Aussie Supermarket Chains: Licensed to Kill the Competition

As a Blue Ocean Strategy consultant my whole professional life revolves around assisting businesses to seek out or create monopoly or oligopoly industry positions.   To find uncontested market space and make the competition irrelevant, as we say in the biz.

So it may come as a surprise when I side with those that view Australia's two major supermarket chains as exercising unconscionable oligopolistic market power.

What's my reason?  Here's a recent example.

Earlier this week my wife and I were shopping at one of the two major supermarket chains in Brunswick in Melbourne near where we live.  We're also able to shop at other supermarkets, at the Queen Vic Markets, wholefood stores etc. - we're lucky enough to have the disposable income (touch wood).  But in this major chain store in inner suburban Melbourne, we found only two, count them, two, brands of plain paper packaged flour on the shelves of this massive floorspace supermarket.

One was a well known Australian brand and the other was the supermarket's home brand.

The home brand is always priced about $0.50 a kilo cheaper than the name brand, and that might raise eyebrows on its own.  But this week, the home brand was priced at less than 30% of the only other direct competition on the shelf - the name brand.

Whether that meant the home brand was being sold at less than the cost of production, I obviously cant say.  But you would have to expect that price could not be sustainable in the long run, at least not until a new strain of Schwarzenegger-style wheat is invented.

So is this a case of a fiercely customer focused supermarket chain looking after the little Aussie battler with everyday lower prices?  Or is it the behaviour of a marketplace bully?  You already know what I think.

But you might say that I can shop with my feet, or with my head and heart, instead of with my wallet.  I can choose to buy the "premium" brand product or shop elsewhere - and we did.  You might argue that it is the premium brand's responsibility to fight the good fight and differentiate their product at least by good brand marketing, history and reputation if not by actual physical point of difference, to attract me as a customer.  And in an ideal world, that would be the case.

But in reality, by allowing the supermarket chains to compete with their own suppliers, there is really only one game in town - that's to get your product on the shelf next to the home brand.

Oh, and by the way, one strategy well known in the industry, but vehemently denied by the chains, is if the supplier refuses to concede to a supermarket's request that the supplier lowers their margins so that the supermarket can price it cheaper on the shelf, the supermarket responds by dropping the price of their home brand to below cost and reducing the shelf space of the name brand, all to put pressure on the supplier to submit.  Sound familiar?  Home brand flour at 30% the price of named brand?

One could say "I bet Coles and Woolies wished they had a dollar for every name branded product they managed to squeeze margins on, or literally squeeze out of the market .... but oh, uh ... I forgot, they do!"

And finally I hear you say. "Well that's all well and good for you.  You already said you have a disposable income that means you dont have to scrimp and save the pennies and can shop where you like!"  To which I say, firstly, with three kids under 7 that's not my whole story ... but taking your point, I'ld turn it back on you and ask ... What if the supermarket chains were legally prohibited from stocking their own home brands?  Wouldn't that force them to compete as true retailers?  Wouldn't they then be focusing on stocking their shelves with a mix of truly differentiated products?  Wouldn't they be forced to truly negotiate for lower, but economically sustainable priced goods to stock their shelves?  Wouldn't the economic impact be truly positive instead of merely reductive?

The difference between what we do as Blue Ocean Strategy consultants and businesses, and what businesses like the supermarket chains do is clear in my mind.  We find uncontested market space - somewhere, nobody else is.

What the supermarket chains are doing is obliterating the competition from an existing space by using anti-competitive techniques.

One of us is creating a bigger pie that makes competition irrelevant.  The other is hogging the pie until it can starve out the competition and make them unviable.