Tesco INSEAD case study.

Essay by CiaostarUniversity, Master'sA, October 2003

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UK Supermarket Industry in the 1990s

The supermarket industry in UK was characterized by fierce competition and low profitability, with big players dominating the marketplace. Porter's five forces analysis (summarized in Exhibit 1) provides insights into the industry:

Rivalry: Since there was little product differentiation between the multiples, price was commonly used as the competitive weapon. While the demographic profile of the shoppers of each chain was different, with Sainsbury at the top end, and Kwik Save at the bottom, most chains had a sub-brand (eg. Sainsbury with Savacentre; Safeway, with Presto) which targeted their competitors' market. As a result, margins were razor thin in the industry.

Suppliers: Due to limited shelf space and the abundance of products to be displayed, supermarkets had traditionally strong bargaining position vis-Ã -vis the suppliers. While this held true for most suppliers, the growth of major FMCG companies like Nestle and Proctor & Gamble had tilted some of the power back to the suppliers.

Overall, the power seemed to be relatively balanced between the two parties. In general, the power varied between retailers and between suppliers, with size the key determinant of power in this relationship.

Customers: While the target customers were different for each major supermarket chain (with differentiation on income levels, age and geography), little product differentiation and extensive overlaps in target segments gave the consumers a lot of flexibility to shop at different chains. As a result of this low switching cost, supermarket chains were unable to raise their prices even though their margins were so slim. Therefore, customer power was judged to be from moderate to high.

Substitutes: There were a number of traditional substitutes for the supermarkets, ranging from butcher shops, convenience stores (Eg. 7-Eleven), corner grocery stores, to department stores (Marks and Spencer had been in the...