Economies Of Scale – Retailing Essay, Research Paper

Aim – During this investigation I will identify the economies of scale earned by a large firm and compare them with a small firm. To make it a fair comparison I have chosen two firms associated with the same market. These are Waitrose, and a small family owned village shop, Beaconsfield Stores. Both of these sell groceries, which will make it easier to directly compare between them. Both these firms make a range of goods including, fruit and vegetables, tinned products, drinks and canned food. When looking at both shops I could clearly see that the different areas covered by the products sold were very similar but the main difference was the range of products within any area, e.g. although both stores sold cat food Beaconsfield may only have one or two flavours, whereas Waitrose stocks many. Some of the advantages enjoyed by Waitrose include buying in bulk, allowing employees to specialize at a particular job, more security when borrowing money, lower administration costs per unit, cheaper cost for transport and the ability to spread risks. These advantages can be grouped under several different economies of scale. Below are the advantages in relation to economies of scale:

Technical Economies of scale in this area occur within the production process. Both these firms use an EPOS system to record sales through the till, however because Waitrose has a steady flow of customers this system is never being left idle and is therefore being used to its full potential. In comparison there are many times in Beaconsfield where no customers are in the shop and so the till system is not in use. This is an example of an indivisibility. The larger the level of output, the less likely that indivisibilities will occur. When they do occur the cost per item of using the machinery will increase because the firm is getting less output from a machine costing the same

price.

Marketing The larger the firm, the bigger chance it has of being able to buy in bulk. This is the main factor associated with economies of scale. It occurs when large firms place consistently large orders with suppliers and so leaves them in control when negotiating terms. A large supermarket may approach a farmer and request them to grow X amount of potatoes and then agree to buy all of them, they can then control them with the threat of canceling the order. By doing this, the large firm is able to secure lower prices for its inputs and so charge less to consumers. The local firm cannot compete on these grounds and so Beaconsfield buys small amounts regularly, this helps avoid wastage, which is a big problem to larger firms.

Financial Within financial economies borrowing money is important for any business when funding expansion. Waitrose is far more likely to borrow large amounts of money and so can secure a lower rate of interest. This is another example of better terms being offered to the larger business. When buying new machinery Beaconsfield will usually choose lease purchase, which allows them to avoid the need to borrow money. Smaller firms are charged higher rates of interest because they are less financially secure and so less likely to be able to repay the loan.

Conclusion

I can quite clearly see that economies of scale exist and are used to maximum effect by large supermarkets. However, smaller shops target different markets such as people with no means of getting to out of town superstores. They provide a social service to the elderly, and stock many convenience items. From my interview I found that the most noticeable economy of scale was the discount gained from buying in bulk. The large supermarkets use specialisation to become more efficient and their range of products to cover any risk involved with changes in peoples wants.