In the U.S., the retail
grocery store and supermarket industry, with 40,229 stores, totaled about
$634.2 billion in revenues during 2012, according to U.S. Department of the
Census figures. However, food products and beverages in America and elsewhere
are sold at a wide variety of stores other than supermarkets. To get the full
picture in the U.S., it is important to consider food and beverage sales,
estimated at $450 billion, at 55,683 non-traditional food-sellers, such as
wholesale clubs and dollar stores, as well as $165.6 billion at about 154,373
convenience stores.
However, the rise of e-commerce
and online retail has altered the general trends in the industry and the
position of these brick-and-mortar giants is now under siege. How will
traditional ‘brick and mortar stores’ fare in this current scenario and are
they transforming themselves to compete? This paper will shed light on the
current and potential challenges that this industry is poised with, whilst
simultaneously adopting a conventional approach in analyzing key aspects of the
same.
Five
Forces
Porter's Five Forces is a
simple framework for assessing and evaluating the competitive strength and
position of a business organization. This theory is based on the concept that there
are five forces that determine the competitive intensity and attractiveness of
a market. Porter’s five forces help to identify where power lies in a business
situation. This is useful both in understanding the strength of an
organization’s current competitive position, and the strength of a position
that an organization may look to move into.
With respect to the U.S
Supermarket and Grocery Retail Industry, the five forces are as follows:
1. Supplier power: An assessment of how easy it is for
suppliers to control the prices of products. This is driven by the number of
suppliers of each essential input; uniqueness of their product or service;
relative size and strength of the supplier; and cost that retailers have to
incur in switching from one supplier to another.
2. Buyer power: An assessment of how easy it is for
buyers to drive prices down. This is driven by the number of buyers in the
market; importance of each individual buyer to the organization; and cost to
the buyer of switching from one supplier to another. If a business has just a
few powerful buyers, they are often able to dictate terms. This is usually the
case with large retailers such as Walmart wherein they are also often able to
use economies of scale in purchasing as a strong price negotiator.
3. Competitive rivalry: The main driver is the number and
capability of competitors in the market. Many competitors, offering
undifferentiated products and services, will reduce market attractiveness. For
instance, the emergence of several low cost retailers within the U.S.
supermarket and grocery store industry has almost led to its saturation of
sorts. This severe competition on several fronts has resulted in lower prices
to consumers, but has also eroded profit margins for major retailers in the
country.
4. Threat of substitution: Where close substitute products
exist in a market, it increases the likelihood of customers switching to
alternatives in response to price increases. This reduces both the power of
suppliers and the attractiveness of the market. While it may be difficult to
picture an outright ‘substitute’ to brick and mortar retailers, the emergence
of online e-commerce giants such as Amazon are seen as viable threats that have
proven their capability to replace traditional forms of retail. In a sense
these disruptive internet retailers can spell demise for the likes of Walmart
and Kroger, as they set out to revolutionize the industry.
5. Threat of new entry: Profitable markets attract new entrants,
which erodes profitability. Unless incumbents have strong and durable barriers
to entry, for example, patents, economies of scale, capital requirements or
government policies, then profitability will decline to a competitive rate.
With regard to the Supermarket and Grocery Retail Industry, the threat of new
entrants can be predominantly attributed to new path changing startup concepts,
primarily from the internet space, with breakthrough operational expertise. For
example, www.makeyourownjeans.com
is an online retailer of customized denim wear while Webvan (http://en.wikipedia.org/wiki/Webvan) made the first attempt at online
"credit and delivery" in the grocery business. These new entrants are particularly dangerous on account of
their low start-up costs, the degree of specificity of their offerings and
their unique value propositions.
PESTLE
Analysis
The PESTLE analysis is in
effect an audit of an organization’s environmental influences with the purpose
of using this information to guide strategic decision-making. The assumption is
that if the organization is able to audit its current environment and assess
potential changes, it will be better placed than its competitors to respond to
changes. However, for the purpose of this paper, it has been adapted to best
reflect prevalent trends and influencing factors specifically in the U.S. Supermarket
and Grocery Retail Industry. These may include the following four major
criteria:
1. Political factors include areas such as tax policy,
employment laws, environmental regulations, trade restrictions and tariffs and
political stability.
2. Economic factors are economic growth, interest
rates, exchange rates and inflation rate.
3. Social factors often look at the cultural aspects
and include health consciousness, population growth rate, age distribution,
career attitudes and emphasis on safety.
4. Technological factors include ecological and
environmental aspects and can determine barriers to entry, minimum efficient
production level and influence outsourcing decisions.
Innovator's
Dilemma
The term ‘Innovator’s
Dilemma’, first coined by Harvard
professor and businessman Clayton Christensen, is synonymous with disruptive
innovation. Basically, it is an innovation that helps create a new market and
value network, and eventually goes on to disrupt an existing market and value
network over a few years or decades, displacing an earlier technology.
The central theme in
Christensen’s bestseller refers to how new and dynamic breakthroughs in
technology can cause large and seemingly invincible companies to fail over the
course of time. Again this concept has been adapted to represent the U.S.
Supermarket and Grocery Retail Industry at large, taking into consideration the
disruptive nature of online retailers and paradigm altering startups over the
period of a decade. It would
serve to examine the credibility of these giant brick and mortar retailers in a
plausible world roughly ten years from now, wherein physical stores are
functionally obsolete and mere boutiques, sculpted towards individual
experiences. Virtual stores have evolved along with technological developments
in requisite logistics to the extent that they thrive solely and most retailers
have either embraced this change or folded. It will also explore the potential
challenges that they may face in advancing towards this reality, which may seem
unlikely today.
Growth
- Share Matrix
The growth share matrix is a
framework formulated
by the Boston Consulting Group (BCG) to help companies think about the priority
and resources that they should give to their different businesses. It puts each
of a firm's businesses into one of four categories. The categories were all
given memorable names—cash cow, star, dog and question mark. The two axes of
the matrix are relative market share or the ability to generate cash and growth
or the need for cash. In relation to the U.S. Supermarket and Grocery Retail
Industry, the four criteria can be depicted across these axes as follows:
1. Cash cows are businesses that have a high
market share and are therefore generating lots of cash but low growth prospects
and therefore a low need for cash. They are often in mature industries that are
about to fall into decline. In an effort to place an entire industry through
this scanner, the thought process will involve measuring the maturity of
traditional U.S. retail vis-à-vis brick and mortar stores.
2. Stars have high growth prospects and a
high market share. This will take
into consideration the position of new and improved forms of retail in
conjunction with their rapid expansion and domination over large portions of
the industry.
3. Question marks
have high growth prospects but a
comparatively low market share. Here, the prospect of promising retail startups
will be evaluated.
4. Dogs by deduction, are low on both growth
prospects and market share. For the scope and focus of the paper, this criteria
does not directly apply.
Scenario
Planning
Scenario planning is a
strategic planning method that organizations use to make flexible long-term
plans. With its military intelligence roots, Scenario planning may involve
aspects of systems thinking, specifically the recognition that many factors may
combine in complex ways to create somewhat surprising futures. In business
applications scenario planning is viewed as changing mindsets about the
exogenous part of the world, prior to formulating specific strategies. The
method also allows the inclusion of factors that are difficult to formalize,
such as novel insights about the future, deep shifts in values, unprecedented
regulations or inventions.
In terms of this paper, the
concepts of Scenario Planning will be applied to simulate two or three
plausible outcomes with respect to causal relationships between relevant factors
of the U.S. Supermarket and Grocery Retail Industry such as demographics,
geography, politics, and industry information, along with socio-cultural, technical,
economic, environmental and aesthetic trends.
PARTS
Analysis - Value Net
The Value Net framework
combines strategy and game theory, in order to describe and analyze the
behavior of multiple players within a given industry or market. The fundamental
idea is that cooperation and competition coexist and it is often necessary to
do both at the same time i.e. cooperate with other players in order to foster
market growth, but also compete with the same players in order to maximize your
market share.
The
framework identifies four players in the Value Net:
1.
Customers that purchase a company’s products
and services, in exchange for money.
2.
Suppliers that provide resources to companies,
in exchange for money.
3.
Competitors
offer substitutes, direct or
indirect, to a company’s products and services. A company’s competitors compete
both on the customer side, offering similar products and services as well as on
the supplier side, buying similar resources.
4.
Complementors
provide products or services that
allow a customer to get more value out of products or services if they buy
both. Again, there is a similar dynamic at work on the supplier side.
In addition, it also states
that business strategy must be defined based on five components, using the
acronym PARTS:
1. Players:
The obvious first task is to
categorize who the relevant players are and what roles they play. In terms of
shaping strategy for an entire industry, a much broader view of the model is
required; one that will examine whether bringing in additional players will
work to the advantage or disadvantage of existing players.
2. Added Value:
This will explore the retail
industry’s efforts in developing lasting relationships with its widespread
existing customer base and translating that to brand equity. This can partially
help insulate major physical retailers that might be under threat in future.
3. Rules:
This will serve to explore whether
or not today’s mighty retail giants can leverage their economic prowess and
strong brand influence to alter the rules of the game such that the game itself
will tilt in their favor.
4. Tactics:
Tactics are defined as actions that
players take to shape the perceptions of other players. The retail business is
played in an arena of uncertainty, where each of the players has an idea or
perception of the situation and strategies of the other players, but ultimately
is uncertain about the reality of those players' situations and strategies.
5. Scope:
Often, a market is not isolated, but
is linked to other markets. Plenty of recent examples have shown that software,
hardware, media, e-commerce, advertising and telecommunications markets are
either closely interlinked, or players in some markets have taken deliberate
strategic moves to pro-actively link them. They key is to ask what markets
could potentially be linked, how companies from within a given space (In this
case, retailers) could create value added from linking their products and
services to that market, and how that may affect the perceptions and actions of
other players, or on this occasion, disruptive competitors.
Strategy
Canvas (Blue Ocean)
The strategy canvas is the
central diagnostic and action framework for building a compelling blue ocean
strategy. The horizontal axis captures the range of factors that the industry
competes on and invests in, while the vertical axis captures the offering level
that buyers receive across all of these key competing factors. In order to
adapt the Strategy Canvas to represent the U.S. Supermarket and Grocery Retail
Industry, a total of six key player will be shortlisted and evaluated against
select criteria. Three of them will fall into the category of traditional
storefront retailers like Walmart, Safeway. Etc. while the remainder will
represent the disruptive new emerging face of retail – Think Amazon, Zappos,
E-Bay. Etc.
The strategy canvas serves
two purposes:
1.
To
capture the current state of play in the known market space, which allows users
to clearly see the factors that the industry competes on and where the
competition currently invests.
2.
To
propel users to action by reorienting focus from competitors to alternatives
and from
customers to noncustomers of the
industry.
The value curve is the basic
component of the strategy canvas. It is a graphic depiction of a company’s
relative performance across its industry’s factors of competition. A strong
value curve has focus, divergence as well as a compelling tagline.
ERRC
Grid (Blue Ocean)
The ‘Four Actions Framework’
is a helpful tool in crafting a future strategy canvas as it facilitates
identifying the value elements to be created, increased, decreased, or eliminated
with respect to the specified industry standards. The
Eliminate-Reduce-Raise-Create (ERRC) Grid pushes companies not only to ask the
questions posed in the Four Actions framework but also to act on all four to
create a new value curve, which is essential to unlocking a new blue ocean.
Stall
Points Analysis
A Stall Point Analysis eludes
to the ‘hiatus’ or stall of a firm’s growth - a crisis that can hit even the
most exemplary organizations. Deeper analysis sheds light on the most common
causes of growth stalls, which turn out to be preventable for the most part.
There is a common assumption that when the fortunes of great companies plunge,
it must be owing to big, external forces which management cannot be held
accountable. In fact most stalls occur for reasons that are both knowable and
addressable at the time. However, research has shown that the vast majority of
stall factors result from a choice about strategy or organizational design; all
of which are controllable by management. Further, even within this broad realm,
nearly half of all root causes fall into one of four categories:
premium-position captivity, innovation management breakdown, premature core
abandonment, and talent bench shortfall.
This paper, pertaining to the
U.S. Supermarket and Grocery Retail Industry, will investigate the growth slump
of traditional forms of retail in comparison to the newly implemented models of
the same. It will effectively focus on the growth potential that traditional
retailers such as Walmart lost or will lose, to the likes of online retailers
such as Amazon.
Application
of the FAROUT framework
The
FAROUT framework promotes a greater understanding of relationships and
situations. It helps analysts consider the fit between techniques and their assignments.
With a strong initial focus on data and facts, this model guides efficient data
collection efforts and forces analysts to think critically while promoting a
proactive attitude to analysis.
Based
on the impending
analysis of the U.S. Supermarket and Grocery Retail Industry, here is how the
selected models would fare against the criteria of the FAROUT framework.
Model
|
Future
Oriented
|
Accurate
|
Resource
Efficient
|
Objective
|
Useful
|
Timely
|
Five
Forces
|
2
|
2
|
3
|
3
|
4
|
3
|
PEST
Analysis
|
2
|
3
|
2
|
3
|
3
|
3
|
Innovator's
Dilemma
|
3
|
2
|
3
|
3
|
2
|
3
|
Scenario
Planning
|
4
|
2
|
4
|
2
|
3
|
3
|
Growth
- Share Matrix
|
3
|
2
|
2
|
2
|
2
|
2
|
PARTS
Analysis - Value Net
|
3
|
3
|
3
|
3
|
3
|
3
|
Strategy
Canvas (Blue Ocean)
|
4
|
3
|
3
|
2
|
4
|
4
|
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