- Threat from substitute merchandise
After the collapse of the bubble economy, the inclinations of consumers seemed to be split into two. Convenience chains face intensified competition with department stores in the domain of ‘value-added’ products and with discount shop on ‘low-priced’ merchandise. In addition, large-scale retail stores have extended their business hours. As a result of this, the advantages which the convenience industry one possessed over the other retail sectors have started to be eroded. Therefore, the pressure from substitute products is becoming much more prevalent.
- Bargaining power of shoppers
For the convenience industry which handles mainly products related to personal effects, the differentiation of products from those of rival is not easy. Since the collapse of the bubble economy, the purchasing patterns are becoming more diversified, symbolized by consumers’ attachment to both value and quality of merchandise and also the lower price merchandise available. Therefore, the bargaining power of shoppers with these variable options is getting stronger. Each chain is trying to produce their own merchandise with the goal of getting into an advantageous position in the drive to attract shopper.
- Bargaining power of manufacturers
The bargaining power of manufacturers in the convenience industry is weak. Conventionally, most producers are medium-sized to small-sized companies with insufficient production facilities, technology, and quality control. Therefore many convenience dealers have been giving various guidance and assistance to producers in order to upgrade their abilities. In the process, the convenience industry had enhanced its dominant power over the producers. Therefore, the convenience industry is even starting to take control of major makers by using joint development of products and its sales network.
PESTEL Analysis
Environment influences is particularly important for the organisation not only in the past but for the future. There are 6 key forces in the macro-environment, sometimes known as a PESTEL analysis, involves identifying the political, economic, social, technological, environment and legal influences on an organisation.
Political
The direction and stability of political factors is a major consideration for industry. Some of the laws and regulations are most commonly restrictive, they tend to reduce the potential profits of industry. However, some political actions are designed to benefit protect industry. For example, in 1974, Japan enacted the ‘Large Scale Retail Store Law’ regulating the set-up of large-scale retail stores and new rules on business hours. Large-scale market retail stores were forced to set up stores in less favourable locations. However the small- to medium-sized retail stores despite being under the protection of this law, began to lose their competitiveness due to inefficiency, lack of effort and other reasons. At this time, Ito Yokado Co., looked at the possibility of setting up small-sized stores which be located in the prime shopping districts. This legal loophole was also the reason why many small-sized chain stores by the name of convenience stores were born.
Economic
Economic factors concern the nature and direction of the economy in which a firm operates. Because consumption patterns are affected by the relative affluence of various market segments, in its strategic planning each industry must consider economic trends in the segments that affect its industry. Over the period of 1987-1997, the grocery trade had grown steadily attribute to the global economic growth and the rise in population. It also reflected convenience retailing industry in a boom. But stepped into 21 century, global economic slow down and population decrease. It affected the farther development of convenience retailing industry.
Social
Social factors involve the beliefs, values, attitudes, opinions and lifestyles of persons in the industry environment, as developed from cultural ecological, demographic, religious, educational and ethnic conditioning.
From 1990s, the tastes of consumers started to change and they begin to place more importance on value of money as consumers’ interest of quality-of-life issues. Consumers started to shop more carefully and selected products based on value and quality rather than merely the selling price. The strategy of bargain sales which were popular during the bubble economy isn’t suitable anymore.
The other most profound social changes in recent years has been the entry of large numbers of women into the labor market. It has created or greatly expanded the demand for a wide range of products and services necessitated by the absence from the home. More prefer to shop in supermarkets or convenience store, which offer convenience, better atmosphere and value for money with their numerous special product promotions.
Technological
Stepped into the 1990s, with the development of information technology, client-server system and data analysis become the most essentials in the grocery industry. By using the information service, a service of payment acceptance of public utility bills among others, also has been rapidly expanding.
By using the integrated information system, the rapid transmission of POS information became possible. It contributes not only higher efficiency in order placement and in the development of new products. It also helps to create a ‘service business’ such as payment acceptance of bills, mail order, catalogue shopping and so on. An effective distribution system with vendors is also hook up via its information system. Convenience store industry was previously simply a ‘place to sell merchandise’ but now it becomes a ‘place to offer services’ as well.
A ‘manpower shortage’ became a serious problem after 1980s, convenience store have to hire many part-time workers. Therefore, its immediate task is to make them into productive employees despite their lack of experience. Industry should design its information system base on the concept that ‘anybody can use it’.
Environmental
It is quite natural that people concerned with environmental issues could worry about the convenience industry. As it operates 24 hours and required high frequency deliveries, it inevitably include in the strong criticism because high frequency delivery is said to cause traffic jams and increase exhaust gas pollution. Even the 24-hour operation mode is criticized by many quarters in light of environmental problems, and even social problems like the increase of crime.
To deal with these problems, convenience store takes up with reducing the numbers of deliveries through their effort. It also invests on electricity-saving equipment to be installed at all of its chain stores to save the electricity of electric lights and also the electricity of air-conditioners simultaneously.
Industry Life Cycle
The nature of corporate strategy will change as industries move along the life cycle.
Introduction Phase
In 1927, the Southland Ice Company is founded in Oak Cliff, Texas Tote’m stores introduced. At the same time, other types of stores were emerging such as "midget" stores and "motorterias" or mobile convenience stores. Sometimes supermarkets had small outlets in rural areas for people.
The pattern of the emerging "convenience" types of stores grew modestly until World War II (although they were not yet called "convenience stores"). The big factor in all of these operations was fast service. In this phase, industry performed a high price, but profit is low due to investment in new category.
Growth Phase
At the end of the World War II and the increased ownership of automobiles sparked the rapid growth of the industry in the 1950s. The automobile helped fuel the growth of suburban living. The industry grew rapidly along with this consumer need for convenient shopping.
Additional forces continued to drive convenience store growth. As grocery stores became larger and larger, they became less convenient for the customer who was in a hurry. Convenience stores filled in. Also, the increase in the number of working women reduced the amount of time available for shopping. Convenience stores began offering gasoline in US when self-serve became popular.
As the industry moves towards growth, competitors are attracted by its potential and enter the market: supermarkets, mom-and-pop grocery stores, specialty food shops, drug and variety stores, vending fast food chains.
Step into 1970s, convenience store operators had to cope with price and wage controls, gasoline and merchandise shortages, record inflation and interest rates, and increased competition due to longer hours and increased discounting by supermarkets.
Maturity Phase
As all the available customers are satisfied by the product, growth slows down and the market becomes mature. In the late 1980s, there was a continued reduction in the opening of new stores and an increase in the investment required for a new store. Industry attention moved to improve operations, margins and cost control. Rapidly changing technology area is providing new challenges and opportunities for the industry.
Costs continued to go up with severe competition held back margins; more regulations were imposed, and there was an increased cost of doing business. Store labor costs were increasing due to increases in the minimum wage, more fringe benefits as well as many other factors such as adding service items like gasoline. As the number of convenience stores increased, the average number of households served by an individual store dropped. The higher level of saturation and increased competition led to fewer customers per store; therefore, stores remodeled to attract more customers rather than building new stores.
The convenience store industry continued in the maturity phase; but the impact of increased competition, higher energy costs, new store expenses, and higher labor expenses reduced profits as a percentage of sales. Those companies that seek out customer needs and align themselves to serve those needs will be successful in the future.
Structural drivers of change
Structural drivers of change are forces likely to affect the structure of an industry, sector or market. It will be the combined effect of some of these separate factors that will be so important, rather than the factors separately. (Johnson & Scholes, 1999)
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Issues of the law’s effectiveness: With the deregulation of many areas such as liquor license, medical supplies, travelling tickets, tours and so on, convenience stores should prepare its entry to deregulation fields. For instance, in expectation of deregulation in the sales of medical supplies, many convenience stores are preparing to entry to this field. It gives more opportunities for industry to attract more customers.
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Offering new services: Offering new service is also a weapon for convenience stores to face the competition. Industry offers convenient services based on each neighborhood's individual needs, including automated money orders, copiers, fax and automatic teller machines, long-distance phone cards and lottery tickets, where available. Not only does this service contribute to the increase in sales figures, but it also attracts many customers resulting in incidental shopping as well. For example, 7-Eleven in Japan sell rice and this contributes in particular to capturing the housewife bracket as a new customer type. This customer group had previously seldom shopped in the convenience store. Offering goods and services related closely to daily life enables a store to expand the base of its customers.
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Penetration of different industry: Competition becomes aggressive because the penetration of different industry. In the convenience retailing area, supermarket establishes their 24 hour store in some place. Convenience stores sell drug in order to attract more customer from drug store. Global players are getting into the game. Discount department stores are moving into grocery store categories. The convergence of retail competition will intensify competitive pressures and renew downward pressure on prices and margins.
Scenarios from configurations of factors
4 high impact, high uncertainty factors in the environment
A: Threats from new entrants
- strong
- weak
B: competition with rival firms
- Strong
- Weak
C: Cost of merchandise
- High and increasing
- Stabilising
D: Productivity and innovation
- Growth rapidly
- Growth normally
Scenario 1:
No great change
Threat from new entrant is weak (A(b)). Existing chains are in an advantageous position compared to new entrants. Competition from existing firms is weak also (B(b)). Industry has strong control over the vendors so that it has stable cost (C(b)).
Productivity and innovation growth normally for the more difficult environment(D(b)).
Scenario 2:
High developing cost
Threat from new entrant is weak (A(b)). Existing chains are in an advantageous position compared to new entrants. Competition from existing firms is weak also (B(b)). Industry lost its strong control over their vendors and cost increased (C(a)). Capability of productivity and innovation grow rapidly attribute to its mature Information System (D(a)).
Scenario 3:
High competition with high development of its own industry
Threats from new entrants of another category is weak due to its excellent information system (A(b)). However, competition and strong hostile relations with rival firms are intensifying year by year (B(a)). Industry has strong control over the vendors and this position in terms of bargaining makes its position in the convenience industry very strong (C(b)). Capability of productivity and innovation grow rapidly attribute to its mature Information System (D(a)).
Analyse of Scenario 3:
With the penetration of industry, many supermarket companies try to step into convenience retailing. Discount department stores are also moving into convenience store categories. They set up their own convenience stores which provide similar service to customers. Convenience retailing industry requires a huge initial investment in technology. It is also necessary to build up an excellent distribution system for the speedy delivery of merchandise. The building up of a large-scale distribution system together with vendors cannot be realized in a day. Therefore, only after years of experience can it be possible to obtain the operational know how on the management of convenience chains.
Competition with rival convenience stores will be intensifying. With the development of more than 70 years, the total number of convenience stores exceeded a large amount and this means less available of population of each stores. The number of stores started to increase in the 1990s but the annual sales of the industry has grown slowly (Konbini 1997, Spring issue). A coined phrase of a ‘convenience street’ was created for the many areas crowded with convenience stores. Even 7-Eleven cannot avoid this intensification of competition with rival firms.
Due to stagnation and the intensification of competition, industry requests vendors to keep up quality, while also pressuring them to produce at lower costs. Major manufacturers now develop new products based on the information on customers and the market information is provided by the convenience industry. For this reason the sales network of the convenience industry are very attractive for producers. Therefore, the cost of merchandise will be stable in a long term.
At the same time, the life cycle of products is getting shorter and the burden of investment in the facilities for the production of new products gets bigger. It makes productivity and innovation become more different and takes longer time. But with the rapid development of information system, the higher productivity and innovation can be achieved.
Conclusion
Business in the grocery trade had grown steadily in the world. This has enabled a number of stores, particularly supermarkets and convenience stores. It is not surprising that convenience stores will present the most successful performance and also make impressive gains in value added and profitability
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Bibliography
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Department of Statistics Singapore, ‘The grocery trade in Singapore, 1987-1997’
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Johnson & Scholes, ‘Exploring Corporate Strategy: text and cases’ (1999)
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Richard Lynch, ‘Corporate Strategy’ (1997)
- http://www.nacsonline.com/NACS/News/Press_Releases/2000/pr012400.htm
- http://www.ameristop.com/industry.html
- http://www.the-infoshop.com/study/dc5662_retail_revolution.html
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