Competition #2

Discount Retailer Case

your client is the largest discount retailer in canada, with 500 sotres spread throughout the country. lets call it CanaCo. for several years running, Canaco has surpassed the second largest Canadian retailer with 300 stores in both relative market share and profitablity. However, the large discount retailer in the US, USco has just bought out CanaCo's competition and is planning to convert all 300 stores into USCo stores. the CEO of CanaCo is quite perturbed by this turn of events, and asks you the following question: should i be worried? how should i react? how would you advise the CEO?

case obtained from INSEAD

Framework:


Market: I would look at the market of the Canada. its market size, its growth rate and trends, its costs and revenue structures, and profitability. also i would look at the customers and what their needs.

CanaCo: I would like to look at the company. its operation. particularly its revenues and costs structures and profit margins.

Competition: USCo. I would look at USco, its home market, its costs and revenue structure and margins. then I will look at how it is likely to do business in Canada and how competitive it is likely to be.

Action: finally i would arrive at a recommendation and advise the CEO.

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me: so our client has 500 stores and has the largest market share. are CanaCo's stores close to the competition's 300 stores, or do they serve different geographic areas? Do they directly compete with one another?

I: they are in the same area. in fact you typically see a CanaCo store around the corner with the USCo store.

me: do we differentiate? product differentiation wise, do we sell a similar product mix?

I: yes, CanaCo's stores tend to have a wider variety of brand names, but largely the same product mix.

me: what about our prices? do we sell at a discount to the competitors or do we have similar price level.

I: the price levels are largely the same.

me: are our stores larger than the compeitor's or the same size?

I: the same.

me: I would like to look at the profit margins. Are we more profitable because we have more stores or do we have a higher per store profit margin?

I: it actually has higher profits than the competition on a per store basis.

me: well, higher profit may be a result of higher revenue, or lower costs. can we look at the revenue and the cost structure?

I: CanaCo's cost structure is not any lower than the competitors. however, its higher per store profits are due to higher per store sales.

me: if the store size the same, the product mix the same, the costs the same, then why are we selling more?

I: what do you think might be the reason.

me: customers may be more satisfied with our services? or do we have better marketing?

I: i can tell you that its management model for individual stores is significantly different. the competitor's stores are centrally owned and managed by the competitor. while canaco uses a franchise model in which each individual store is owned and managed by a franchisee that has invested in the store and retains part of the profit.

me: i would probably conclude here that the store managers have better incentives to manage the stores. I believe I have learnt enough about the Canadian market and our client company as well as its competition in the Canadian market. Next, i would like to look at USCo and how it managed to succeed in the US market. I would look at its market position, its costs structures and revenue structures. then I will pay attention to how might USCo do business differently in the Canadian market.

I: fair enough.

me: first i wanna know something about their market shares. how many stores does USCo own and its second largest competitor?

I: USCo currently have 4000 stores and the second largest competitor owns approximately 1000 stores.

me: are USCo's stores larger than competitors?

I: yes about 200,000 sq feet on average. typical discount retail store is approximately 100,000 sq feet.

me: so i would guess that our sales is 8 times the competitor's?

I: 5 times. USCo has 5 billion in revenue, and the nearest competitor sells about 1 billion.

me: I would like to consider the costs strcuture. does USCo have a lower cost structure than the competitions?

I: in fact, its cost goods is approximately 15% less than that of the competition.

me: so it should be able to sell at a lower price than the competition.

I: yes. its prices are on average about 10% ower than those of the competition.

me: so it should still have a 5% more in margin than the competition. now i wanna know how it would do business in Canada. How is USCo's brand recognition in Canada?

I: Canadian shoppers are not familiar with USCo.

me: product differentiation wise, does USCo sell different products? or does the customers in Canada expect USCo to sell different products?

I: no, they should sell essentially the same products.

me: I would imagine that USCo should incur higher costs to do business here in Canada than in US? especially distribution costs. does that make sense?

I: yes, but as CanaCo get a large amount of products from US, the difference here is small, about 2-3%.

me: considering a 10% lower price in US market, that would probably mean they should sell at a 7-8% lower price than us?

I: I would agree with you on that. Summarize for me.

me: First, should CanaCo be worried. yes. in the short run, it may be safe, considering the stores are well managed and the brand name is better in Canada. but in the long run, people will see there is a consistent price difference and a lot of them would switch. Second, what should CanaCo do? I belive CanaCo should look to lower its costs to compete with USCo. probably by consolidating suppliers?

I: how would you go about with the suppliers?

me: I would probably look to purchase from fewer suppliers to achieve economies of scale. and I would probably also consider offering fewer lines of product so that i can consolidate buying power. Perhaps to negotiate price with the suppliers. I would carefully pick some of the more premium and profitable products that people would like to buy at a premium. I mean, if we cant compete with USCo on volume, size and price, we could compete with them in terms of service, and in premium market.

I: do you have other suggestions to make CanaCo more competitive?

me: I would also suggest we prepare some loyalty program, but that would probably reward some of the customers that would be shopping here anyway, which is not cost efficient.

I: what else?

me: I would assemble a marketing team to advertise our better service here. we could also offer gurantee programs that surpass USCo's.

I: I would suggest you analyze the advantages and disadvantages of each of your recommendations before presenting to the CEO.