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 £181 billion and is expected to grow well in coming years. 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 industry and can erode the profitability of the existing market players.
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.
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 (HBR, 2019). 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 into 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 guarantee of success.
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.
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, 2020). Likewise, price wars launched by Aldi and Lidl are also squeezing everyone else’s profit margins.
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Last update: 01 January 2020
HBR (2019) The Five Forces, available at: https://www.isc.hbs.edu/strategy/business-strategy/Pages/the-five-forces.aspx (available at 24 December 2019)
Kantar (2020) Grocery market share, available at: https://www.kantarworldpanel.com/en/grocery-market-share/great-britain (accessed 01 January 2020)
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Author: M Rahman
M Rahman writes extensively online 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.