Industry+Analysis+-+Q2


 * Part One: Industry Analysis **

2. Go through each of Porter’s 5 Forces and identify and discuss each of the forces. For example, who are the industry buyers? What is the strength of buyer power (high, medium, or low)? How does it impact industry attractiveness/profits? Address these questions for each of the other forces.

__ Threat of Entry __

Four important barriers to entry:

1 – //Economies of scale.// A good example to use here would be how Whole Foods entered the industry. The grocery industry possesses the qualities of economies of scale (grocery store volume of production is extremely high, making its costs relatively low), making it very difficult for competitors to enter the industry. However, Whole Foods gained entry into this mass market, in 1978 (Wikipedia) by appealing to customers through organic foods, herbal remedies, and natural skin care products. This “barrier-busting” (Textbook, 38) technique is one of many that can be used to enter this industry.

2 – //Product differentiation.// The grocery store industry is very diverse. From the lowest prices at stores like Wal-Mart, to the premium, unique (and low-cost, hard-to-find) products found at Trader Joe’s or specialty items at Whole Foods, this industry makes it easy for new entrants to gain profits through product differentiation. Another example is Wal-Mart’s supercenter: “a factor in the U.S. food retailing industry was the introduction of Wal-Mart’s Supercenter. Now the nation’s largest grocery retailer, Wal-Mart developed the one-stop family shopping Supercenter concept in 1988, which offered consumers groceries and general merchandise under one roof” ** Source ** : Holz-Clause, M., & Geisler, M. (Updated February 2010). //Grocery Retailing Profile//. Retrieved from []grocery_industry.cfm.

3 – //Cost advantages independent of scale.//

4 – //Government regulation of entry.// A good example here would be the FDA label requirements for grocery chains. These final regulations are due by March 23, 2011 from the FDA and claim “Retailers must post calories in each standard menu item on menus/menu boards and make additional written nutrition information available to consumers upon request. Retailers will also have to publish calorie information on signage (per serving or per food item) for most self-service items not already labeled.” / “new law will apply to grocery and natural product stores with food outlets in 20 or more locations; grocery stores with buffets, self-serve and cafeteria-style restaurants (ex. Wegmans), soup and salad bars (ex. Giant) and beverage fountains.” ** Sources ** : 1. Lord-Stewart, K. (2010, August 26). FDA releases menu labeling requirements for grocery chains. [Web log]. Retrieved from [|http://www.nrn.com/article/fda-seeks-comments menu-labeling#ixzz0xk9paFoH] 2. Thorn, B. (2010, August 25). FDA seeks comments on menu labeling. [Web log]. Retrieved from [] releases-menu-labeling-requirements-for-grocer.aspx?cid=nl_iu

__ Threat of Rivalry __

Five industry conditions facilitate rivalry:

1 – //Large numbers of competitors//. The grocery store industry consists of multiple options for consumers. For example, Safeway, Giant, Harris Teeter, Wegman’s, Whole Foods, Trader Joes, Kroger, Bloom, Shopper’s Food Warehouse, Target (grocery), Super Wal-Mart; the list is endless.

2 – //Slow or declining growth.// Whole foods was introduced in 1978 (http://en.wikipedia.org/wiki/Whole_Foods_Market), Trader Joes in 1958 (http://en.wikipedia.org/wiki/Trader_Joe's), Safeway in 1912 (http://en.wikipedia.org/wiki/Safeway_Inc.), Giant in 1923 ([]), Bloom was introduced in 2004 ([]) – just to name a few. With the exception of Bloom, which was a division of Food Lion, there appears to be slow or declining growth amongst this industry.

3 – //High fixed costs and/or high storage costs.// The grocery store industry has extremely high storage costs not only at retail locations but also at distribution centers worldwide.

4 – //Low product differentiation.// With the various options available to consumers, such as organic grocery stores or farmer’s markets, it appears that the grocery industry has high product differentiation, and is therefore (under this condition) not a facilitator of rivalry.

5 – //Industry capacity added in large increments//.

__ Threat of Buyers __

1 – //Buyers operate in a competitive market.// This industry is highly competitive. With numerous (find number) grocery chains worldwide, this is a very large, highly competitive market.

2 – //Buyers can vertically integrate backwards//. A great example of this is the grocery industry’s ability to manufacture their own (“Safeway brand” or “Giant brand”) selection of merchandise – commodity products.

3 – //Many small buyers can be united around an issue to act as a block//. An excellent example is the one she provided in class – the canned tuna that received a huge uproar when consumers discovered they were including dolphin as well. This indicates that this industry is very consumer-sensitive, relying on feedback from its customers to decide whether or not to carry a product.

__ Threat of Substitutes __

1 – //Substitutes fill the same need but in a different way//. Whole Foods and Safeway, for example, both fill consumers needs for the same product (i.e. cucumber). The cucumbers at Whole Foods are grown organically, free of pesticides and pollutants. Cucumbers found at Safeway, however, are grown to perfection with the use of pesticides and growth stimulants in soil. Both stores the consumers need for the cucumber, but do so very differently.

2 – //Substitutes create a price ceiling because consumers switch to the substitutes if prices rise.// I’m not exactly sure how expensive farmer’s markets are, but I’d be inclined to think they’d be marginally cheaper. If this is the case, it prevents local grocery stores from raising their prices too high, in order to maintain its customers and profits.

3 – //Substitutes will likely come from outside the industry//. Peapod is a service that is growing more and more as consumers want convenience/resort to the Internet; it gives them the ability to shop online and have groceries delivered to your door and keeps potential customers out of stores. It is the “nation’s leading Internet grocer, serving over 280,000 customers in Chicago, New England, and the mid-Atlantic metropolitan regions.” Also “Peapod’s service has proved popular, growing at a rate of 25% in most areas” **Source:** [] Another alternative to the traditional grocery store is Farmers markets – consumers can turn to these to find fresh produce, homemade baked goods, and other assorted home-grown or made products.

__ Threat of Suppliers __

1 – //Small number of firms in a supplier’s industry.// As agriculture is such a small percentage, it limits the locations or business from which to purchase their products. Furthermore, some foods are only available seasonally. They can, however, be obtained from other states, but this limits their selection from who to purchase. This indicates high supplier power.

2 – //Highly differentiated product//. In the grocery industry, an example of a highly differentiated product that suppliers provide to buyers (grocery chains) is organic vs. non-organic fruits and vegetables. Both are the same product, but are highly differentiated in the eyes of consumers.

3 – //Lack of close substitutes for supplier’s products.//

4 – //Supplier could integrate forward//.

5 – //Focal firm is an insignificant customer of supplier//. According to this condition, the threat of suppliers is low. Grocery stores are large if not the only customer of certain suppliers (i.e. agriculture). Canned Foods