Industry Competitive Analysis - Essay Example

Name: Course: Tutor: Date: Industry Competitive Analysis Executive Summary This paper analyses the competitiveness of the retail industry. In doing so, it focuses on the operations of Walmart, which is the largest retailer in the world and compares the same with Tesco. To achieve this, the paper analyzes the retail industry indicators and its driving forces. SWOT analyses are conducted to compare the retailers’ competitive positions while a PEST analysis is used to analyze the factors beyond the control of firms which affect the retail industry. A Porter’s Five Forces analysis is also applied to show Walmart’s and Tesco’s position in the market environment. Based on these analyses, the attractiveness of the retail industry is discussed followed by an analysis of Walmart’s current position in the industry. Finally, on the prospects of the retail industry, it is projected that retails stores will continue to grow due to the increasing need for consumers’ convenience. This growth include offering of more products and services that were not offered in the past, as well enhanced e adoption of technology in the industry. Introduction The latter half of the 20th century both in North America and Europe, saw the emergence of the supermarket as the dominant form of grocery retail. The reasons why supermarkets have become dominant in food retailing are elaborate. The search for expediency in shopping and utilization, coupled to ownership of cars, led to the birth of the supermarket. As incomes increased and consumers sought expediency, new tastes and excitement, supermarkets were able to expand the products on offer. It is therefore no wonder that today, there are many giant retail chains (supermarkets and superstores), some of which have their operations spread across many countries in the world. The significance of the retail industry in the world economy can be drawn from the fact that the world’s largest corporation by 2009 – Walmart – is a retail chain (Pradhan 8). This industry is also significant because of its contributions to various economies through aspects such as creation of multiple employment opportunities. This essay will analyze the retail industry with focus on the market operations of Walmart – the largest retail chain in the world – and compare the same with Tesco. Walmart is the world’s biggest retailer headquartered in the United States. It employs a strategy dubbed “everyday low price” and uses centralized purchasing through its home office for substantially all its merchandise in the areas in which it operates (Wahlen et al 335-336). Walmart has more than 4,100 stores in the United States and about 2,800 global outlets located in 13 countries. The retail chain sells, according to Ireland, Hoskisson, and Hitt, “everything from electronics and groceries to medication at everyday low prices” (10). On the other hand, Tesco, which is a British-based international grocery and merchandise retail chain, is the world’s third largest retailer behind Walmart and France’s Carrefour (Ireland, Hoskisson, and Hitt 10). Tesco is chosen for comparison with Walmart because of its international operations and because of the fact that it also has operations in the United States and is therefore Walmart’s close competitor. Retail Industry Indicators Size and growth rate The advent of the global marketplace and the increase in the 24/7 economy has propelled the growth of retail across the world. The global retailing industry grew by 5.5 percent in 2004 with an estimated value of $9,498.5 billion according to the Global Industry Classification Standard figures. The compounded yearly growth rate between 2000 and 2004 was 3.9 percent. The United States dominates the word retail market space and accounts for 32.3 percent of the global retailing group. Europe accounts for a further 30.8 percent of the group’s value while others are Asia Pacific (25.6 percent) and the rest of the world (11.20 percent). By the year 2009, the retail industry was projected to have a value of $12,104 billion – an increase of 27.4 percent since 2004 (Pradhan 8). Market size The market size of the retail industry has grown significantly but shrunk in recent years (probably due to the global economic downturn). Table 1 below shows the size of the global retail industry as well as the rate of change witnessed year by year. Year $ (billion) % growth 2009 12,104.0 4.7% 2008 11,561.5 4.8% 2007 11,029.1 5.1% 2006 10,496.3 5.20% 2005 9,981.1 5.1% 2004 9,498.5 5.5% 2003 9,005.4 4.5% 2002 8,620.1 3.0% 2001 8,366.0 2.7% 2000 8,144.2 - Source: Pradhan (8). Products/services Traditionally, players in the retail industry such as supermarkets have offered food and some non-food items on a self-service basis. However, with the growth of the sector large superstores such as Walmart, Carrefour, Tesco and Target are offering products that meet the needs of today’s consumers for convenience, variety and service. These include pharmacies, salad bars, flower shops, in-store bakeries, health food sections, video rentals, sit-down restaurants, photo processing, and many more (Lamb, Hair and McDaniel 230). Profitability Profitability in the retail industry has continued to improve despite increasing competition and rising supply costs. The top 250 retailers’ net profit margin rose to 3.8 percent in 2010, up from 3.1 percent and 2.4 percent in 2009 and 2008 respectively. Nearly all firms that unveiled their bottom-line results (183 out of 195) operated at a profit 2010, and over two thirds of the reporting firms realized an improvement in their net profit margin (Deloitte G10). Capital requirements Capital requirements can be significant in hindering or slowing entry into the retail market. Large multiple retailers are largely in a better position to raise capital more easily than new entrants (London Economics n.d.). Huge amounts of capital are required to establish stores, pay employees, purchase inventory management systems and so on. Entry and exit barriers As shown above, high capital requirement is one of the barriers to entry of new players into the retail industry. Others include stiff competition from established retailers, customer loyalty and government restrictions. Exit barriers are the costs of leaving the market and include liquidation costs, discounted stock, severance pay, local community pressure, government intervention, and employee protests (Waters and Waters 46). Level of fragmentation/consolidation Traditionally, the retail industry has been fragmented. However, presently there is consolidation whereby large retailers are emerging with increased market share as well as financial power. This has increased competition in the market. The large retailers are leveraging their size to bargain with suppliers in order to share with them the cost of competition and increase promotional expenditure so as to ensure better retailer sales and profitability (Madaan 140). Customer characteristics The end consumer in the retail industry has three major characteristics: they are small, immobile and uniformed. The consumers are small in the sense that the size of the purchase they make forms a small part both of the retailer’s total sales and of the consumer’s total expenditure. They are immobile in the sense that they often not willing or able to travel long distances in order to buy the appropriate product. Finally, consumers are uninformed as they often do not know which products/services are available where and at what prices; and they may not be in a position to take note of product quality prior to the purchase (London Economics n.d.). Capacity utilization Capacity of a process refers to the maximum rate at which it can operate while utilization is a measure of rate at which the installed capacity is demanded by customers (Bidgoli 112). Capacity problems might deal with issues like how many checkout lines to provide in a superstore, how many suppliers to have, and what kind of inventory management systems to install in a retail chain. Industry Driving Forces The major driving forces in the retail industry include e-commerce, changes in the store structure, marketing, information technology, use of mobile and social media, changes in generations of shoppers, economic growth and the use of coupons to maintain customers (Rucker). For instance, with e-commerce, consumers can shop online without necessarily having to go to the store. In addition, the more products a retailer offers and presents to shoppers, the more retailers the retailer is likely to attract. This means that retailers involved in aggressive marketing strategies are likely to attract more customers. Further, the use of technologies such as automation means that retail logistics is improved a lot, especially with regard to automation of the flow of information. The general flow of information within a retail supply chain is usually managed by integrated retail logistics information systems, which are able to extract individual consumer specific purchase patterns based on synchronized point of sale data (Skjott-Larsen 152). There is no doubt that the current generation of IT-savvy populations would be attracted towards retail chains that have such sophisticated facilities. Such populations are also attracted by stores that use social and mobile media. For instance, Facebook users can browse and buy from Roots, a Canadian clothes retailer, without clicking away from the site. The retailer has created special “pop-up” stores on the social site for users to preview merchandise season by season (Pride, Hughes and Kapoor 376). Rucker predicted small booms in the economy in 2011; this is critical in consumers’ spending decisions with respect to the retail industry. PEST Analysis PEST refers to the political, economic, social and technological factors that affect the general business environment, and which the business has no control over. Political factors Some governments are not keen to allow entry of large retail chains into their jurisdictions. For instance, Walmart was one of the companies that failed to get into India at all following objections by the Indian government (Emerald 30). Walmart however has operations in several other countries including Britain where it acquired Asda Group PLC, China, Germany and Japan. Economic factors Overall, the global economy has been decelerating, and growth in 2012 is likely to be slower than was experienced in the previous year in many of the world’s leading markets. Retailers may find some consolation in the otherwise unpredictable environment, however. A notable positive impact of slower economic growth is the continued dampening of commodity prices. For retailers, this implies some improvement on the cost side of the ledger (Deloitte G10). Social factors Social factors in relation to the retail industry refer to the social conditions embodied by the number, type and behavior of employees and customers. These include size of the population, income distribution, demographics of the population, rate of population growth, and age profile of the population. Technological factors These include level of technology usage in the retail sector including automation of inventory management and penetration of the Internet, penetration of mobile technology and so on (Pradhan 112). Competitive Analysis (SWOT) of the Two Companies Walmart Tesco Strengths Dominance in the American retail market, expansion in international markets and exploration of new retail stores (Kneer 3). Dominance in the British market even with the entry of Walmart in Britain in 1999. Tesco signed up 12 million Britons for its ClubCard program, which boosted Tesco’s market share in groceries in Britain to 31 percent, nearly twofold the 16 percent held by Walmart’s Asda chain (DuBrin 507). Weaknesses Not well known or popular in global markets such as India. Presence of other players such as Target and Tesco, which could affect Walmart’s chance of globalization. Inability to be dominant in the city center marketplace. It this regard, it is outdone by major competitors such as Sainsbury. Opportunities Formation of strategic alliances with other global retailers, focusing on Europe or growth markets like China and India. Although many retailers have loyalty cards, Tesco’s ClubCard is perceived to be the best. The ClubCard captures purchasing data as well customer profiles, hence enabling the retailer to set well defined marketing propositions and communications (Hart 206) Threats There are many hindrances including poor infrastructure that limit the application of centralized logistics management in international markets such as China. Diversification into new markets reduces reliance on a few business areas but also increases risks since the retail industry life-cycle is well understood in emerging markets (Henry 77). Porter’s Five Forces Model Bargaining power of buyers Customers do not have to bargain with Walmart for low prices, more services or higher quality since the retailer has already established these concerns in its business philosophy. Walmart has many attractive pricing philosophies such as “Special Buy”, “Rollback” and “Everyday Low Price” (Kneer 3). Similarly, Tesco targets the low price aspect to the advantage of buyers (Molenaar 49). Bargaining power of suppliers Walmart hand picks suppliers and has a good long standing relationship with them in order to maintain their pricing strategies (Kneer 3). Tesco hires out its shelf space to manufacturers who assure it of the highest profit per square inch. The bargaining power of smaller suppliers is affected by the extent to which Tesco is able to buy a substantial amount of their output (Henry 79). Threat of new entrants New entrants must examine the risk that incumbent firms might retaliate if a newcomer enters the market. Both Walmart and Tesco can utilize economies of scale which spread the costs of production over the number of units produced. Threat of substitutes Substitutes are products and services that can meet similar needs. Therefore, a key question is, if one chooses to not to buy from one retailer, what alternatives are available? The price performance ratio of retailers such as Walmart and Tesco vis-à-vis their competitors will determine profitability levels in the industry. Intensity of rivalry Walmart’s other key competitors include Sear and Kmart. But these retailers cannot beat Walmart because of their higher prices and because of Walmart’s keen focus on customer satisfaction (Kneer 4). In the United Kingdom, rivalry is among Tesco, Asda Walmart, Morrison’s (Safeway) and Sainsbury. Industry Attractiveness The fact that major retailers still make huge sales and significant profits means that the industry is highly attractive. For instance, Walmart made sales worth $419 billion in 2010 (Roberts and Berg 2). This value is exceeds the Gross Domestic Product (GDP) of many countries across the world. Further, there are many markets such as China and India which harbor investment opportunities. For instance, in India, organized retail has been growing at a much higher rate than unorganized retail over the last few years (Madaan, 23). Given the attractiveness of the market, foreign retailers like Walmart, Carrefour, and Tesco have been keen to venture in India (Thorpe and Thorpe 172). Current Position of Walmart in the Retail Industry Walmart stands out as the largest retailer in the world. According to Roberts and Berg, owing to its scale, Walmart is best positioned to absorb inflation, to leverage power over its suppliers, to drive efficiencies in the supply chain, and to influence millions of consumers who buy its products every week (2). The retailer got where is today because of its high efficiency. It focused on driving costs out of business and this has enabled it to offer consistently low prices of a wide range of goods (Roberts and Berg 2). Even though Tesco ventured in Los Angeles through its store called Fresh & Easy in 2007, it only managed to have about an equivalent of Walmart’s units in the same area (Ireland, Hoskisson, and Hitt 10). However, in markets such as the United Kingdom, Walmart has not done well through Asda as it is still outdone by Tesco. Even then, Walmart’s efficiency and profitability imply that the retailer remains strong especially with huge investments in new markets such as China. Future Outlook The retail industry is expected to grow given that the factors that led to the advent of the supermarket are still strong. Consumers need convenience in shopping, and more and more of them are owning cars, meaning that they are better placed to visit retail stores for their shopping. In addition incomes are growing and this means that the demand for retail products coupled to convenience will increase. Moreover, large retailers are continuously using superstores to offer a wide array of merchandise and services to increase the shopper’s convenience. For instance, Walmart plans to establish walk-in medical care facilities in 400 of its stores by partnering with medical practices and local hospitals (Ireland, Hoskisson, and Hitt 10). The use of technology is expected to increase, with consumers shopping online and having their merchandise delivered where they are. Works Cited Bidgoli, Hossein. The Handbook of Technology Management: Supply Chain Management, Marketing and Advertising, and Global Management. New York: John Wiley & Sons, 2010. Deloitte. “Switching channels: Global Powers of Retailing 2012.” 2012. 04 Sep. 2012. DuBrin, Andrew J. Essentials of Management. 8th ed. New York: Cengage Learning, 2008. Emerald. “A world apart for retail giants: Globalization provides challenges yet to be addressed.” Strategic Direction. 2012. Vol. 28 Iss: 7 pp. 30 – 33, 2012. Hart, Susan. 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