Porter’s Five Forces Analysis on Indian Retail Industry An analysis of the structure of the industry should be undertaken in order to find effective sources of competitive advantage (Porter, 1985). Therefore, in order to analyse the competitive environment of Tesco, Porter’s five forces analysis has been used by the researcher as follows: Threat of substitute products and services The threat of substitutes in the grocery retail market is considerably low for food items and medium to high for non-food items.
In the food retail market, the substitutes of major food retailers are small chains of convenience stores, off licenses and organic shops which are not seen as a threat to supermarkets like Tesco that offer high quality products at considerably lower prices (Financial Times, 2009). Moreover, Tesco is further getting hold of these shops by opening Express stores in local towns and city centres creating a hurdle for these substitutes to enter the market. However, the threat of substitutes for non-food items, for instance clothing, is fairly high.
It should be noted that so long as the economic recession prevails, customers will be inclined towards discounted prices hence Tesco is a threat to the speciality shops. Threat of entry of new competitors The threat of entry of new competitors into the food retail industry is low. It requires huge capital investments in order to be competitive and to establish a brand name. Major brands that have already captured the food retail market are Tesco, Asda, Sainsbury’s and Morrisons and they account for 80% of all shopping in the UK (Mintel, 2010).
Therefore, new entrants have to produce something at an exceptionally low price and/or high quality to establish their market value. Gaining planning authorisation from local government takes a considerable amount of time and resources to establish new supermarkets and this is therefore a considerable barrier to new entrants. Intensity of competitive rivalry The intensity of competitive rivalry in the food and grocery retail industry is extremely high. Tesco faces intense competition from its direct competitors, including Asda, Sainsbury’s, Morrisons and Waitrose, which are ompeting with each other over price, products and promotions intermittently. It should therefore be highlighted that Asda is one of the key competitors in this segment with an increase of market share from 16. 6% to 16. 8% during the fiscal year 2010/ 09, while Sainsbury’s has shown an increase to 16. 1% from 15. 8% and Morrisons to 11. 6% from 11. 3% through the same period (Euromonitor, 2010). The slow market growth essentially means that these increasing market shares from competitors have intensified the market rivalry, which is threatening Tesco’s market leadership position.
In rural areas where the nearest superstore can be some distance away, some primary consumers are attracted by retailers like Somerfield and Co-op . Hard discounters like Aldi and Lidl have taken over the market in times of recession. During 2008 they recorded a growth of sales of over 25% (Keynote, 2010). Bargaining power of buyers The bargaining power of buyers is fairly high. In cases where products have a slight differentiation and are more standardized, the switching cost is very low and the buyers can easily switch from one brand to another.
It has been proposed that customers are attracted towards the low prices, and with the availability of online retail shopping, the prices of products are easily compared and thus selected. Bargaining power of suppliers The bargaining power of suppliers is fairly low. It should be noted that the suppliers are inclined towards major food and grocery retailers and dread losing their business contracts with large supermarkets. Hence, the position of the retailers like Tesco, Asda, and Sainsbury’s is further strengthened and negotiations are positive in order to get the lowest possible price from the suppliers.
