Economic Characteristics Essay, Research Paper

DOMINANT ECONOMIC FACTORS

OF THE FOOD AND DRUG RETAIL INDUSTRY

It is extremely important to understand what the dominant economic factors are in an industry in which you are participating. These factors have a very strong influence in determining the corporate strategies that a company will decide to implement. How can a corporation define and implement their corporate strategy without understanding the environment of the market they are in? They simply can not! The economic factors to be considered are as follows: market size, scope of competitive rivalry, market growth rate, number of rivals, number of customers, degree of vertical integration, economies of scales, resource requirements for market entry, and profitability of the industry. Each one of these factors will be defined in the following paragraphs.

The supermarket retail market is a $363 billion industry(sales 2000). Approximately $272 billion in sales, or 75%, is achieved by 25 companies with 16,000 stores. The total number of retail grocery stores total 127,000. It is obvious that the market share is dominated by a select few corporations. The largest company is Kroger (11% market share), followed closely by Albertson s(9%), Safeway(6%), and Winn-Dixie(4%). See appendix A for the latest sales figures of the top 25 retail grocery industry. The drug store retail market is approximately a $146 billion industry.

The scope of competitive rivalry is intense. The competition among the top 25 retail stores is aggressive at the regional and national level. For example, Kroger operates in 46 major markets and has held the number (1) or (2) position in 40 of these markets. The top (5) major markets are Los Angeles, Atlanta, Seatle, Houston, and Phoenix. Each of these corporations have areas where they are more prevalent in certain regions of the country. For example, Safeway is predominately in the western part of the United States. As stated above, the top 25 companies capture 75% of the market. Where is the other 25% market share going? This is going to local retail grocery stores within certain smaller communities. Of the 127,000 grocery stores, 60% of them employ less than 10 employees. These 76,000+ stores are successful at the local community level and have identified a niche where the larger corporations have decided it is not worth the investment to pursue.

Acquisitions have occurred in recent years for the following reasons:

The supermarket industry is mature

The market is highly saturated with competitors

Severe difficulty in growing through internal operations

The cost of entering markets is high

The retail supermarket industry is a mature market. There is very little changes in market share for the companies included in this category. Supermarkets must acquire existing chains to grow and it is cheaper to grow through acquisitions than to build units through internal development. For example, Kroger has acquired Fred Meyer to gain market share in the Pacific Northwest. Albertson s has acquired American Food to increase their market share in the West region. Safeway has acquired Dominick to gain market share in the Chicago area. Mergers and acquisitions eliminate the risk in entering new markets, enhances customer knowledge with little market research, allows faster expansion, and often lowers operating costs through marketing/advertising, procurement, distribution, coordination, and corporate overhead.

The market does continue to grow at a slow pace. According to Progressive Grocer, supermarket sales have increased 5.6% from 1998 to 1999. All indications in the research that I have done leads me to believe that sales have increased at the same pace in 2000 that it did in 1999. This increase in sales promotes a very competitive environment among existing companies. However, an increase in single-person and one-parent households indicate expansion of away-from-home markets at the expense of the retail grocery industry.

The number of rivals in this industry is becoming more important to recognize. Even though the larger (25) companies dominate the market, substitutes are becoming more of a concern. Because of the single-person and one-parent households, less people are frequenting the grocery stores and more people are eating out at restaurants. Only 6.2% of disposable income is being spent on food to be bought at retail stores.

Backward vertical integration is very important in the distribution of products. It is extremely important to control inventory at the retail store and the warehouse and without timely distribution the retail stores lose customers and sales. According to the Food Marketing Industry Speaks, in the year 2000, the median number of items carried in a supermarket was 49,225. Inventory management is essential for success in this industry. Kroger is the only major supermarket operator to implement a three-tier distribution system. This allows the company to secure favorable terms on slower moving items by buying in full truckloads. Also, Kroger has installed the WIN(warehouse information network) in selected distribution centers to provide real-time on-line inventory information. Gross margins are approximately 2% greater for a supermarket when they have access to a distribution center. This is proof that operational efficiency is key to the success of supermarkets. Because this industry is purely competitive, it is important to become more efficient in their operations.

Safeway, SuperValu, and Kroger are the only companies that go even further upstream concerning vertical integration. These companies manufacture some of their products in inventory. For instance, Kroger has 42 manufacturing facilities. They use these facilities to produce private label products. These products are less expensive to manufacture and are sold at a lower cost than the major brand items. Kroger brand(private label) products account for approximately 25% of their grocery sales and almost 9% of drugs and general merchandise. This strategy allows for more inventory control and also limits the power of suppliers in the industry. Does Kroger have their own trucking fleet?

The supermarket industry is a $4.7 billion dollar industry. However, the resource requirements are high for those companies desiring to enter into this industry. It is capital intense. You must pay for the real estate. You must buy, or build, the structure or pay rent on the existing structure. There are learning and experience curves that must be overcome. On average, for every $1 spent on inventory in the supermarket industry, companies make $.01 profit. If a company is new in the industry, then it is very difficult to know how to price each item in the store, especially since the median number of products is over 49,000. It is also very difficult to compete with the buying power that has been established by the top 25 supermarkets that capture 75% market share.

In closing, the supermarket industry is profitable. However, when a company is developing or evaluating their corporate and business strategy they must recognize the industry s dominant economic factors. Once careful analysis is achieved, each company must recognize their strengths and weaknesses and then develop a strategy designed around the economic environment of the industry.