchased by supermarkets and then sold as their own products. Typically, these products are cheaper than branded products because of limited marketing activities.
Historically, private brands had an image of being quite avarage, targeting the most price-sensitive consumer; these days they are increasing thought of as an equal-quality, lower-price alternative. According to Coles’s data on ranging and space allocation decisions, Coles brand products are treated in the same manner as proprietary brand products. In many cases Coles brand products are located together with similar brands and less shelf space than proprietary brands. Coles periodically reviews if their brand is over/under represented by examining the quantity they sell relative to the space on the shelves. Private labels have been a matter of policy discussion: critics have asserted that they are part of a strategy to dominate the supply chain, thus reducing the viability of branded products.
Table 1.2: White bread 650 Retail Prices Margin above COGS
Coles Smart Buy White bread 650g $1.00 1% Wonder White Bread Wholemeal Plus Iron 700g $3.31 5.4%
Table 1.3: Eggs 12 Pack 700gr Retail Price Margin above COGS
Coles Eggs Free Range 12 Pack 700gr $4.04 24.5% Farmpride Eggs Free Range 12 Pack 700g $5.44 20% ￼￼￼￼￼￼￼￼￼￼
Source: Coles Data
We analyze the margins for branded and private label products, following the Tables 1.2 and 1.3. For the white bread the branded product yields greater margins for Coles – for Eggs, the opposite. This suggests it is unlikely that Coles systematically achieves higher margins on its own products and directly encourages consumers not to buy branded products. According to Macquarie, Coles and Woolworths hold 72% of the Australian grocery market. The concentration of competition has made the rivalry palpable, penetrating deep into consumers mind. “Our customers want good honest food which is fresh, available and affordable”, says Simon McDowell, marketing director of Coles. Woolworths upholds those same values: “We want our customers to trust us to deliver best quality food and the best value every time they visit one of our stores,” said Lizzy Ryley, GM marketing at Woolworts. The five main players in the Australian retail food industry have vastly different approaches.
Woolworths and Coles have well-known and similar business models, and command the lion’s share of the domestic food and liquor market due to their long history in Australia. Woolworths is commonly perceived to be more ‘premium’ while Coles promises low prices, but in reality the experiences offered by both are incredibly similar. Beneath all the taglines and promotional strategies , the mandates of both Woolies and Coles are based on two things: fresh food and value for money. Aldi, like Costco, operates in the eastern states and sells private label (Aldi-branded) groceries, electronics and everyday household goods like bathroom taps. IGA operate small-scale, privately owned, stores across the country specialising in everyday groceries and liquors.
In terms of size, Aldi’s 305 stores (March figure) are believed to generate in excess of $5 billion, Costco generated $612 million in 2012/13, while Woolworths reported sales of $58 billion and Coles $36 billion in the 2012/13 financial year. IGA sales data couldn’t be found as they are private companies, however Metcash (ASX: MTS) supplies IGA stores and reported revenue of $13 billion in 2012/13. Therefore, as a rough estimate it can be assumed that Aldi, Costco and IGA account for between 15% and 20% of the Australian food and liquor market. To make the Company a more effective organisation and in order to maximazie the shareholders value, I would focus on increasing staff productivity as well as motivation, not to mention the emphasis of maintaining or increasing profit margins where possible; developing the ‘Down Down’ campaigne and lowering the average prices by a further 1.9% .
I would enfasise Exploiting the presence if Westfarmers in New Zealand, I would try an international market penetration and the trading environment. Following a comprehensive reform program that began in the mid-80s, the New Zealand economy is now largely deregulated, and more internationally competitive. Food prices rose 0.6 percent in April 2014, and were up 1.5 percent on a year earlier, Statistics New Zealand declare. The monthly rise follows a 0.3 percent fall in March, and a 1.0 percent fall in February. Niche products and Australia’s reputation for product safety can help the company with the penetration.
I would try and finalize the acquisition of EziBuy, a leading direct retailer of apparel and homewares in Australia and New Zealand, so it will act as a launch pad for our next phase of growth but most importantly it would represent a stop for the expansion of Woolworths into the country. Last but not least I would continue investing in important environmental projects and partnerships to further reduce the impact on the environment and I would also improve efficiencies within the supply chains, reducing gas emissions across the overall business. In the future I would develop a marketing campaigne based on our recycling and sustainable efforts and we will continue to work on ways to both reduce the waste and increase the level of recycling in our stores.
ABARES, 2011, ‘Agricultural commodity statistics 2011.’
King, Matthew, 2012, ‘One shopping basket, four supermarkets, who wins?’ Wesfarmers, 2012, ‘Annual Report 2012’.