Publix Supermarkets Analysis - Report Example

Publix Supermarkets: Porters Competitive Forces

Michael Porter’s five forces of competition provide a proven framework for the analysis of a company’s strategy within its industry. The concept is modeled from the arguments that industries tend to be affected by the same factors and it is the position, capacities, and strategy of an individual company that dictates its performance. These five forces identified by Porter (2008) include the threat of new entrants, rivalry between existing, threat of substitutes, bargaining power of buyers, and bargaining power of suppliers. Considering the five forces in the identification and implementation of the company’s strategic options can inevitably result in organizational excellence. The five forces can be used to evaluate the position of Publix Super Markets Inc., simply known as Publix, the company was started by George Jenkins in the 1930s at Winter Haven, Florida.

Financials

Publix is currently one of the largest regional grocery in the United States as it operates over 1000 stores in Florida, Georgia, Tennessee, North Carolina, Alabama, Virginia, and South Carolina operated by approximately 188,000 employees. It is widely identified as the largest employee-owned organization in the world as its shares are split among the past and current employees. The most recent financial data shows that the company’s revenues increased from $32.36 billion in 2015 to $34 billion in 2016. The operating income, income, asset base, and equity had similar trends, as well as the earnings per share. Over the years, the company has vested its shares on employees who earn them over time, as one of the benefits of working for the organization. The company’s growth has continued to be slow under Todd Jones but still established a 5% increase in revenue, which reached $34 billion in 2016 – a demonstration that the company’s market is growing. There was also a 3.1% increase in the profits that reached $2 billion with a market valuation of $31 billion.

Moving on the ratios, the company’s quick ratio is 0.81 compared to 0.96 for the industry, which shows that the company does not have adequate liquidity to cover its short-term liabilities compared to competitors (Reuters, 2017). On the contrary, the company has a debt-to-equity ratio of 1.6 compared to 68.62 for the industry, which demonstrates that the company largely relies on its assets to generate income compared to competitors who depend much on debt. On the other hand, it has a gross margin ratio of 27.84 compared to 34.34 for the industry, meaning that the company is not as profitable as it should be according to the industrial averages (Reuters, 2017). The financials of the company reveals very low efficiency levels compared to the industrial standards. For instance, the revenue generated per employee at Publix was just $183,373 compared to $74,160,692 (Reuters, 2017). This means that the company has more employees than it should have or that the processes at the company have not been improved. Nevertheless, the return on equity is slightly higher at $15.35 compared to 10.82, an illustration that the company is working to maximize the value for the shareholders.

Table 1: Comparing Financial Ratios

Publix

Supervalu

Costco

Walmart

Quick Ratio

0.81

0.63

0.43

0.19

Gross Margin

27.84

13.28

13.29

25.56

Revenue/Employee

183,373

472,897

970,113

215,223

Return on Assets

11.73

-0.41

7.81

5.84

Earnings per Share

2.63

3.44

5.3

4.57

(Source: Reuters)

Threat of Entry: Low

As argued by Porter, the entry of new companies in the market comes with the intent to scramble for and acquire market share from the existing firms. The threat of entry reduces the potential of existing firms as it causes stains in the market prices and rate of reinvestment, as well as costs. However, industries have varying levels of this threat, which is determined by the barriers of entry that include the supply-side economies of scale, demand-side benefits of scale, and customer switching costs, capital requirements, incumbency advantages independent of size, unequal access to distribution channels, and restrictive government policies (Porter & Heppelmann, 2014).

The economies of the supply-side can be considered to be high considering that Publix deals with products that require large-scale production for the supplier to enjoy significant gains. Some of these products include liquor, DVDs, medicine, gasoline, and food products, as well as agricultural produce. The scale benefits of the demand side are quite low for this industry considering that the differences between the price of one item and a volume is quite thin and can hardly influence the buying behavior of the customers. On the other hand, the switching costs of customers is low but is moderated by the quality of service and customer loyalty while the amount of capital required to set up a large and competitive company like Publix is quite high – it has an asset base of $17.46 billion in 2016. The company enjoys some significant cost and quality benefits associated with its model rather than size, especially considering that it has manufacturing facilities for dairy, fresh foods, and wheat products. In addition, having unique distribution channels as it is with Publix is a critical in surviving the industry despite there being quite low restrictive government policies.

Power of Suppliers: Low

Suppliers have the potential to determine the ability of a company in the generation of profits from sales. Porter (2008) argues that having powerful suppliers influences the value gained by the company as these suppliers tend want more for themselves as he has demonstrated with the case of Microsoft and personal computer makes. Companies such as Publix depend in a larger number of suppliers, best known as the supplier group. These groups may be powerful in case there is a higher concentration than in the served industry, has alternative sources of revenue, there are high switching costs, no substitutes, and they deliver highly differentiated products. In cases where the players in the industry make more profits compared to the suppliers, the latter may threaten to enter the market (Bose, 2008).

In all the mentioned considerations, the suppliers in Publix’s industry can be seen to have limited power. For instance, it is common to find over 15 brands of a certain product in the stalls of one store, sometimes with very minor differences. In addition, switching between one supplier of milk to another is quite easy. For instance, Publix suspended Larson Dairy Company from delivering its milk on November 9, 2017 after a video showing an employee beating cows surfaced (Madan, 2017). This decision unlikely had a significant impact on the company’s ability to deliver dairy products to the market. Considering the size of this organization, it is very likely that it has more power than a majority of its suppliers, which implies that Publix probably uses its power to get better deals from the suppliers. In addition, it is very unlikely that the suppliers will threaten to enter the industry considering that they have higher profit margins compared to the retailers.

Power of Buyers: Low

Like suppliers, customers have much strength in determining the performance of a company as they can capture more value for themselves by forcing the prices to go down. They can also force the players in the industry to improve the quality of services, which is likely to push the costs higher. At the end of the day, companies make lower profits besides having to work harder as argued by Porter in the book Competitive advantage: Creating and sustaining superior performance (2008). Companies such as Publix depend on a customer group who tend to have more power, especially when they are few, buy in bulks, industry’s products are standardized, customers face low switching costs or when they can start producing similar goods and services. Ideally, companies in this retail market serve thousands of customers who do not buy in significant bulks, which reduces their power. However, the industry provides standardized goods and services, which implies that a customer can buy from any other outlet as their switching costs are very low or nil.

The price sensitivity of the customer group is another factor that influences the authority they have in determining the prices of products. Price sensitivity can be determined by the influence of a singular product on the cost structure of an organization. Unlike a mortgage, a customer will not shop around bargaining and investigating the price of pasteurized milk, which is one of the key products sold by Publix in its stores. Also, unlike other industries, the buyer groups do not intend to make profits from the products or develop secondary products. Certainly, the industry provides finished products ready for consumption and which, are very unlikely to influence other costs. Generally, the sensitivity of customers towards the cost of products in this industry is low as is their overall power.

Threat of Substitutes: High

When a product has substitutes, it implies that there are other ways to satisfy the need it is intended. Ideally, there are substitutions that are direct while others are downstream as it has been illustrated by Porter using the examples of plastic - aluminum and multi-family – single family homes on lawn care services respectively. Substitutes tend to place limitations on the price at which the industry can sell its products as it is the case with Publix’s products. Essentially, alternatives exist almost everywhere and it may be challenging to identify in some cases. However, they are obvious in a situation where customers can grow kitchen gardens to avoid the costs associated with buying goods at grocery stores or taking black coffee instead of one with milk. Both of these are substitutes for customers shopping at Publix stores and may end up affecting the power of the company over the prices as it will push away customers towards such and other alternatives.

The argument in the preceding paragraph fits into Porter’s argument concerning the occasions that result in a high threat from substitutes. Particularly, the example on growing a vegetable garden instead of buying groceries represents the condition when the industrial products provide an attractive price-performance trade-off. However, the marginal gains in this industry after trade-off are quite small considering scale of the clients (Hernández-Espallardo & Delgado-Ballester, 2009). Another condition argued by Porter is the cost of switching for the customers. In this regard, the cost would be quite small because the customer will just require to acquire a few tools for cultivation and farming sacks for those with no land. However, switching from some products such as medicines, and some consumer products could be quite expensive. Nevertheless, cheaper alternatives such as generic medications offer some significant trade-offs for customers at low costs.

Rivalry among Existing Competitors: High

Rivalry among players in the industry is greatest threat identified by the management in most organizations. Competition assumes many forms that may be used to achieve the same goal and may include the introduction of products, advertisement, and provision of discounts. The leading competitors include Wal-Mart Stores, Costco Wholesale Corporation and Southeastern Grocers. Like new market entrants, the existing competitors work by acquiring additional market share from other companies by giving the customers some advantages that are perceived to be superior to those of the other company. The intensity of competition is defined by the number and size of the competing companies, growth of the industry, barriers to exit, commitment to the business among rivals, and if there are differing or competing goals (Dobbs, 2014). First, there are very few companies that are of Publik’s size, which implies that the company has an immense competitive advantage. The growth in the industry is moderate, especially with the growth of online shopping over the last 10 years. For exit, companies can easily sell-off their assets and interest to individuals or organizations. However, the commitment to subdue competition among rivals is generally high as each intend to have the leading position even when there are few competing or differing goals.

In many cases, competition is done through the price of products. Such competition mostly arises when the products are almost identical, which is the case with Publix. With high fixed costs and low marginal costs, there is intense pressure reduce the prices way below the average costs with the intention of acquiring more clients, which will help in the recovery of the fixed costs. For Publix, it is possible to play price wars, especially when it comes to the products developed in-house. The power to play price wars is curtailed by the fact that the industry does not require the creation of much capacity for incremental efficiency considering the nature of the products the companies deal with. However, the company deals with perishable products, which incentivizes the reduction of prices to avoid losses.

Conclusion

Publix is a player in an industry that is not much different from the others. Its strategies are guided by the five forces of competition proposed by Porter and as has been evaluated in this paper. The threat of entry is quite low as is the power of the suppliers and the customers. However, the threat of substitutes is moderate as is the rivalry among existing competitors. Generally, Publix can be seen to be operating in a safe industry where its strategic decisions are not influenced fully by the five forces of competition. Security in this industry tends to be aligned with the position of the individual company, especially with consideration of the size. With size, a company is able to create advantages that would take years or decades for competitors to surpass, as it is the case with Publix. This implies that further growth would come with more security in the company in its industry.