Five fundamental forces with respect to the Indian retail sector

The five fundamental competitive forces are listed below and are illustrated

1) Entry of competitors: The ease of entry for competitors to enter the market and to start competing and the barriers to entry that may exist.
2) Threat of substitutes: The ease with which a product or a service can be substituted, especially made cheaper.
3) Bargaining Power of Buyers. The position of the buyers, and the possibility of their being able to work together to gain efficiencies in buying.
4) Bargaining Power of Suppliers: The position of the sellers. Do many suppliers exist or is there an existence of only a few suppliers?
5) Rivalry among the existing players. The level of competition between the existing players, the size and the strength of the players in the industry.

Let us consider each of the five forces with respect to the Indian retail sector.

Threat of New Entrants:

In any industry, new entrants bring in new capacity, the desire to gain market share and often, substantial 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, product differentiation switching costs, cost disadvantages independent of scale access to distribution channels 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. Other barriers to entry may be the inability to build economies of scale, which are essentially due to he diversity and the geographical size of the market. Considering the boom in real estate and the rising real estate costs, capital requirements in terms in store locations are substantial. At the same time, high investments may also be required to set up logistics and supply chain efficiencies. Product differentiation or the lack of product differentiation could also be seen as threat to entry.

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. The government’s policy on international players entering the market serves in many cases, as a barrier to entry. At an overall level, one can say that the barriers to entry into the sector at this point in time are low.

Threat of Substitutes:

The threat of substitutes exists when the demand for a product declines due to either lower prices of a better performing substitute product, low brand loyalty, new current trends or low switching cost. 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. This segment services a large section of the middle and poor income families in the country.

Bargaining Power of Suppliers:

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, which can include differentiation of inputs, switching costs for transferring to other suppliers, availability of substitute supplier concentration and suppliers’ dependence ob 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, then in theory, the industry isles attractive. The number of buyers and the existence of a few dominant suppliers influence the bargaining power of suppliers. The availability of undifferentiated, highly valued products and suppliers who can integrate forward into 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 re the companies who provide 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 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.