Porter’s five forces analysis of the UK supermarket industry
This is a detailed Porter’s five forces analysis of the UK supermarket industry. It aims to examine the competitiveness and attractiveness of the UK supermarket industry which is worth approximately £190.8 billion and is expected to grow in coming years (IBISWorld, 2023).
To this end, this article explores how the five forces i.e. competitive rivalry, supplier power, buyer power, threat of substitutes, and threat of new entrants can impact on the UK grocery and supermarket industry and erode the profitability of the existing market players. It is worth mentioning that this industry is dominated by a small number of large supermarket chains.
Bargaining power of buyers in the UK supermarket industry
Powerful customers drive prices down and can demand more products and services at the existing pries. However, to do so, they need to be organised, their number needs to be relatively small, and the switching cost to go from one competitor to another needs to be small.
Considering these criteria, many analysts argue that bargaining power of buyers in the UK supermarket industry is relatively weak making the industry attractive and profitable for the existing companies. However, customers can switch from one competitor to another as the products in this industry are mostly undifferentiated.
Consumers in the UK have changed their shopping habits in recent years. They are increasingly turning to online shopping. They are also opting for convenience stores and discount stores over traditional supermarkets, as these stores are able to offer lower prices and a wider selection of products.
Bargaining power of suppliers in the UK supermarket industry
If there are a small number of suppliers in an industry, they can wield more power (HBS, 2023). The supplier power is not particularly strong in the UK supermarket industry as there are thousands of suppliers both local and international that cater to the needs of the supermarkets. Therefore, supermarkets can negotiate better deals with the suppliers to increase their profitability.
Threat of new entrants in the UK supermarket industry
The threat of new entrants in an industry is determined by barriers to entry. Certainly, it is very difficult for a new company to enter the UK supermarket industry, making the industry very attractive for existing companies.
Just imagine the brand image of Tesco, Asda, Sainsbury’s, Morrisons, Lidl and Aldi. How can a new company challenge these existing giants? It took many years for both Aldi and Lidl to come to a considerable stage.
In addition, opening a business as big as Tesco may cost hundreds of millions of pounds with no warranty of success. Likewise, expertise, industry know-how, and access to affordable suppliers are some other major factors that bar potential businesses to enter the market.
Threat of substitute products or services in the UK supermarket industry
The threat of substitutes in the UK supermarket industry is considerably low for food items. No doubt that it is impossible for customers not to eat food. Likewise, the substitutes of major supermarkets are small convenience stores, off licences, corner shops, and shops selling organic products which are not able to meet all the needs of the customers.
Thus, the threat of substitutes is low making the supermarket industry attractive for the existing companies. It increases the profit potential for the existing companies.
Rivalry amongst existing competitors in the UK supermarket industry
Competition is extremely intense in the UK supermarket industry. Therefore, it is a less profitable industry for existing companies. While Tesco is the market leader, the competition between Asda and Sainsbury’s for the 2nd position is fierce (Kantar, 2023).
Both Morrisons and Aldi are locked in a massive battle for the 4th and 5th positions. Likewise, price wars launched by Aldi and Lidl are also squeezing everyone else’s profit margins.
Discount stores such as Aldi and Lidl are the most formidable competitors in the industry. These stores have been able to undercut traditional supermarkets on price, while also offering a wide selection of products. They have also been able to capitalize on the rise of online shopping, with many stores now offering delivery and click-and-collect services.
Some smaller independent stores are doing very well as well. These stores tend to be smaller, more localized, and specialize in niche products. They are often favoured by consumers due to their more personalized service and greater selection of local produce. However, they do not pose any significant threats to the big retailers.
Summary of Porter’s five forces analysis of the UK supermarket industry
Thus it can be concluded that the UK grocery and supermarket industry is a highly competitive and complex one. It is dominated by large supermarket chains and is constantly evolving to meet the changing needs of consumers.
By understanding the size and trends of the industry, key players, challenges, consumer trends, and strategies for success, existing businesses can develop a successful strategy for success in the UK grocery and supermarket industry. Likewise, potential entrants may decide whether this market is suitable for them or not.
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Last update: 01 March 2023
HBS (2023) The Five Forces, available at: https://www.isc.hbs.edu/strategy/business-strategy/Pages/the-five-forces.aspx (available at 01 March 2023)
IBISWorld (2023) Supermarkets in the UK, available: https://www.ibisworld.com/united-kingdom/market-size/supermarkets/ (accessed 01 March 2023)
Kantar (2023) Grocery market share, available at: https://www.kantarworldpanel.com/en/grocery-market-share/great-britain (accessed 01 March 2023)
Author: M Rahman
M Rahman writes extensively online and offline with an emphasis on business management, marketing, and tourism. He is a lecturer in Management and Marketing. He holds an MSc in Tourism & Hospitality from the University of Sunderland. Also, graduated from Leeds Metropolitan University with a BA in Business & Management Studies and completed a DTLLS (Diploma in Teaching in the Life-Long Learning Sector) from London South Bank University.