The best work that I’ve ever seen describing the forces at work in a market is from the writings of Michael Porter. Dr. Porter is the Director of the Institute for Strategy and Competitiveness at Harvard Business School. (www.isc.hbs.edu) His material is literally known and used all around the world.
An article describing in the full the concepts here is available for purchase and download from Harvard Business Review via this link - - http://tinyurl.com/be2p4s
Porter defines the Five Forces at work in each market as The Threat of New Entrants, The Power of Suppliers, The Power of Buyers, The Threat of Substitute Products, and The Nature of Rivalry and Competition. (www.bized.co.uk/images/ketporter.gif)
While the meaning of all of these concepts is pretty obvious – the impact that changes to any one of them can have on your business can be substantial.
The Threat of New Entrants - How easy is it for someone else to carry natural foods in your community? For years, local natural products retailers were pretty well immune to competition, other than from other local stores, with whom they competed on a pretty level footing. If you look now at how many grocery stores are seeing opportunities with natural foods and are not only carrying them, but are carrying the with some great merchandising and effective marketing, you will see how much this has changed. How many on-line purveyors of vitamins and supplements are there? While a retailer can pretty well research available real estate and the tendencies of local grocers, the internet makes it relatively easy for someone new to “come to town.” BUT – is this a threat? Are your customers, internet-active? My point here is that the barriers to entry to retailing natural foods are not that high. (I would still say that there are many hurdles, some of them quite high, to have a long-term success at retailing natural products.)
The Power of Suppliers – How much are your suppliers able to control your business? Can they unilaterally raise prices, increase minimum orders, and alter delivery schedules? Or – are there enough alternatives available to you in the supply chain that changes are made a bit more tentatively or even collaboratively? It used to be that geography was a major predictor of the supplier choices that you had – the more rural you were, the few options that you had. I wouldn’t use that as a hard and fast rule any more. During my tenure in retail, in Northeast Oklahoma (hardly a national hotbed of natural products activity) we had a time when we had nine (yes, 9) different delivery options available to use between four different full-line natural products distributors.
The Power of Buyers – In the world of retail, the buyer, the customer, is the one that holds the power. If, obviously, you are not meeting the needs of the customer, they will go elsewhere. As I talk with retailers all across the country about dynamics in their markets, I am finding that a premise that I have used for many seminars to be quite true. For so many years, there was no competition in many markets and many natural products retailers were not focusing on good retail execution. Signage was old and ineffective, in-store merchandising was poor or non-existent, marketing was shoddy, customer service was not a focus, etc., etc., etc. But the customer stayed because no one else carried these natural products. Now, with increased competition, not only from conventional grocery chains and on-line retailers, but from other local independents and even from strong regional chains like Sprouts, Earth Fare, et al, customers are finding that they have choices of where to shop and retailers are learning the lesson about the power of buyers in a painful way. In our market, the buyers are quite powerful simply because they have a wide array of options to choose from.
The Threat of Substitute Products – This is a force that I personally don’t see as a major one in our industry. Products are either organic or they aren’t! Natural, which is a hard term to define, sort of fits into this thought process, as well. What I do see, however, are substitute brands. How many mainstream brands are coming up with organic alternatives to their own products? How many brands are now in the “bar” business? I was in a store the other day that had at least twenty-four foot long, five foot tall bar section! (And there was a particular brand and flavor that I was looking for that they didn’t have!) Along these same lines, many manufacturers are finding a growing amount of private label product available. In our current economy, consumers are accepting these products for premium items (like natural and organic products) much more so that in even the recent past.
The Nature of Rivalry and Competition – How do retailers in your market compete? Are you friendly, but still competing or is it a bitter rivalry? This past weekend, Tiger Woods and Phil Mickelson were able to golf as a pair, both vying to win, but being civil to and complimentary about each other. I am sure that there are some folks who could not do that! I was chatting with the president of one of Tree of Life’s divisions some time back, he told me about a small town in which he served eight stores. Each of the stores sent staff to their competitors’ parking lots on the day that he had a truck roll into town. Each week, he got seven complaints – they all complained that “Store A” got their delivery first. Each week, they changed the order of the deliveries, and each week he still got seven complaints! I am quite sure that their bitterness went far beyond who got the first delivery!
I'll be back in a week or so with some thoughts about SWOT Analyses!