According to Michael Porter, an industry is affected by certain forces, which enable them to attain different levels of profitability. These five forces help managers analyze the industry to gain a better understanding and develop a more effective business strategy. In the discount retailing industry, it is important to consider the following when considering entry:
Threat of New Entrants: Four major competitors, WalMart, Kmart, Target and Costco Wholesale dominate the discount retail industry. The threat of new entrants is low, as this small number of large firms has spent decades establishing their position in the market.
While online retailers, such as Amazon.com, and smaller department stores do create a semi-competitive environment, there is no major threat as the entry barriers are high (there is major risk and expensive start-up costs) and small start-ups are discouraged from trying to penetrate the market. The lack of patents and government regulation allow the existence of small department stores in the industry, but their expansion is limited.
Rivalry Within the Industry: In the discount retail industry, there is fierce competition among the major brands, as products sold are usually relatively price elastic; most of the shoppers are looking for the “best value for price” and the goods are not significantly differentiated from one another. This leads to efficient management and competitive costs. While dollar stores and other small retailers have established a niche market, they do not pose a significant threat to the market leaders.
Supplier Power: The existence of a large number of suppliers and limited shelf space has lead to low supplier power; retailers like Kmart are free to switch to alternate, cheaper brands.
Threat of Substitutes: In terms of brand identity, the main players attempt to differentiate themselves from each other by emphasizing on their strengths; while WalMart is known as the price leader, Target