Initially there were too many Agencies selling Branded and non-branded goods according to their whims and fancies and competition was nowhere in the picture. That was decades before liberalization. Then slowly the marketers introduced their close relatives as sole distributors. This method encouraged monopoly and again competition was not relevant to either the customer or the marketer. The goods were either imported or merchandised and disposed off through the sole distributor. With an increase in the government regulations the marketer was allowed to appoint distributors on the basis of area. This resulted in some competition. The manufacturers had also taken the mantle of marketers and drastically reduced the number of distributors as their goods were sold through Malls and Hyper markets at very competitive rates.
Some of the competitive forces are listed below:
*The ease of entry for competitors to enter the market and to start competing.
*The ease with which a product or a service can be substituted because of several cheaper alternatives.
*The position of the buyers, and the possibility of their being able to work together to gain cost competitive buying.
*In some cases before the liberalization the suppliers or sellers were few and as such the sellers had a power to bargain. After liberalization this situation has been reversed.
*The level of competition between the existing players, the size and the strength of the players in the industry.
In any industry new entrants bring in new capacity, the desire to gain market share and resources. Barriers to entry deter new competitors from entering the market and creating more competition for established firms. There are several major barriers to entry and they include economies of scale, capital requirements, cost disadvantages and government policy.
The key barrier to entry is the one faced by foreign firms in entering the Indian market. This is the government’s policy on Foreign Direct Investment FDI.
Considering the boom in real estate and the rising real estate costs, capital requirements in terms of store locations are substantial. At the same time, high investments may also be required to set up logistics and supply chain efficiencies.
Taking the above points into consideration, a retailer who has a deep financial base may not face barriers to entry, while on the other hand, it may not be very easy for small players to enter the market and create a significant presence. At an overall level, one can say that the barriers to entry into the sector at this point in time are low.
The threat of substitutes exists when the demand for a product declines due to either lower prices of a better performing substitute product and low brand loyalty. When the threat of substitutes is low, the outcome is favorable to the industry, because fewer alternatives exist.
In Indian retail, the threat of substitutes ranges from moderate to low, depending on the type of product. The unorganized retailing sector in India is still the largest, wherein cheaper versions of products are available.
Bargaining power of suppliers is the ability of a supplier to control the cost and supply of the inputs in the market. The supplier power of an industry can be altered in many ways, availability of substitute supplier concentration and suppliers’ dependence on volume.
The price at which the product is available to the retailer for selling to the end consumer is very important in retail, as it plays a large role in the actual profitability. If suppliers have high bargaining power over a company, the industry is less attractive. The number of buyers and the existence of a few dominant suppliers influence the bargaining power of suppliers. The availability of highly valued products and suppliers who can integrate forward into the industry (e.g. brand manufacturers threatening to set up their own retail outlets) can be seen as a threat.
The suppliers to the retail sector are the companies who provide the finished products to make various retail products or those who actually provide the finished products that can be sold in a retail store. The bargaining power of the suppliers varies from product to product, however, at an overall level one can say that the bargaining power of suppliers in India is low because there are a large number of potential suppliers in the market.
Now Malls and Hyper Markets are buying goods in high volumes and therefore their power of buying from manufacturers is high and so is their negotiating power. Up to Tier 3 cities one can find Malls if not Super Markets. Therefore as the volume moves up the prices have to go down.