2.

0 INDUSTRY ANALYSIS: PORTER’S

FIVE FORCES

2.1 Threat of New Entrants

The UK grocery market is primary dominated by few competitors, including four
major brands of Tesco, Asda, Sainsbury’s and Safeway that possess a market
share of 70% and small chains of Somerfield, Waitrose and Budgens with a
further 10%. Over the last 30 years, according to Ritz (2005), the grocery
market has been transformed into the supermarket-dominated business. Here
are some points to ace market position and provide barrier to any further
entries.

1.1.1. Economies of scale:

UK food retail industry make use of “economies of scale” to great extent, by .

Especially the major chains have economies of scale, which improves their
market position (Datamonitor, 2010).

1.1.2. Capital requirements of entry:

Entry and exit costs are no barrier to enter the market. Therefore, many small
and local retailer take the opportunity and go into competition with the majors
competitors (Datamonitor, 2010).

1.1.3. Access to supply or distribution channels:

The distribution system is well-developed, with a large number of small

suppliers.
1.1.4. Customer or supplier loyalty:

Most UK customers are brand conscious, brand is more important than price. So
competitors like tesco have loyalty incentives like club card to attract customer
and encourage them to be brand loyal. (Datamonitor, 2010).

1.1.5. Experience:

To compete with the market leaders as well as with smaller companies,

addressing niche segments, great knowledge of the market and its consumers is
needed .

1.1.6. Expected retaliation:

The industry is characterised by strong rivalry and price sensitivity. Therefore,

new entrants may well face retaliation (Datamonitor, 2010).

1.1.7. Legislation or government action:

Legislation and government action are not prohibit for market entry. Still there
are a couple of regulations e.g. on spatial planning or environmental protection
that companies need to comply with (see 1.1.5).

1.1.8. Differentiation:

There are opportunities for small companies to operate in niche markets, due to
growth in awareness on healthy diets and organic food (Datamonitor, 2010).

2.2 Bargaining Power of Suppliers

This force represents the power of suppliers that can be influenced by major
grocery chains and that fear of losing their business to the large supermarkets.
Therefore, this consolidates further leading positions of stores like Tesco and
Asda in negotiating better promotional prices from suppliers that small
individual chains are unable to match Ritz (2005). In return, UK based suppliers
are also threatened by the growing ability of large retailers to source their
products from abroad at cheaper deals. The relationship with sellers can have
similar effects in constraining the strategic freedom of the company and in
influencing its margins. The forces of competitive rivalry have reduced the profit
margins for supermarket chains and suppliers.

2.3 Bargaining Power of Customers

Porter theorized that the more products that become standardized or
undifferentiated, the lower the switching cost, and hence, more power is yielded
to buyers Porter M. (1980). Tesco’s famous loyalty card – Clubcard remains the
most successful customer retention strategy that significantly increases the
profitability of Tesco’s business. In meeting customer needs, customizing
service, ensure low prices, better choices, constant flow of in-store promotions
enables brands like Tesco to control and retain their customer base.

In recent years a crucial change in food retailing has occurred due to a large
demand of consumers doing the majority of their shopping in supermarkets that
shows a greater need for supermarkets to sell non-food items. It has also
provided supermarkets with a new strategic expansion into new markets of
banking, pharmacies, etc. Consumers also have become more aware of the
issues surrounding fairer trade and the influence of western consumers on the
expectations and aspirations of Third World producers. Ecologically benign and
ethically sound production of consumer produce such as tea, coffee and cocoa is
viable, and such products are now widely available at the majority of large
chains.

2.4 Threat of Substitutes

General substitution is able to reduce demand for a particular product, as there
is a threat of consumers switching to the alternatives Porter M. (1980). In the
grocery industry this can be seen in the form of product-for-product or the
substitute of need and is further weakened by new trends, such as the way
small chains of convenience stores are emerging in the industry. In this case
Tesco, Asda and Sainsbury’s are trying to acquire existing small-scale
operations and opening Metro and Express stores in local towns and city centres
Ritz (2005).

2.5 Bargaining Power of Competitors

The grocery environment has seen a very significant growth in the size and
market dominance of the larger players, with greater store size, increased
retailer concentration, and the utilisation of a range of formats, which are now
prominent characteristics of the sector. As it was mentioned above, the
purchasing power of the food-retailing industry is concentrated in the hands of a
relatively small number of retail buyers. Operating in a mature, flat market
where growth is difficult (a driver of the diversification into non-food areas), and
consumers are increasingly demanding and sophisticated, large chains as Aldi
are accruing large amounts of consumer information that can be used to
communicate with the consumer Ritz (2005). This highly competitive market
has fostered an accelerated level of development, resulting in a situation in
which UK grocery retailers have had to be innovative to maintain and build
market share. Such innovation can be seen in the development of a range of
trading formats, in response to changes in consumer behaviour. The dominant
market leaders have responded by refocusing on price and value, whilst
reinforcing the added value elements of their service.