Specification topic: Porter s five forces

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1 The rise of the 25p stores (Porter s five forces) Specification topic: Porter s five forces Case Study: The rise of the 25p stores! Are the 25p stores the next big phenomenon to hit the UK grocery market? Stavros, the Greek multi-millionaire entrepreneur, recently launched his next new venture in his simply product portfolio, which already includes simplyjet, simplyhotel and simplycar. The opening of his pilot simplyfoodstore in North-West London earlier this month could mark a milestone in food retailing. The big four supermarkets have been dogged in recent years with the growing popularity of German discounter brands Aldi and Lidl, the continuing rise of ecommerce and consumers favouring convenience stores, preferring to buy more regularly in smaller quantities. This has resulted in a fiercely competitive market jostling for sales. The simplyfoodstore s motto is No expensive brands, just food honestly priced. The store stocks a total of only 76 food lines and excludes fresh products such as milk, cheese, meat and fruit & veg. Although basic, the layout of the store is easy to shop with clear pricing and the corporate orange livery being visible throughout the store. The no frills legacy of the brand is clearly evident with the store being located in a low cost area. There are no trollies for customers to use, just baskets, and only one till manned by two employees. The 25p price point is an introductory price, at which many products will be loss leaders. It is anticipated that this will be reviewed after an initial trial period. In fact Stavros made it clear from the offset that prices may rise, but to no more than 50p per item. Initial sales at the store appear extremely positive, with 200 customers passing through the doors within the first two hours of opening and all frozen food selling out in the same time frame. The concept of the 25p store does not seem to be pigeon holed to the already very successful entrepreneurs, such as Stavros. Charlotte Hudson, a 20 year old entrepreneur, has launched her own 25p store in Cornwall. She buys and collects stock directly from the larger retailers distribution centres then charges 25p for most items, having bought the products for approximately 20p each. This business model has proven so successful that Charlotte plans to open two further stores in the Cornwall area. Stavros is also looking to expand his idea into the less affluent areas of the North, Midlands and South West London, if his pilot store proves successful. This seems likely when a weekly shop for four costs approximately and initial sales have been so positive. Will the 25p or 50p stores survive and threaten yet again the market share of the big supermarkets? Only time will tell in this intensely competitive market! Market share This year Last year Tesco 28% 29.1% Asda, Sainsbury & Morrrisons 43.7% 44.9% Aldi & Lidl 10% 8.3% Exam-style questions 1. With reference to the Porter s five forces framework, analyse how Tesco can protect its profitability in this industry (12 marks) 2. Do you believe that the 25p-50p shops will be able to survive in an industry dominated by the four leading supermarkets and German discounters? (20 marks)

2 The rise of the 25p stores (Porter s five forces) Suggested answers: 1. How Tesco can protect its profitability in this industry Reference to buyer power Tesco will buy in large quantities and use scale to negotiate cheaper prices with its suppliers, leading to lower unit costs Reference to supplier power Some suppliers will possess more power than others when dealing with Tesco, such as Kellogg s and Heinz, as Tesco will want to stock these branded products. Tesco will work with suppliers collaboratively to work on NPD and to guarantee stock availability, enhancing customer service. Strong relationships with suppliers will allow price negotiations to be more flexible Entry threat the business has a 28% market share. The sheer size of the business would be a deterrent to any further new comers entering the market. The 25p stores are targeting a specific niche and are small (baskets only). They will be situated in low cost areas and are more likely to take trade away from the shops or Aldi/Lidl than Tesco Intensity of rivalry - Aldi/Lidl have taken share away from Tesco, but Tesco has the size to respond aggressively with tactical price changes/promotion. It offers a larger product range and a variety of ways to shop for customers 2. Will the 25p-50p shops be able to survive? Arguments for: Targeting specific niche i.e. the unemployed, low income families, larger supermarkets have a broader target market The price points will generate publicity, increasing awareness, interest and sales simplyfoodstores have the backing of a well-known successful entrepreneur. This again will generate publicity, allow the business to have access to necessary funds when needed Initial sales are promising, frozen food sold out within two hours of opening, large footfall this level of demand could be sustained when prices are so cheap. Charlotte Hudson s store is proving so successful that she is looking to expand to two further stores The government welcomes new entrants and more competition in markets, especially one that is oligopolistic where approximately 72% of the market share is dominated by 4 main players Arguments against: Can the 25p-50p price points be sustained? Stavros has already stated that he may deviate from the 25p price point, who is to say this will not increase further in the

3 The rise of the 25p stores (Porter s five forces) future resulting in the USP being eliminated and the stores reverting to the equivalent of shops? Margins are extremely slim 5p on each product sold for Charlotte Hudson. How can this be sustained? Many of the products are clearly loss leaders for Stavros at this price Customers may view the products as inferior and not return. They may not see the benefit of cheaper prices being a trade-off for quality The initial interest in the concept of the store may be a fad and consumer interest may die out, as customers show loyalty to other supermarkets and the brands they stock or valuing convenience, in terms of location or a choice of how to shop, as more important than price Charlotte s business model is dependent on distribution centres supplying her with stock and her collecting it - if she intends to open two additional stores is this plan feasible? Extra collections of stock, when her mark-up is 5p per product, may result in her costs being too expensive and her business failing. If Charlotte s suppliers decide to increase their prices, Charlotte will not be able to keep the 25p price point. Will Stavros be able to match supply with demand and guarantee stock availability frozen food was sold out in 2 hours? Unhappy customers will not return if they cannot make the purchases they want Customers still need other retailers, as the 25p stores do not sell everything. This Evaluation: gives the big 4 supermarkets, and other rivals, the chance to win customers back, as shopping in more than one place may be seen as inconvenient The concept of the 25p-50p store and the pull of the low prices will no doubt continue to attract customers within a specific niche, where consumers shopping patterns are dictated largely by price. Whether the sales from this target market will be enough to assure the stores survival in the long term will be dependent upon whether enough sales can be made to cover the costs. Charlotte Hudson is clearly working on very slim margins and being 20, may not have financial reserves to fall back on to keep her business going. simplyfoodstores may have more chance of survival, due to Stavros s individual financial position and the existence of the simply brand Success will depend on how the big 4 supermarkets react to the opening of the new 25p stores and how much they view them as a threat to their sales and market share. The supermarkets have access to funding which they could use to help them secure their position in the market and quash any real threat Both Stavros and Charlotte s success is dependent on the actions of their suppliers. They both have only one store each at present; their suppliers are therefore in a position of strength, although Stavros will have ultimately more power than Charlotte due to his background and investment potential. Charlotte and Stavros will need to work with their suppliers to guarantee prices and stock availability

4 The rise of the 25p stores (Porter s five forces) The location of the stores need to be chosen carefully. If the stores are to survive, they need to be in low cost areas which the target market can easily access. Location choices could be the difference between survival and failure Questionable what is meant by survival e.g. that the businesses are continuing to trade, if Charlotte Hudson is making a reasonable living from her store or if the simplyfoodstores are generating profit? It looks as if in the short term the stores will survive, but in the long term are they realistic business propositions when the market is so intensely competitive not only with supermarkets and the growth of Aldi and Lidl, but with existing shops. Survival is more likely if the 25p stores are very clear on their target market and stick rigidly to this niche

5 Specification Topic: Porter s five forces Q1 Fill in the gaps Every market or industry that businesses operate within is. These differences include the number of found within it; whether the market is growing or ; the needs and wants of consumers and the level of loyalty. Most businesses today operate in competitive markets. This has been fuelled by factors such as, changes in technology and the growth of. In 1980, developed a model which provided a framework to determine the nature of competition in a particular. This aimed to help businesses establish how best to achieve and keep a. This model is referred to as Porter s and is represented in an easily understandable. Choose from: Michael Porter; globalisation; declining; highly; different; e-commerce; market; diagram; Five Forces; brand; competitors; competitive advantage Q2 Porter s five forces diagram Complete the diagram and give a brief explanation of each element in the table below. ` Force Explanation

6 Specification Topic: Porter s five forces Q3 Identify the term 3.1 Factors that make it difficult for new competitors to easily enter an industry. 3.2 The type of market that is dominated by a few large businesses. 3.3 A market situation where one firm controls supply of a good or service. 3.4 Where two firms control all or most of the market. 3.5 An agreement between firms to restrict competition in the market by limiting supply and/or raising prices. 3.6 The responsiveness in demand after a change in price. Q4 True or False 4.1 A UK monopoly is one where a business holds a market share of 30% according to the Competition and Markets Authority. 4.2 Porter s five forces model can be used in conjunction with SWOT and PEST to help develop strategy. 4.3 Every market experiences the same or similar competitive pressures. 4.4 A buyer s sole supplier agreement weakens the power of the supplier. 4.5 Buyers may have a large amount of control in the market if the product is highly price elastic. 4.6 Businesses may rely on product differentiation to compete and survive in extremely competitive markets. 4.7 Barriers to entry determine the level of threat from new entrants into a market. 4.8 Businesses must monitor the competitive environment carefully and on an ongoing basis, if they are to make suitable strategic and operational decisions.

7 Specification Topic: Porter s five forces Q5 Match the scenario to the likely effect (i) (ii) (iii) (iv) (v) A business accesses 85% of its supplies from one supplier and there are no substitutes. A market is dominated by a few major players, each benefiting from economies of scale. A leading supermarket chain is thinking about changing suppliers for one of its best selling lines. There are currently a large number of suppliers in the market which could potentially supply them. A market where there is limited brand loyalty and a huge number of substitutes available for customers to buy. One business dominates the market, holding an 85% market share. (a) The threat of new entrants is significantly reduced protecting business profitability and market share. (b) The price of products will be kept low, therefore reducing the potential for high profits. (c) The profit margins of the business will be squeezed if the supplier chooses to raise prices. (d) Choice is restricted and therefore prices tend to rise, increasing the profitability of the firm, although the business may be inefficient. (e) The business may be able to negotiate cheaper prices, reducing the supplier s profit margins. (i) (ii) (iii) (iv) (v)

8 Specification Topic: Porter s five forces - Answers Q1 Fill in the gaps different; competitors; declining; brand; highly; globalisation; e-commerce; Michael Porter; market; competitive advantage; Five Forces; diagram Q2 Porter s five forces diagram Complete the diagram and give a brief explanation of each element in the table below. Force Explanation 2.1 Threat of new entrants: How easy it is for new competitors to enter the market, dependent on the barriers to entry. 2.2 Bargaining power of buyers: The degree of control a buyer has over its suppliers. 2.3 Threat of subsitutes: How many products are available that offer the same or similar benefits to the buyers of that product. 2.4 Bargaining power of suppliers: The degree of control a supplier has over its buyers. 2.5 Intensity of rivalry: The level of competition within the market place. Q3 Identify the term 3.1 Barriers to entry 3.2 Oligopoly 3.3 Monopoly 3.4 Duopoly 3.5 Collusion 3.6 Price elasticity of demand Q4 True or False 4.1 F UK monopoly is classed as a business which holds 25% market share 4.2 T 4.3 F every industry is different, as is the number of businesses that exist in each market 4.4 F strengthens the power, as the buyer is forced to purchase supplies from the one supplier 4.5 T

9 Specification Topic: Porter s five forces - Answers 4.6 T 4.7 T 4.8 T Q5 Match the scenario to the likely effect (i)(c) (ii) (a) (iii) (e) (iv) (b) (v) (d)

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