Overall, the supermarket industry is unattractive in 2013 due to the following conditions:
Low threat of new entrants because of strong barriers to entry and the dominance of established players in the industry, especially when including the grocery component of discount retailers, warehouse clubs, and pharmacy chains.
Economies of scale is achieved through high production volumes and low costs, making it challenging for companies to enter the industry and do the same from the get-go.
Proprietary product differences exist primarily in price, quality, and availability. New entrants that are able to differentiate from the current competitors have a greater …show more content…
This “outside” substitute has detracted sales from the traditional brick and mortar supermarket.
High threat of rivalry among existing competitors in all supermarket segments.
Industry growth as a whole has slowed and even diminished due to increased substitutes as discussed above, though individual supermarkets such as Trader Joe’s and Whole Foods experienced high growth in 2012-13 partly due to consumers’ preferences for healthier foods, including organic and specialty products. These changing consumer preferences increase rivalry for profits among the various supermarkets.
Fixed costs are dependent on supermarket size, though most are fairly high. Profit margins are traditionally very thin.
PRICE WARS?
Conduct a financial ratio analysis using the data in Exhibit 2. How do the results reflect the different strategies pursued by these firms? (10 points)
The following financial ratio analysis displays the spread of several grocery retailers, from Whole Foods on the leftmost (premium) end of the spectrum to Supervalu on the rightmost (discount) end. Both Kroger and Safeway are classified as traditional supermarkets, and are wedged in the middle.
Whole Foods
Kroger
Safeway