Supermarket Industry Analysis

.From the report of the Progressive Grocer, a monthly industry publication, we can know that in 2009, 35,612 supermarkets were in business in the United States, which accounted for 54. 5% of food item sales by grocery stores including supercenters and warehouse outlets. Convenience stores had 31. 9% of sales, and wholesale clubs had11. 5% of sales. So, supermarkets overall account for more than half of all food sales. Market definition

In general, we believe that a supermarket is a large comprehensive retail store that sells a wide variety of goods including food and alcohol, medicine, clothes, and other household products that are consumed regularly.

Customers can use the most comfortable and free way to choose goods by themselves in the supermarket. It is the most popular way for retailer in developed countries. And, the Standard & Poor’s industry surveys define that the US supermarket industry includes a range of businesses, from small grocery shops and convenience stores to large supermarket chains, excluding restaurants and department stores that sell gourmet foods.

Through the definition of supermarket, we can know that supermarket is not only a market; it covers many different industry areas. We want to analyze a single market, and, according to the North American Industry Classification System (NAICS), the supermarket industry is found in section 445110: Supermarkets and Other Grocery (except Convenience) Stores. NAICS states that “This industry comprises establishments generally known as supermarkets and grocery stores primarily engaged in retailing a general line of food, such as canned and frozen foods; fresh fruits and vegetables; and fresh and prepared meats, fish, and poultry.

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Included in this industry are delicatessen-type establishments primarily engaged in retailing a general line of food”. It means that supermarkets mainly sell food. So, I will choose the definition of supermarket industry in the NAICS and just focus on food retail. [pic] How can I know the food retail is an own industry? There are two questions we must ask ourselves in order to answer this question. First, do the consumers view food and other items the same? Second, can the food retailer easily switch from selling one to others? For customers, I think it is easy to answer.

When someone feels hungry, he/she just want to buy some food to eat; he/she can not choose some clothes to make him full. Even when the price of food increases, people can not buy medicine or other items to substitute it. They have no choice to satisfy their need except food. To sum up, customers see food as different from other items. For food retailer, they just have experience of food selling, so they just understand what kinds of food can attract consumers and where they can purchase the cheapest products, which means that they lack the knowledge and suppliers of other market.

Further more, selling food and selling other products needs different facilities. For example, selling food needs refrigerators which is not required when selling cars. Moreover, transportation and distribution of selling food are separate from selling other types of products. Customers require food is fresh, so food retailers should buy from the closest place and use the fastest way to take foods into the supermarket. There are not these demands for other products. Thus, it is difficult for food retailers to switch from selling food to other products.

All in all, I can conclude that food retail is its own industry. Five Forces that Shape Industry Competition [pic] Internal rivalry The rivalry in the food retail industry is extremely high. First, a large number of various companies exist within this industry. In the United States, there are three kinds of main competitor sharing the supermarket industry: international supermarkets, like Wal-Mart; national supermarkets, like Costco; and regional supermarkets, like Roth in Independence.

Because these food retailers sell the same or very similar products, each company wants to steal customers from others to sell more of their own merchandise, and as a result, rivalry intensifies. Second, although the unfavorable economic environment lead the consumers trading down to lower-priced goods within supermarkets in 2009, with a more stable economic trend for 2010, retailers are beginning to increase capital spending budgets. For example, Safeway boosted capital spending from the $852 million spent in 2009 to a range of $900 million to $1 billion in 2010.

Whole foods market increased capital spending significantly from $315 million in 2009 to a range of $350 million to $400 million in 2010 (Standard & Poor’s industry surveys, 2010). When companies increase investment to expand their own output, it always tends to intensify competition for luring customers from competitors, and as a result, rivalry intensifies. Third, significant costs vary greatly among firms. Significant costs will lead companies to have different market shares and will bring differing commodity prices to various companies.

To take Wal-Mart for an example, a Wal-Mart supermarket is always over 100,000 square feet; however, the average supermarket is only 35,000 square feet. In 2011, the company will not only invest in growing to 12 million square feet of retail space in the US, but they are also planning to remodel stores (Standard & Poor’s industry surveys, 2010). Through the example of Wal-Mart, we can know because of its vast size, Wal-Mart has strong ability to bargain with its suppliers, which will allow it to keep fullest advantage and lowest cost.

The result of the lower price is to increase sales volumes, profit and cost leverage; at the end, Wal-Mart will increase its market share and keep worldwide leadership in retailing, which means other companies have to face the fact of the power wielded by Wal-Mart. Next, Wal-Mart is the price leader of supermarket industry, and it continually drives down price. The low price of Wal-Mart may not influence the buying decisions of consumers in a short time. However, for a long time, Wal-Mart would make customers to be aware of its lowest price.

Even when other supermarkets are close to price parity with Wal-Mart, customers still believe that Wal-Mart’s prices are the lowest, and the Wal-Mart will become the first choice for customers. Thus, the low price strategy of Wal-Mart will become the heavy competitive pressure to other food retailers. Then, there are the strength of exit barriers in the supermarket industry. High investment in property, distribution, and inventories are the three main exit barriers for the supermarket industry.

Usually the floor area of a supermarket is wider than other kinds of shops except shopping mall, so if a company wants to leave this industry, the property would become waste. For distribution, usually, customers only see one or two local stores, but they forget that there are still many stores which belong to the company in different areas, so a company generally has a transportation center which is working for sending foods to all stores. If a company decides to exit the industry competition, the investment of the transportation center and conveyance would lose its value.

Furthermore, food goes bad easily, so it should be sold in a short time. That is why the inventories not only can not bring profit to retailer, but also becomes a burden to the retailer when a company closes down. Thus, when companies have operating problems and retailers do not want to lose all investment, they always try to do something to change the status quo. At the end, this condition can prolong price wars as firms struggle to survive instead of exiting. Substitute Substitute means two or more different goods have the same function which can satisfy a customer’s need.

The relationship between these goods is competition in sale. When one product’s sale goes up, the others’ would go down. For food retail industry, farmer markets, restaurants and homemade foods are the three main substitutes. Generally, a supermarket is not a producer, it is just a broker. It should purchase all products from real producers, and then sell them to customers. Through trading, the supermarket earns the purchase and sale price differentials. So, if real producers can substitute supermarket to become sellers, consumers can buy products in lower price; at the same time, producers can earn more money.

Restaurants would also be substitutes. In a restaurant, consumers do not only get some food, but also can get service. So, in some case, restaurants easily become no-price competitor for supermarkets. Home-made food usually lets people feel cleaner. When we eat homemade food, we know where the food comes from, and we can be sure of the food’s safety. Thus, homemade food has opportunity to become the substitute, especially, in inflation, homemade food also can help us to save money. Powers of buyers In normal conditions, we consider that consumers’ food budgets are price insensitive.

They do not abandon a close and convenient supermarket for a far but cheaper one. Convenience for shopping is the most important thing for a customer. However, price is a potential risk for food retailers. If a nation always stays in a state of economic recession, the income of people would keep decreasing. When people feel income falling short of expenditure, they have to think more about their budgets and then switch from high margin stores to mass merchandisers. Furthermore, an individual consumer does not have strong buyer’s power to affect the prices of merchandise.

For example, if someone goes to Wal-Mart to bargain, no people will care, even the supermarket will call police. However, individual consumers can influence on retailers to sell or not sell specific types of product. For example, more and more people care about health; they want more natural and organic food, hence, “the natural/gourmet stores’ count increased 3. 0% in 2009” (Progressive Grocer,). Powers of supplier In the food retail industry, food suppliers are not highly concentrated, hence, the larger number of suppliers of food products, the less influence one supplier can have in the market.

Further more, food retailers have rights to choose diverse products to sell in a store, but suppliers just can produce only one kind of product, like a beverage company just can produce drinks, but producing clothes is impossible, which means the market for retailers is bigger than for suppliers. If the supplier can not give the retailer a satisfactory price, or the retailer dislikes the quality of product, the retailer can switch to other suppliers who support the same kind of goods in the market easily.

Because the switch cost is low, retailers do not need to worry about it. In addition, for some companies which have substantial wealth and economic power, they can even buy out all products of a supplier. In this case, the supplier has such a deep symbiosis with the food retailer; the food retailer will decide the subsistence for the supplier. That is, if the food retailer wants a lower price, the supplier just can sell products at a lower price. Consequently, the powers of supplier are moderate to low. Barriers of entry

Economies of Scale can be a barrier to entry. An economy of scale is when you are able to sell more products at the same time; cost of unit product will be decrease, which will bring lower price of products to customers in the supermarket industry. Therefore, I take the labor costs for an example: “Food retailing is a labor-intensive business, and employee costs represent the supermarket’s greatest operating expense. Usually, labor accounts for more than 50% of total operating expenses” (Standard & Poor’s).

The wage of everyday and the working time for a cashier are fixed. Customers not only buy food, but also other items, like clothes, auto parts and so on in a big one-stop shopping supermarket, when they check out, cashier should check all the items, not just food. Comparing with a shopping mall which includes many small shops, but normally every shop just sells one type of goods, customers can save more time, and the supermarket just need only one type of laborer to do all the jobs which are separated to different sellers in a shopping mall.

But economies of scale for a newcomer to the supermarket industry are hard to come true. The economies of scale not only reduce cost, but also increase the power of company. When a supermarket cooperates with a products supplier, the bigger supermarket has the ability to bargaining with the supplier. Like the biggest international chain supermarket, Wal-Mart, always can sell its items at the lowest price just because of its size and status.

If the supplier does not give a good deal to Wal-Mart, they will lose the biggest buyer in the world, which means the supplier will lose unimagined huge sale and profit. However, if a small supermarket, a regional supermarket, hopes to use the lowest price to buy in products, normally, the supplier does not agree, because when he loses this buyer, his market is still there; he still can earn a lot of profit from other buyers. High investment and technological cost make entry into the supermarket industry extremely difficult.

The trend of the development of supermarket industry is supercenters: “Supercenters are huge retail outlets (more than 150,000 square feet, on average) that house a mass merchandiser and a combination food and drugstore in a single unit, and devote as much as 40% of their shelf space to grocery items” (Standard & Poor’s). The large size of the building destines a high investment. Otherwise, to make a supermarket more competitive, most existing supermarkets have invested heavily in computer and telecommunications equipment.

Like electronic shelf tags, self-scanning checkouts, point-of-sale equipment and quick response program. The more high technology used, the more investment has to be made. In addition, for customers, one size does not fit all. Different consumers have different requirements; a supermarket should respond to consumers’ different needs as much as possible. That is a variety of products is required for any supermarket, and the same product with different sizes or colors should appear on shelves.

Hence, economic strength of operator is other barrier to entry into the supermarket industry. Last but not least, distribution decides the state of operation for a supermarket, because the transportation cost is one of the biggest parts for a supermarket. Usually, a supermarket chain includes a distribution center and some stores. Stores are distributed throughout a city, so how to choose a suitable place to build the distribution center to make the shortest distance to different stores is an important thing for a newcomer.