According to Michael Porter, an industry is affected by certain forces, which enable them to attain different levels of profitability. These five forces help managers analyze the industry to gain a better understanding and develop a more effective business strategy. In the discount retailing industry, it is important to consider the following when considering entry:Threat of New Entrants: Four major competitors, WalMart, Kmart, Target and Costco Wholesale dominate the discount retail industry. The threat of new entrants is low, as this small number of large firms has spent decades establishing their position in the market. While online retailers, such as Amazon.com, and smaller department stores do create a semi-competitive environment, there is no major threat as the entry barriers are high (there is major risk and expensive start-up costs) and small start-ups are discouraged from trying to penetrate the market.
The lack of patents and government regulation allow the existence of small department stores in the industry, but their expansion is limited.Rivalry Within the Industry: In the discount retail industry, there is fierce competition among the major brands, as products sold are usually relatively price elastic; most of the shoppers are looking for the “best value for price” and the goods are not significantly differentiated from one another. This leads to efficient management and competitive costs. While dollar stores and other small retailers have established a niche market, they do not pose a significant threat to the market leaders.Supplier Power: The existence of a large number of suppliers and limited shelf space has lead to low supplier power; retailers like Kmart are free to switch to alternate, cheaper brands.
Threat of Substitutes: In terms of brand identity, the main players attempt to differentiate themselves from each other by emphasizing on their strengths; while WalMart is known as the price leader, Target attempts to focus on a slightly more upscale target market. Their efforts to differentiate their brand images aren’t very effective since the products are homogenous and the threat of substitutes is high.Buyer Power: The three main retailers are able to price their merchandise below market price because of their purchasing economies of scale (they are able to avail of discounts when buying in bulk). The consumers have an average bargaining power: the large variety allows for a low level of loyalty, and unrestricted mobility. Their control over price is limited- there isn’t much disparity in since the prices are set as low as possible. However, the price-sensitive nature of the buyers ensures that a supplier that sets prices above the norm is likely to do badly.
The Five Forces analysis makes it clear that the discount retail industry is relatively unattractive to enter. It is difficult for small start-ups to set costs as low as the market leaders; the inability to price competitively in this price elastic market will result in it’s elimination.
