Porter's Five Forces Analysis: Walmart

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Five Forces Analysis of Wal-Mart Industry

Threat of Competitors:
The biggest threat in the US Grocery/Discount Retailer industry is competition. In particular, the main players are Wal-Mart, Kmart and Target. These firms also face competition from wholesalers such as BJ’s and Costco. Wal-Mart, as the industry leader, has adopted a cost leadership generic strategy. In the past, most firms have not been able to match Wal-Mart’s “everyday low prices.” The problem is that Wal-Mart’s barrier to entry (economies of scale) and strength (supply-chain management) can be easily replicated with sufficient resources. By definition, discount retailers are competing to see who can offer the lowest prices. This places a heavy burden on all firms to maintain a profit margin as they do so.

Threat of New Entrants:
The Grocery/Discount Retailer industry’s threat of new entrants is very low. New firms would be faced with the task of beating the prices of wholesale giants immediate upon entry. Given the economies of scale, brand recognition, service, and variety of product offerings that Wal-Mart, Target, and others continue to improve on each day, this seems very unlikely. In addition, existing firms could afford to temporarily drop prices even lower in order to force a new competitor out of the market.

Suppliers’ Power:
The suppliers to Wal-Mart and other discounters have almost no power. Wal-Mart is notorious for pressuring suppliers to cut their margins lower and lower, and often receives criticism for this practice. Unfortunately, there is no way around this given the consumer demand for quality goods at low prices. And while a supplier might sell half of its volume through Wal-Mart, this brand probably makes up less than 5% of Wal-Mart’s sales. Relentlessly cutting costs all the time, wholesalers deal directly with suppliers and hold all the power.

Buyers’ Power:
Buyers’ actually hold a good deal of power in the US Grocery/Discount Retailer industry. For...
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