Supermarket industry Essay
Since its inaugural year of 1924, Woolworths has grown to become a leader in the Australian supermarket industry. It currently owns more than 1600 retail stores in Australia and New Zealand, comprising of numerous major food, alcohol and general merchandise businesses (www. woolworthslimited. com. au, 2006). Woolworths has since undertaken numerous strategies including a chaining strategy to obtain the advantages of cost leadership.
In this way, it establishes networks of linked merchandising outlets which are so interconnected that they function as one large business entity, thereby achieving economies of scale. The pursuing result of such strategies and “against a background of tightening discretionary spending” (Anonymous, 2006) has meant that for many years, Woolworths has led the way regarding year-by-year growth figures. This report will analyse the strategies which Woolworths implemented post 2003, whilst recommending some alternate strategies which could have been applied.
Despite the early success of its “Project Refresh” marketing scheme, which was aimed at creating a revitalised and healthy brand image, Woolworths experienced a downward trend in its share price, indicating that its sales for the July-September quarter of 2003-04 would not match the past levels of growth (Moran J, 2003). However in light of this decline, Woolworths’ CEO Roger
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In order to achieve such goals, Woolworths should look to achieve a more superior level of efficiency. To do so, Woolworths would attempt to gain the maximum possible output for the minimum possible costs involved, thus achieving economies of scale. Such a “sales up/costs down” approach is the very thing that has driven the productivity loop at Woolworths for many years. Such a loop has the desired effect of reducing the associated costs of production, thereby enabling Woolworths to lower their prices in order to fuel further volume gains.
In turn, this is likely to lead to higher operating margins and returns on equity (Bartholomeusz S, 2003). One way in which Woolworths minimises their costs, is by using cost leadership schemes such as the “just in time” ethos of managing goods in the supply chain. This means that goods are made and arrive at retailers exactly when they are required thereby reducing wastage and storage costs and provides for an easy measure of quality control (Anonymous, 2004).
Woolworths achieves this strategy by employing a stock replenishment system by using a program called ‘AutostockR’ which forecasts the demand for a product and replenishes stock of this product. This is to increase profit margins and allow for more available cashflow and also results in additional shelf space for more wide-ranging opportunities (Mudgil V, 2004). In a further attempt to boost efficiency, Woolworths should often consider upgrading its usage of electronic equipment.
Such was the case in 2004 when a five year IT contract with IBM Global Services was made in order to supply Total Service Management (Computerworld Staff, 2004), thereby providing service management and maintenance for 130,000 hardware components which are used by Woolworths, including printers, cash registers and radio frequency devices. Such a contract would assist Woolworths to reduce its costs, increase efficiency and to improve the responsiveness of its operations.
Another strategy which Woolworths has employed is the creation of strategic alliances between itself and other businesses with different operations. Such alliances are mutually beneficial as it allows for each business to gain excess profits which it would not have been able to achieve on its own. Both Woolworths and its main competitor Coles have formed alliances with petrol companies Caltex and Shell respectively. This is because, “a far greater recent influence [as opposed to lower prices] has been that of the grocery retailers selling petrol.
” (Drainer P, 2004) Such alliances were formed as most of their customers require petrol for the cars they drive, and with petrol prices rising, a discount is offered by enticing a customer to spend an extra amount. Woolworths has since forged a strategic alliance with Visa International and Caltex, whereby if a customer uses a Visa card to purchase more than thirty dollars worth of goods from a Woolworths or Big W store, they receive a discount of eight cents per litre off petrol prices instead of the usual four cents if the purchaser uses an alternate method of payment (Anonymous, 2005).
However it is suggested that Woolworths also look to form a strategic alliance with a rewards program in the same way as Coles has with ‘Flybuys’. This would be an added incentive for customers to gain ‘free’ reward points when they shop and also may increase customer loyalty for those who are members of specific rewards programs. As seen in the diagram below, customer loyalty is important as there is a positive relationship with regards to sales, between the length of time that a particular consumer stays with a company and profit per consumer.