Porter’s Five Forces Analysis Of Kiwi Supermarket Industry

Monday, 16 November 2020, 3:58 pm
Press Release: Kalkine

Summary

• The supermarket industry is dominated by Woolworths (that owns Countdown, SuperValue and Fresh Choice) and Foodstuffs (that owns Pak 'n Save, New World and Four Square).
• With two large entities dominating the market, NZ consumers appear to have limited options to choose from for buying their groceries.
• Several suppliers in Kiwi Land have raised concerns of mistreatment and unfair commercial practices on the part of supermarkets in the past.
• There seems to be little threat of substitution in this duopolistic market structure.
• Experts believe it could be very difficult for a potential competitor to break the existing supermarket duopoly in Kiwi Land.

While NZ supermarkets have continued to observe strong sales over the past few years, insignificant competition in the supermarket industry has been a growing cause of concern. With the government likely to conduct competition review of the supermarket chain in 2021, Porter’s Five Forces analysis seems relevant to gauge the competitiveness of this industry.

Supermarkets and grocery stores take the largest pie of consumer spending in Kiwi Land. New Zealanders are seen to be paying a higher price for food than the rest of the world. A report unveiled by Retail NZ in December 2019 stated that an average Kiwi spends ND$4,149 in supermarkets and grocery stores every year.

While the food industry insists that groceries are sold at a reasonable price in NZ, consumers have a fair idea that they are paying relatively higher prices amidst lack of competition. In fact, New Zealanders observed a sharp uptick in supermarket prices during COVID-19 lockdown, which currently remain at elevated levels. Undeniably, Kiwi Land is longing for a level playing field in the supermarket industry.

Given the scenario, Michael Porter’s Five Forces Model evaluating competitive trends and the magnitude of the rivalry amongst the current supermarket competitors need closer attention.

Competitive Rivalry

NZ’s supermarket structure is unusual and different from the rest of the world. The nation’s supermarket industry is dominated by two giants - Woolworths (that owns Countdown, SuperValue and Fresh Choice) and Foodstuffs (that owns Pak 'n Save, New World and Four Square).

According to Canstar, Foodstuffs enjoys ~53 per cent share of the NZ grocery market, while Countdown boasts a 32.4 per cent market share. This supermarket duopoly is believed to be driving up food prices in NZ, taking a significant hit on Kiwi wallets.

In order to ensure fair market competition and break the existing duopoly, the NZ government is expected to undertake a market study of the supermarket industry as soon as next year. Under the study, the Commerce Commission is likely to investigate the prevalence of misleading advertising and market dominance in the industry.

Customer’s Bargaining Power

With two large entities dominating the market, NZ consumers appear to have limited options to choose for buying their groceries. Amidst the absence of usual competitive pressure, consumers end up paying more for the groceries than they otherwise should. In other words, consumers seem to have little or no bargaining power in the supermarket industry.

In a recently released supermarket price survey, Consumer NZ claimed that NZ supermarkets are misleading buyers by promoting their prices as ‘specials’ during COVID-19. The survey highlighted that one supermarket’s special price could possibly be another store’s regular price, thus tricking consumers.

Supplier’s Bargaining Power

While supermarkets seem to play a dominant role in deciding what ends up in consumers’ kitchen shelves, the suppliers’ power remains insignificant and small in the supermarket industry. Several suppliers have raised concerns about mistreatment and unfair commercial practices on the part of supermarkets in the past.

The complaints ranged from supermarkets ‘demanding retrospective payments from suppliers to preserve margins’ to ‘penalising suppliers for undertaking promotions of rivals’.

The imbalance between market power of suppliers and supermarkets is also expected to be a significant focus area for the Commerce Commission investigating the supermarket industry.

Threat of Substitution

Although the existence of substitutes can influence supermarket prices to a considerable extent, there seems to be little threat of substitution in this duopolistic structure at the moment. However, one need not neglect that online supermarkets are gaining ground in amidst burgeoning demand from online shoppers.

Kiwi Land witnessed some local businesses hopping on the online supermarket chain during COVID-19 lockdown. Service Foods launched a new online supermarket in April 2020 to deliver bulk pantry staples right at Kiwis’ doorstep. Besides, Bidfood also unveiled its new home delivery service in April to supply drinks, food and kitchen essentials to domestic customers.

Threat of New Entrants

Apparently, the NZ supermarket industry does not seem to be at high risk of new entrants. Experts believe it could be very difficult for a potential competitor to break the existing supermarket duopoly in Kiwi Land.

No, the issue is not the barrier to entry! It is actually the power of current dominating players. In case a third company marks its entry into the supermarket space offering goods at reasonable prices, the existing players can simply respond by pushing their prices down. Consequently, the new entrant may find it hard to recover high set-up costs with reduced prices.

However, an established, well-known, and trusted online-only supermarket entrant could possibly turn the tables around for these major supermarket chains.

The current scenario calls for significant government intervention to crack the existing duopoly in the supermarket industry. While high hopes are attached to the government competition review expected next year, one can anticipate supermarkets wooing customers during the market study.

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