Brilliant article about the Australian marketplace
Posted on 23/04/2012
Death of an oligopoly
Australian brands need to take a reality check: the days of being an oligopoly are finished, writes Mark Ritson.
Oligopoly. It’s a word that originated from the Greek word monopoly in the 19th century to describe a situation in which a small number of companies dominate a large proportion of a particular category or market.
The marketing implications of an oligopoly are as ancient and well established as the concept itself. With a distinct lack of competition, incumbent brands can achieve relatively high prices and profitability while reducing or eliminating product innovation. Lesser competition also creates a false sense of brand superiority in the organisations and a dismissive and overconfident rejection of the threat of possible competitive entrants. With limited options the oligopoly tends to largely ignore the actual consumer because they have such little market power – so consumer orientation is low in an oligopoly and the investment in market research tends to be low to non-existent. As a result of all this, oligopolistic brands are usually high in brand awareness but very low in brand associations and exhibit low differentiation from each other. Ask a consumer trapped in an oligopoly to name some brands and they can rattle off four or five immediately. Ask them to then tell you what each of those brands stands for and, more often than not, the question is met with a blank response and a shrug of shoulders.
Sound familiar? It should. For the past 40 years, while the rest of the world increasingly embraced international trade and fierce global competition, Australian has ticked along very nicely with a very limited set of international entrants and a very healthy – some would say too healthy – domestic competitive environment. And the result has created one of the biggest and most oligopolistic markets in history. Across Australia, until very recently, you could find classic oligopolistic conditions in most categories. Two brands with 70% share of the usually fragmented and ultra-competitive grocery sector. Four brands with 80% share of national retail banking. Three companies controlling 80% of the news media. Three airlines with almost all of the domestic flights under their control. Two companies with a stranglehold over the vast majority of beer drunk in Australia. I could go on.
It’s more than just the presence of a small number of Aussie brands dominating the domestic categories that makes us a classic oligopoly, however. Australian brands also consistently exhibit all the hallmarks of oligopolistic behaviour. For example, there is no better evidence of the presence of the oligopoly than an arrogant, dismissive response to external entrants. And we have seen that response time and again in Australia. Aussie winemakers dismissed the threat from South American vines because their wine was “shit” and not up to the standards of Aussie production. When Aldi announced it was entering Australia there was an outpouring of scorn poured on the ability of a German player to be able to handle the extremely difficult and very different Australian market. Eight years later Aldi continues to grow at a very healthy pace and rates Australia as one of its most successful markets. Costco can tell a similar story. Each foreign brand was warned that Australia was a tough market to crack, and yet each one has cut through incumbent local brands like a hot knife through butter.
It was the same scenario among the fashion retail circle in 2010 when the potential threat posed by the fast fashion brands of Zara and H&M was initially debated in Sydney and Melbourne. Once again incumbent executives were sceptical of Zara’s potential down under and its ability to negotiate the Southern hemisphere seasonality into its offerings. And once again the brand found Australia both fruitful and easy to enter. Meanwhile, such is the oligopolistic attitude of the domestic brands that many of their leaders continue to dismiss Zara as “nothing special” when they mystery shop their Spanish rival.
Australia has also been clearly guilty of another oligopolistic trait – low consumer orientation. It’s best exemplified by the almost total lack of regular and recurrent market research taking place in many of Australia’s biggest brands. In contrast with Europe or America my decade in Australia has taught me that it is entirely possible to be a marketing director or brand manager here and have absolutely no consumer research of any kind. While about six in 10 brands track their brand equity on an annual basis in America, less than 10% manage to do the same here. Our oligopolistic tendencies are also reflected in our leaders. Whenever I give a talk in Australia about being better at branding the inevitable question from the audience is how Aussie marketers can convince a senior management team bereft of marketers and devoid of any consumer orientation of the branding imperative – and the honest answer is that you can’t. Many Aussie businesses were built around the ridiculous belief that their success comes from their sales figures and their stock price. The idea that both these two metrics are in turn driven by the consumers that pay for everything is entirely lost on the sad, old white men that disrespect marketing and run most big Australian brands.
Combine an unhealthy internal arrogance and a distinct lack of consumer focus, and the third classic feature of an oligopoly – lack of Australian product innovation – becomes easily understandable. And once again Australia has proven to be a perfect exposition of low product innovation from incumbent firms. There is no better example than the general approach to wine production in this country. More than 70% of the wine grapes under production in Australia are derived from just Chardonnay, Shiraz and Cabernet Sauvignon. When Dan Jago, the wine buyer from British supermarket Tesco, came to Australia in 2007 and warned producers their lack of innovation in lighter styles of wine and in less homogenous varietals was going to end in disaster his comments were met with characteristic oligopolistic arrogance. Jago was told he should go back to “selling dog food” and leave the wine business to the Aussie experts. Five years on, his comments have proved prescient in the extreme. A lack of product innovation has been endemic across Australian business for decades. From Gerry Harvey making an entirely ridiculous argument why Harvey Norman had decided not to sell their products online – ““Online people do not make any money. The whole world was conned with online retailing… it’s a con, a complete con.” – to our big two supermarkets only finally committing to proper private label strategies more than a decade after every other major grocery industry had developed one. We moved slowly in Australia – not because we like moving slowly – but because the oligopoly allowed us the luxury of laziness. Competition was dull and therefore so was the response to it in innovation terms.
All of this has played out in the enormous disparity between domestic prices and those paid overseas for exactly the same products overseas in more competitive markets. There is no better example than in foreign cars. Take Mercedes, for example. In the US you will pay about $200,000 for the new Mercedes SLS roadster. That same car, inexplicably, will set you back more than double that price here in Australia. In an oligopoly the lack of competition allows competitors to charge more for products and decades of its existence has encouraged consumers to accept blatant overpricing as something endemic and acceptable in their market. That’s why, despite the American and US dollars enjoying parity in recent years, we pay double the price for our Grande Latte than an American pays for exactly the same beverage. The impact of the internet on domestic Australian retailers such as Harvey Norman and Dymocks is not simply a story of technological change. It is also one of pure competition in which a newly globalised consumer can and will seek out better prices, for the same products, outside of the oligopoly they have been constrained within for so many years.
And the end result of all this is weaker brands with low differentiation and relatively low brand equity. The valuation firm Brand Finance has repeatedly shown that Australian firms derive less of their overall enterprise value from brand equity than their international peers. Or to put that in layman’s terms, our brands are less valuable than our foreign competitors. And is that really any surprise? Most Australian managers still over rely on sales promotions which destroy brand equity. Most still underspend on integrated marketing communications. Most still eschew consumer research and tracking in favour of “gut feel” and “instinct”. Have we really created that many distinctive brands in Australia? For all the talk, for example, of the battle between DJs and Myer – if I was to knock a passageway between their two flagship stores on Bourke Street Mall in Melbourne, how many consumers would really notice they had switched stores? The cosy nature of our Australian oligopoly has meant that our competitive brands have coexisted rather than competed with each other.
Make no mistake, there is nothing illegal about an oligopoly. In fact you can make a very coherent argument that if you are one of the brands operating inside an oligopoly you should de-focus on consumers and differentiation and ramp up prices and margins. While it would be easy to criticise Coles back in 2005 for an incredibly poor operation, low consumer focus and sub-standard retail standards, one could only be impressed with the sustained and consistent profits that the company was able to extract from the market at this time. But the killer point about oligopolies is that eventually they implode. Just as nature hates a vacuum, capitalism hates oligopolies. A dangerous transition is now taking place across Australia. As our dollar grows in value and our population gradually inches towards 25 million the eyes of foreign brands turn southward towards us. In America the parity with the dollar makes us roughly as valuable as New York or Texas. In Europe a jittery economy and long-term market decline make Australia’s relatively stable and cashed-up economy a very attractive target despite the long distances involved. Australia is suddenly a focus for global brands and the recognition that the local brands here are poorly run and devoid of brand equity makes the attraction all the greater. One global marketing director I spoke with at Christmas described Australia as “a gold mine currently being exploited by locals with pick axes”.
Personally, I prefer the metaphor of the small town disco. Imagine a small country town where the women outnumber the men four to one. The Saturday night disco has been an easy place for the local men to get lucky. Now imagine a mine opens just outside town and there is a sudden influx of young, fit, rich, single men. The local men are out of shape, under-dressed, and over-confident about their charms because of years of success. They are unprepared for the deluge of new suitors now heading to the disco every Saturday night. In contrast, the local single women cannot believe their luck and are quick to see all the advantages. They now openly reject the local men who they once aspired to date. Indeed, it becomes the fashion in the town to only date the new men because the locals are seen as being old fashioned and out of touch. Bereft of company, the local men debate whether to head to the nearby city on Saturdays to meet new single women – but they have become so reliant on the local dating scene none of them know where to hang out or what to say in other locations. It’s a crude metaphor – but a good one for the years ahead in a newly competitive Australia.
The problems of an oligopoly only become apparent when it starts to break down. With the arrival of foreign competition the local incumbents are simply not ready to compete at the same level. And here we glimpse two of the other implications of oligopolistic behaviour. First, a lack of real competition has left most firms unable to react and respond to new threats in a strategically successful way. The response of local brands to the threat of internet imports in lobbying the government for a change in the tax policy was a classic example of how old world oligopolistic brands try to respond to new threats. To take another example, the management team at Coles have been forged from the crucible of foreign supermarket competition and are subsequently running rings around Woolworths with smartly marketed, consumer-based strategies. The old world response of Woolworths thus far has been to play the classic oligopolistic response: we will copy you. You get a chef, we get a chef. You get a meat policy, we get a meat policy. But this is no way to respond in the long term.
The second implication of the oligopoly is the most troubling of all, however. The internal market has been so easy and profitable most domestic brands have refused to countenance major foreign expansion. For all its country brand attractiveness, Australia does not have a single strong international brand. And I am not counting brands such as Ugg and Fosters beer, which are successfully run by foreign owners who understand international expansion and brand management unlike most of our domestic executives. Yes Collette Dinnigan sells a few outfits in Europe but the brand would have less than 0.1% unaided awareness among fashion buyers there. Okay, Harvey Norman does a decent trade in Singapore and Slovenia – but that’s hardly a global brand is it?
We talk a good game in Australia when it comes to brand equity and brand management but the harsh reality is that our brands are weak and they are struggling. Groups that owe their success to brands and branding such as Billabong, Goodman Fielder and National Foods have all stumbled in recent years. The recent acquisition of the former-Fosters group by SAM Miller highlighted both how poorly our domestic brand management has fared and how much easier foreign acquirers could improve things quickly by doing the basics well. The cosy, profitable nature of the Australian oligopoly has had a double impact on our foreign competitiveness: making us both a soft target for the foreign brands now entering our domestic market and having limited our interest and ability to successfully enter and export our brands to foreign markets.
The popular press has been too keen to paint a picture of a major high street recession for Australian consumers. Clearly this has not been an easy 12 months for Australian consumers. But mixed into this minor recessionary story is a deeper and more troubling malaise caused by weak domestic brands being attacked by stronger international entrants. How else do we explain the success of international players such as Costco, Apple, Zara, Burberry and Gucci in Australia if there is such an enormous recession going on? The bitter legacy of living and managing in an oligopoly for so long is that we simply do not build strong, differentiated brands well in this country. The sooner we accept this fact, the sooner we can do something about it.
Unfortunately, however, one of the classic characteristics of oligopolistic firms is that they cannot see the competitive threat in these terms. They would rather blame the government, the economy or even the consumers for their downturn in sales and profits. The first step of an Australian renaissance on the high street is the acceptance that the threat from foreign brands is real and the current ability to meet that threat with our domestic marketing competence is low to non-existent.
It’s time to wake up and recognise the new reality of Australian marketing. We are an oligopoly no more.
Professor Mark Ritson is a consultant to some of the world’s biggest brands. He teaches brand management at Melbourne Business School and on the AMI’s Masterclass program.
This article first appeared in B&T’s sister magazine Professional Marketing.
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