Porter’s Five Forces and SWOT RETAIL INDUSTRY

VAIBHAV GUMASTE - 15

ADITYA KRISHNAN - 29

RESHMA CHORE - 7

NAYAN SATSANGI - 46

NIKITA DEORA - 10

HARNISH ZAVERI - 52

KANDARP DESAI - 11

Introduction• Retailing in India is one of the pillars of India’s economy and

accounts for 14 to 15 percent of its GDP.

• Organized retailing, in India, refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the publicly traded supermarkets, corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses. Organised retailing accounts for 4% of total retailing.

• Unorganized retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local corner shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.

Retail Industry Evolution

Traditional Formats

Itinerant SalesmanHaatsMelas

Mandis etc.

Established formats

Kirana shopsConvenience/

department storesPDS/

fair price shopsPan/ Beedi shops

Emerging Formats

Exclusive retail outletsHypermarketInternal retail

Malls / Specialty MallsMultiplexes

Fast food outletsService galleries

Trends in retailing• In January 2012, India approved reforms for single-brand stores welcoming anyone in the world to innovate in Indian retail market with 100% ownership, but imposed the requirement that the single brand retailer source 30% of its goods from India.

• On 7 December 2012, the Federal Government of India allowed 51% FDI in multi-brand retail in India.

Internal Rivalry

• Rivalry refers to number of companies competing in the same markets.

• If there is intense rivalry in an industry, it will encourage businesses to engage in:

1) Price wars (competitive price reductions),

2) Investment in innovation & new products Intensive promotion (sales promotion and higher spending on advertising)

• All these activities are likely to increase costs and lower profits.

• The presence of different types of retailers in India , i.e, foreign retailers and domestic organized and unorganized retail , creates diversity in competition.

• Foreign and domesic retailers in organized sector are competing on large size , broad assortment ,self service format and pleasant store environment.

• Product differentiation can increase profitibility by creating lesser rivalry in the market

• Smaller retailers are moving towards organised formats by including branded merchandise in their offerings.

• Presence of foreign retailers and increased competition create product diversity and innovation in the market.

Characterization (current)

Future Trend

Degree of seller concentration

High High

Excess capacity Medium High

Cost structure of firm High High

Degree of product differentiation among seller

Medium High

Buyer’s cost of switching from one competitor to another

Low Low

Strength of exit barriers Low to Medium

Low to Medium

THREAT OF NEW ENTRANTs

BARRIERS

1. ECONOMIES OF SCALE• Retailing- one of the business enterprises of economy.• Accounts for 14-15% of GDP as Aug,12.• Market share- US $450 billion.

By 2020,• Expected to cross US $1.3 trillion.• Additional US $800 billion in next 8 years.• Modern retail will grow upto US $220 billion.

2. ACCESS TO DISTRIBUTION CHANNELS• The emergence of Digital Channels-

To augment customers’ reach and engage with them.• In India- Lack of physical presence, low technology

penetration and usage and imperfect payment mechanisms.

• Sales through digital marketing-

Miniscule percentage today• By 2020, US $13.3-17.6 billion with 6-8% of modern

retailing

3. GOVERNMENT PROTECTION OF INCUMBENTS

Conditions contemplated by government-• Requirement of State permission• Minimum FDI of `450Cr and maximum stake of 51%• Half of the total investment must be in the back-end infrastructure.• 30% manufactured products should be sourced from SME.

PERCEPTIONS OF ENTRANTS ABOUT EXPECTED RETALIATION OF INCUMBENTS

The Road Ahead for new entrants• Growth opportunities for foreign retailers.• Particularly, for supermarket and hypermarket.• Mom-n-pop'/'kirana' grocery stores - force to reckon with for

new foreign entrants.• Liberalization- phased and calibrated.• Time for potential foreign entrants to make earnest start

with strategizing locations.• Luxury brands like Marks & Spencer, Louis Vuitton or

Versace - to open more stores in the country.

Threat of substitute in the Retail Industry

• Availability of Substitutes:

The tendency in retail is not to specialize in one good or service, but to deal in a wide range of products and services. This means that what one store offers you will likely find at another store. Retailers offering products that are unique have a distinct or absolute advantage over their competitors.

Threat of Substitute Products or Services

• Threat of substitute products or services – high when there are many alternatives to a product or service, and low when there are few alternatives• If you’re a buyer, you want this to be high• If you’re a supplier, you want this to be low

5-16

Threat of Substitute ProductsThreat of Substitute Products

Products with similar function limit the prices firms can charge

Products with similar function limit the prices firms can charge

Keys to evaluate substitute products:Keys to evaluate substitute products:

Products with improving Products with improving price/performance tradeoffs price/performance tradeoffs relative to present industry relative to present industry productsproducts

Example:Example:

Electronic security systems in Electronic security systems in place of security guardsplace of security guards

Fax machines in place of Fax machines in place of overnight mail deliveryovernight mail delivery

Porter’s 5 Forces and Profit

ForceForce Profitability will Profitability will be higher if:be higher if:

Profitability will Profitability will be lower if:be lower if:

Threat of Threat of substitutessubstitutes

Few possible Few possible substitutessubstitutes

Many possible Many possible substitutessubstitutes

Threat of Substitute Products or Services

• As a supplier, you can use switching costs• Switching costs – costs that make customers reluctant

to switch to another supplier• Can be monetary penalties for early termination• Can be like Amazon, which tracks information about you and tailors

offerings

5-19

Examples• Products/services facing a strong threat of substitution:

• Washing powder. A dozen of brands sitting on the shelves and waiting for consumers to pick them up. Consumer will often pick up the one that is on special on shopping day.

• Retail Outlets. Don't like Dmart . Shop at Big Bazar

• Products/services facing a weak threat of substitution:

• Oil. Although alternative forms of energy are being studied and introduced, most engines today run on gasoline. Gasoline can not be replaced that quickly on a large scale.

• The threat of substitute product can be evaluated in the terms of the availability and performance of substitutes, switching cost incurred by the customers and propensity of the consumer to consume.

• There is a high threat of substitution the Indian retail market due its unique market structure. Indian consumers have an array of options to choose ,including small unorganised retailers and large organised retailers for domestic and foreign brands.

Availability of close complement• A perfect complement is a good that has to be

consumed with another good.

Other examples include: Printers and ink cartridges DVD players and DVDs Computer hardware and computer software Torch and battery Car and petrol

Substitutes and Complements• Although the five-forces analysis does not directly consider demand, it considers two important factors that influence demand-substitutes and complements.

• Substitutes erode profits in the same way as entrants by stealing business and intensifying competition.

• Complements boost the demand for the product in question, thereby enhancing profit opportunities for the industry.

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The power of the buyer is the impact that the customers has on a producing industry.

In general, when the buyers power is strong, the relationship to the producing industry is near to market in which there are many supplier and only one buyer.

Under such conditions the buyer sets the price.

In reality there are few such markets.

However the Indian retail sectors are characterized by high buyer-to-supplier ratio with highest density of retail outlets in the world ,making India a supplier’s market.

The Retail sector can be broadly divided into two segments: Value Retailing- which is typically a low margin-high volume

business Lifestyle Retailing-which is a high margin-low volume

business

Bargaining Power of Customers

Factors determining the bargaining power of customers.

Number of Customers

Their size of their orders

Number of firms supplying the product

The threat of integrating backward

The cost of switching

Future Trend In the retail Industry food dominates market consumption followed by

fashion.

The relatively low contribution of other categories indicates opportunity for organized retail growth in these segments, especially with India being one of the world’s youngest markets.

Historically, Indians have been conservative spenders ,thus food forms a huge chunk of India’s consumption needs.

Transition from traditional retail to organized retailing is taking place due to changing consumer expectations, demographic mix etc. With the revival in consumer spending, expansion plans of retailers are back in full swing.

Many International brands have entered the market.

With FDI coming in the bargaining power of the customers will increase further.

Bargaining Power of suppliers• Bargaining power of suppliers is the ability of a supplier to control the cost and supply of the inputs in the market.

• The supplier power of an industry can be altered in many ways, which can include

I. Differentiation of inputs.II.Switching costs for transferring to other suppliers.

Bargaining power of suppliers• The number of buyers and the existence of a few dominant

suppliers influence the bargaining power of suppliers.

• Brand manufacturers can set up their own retail outlets which can be seen as a threat.

• The suppliers to the retail sector are the companies who actually provide the finished products that can be sold in a retail store.

Power of suppliers : Retail industry

• The bargaining power of suppliers varies from product to product, however, at an overall level one can say that the bargaining power of suppliers in India is low because there are a large number of potential suppliers in the market.

• Supplier can exert power by threatening to raise prices or reduce the quality of purchased goods.

• Large no of suppliers and product differentiation is low.

Power of Suppliers : Retail Industry

•  Varies depending upon the target segment, the format followed, and products on offer.

• The unorganised sector has a dominant position, still contributing 95% of the total retail market.

• There are few players who have a slight edge over others on account of being established players and enjoying brand distinction.

• Since it is a capital intensive industry, access to capital also plays an important part for expansion in the space. 

Factors affecting power of suppliersCurrent Future trend

Do supplier pose credible Threat of forward integration into the product market ?

Less only a few main suppliers have started

Can be a option for many well known brands to control direct distribution.

Do firms in industry purchase in small volumes relative to other customers of supplier?

Most of the firms are still local retailers who purchase in relatively small volume.

Firms will purchase in bulk as organised retail is set to grow in India in the coming years.

Are suppliers able to price discriminate among prospective customers according to ability to pay for input?

They are able to discriminate customers based on their requirements.

They may have a problem as there would be many new players in the retail market.

SWOT ANALYSIS

Strengths• High brand equity .• State of the art infrastructure.• A vast variety of products under one roof.• Maximum percent of footfalls converted in sales.• It offers a family shopping experience, where entire family can visit together.

• Benefit of early entry into the retail industry.• Huge investment capacity.• Biggest value retail chain in India .• Available facilities such as online booking & delivery of goods.

Weakness

• Long lines at billing counters which are time consuming.

• High cost of operations due to large fixed costs.• Unable to meet store opening targets on time.• Falling revenue per sq ft.• Overcrowded during offers and peak seasons.• Many branded products are are still missing from Big Bazaar’s line of products.

• High attrition rate of employees.

Opportunities• Lot of potential in the rural market and can also expand the business in smaller towns .

• They can enter into production of various products due to their understanding of customer’s taste and preferences.

• Organised retail is expected to garner about 16-18 % of the total retail market in the next 5 years.

• Increasing mall culture in India.• Improving in store experiences according to evolving customer preferences.

• FDI in retail.

Threats

Competition from other value retail chains such as Shoprite, Reliance (Fresh and trends), Hypercity and D mart.

Unorganized retail also appears to be a threat to Big Bazaar’s business.

Changing Government policies. International players looking to foray into the

market. High business risk involved and margin of

business reducing all the time. Increasing number of Online retail sites.

SWOT matrixStrength – Opportunity•High brand equity and huge investment capacity can help them to enter rural markets and smaller towns.

•Private labels offering good value will have huge scope given the escalating prices of conventional branded offerings. Big Bazaar will have an advantage due to their scale. 

•As a biggest retail value chain in India it should try to establish partnerships with foreign players after FDI in retail announcement.

Strength- Threat•Selling goods at a lesser price will help them to overcome the threat of local retailers where the goods are priced higher.

•Brand awareness and loyalty is high due to which many people buy goods from Big Bazaar in the supermarket category this may suppress the threat of other competitors.

Weakness- Opportunity•It can reduce the waiting time of customers at billing counters and improve the in store customer experience by opening more counters and keeping them always functional with adequate staff.

Weakness- Threat•High attrition rate will lead to more untrained staff, lack of knowlegde and may decrease service quality affecting sales.• Absence of many branded products may give the competitors a huge edge .

THANK YOU