The Forces of Retail Rivalry

In the saturated business of retail, it would seem that every profitable niche is taken.  But if you are a student of the industry, there are plenty of ways to see where to exploit value pools and predict where retail rivalry will leave some companies as roadkill.

First, take a look at my previous post on Retail Strengths to understand how a retailer must position itself to differentiate and be meaningful to its target market.  Obviously, the world is large enough to accommodate more than just a leader and a #2 in every strength position (as in WalMart and Target who compete on Price then Selection for the former and Selection then Price for the later.)

According to Porter’s Five Forces of the Market, competition among rivals will drive profits down to zero.  But because the market and competition is not perfect, rivalrous companies compete to defend their advantages and survive.  The traditional way to measure that is through Market Share. When a low number of rivals share in a substantial market share (indicating high rivalry,)there is a grand struggle for market leadership (think Coke and Pepsi) which often creates extremely high barriers of entry for smaller companies. A high industry concentration  can create almost a de facto monopoly – giving consumers very few choices.  (Another great example of that is a two party political system – but that’s a rant for another post.)

A high number of players with low market share (think of hair salons) means the market is highly fragmented with no single player having a significant market share and, therefore, a high degree of market competitive forces.  Looking at retail as a whole, Americans have a huge variety of choices.   In theory, our many retail choices means we can select to shop at whichever retailer best meets our primary need: low price, high service, convenient location, entertaining experience, etc.  (While true in the macro-sense for the country as a whole, it is NOT true for many inner city neighborhoods and rural outposts of the USA.)

As rivals become more numerous, competition increases.  Incumbent stores attempt to defend their market share by addressing the new disruptive forces in the marketplace.  For example, nearly every grocery chain is attempting to introduce a farm-fresh strategy as they see the growing shift to farmer’s markets and a demand for locally-sourced produce influence their balance sheets.  Some retailers and brands lose their way.  Retailers that stray from their core strength are usually doomed.  (Best Buy, for example strayed from its lowest price in the market position with the advent of Amazon, New Egg and others and now wants to compete on Service (Geek Squad) and Selection and Experience….leading it to no longer mean anything any more….a foreboding sign in retail.)

If you are a retail maven – or if you are a supplier to a retailer – one of the most strategic moves you can make is to deeply understand the positions of the retail rivals in your market and develop a harmonious business plan that complements your retail partner’s strengths.  For example, I can immediately tell you that a high-end fashion brand will fail in its attempt to gain market share through Dollar General.  A niche retail brand that is direct store delivered will fail at Walgreens.  A customized sales product will fail in WalMart as much as a mass market brand will fail in Nordstroms.

When suppliers understand the forces of retail rivalry, they can build deeper relationships and stronger market shares with similarly aligned retailers.

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