HOLMES INSTITUTE FACULTY OF HIGHER EDUCATION

Introduction

Table of contentsTable of contents
Introduction……………………………………………………………………………. 2Introduction to the company – Woolworths………………………………………….2Industry/sector background – Consumer goods retail……………………………..3The market structure of the sector – Consumer goods retail……………………..4Factors that influence demand for the company’s product(s) ……………………5Factors that influence the supply of the company’s product(s) …………………..6The concept of Elasticity………………………………………………………………7Impacts of an event on the industry/company ……………………………………..7Response to the changing economic scenario…………………………………….9Conclusion…………………………………………………………………………….10References……………………………………………………………………………11

 Introduction The sector we have chosen here is consumer retail, which is the third-largest industry in Australia and was valued at $150.0B in 2020 (IBISWorld, 2020). There has been a difficult time in the retail space for the last five years, and it was noteworthy to see how companies in this segment have navigated through these challenging times. The company being investigated here is Woolworths. As of 2019, it was one of the largest retailers, with other main players in the segment being – ALDI group, Metcash Limited, WesFarmers, JB Hi-Fi, and Kmart Australia (Morgan, 2020). This paper aims to understand the integration of company strategy with the economic environment and apply the economic principles to its overall development. It aims to draw a bottom-up approach, starting from company outlook, moving on to sectoral outlook, and finally the economic view of the country.
 Introduction to the company – WoolworthsWoolworths is one of the largest consumer retail group in Australia and operates in the following segments – Australian Food – catering to food and allied products and services in Australia- New Zealand Food – focus on food and allied services in New Zealand- Big W – takes care of general merchandise at a discounted value- Endeavor drinks – as a specialization for drinks and related products- Hotels – catering to hospitality and leisure services- Others – which can not be categorized in any of the aboveAccording to Fresh Food and Grocery Report, the company has a market share of around 32%, being valued at $34 billion, in the total grocery market in Australia. The company has also forayed into the e-commerce space and is looking to expand its presence in this area. The company’s strategies and size of operations place it in a comfortable position in society and gives it the competitive advantage it needs to maintain sustainable growth. Woolworths has more than 800 stores and can boast of more than 7 million in its customer base and has reported a steady increase on a year-on-year basis (Woolworths, Annual report).
 Industry/sector background – Consumer goods retailAustralia is one of the most urbanized places in the world, with a population of roughly 24 million as of 2018. The country has a high per capita GDP value of USD 50,000 (this being recorded as the second-highest wealth per adult). Retail space is one of the largest sectors in Australia, accounting for $300 billion worth of consumer spending in 2019, and is a source of employment to roughly 17% of the Australian population (Mordor Intelligence, 2019). The sector has been facing slow growth in the past five years, nonetheless, it has always been positive until the recent economic crisis. In recent times, this growth was supported because of low-interest rates, increased credit availability for households, and consumer spending pattern.
 The market structure of the sector – Consumer goods retailIn Australia, the retail space can be said to be a concentrated market with more than 80% of the share being captured by the top four players in the segment. The industry is marked with high barriers to entry, as larger players have the resources to set stores and stock up on goods (Morgan, 2020). Differentiation strategy usually works best to get a competitive advantage in this sector, and companies that have managed to maintain this strategy have seen a stronghold in this industry. The consumer retail space consists of five main components – food, alcoholic beverages, apparel, personal care, and household goods. The retail sector is marked by the presence of foreign retailers and international buyers, which is taking a hit because of cross-border limitations in the pandemic situation. The industry is expected to see some consolidation with small-time traditional retailers crumbling under the pressure of high levels of debt and low income because of reduced and changed consumer spending (PwC,2020).
 Factors that influence demand for the company’s product(s) The segment has seen a significant increase in consumer spending on food goods by approximately 22% in 2020, as compared to a year-on-year basis. The demand for alcoholic beverages has also increased by 25% for the same period. However, apparel and personal care items have seen a 50% and 41% dip in spending recently (PwC, 2020). We have been cruising turbulent economic times and this has led us to a different demand pattern than what would have been conventionally expected. The demand in the consumer retail sector depends on the disposable household income and the trends thereof. Another factor that affects demand in the retail sector is prices/inflation or the prices of the substitute as well as complementary goods. Another important factor that decides the level of demand is consumer confidence, and consumer preferences which keep changing over the period. In the recent COVID pandemic situation, the disposable incomes were severely hit. This caused a huge blow to the retail sector. People were only buying the necessities, which caused the demand for food items and alcohol to surge. However, other items such as apparel and personal care items which are not necessities took a dip. Also, there is an increasing proportion of people who want home delivery and pick-up. The in-store customer has reduced, and the hotel and leisure segment demand also went to an unprecedented low because of lockdown.
 Factors that influence the supply of the company’s product(s)Supply of the products depends on the agricultural output of the country, farm output, cost of production which includes the cost of factors of production. There are two main factors of production – labor and capital. When there is a shortage in supply of either of them or they become expensive it affects the supply of products. The third factor that could affect supply is the changes in technology. In some cases, things become obsolete or inefficient which impacts their supply. As technology advances, older items’ supply slowly reduces. Government policies have a significant impact on the supply of products, especially in the case of imported and exported products. The government may choose to levy taxes on imported goods, causing them to become more expensive. Now buyers would start looking for substitutes, so the supply of the original goods could be affected. On the other hand, if more taxes are imposed, the supply could reduce. Infrastructure and network could impact supply since it is easier to procure and supply things in a well-connected place, which has good transportation facilities. Logistics is a crucial component in this industry to develop a reliable and timely supply of products and finished goods. Woolworths has also announced plans to bolster its supply chain network, with an investment of $176 million, and two new state of the art distribution center, which will replace the existing ones. The sites – an automated regional distribution center and a semi-automated national distribution center – are expected to be completed by the end of 2023. Also, the company is diversifying its relationships with the supplier by increasing the number of First Nations supply partners. As an environmentally and socially responsible company, it is aiming at removing plastic from its supply (Woolworths, 2020).
 The concept of Elasticity Elasticity is a concept which explains the responsiveness of supply or demand for any change in the underlying factor (this could be price or quantity). The price elasticity of demand is the measure of the change in quantity demanded in response to change in the price of the product. It is interesting to note that some products are more sensitive to change in prices than others. If the absolute value of elasticity is greater than 1, the demand changes by a greater degree for each unit change in price. If the absolute value is less than 1, the variation in demand is lesser for a unit change in price, indicating the demand is inelastic. If the demand for a product is elastic, it can be easily replaced or could be a not-so-necessary item, while if the demand is inelastic, the product is not easily replaceable, and is usually marked as essentials. An example of the former is butter, which is easily replaced by margarine if prices go up. For the latter, the example could be salt. The consumption of salt is not changed much even if its prices go up or down. Deep diving at the sub-sector level, the non-discretionary items such as food, health, etc, will see the highest growth in demand in the current scenario, while the short term non-discretionary such as office furniture, electronics will also increase. The flip side to this is that there is not much recovery expected in the personal care segment, which is the short-term discretionary products segments and long term discretionary products such as apparel will be the slowest to see the face of growth (PwC, 2020).
 Impacts of an event on the industry/company The recent COVID pandemic has had a severe impact on the world. The exceptional situation has introduced a paradigm shift in the world order. No industry is untouched by its impact, some in positive, but most in a negative way. Retail space is no different and has been fighting the challenges thrown at it because of the recessionary economic situation created by the COVID pandemic. Most of the segments have seen a significant drop in sales, and some new trends have emerged. There is a shift of consumers towards online shopping, because of the government imposing lockdown situation in most parts. Retailers have been given some relief by the government scheme – JobKeeper – the wage subsidy scheme. The retailers are grappling with debt burdens and lease obligations which are given only temporary relief by the government introduced EMI moratorium scheme up to Sept 2020 (Pwc, 2020). Also, this situation is bound to bring a significant change in consumer behavior, which will impact the price elasticity of demand. The companies will have to readjust their sales strategy to keep up with steady sales growth in this challenging environment. Australian retail industry is heavily dependent on imports as much as 15% in the $130b food sector and half of the $30b apparel segment), which has seen supply disruption and will continue to do so in foreseeable future (Mordor, 2019). COVID has also moved the companies towards making their online presence stronger since the social distancing and lockdown norms have created a huge demand in people staying indoors with the convenience of delivery of goods at doorstep. Also, tax reforms are speculated as the government is reeling under the pressure of significant debts, this may impact retailers’ profits even further. With the tourism industry crumbling, the luxury goods retail segment has seen the hardest hit, as most of the buyers in this segment were international travellers. All these factors are also bound to put pressure on the Australian dollar, which will in turn impact the country’s relationship with its trading partners (Mordor, 2019). Specifically, talking about Woolworths, the company has outlined its strategy to deal with the pandemic situation for both its employees as well as customers. The management is not expected in the post-COVID era to be the same as the pre-COVID era. There will be a permanent discord between the two. Initially, COVID resulted in ‘panic-buying’ behavior wherein customers stared to stockpile on necessary items and the company’s food business and essentials sales saw a big upside. Secondly, the company’s online sales were improved and it also worked on strengthening its logistics channels to meet rising demands in this segment. The third aspect of its strategy in response to the COVID situation was to meet changing expectations for the customer’s shopping experience. The company has been using this experience as a platform to get more capital investments, particularly in improving its supply chain infrastructure, as well as e-commerce capabilities

 Response to the changing economic scenarioThe crisis comes with a disturbance to the normal set-up but also presents an opportunity for disruption. The retailers have been embracing the change and adapting to the need of the hour. For instance, a consumer goods company implemented an online payment platform that has helped revived its revenue shortfall. Woolworths also made a rapid response to the need for implementation of a safe working environment, which helped it restore operations quickly and recover from the shock to some extent. In another example, the consumer goods company made a sudden shift to the online sales platform which helps it regain the lost sales and it was able to hire back more than 20% of the employees into the online sales staff segment (PwC, 2020). It can not be done singlehandedly by the company, a crisis of this magnitude calls for government intervention and relief. In Australia, the government has been active in introducing relief packages, such as the JobKeeper scheme to enable people to earn their livelihood and get the economy running. Besides, the protectionist view of the government on imports and export will also help the distraught industry and put it on a path to recovery. The hit that this industry has taken is not expected to be sorted out in the short-term. The sales recovery to pre-COVID levels will take at least two years, as is being predicted by most of the experts. The firms and government will have to work in tandem to create a COVID safe environment to drive the growth of the sectors as well as the economy, as both can not be mutually exclusive of each other.

 Conclusion COVID situation is an exceptional test of the robustness of the market, and only the fittest shall survive this. Apart from this, there have been other situations that have led to a recessionary economic environment, and each time it happens, it is different. There are different causes and varying impacts. The best a company can do is have enough cushion to adjust itself as dynamically as the economic situation changes. This becomes key to survival in the ever-changing and challenging situations presented before a company. Woolworths has the advantage of the magnitude of the operation, which gives it an edge in the market. However, it still needs to readjust its strategy and focus to deal with customer expectations along with changing macroeconomics. The company has successfully integrated this in its strategy, which has helped it deal efficiently with the problems presented in the recent pandemic. The company offers many strategic lessons that could be useful for budding companies, not only in the retail space but across multiple sectors.

 List of ReferencesWhere next for retail and consumer? (n.d.). [online] Available at: https://www.pwc.com.au/financial-services/pdf/pwc-where-next-for-retail-and-consumer.pdf.
Creating better experiences 2020 Woolsworth Annual Report (n.d.). [online] Available at: https://www.woolworthsgroup.com.au/icms_docs/195785_2020-annual-report.pdf.
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Mordorintelligence.com. (2019). Mordor intelligence. [online] Available at: https://www.mordorintelligence.com/industry-reports/retail-industry-in-australia.
Roy Morgan. (n.d.). Looking beyond the panic-buying, Australia’s big supermarket story is Aldi’s growing market share. [online] Available at: http://www.roymorgan.com/findings/8336-fresh-food-and-grocery-report-december-2019-202003230634#:~:text=The%20Fresh%20Food%20and%20Grocery.
National Industry Insights Report. (2017). Factors and trends. [online] Available at: https://nationalindustryinsights.aisc.net.au/national/factors-and-trends#economic_conditions [Accessed 12 Sep. 2020].