2.0 PORTERS FIVE FORCES MODEL FOR UK SUPERMARKET INDUSTRY Supermarkets’ performance is reliant on consumer’s income and their willingness to spend. The growing consumer pressure to drive value, quality and taste requires companies with strong management teams to understand the market trends in the industry of which this had led to constant competition among firms in the industry. This rivalry is based on firms in the industry battling to win the highest market share in the industry (IBISWorld). However, the UK supermarket industry has witnessed rapid growth since the establishment of its first service shop in 1950. The UK supermarket industry is an oligopolistic market with an annual growth rate of 1.5% in 2011. The industry has employed a total of 923,196 people and has generated a sum of £127 billion in revenue (IBISWorld). Furthermore, more than 50% of the market share in the industry is controlled by TESCO, ASDA, Sainsbury’s and Morrisons (BBC). Porter (1980) illustrates in this analytical tool 5 variables that determine the attractiveness of an industry for organisations in terms of profitability in their immediate environment. Using the forces in this model we can analyse how attractive the UK Supermarket industry is to enter, the 5 forces are as follows.
2.1 BARRIERS TO ENTRY The UK supermarket industry has continued to provide a very tough and highly competitive environment. New entrants to the Supermarkets industry face significant hurdles (IBISWorld). Barriers to entry in the UK supermarket industry relies on the entrants capability of matching capital requirements of existing firms,
the UK supermarket industry is dominated by firms known as Tesco, ASDA, Sainsbury’s and Morrison’s (Big 4) owing up to 69% of market share in the UK (Prophet, 2009). A new entrant would have to achieve economies of scale needed to achieve cost parity with the big 4 and compete on cost advantage. However, achieving economies of scale is not based on production but other factors such as efficiency, pricing, range of goods and value of products (Prophet, 2009). Tesco for example have very low cost margins in comparison to the scale of their operations and distribution channels but they are able to achieve high sales because of convenience, range of products and different services they offer (Coriolis Research, 2004). Product differentiation is another barrier to entry. A new entrant would need to achieve an individual level of differentiation and attain an identity through promotions and costly advertising. In 2009, total advertising costs for the big 4 firms in the industry was approximately £140 million (IBISWorld). However, new entrants face disadvantages in lack of expertise and knowledge of consumer trends, access to distribution channels and location to gain competitive advantage (Prophet, 2009). The big 4 are also highly responsive to competition and what they do; any move will be counter acted to sustain market share. Therefore, there is a low threat of new entrants into the industry.
2.2 BARGAINING POWER OF BUYERS The bargaining power of buyers in this industry is high because customer power also acts to force prices down. If beans are too expensive in Tesco, buyers will exercise their power and move to Sainsbury. Tesco’s famous loyalty club card remains the most successful customer retention strategy that significantly increases the profitability of Tesco in meeting customer needs, customizing service, ensuring low prices, better choices, and constant flow of in-store promotions enabling brands like Tesco to control and retain their customer base (Prophet, 2009). In the UK supermarket industry, the buyers are high in number but low in...