Competition and Profit Margins in the Retail Trade Sector

 In Australia, Coles, Costco, Metcash/IGA, Woolworths

Net profit margins have declined for both food and non-food retailers over recent years. This has been driven by a decline in gross margins suggesting a reduction in firms’ pricing power. This is consistent with information from the Reserve Bank’s business liaison program about heightened competition in the retail trade sector. Liaison indicates that firms are seeking to offset the decline in margins through measures such as vertically integrating supply chains and adjusting product mixes. Retailers also report a push to reduce operating expenses such as rent and labour, though with mixed success.
A consistent theme in discussion with firms in the Reserve Bank’s business liaison program for several years has been heightened competition in the retail trade sector.[1] The retail sector has undergone significant structural change since the early 2000s, including the rise of online shopping and the entrance of new international firms into the market. Firms suggest these changes have increased competitive pressures and that, in response, they have had to adjust their pricing behaviour to compete for sales and market share. While firms in other industries also report changes in the level of competition over time due to similar factors, liaison has identified the retail sector as being particularly affected. Survey-based measures also suggest that business conditions in the retail sector have been weaker than other industries in recent years (Graph 1). Reserve Bank of Australia – Read more…

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