Five Forces of Competition for Supermarkets

Threat of New Entrants - The threat of new entrants for the grocery industry is high. Barriers to entry are low and many discount retailers are entering the market. Wal-Mart, Super Targets, Costco, Trader Joes, Whole Foods have all recently entered the grocery retail industry vying for market share.

Power of Buyers - The power of consumers and/or buyers is strong as a result of competition, new business formats, and technology.

Substitutes - Threat from substitutes is high. Restaurants, convenience stores, gas stations, fast food establishments, and Internet retailers are all substitutes to the conventional supermarket.

Suppliers - The power of suppliers is relatively low. National brands have the greatest amount of supplier power but overall the supply is fragmented.

Industry Competition - More than a dozen types of retailers from discount stores, entrepreneurs, fresh organic/natural firms, and ethnic supermarkets are vying for market share. Competition leans toward a perfectly competitive market.

Key Industry Issues
Price Competition - Conventional supermarkets face significant price competition from discount retailers such as Wal-Mart and warehouse stores such as Costco and Sam's Club. Discount Retailers and warehouse stores can compete on price since they have greater buying power and in many cases use non-union labor.

Minimal Growth of U.S. Population - For decades the annual growth rate of the U.S. population has been 1 percent or less. The minimal growth in the number of people to feed, forces food retailers to grow only by taking business away from competitors. This makes the competition in the grocery industry intense.

Health Care Threat - A major concern for US grocery retailers is the increase in health care costs. Employer sponsored premiums have experienced double digit growth rates in the last four years.

Restrictive Legislation/Regulatory Costs - Country-of-origin labeling and record keeping provisions are increasing the costs for US grocery retailers. The increased labeling and enforcement costs are eroding profit margins.

Rising Energy Costs - Rising crude oil prices are hurting gross margins within the US grocery industry. This increases the packaging and transportation costs and is likely to reduce consumer spending thus impacting revenue streams.

Wal-Mart - Depending on how companies deal with the opposition posed by Wal-Mart and its huge economy of scale, further changes are likely to occur in the industry. In a survey by the "Progressive Grocer", conventional supermarkets named Wal-Mart as the biggest challenge supermarkets face in the next 12 months. On a positive note, many supermarket operators have studied Wal-Mart's strengths and weaknesses and have developed plans of attack. Various retailers are implementing upscale touches, better customer service, or stronger perishables to compete against Wal-Mart.

Learn more about this author, John Elliott Senior.
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