Industry Analysis: Discount Department Stores

Industry Analysis: Discount Department Stores

Discount department stores are those that offer lower prices for products that may be lower quality, extra inventory from other stores, or simply something that consumers purchase often, and like to buy inexpensively. These department stores often base what they have to offer consumers on their prices, as opposed to their selection, quality, shopping experience, or other factors.

Industry's Dominant Features

The dominant feature of the discount department store industry is the pricing structure. it's the area in which most discount stores come out ahead when it comes to the competition of the bigger retailers (Rugman & Collinson, 2009). The market size for discount retailers is growing rapidly, however, because a tight economy means that many more people must shop for discounts and only purchase what they need. Because of that, the market share of these kinds of retail stores has grown tremendously in the last five years. At the same time, the scope of rivalry has also grown. Retailers that are not classified as discount department stores realize that they must do something in order to keep customers coming in, so they have cut some of their prices on certain items to more closely match what is offered at the discount stores. By doing that, they feel as though customers will come in for those low-cost items, and they will stay to buy other items, as well. This strategy has worked relatively well, but many people are still going to the discount stores and shopping around much more carefully than they did in the past, when economic times were much easier. The discount department stores are in a huge growth cycle at the moment, because of the economy (Liston, 1986). Even when things improve, the possibility is there that growth will remain because consumers are aware of what these stores have to offer.

Issues of concern in the Broad Macro-Environment

In the macro-environment, there are many issues of concern that can affect discount department stores. These can include political, economic, socio-cultural, technological, legal, and environmental, but not all of them are highly applicable to stores of this type. Politically, there is little that a discount department store must worry about. Because the store is not engaged in anything that would be an issue politically for either side, there is really no fear there. The only issue that could relate to discount department stores politically could have to do with where the products are made (Chant, 1997; Hunter & Green, 1995). If there are tariffs or other brewing problems, getting products from a particular country and stocking the shelves with them could be a legitimate cause for concern (Lea, 1988; Lee, 1987). This would, however, be unusual.

Economic forces are much more of interest to a discount department store, because these kinds of forces are the main ones at play when people shop at a store where things cost them less (Nickols, 2000; Rugman & Collinson, 2009). While discount department stores are also used when the economy is good, there are more likely to be used by a larger number of people when the economy is poor and there are difficulties. Because of this, economic forces that are acting on the store are more significant than any other forces to which the store might succumb. Of course, the store must also consider the other side of the economic forces: how much is it paying for merchandise? If the store is being required to pay too much for merchandise, labor, or anything else, it is very possible that it will not be able to meet its overhead - and that will be a problem regardless of how many customers are coming into the store.

Socio-cultural forces are often tied to economic forces, especially for a discount department store. The reason behind this tie-in has to do with the fact that these kinds of stores are typically utilized by people who either (a) do not have much money, or (b) are very frugal (Lockwood, Loomis, & DeLacy, 1993). Sometimes these people are one and the same, but it is not common to see rich or even upper-middle-class people shopping at discount department stores. They have the money to buy the finest goods, so that is what they do. With this being the case, the lower- and middle-income people are the ones who shop at discount department stores. When the economy has difficulties, though, there are more people who fall into those categories. That means more customers for the store, but it also means that it is possible that none of the people who shop at the store will be able to purchase as much as they otherwise would. These two issues can balance out for a discount department store during lean economic times.

Technology is not really much of an issue for discount department stores. These stores have, generally, the same basic technology as higher-priced stores. Their systems may be a bit older, but that is not a problem or a surprise to the people who work or shop there. The same is true with legal issues, as there are very few that are specific to discount department stores. These stores face the same kinds of legal problems that could be faced by other department stores, including defective product lawsuits, injuries like slips and falls, and workers compensation claims from employees who were injured while they were performing their assigned job duties for the company.

As with many other trends in the PESTLE forces, environmental issues are not necessarily a concern for discount department stores any more than they are a concern for any other type of store. As long as the store is disposing of trash correctly and cleaning up any kinds of spills or other problems in accordance with environmental regulations, there is little else that can be done or that needs to be done. Overall, the only serious concerns for discount department stores are economic and socio-cultural factors, as both of those drive the business model of these stores much more than any other factor.

Porter's Five Forces

With Porter's Five Forces, there are several issues that have to be considered. These are:

The threat of substitute products

The intensity of competitive rivalry in the industry among current competitors

The threat of new entrants

The power of buyers

The power of suppliers (Porter, 2002).

Each one of Porter's Five Forces will need to be discussed here, because they are all highly relevant to what is taking place in the discount department store industry and what could take place in the future.

Threat of Substitute Products

The threat of substitute products is very real for discount department stores. These stores often find that they struggle with the selection they have already, because it is not seen to be as good as the selection of products that can be found at other retailers. With that already being the case, the discount department store must work to keep its customers and to keep the products that it has as fresh and innovative as possible. Sometimes, that is easier to do than it is at other times. Substitute products that are new and improved, or that come out in place of other products, are often not as common in discount department stores as they are in higher-end stores that have more expensive products for sale. Because of that, discount department stores may miss out on some of the sales that they would otherwise get. The more substitute products that appear in the marketplace, the more likely it is that discount department stores will not be able to provide customers with what they really need and want in their department store experience, and that can mean a high degree of lost revenue (Porter, 2002).

Intensity of Competitive Rivalry in the Industry

Within many industries, the intensity of competitive rivalry is very high (Nickols, 2000; Porter, 2002). The discount department store industry is no exception to that, because it has quite a large number of competitors around which it must work. Many people think that the only competitors are other discount department stores, but that is not really the case. Any retail or department store, online or offline, that carries the same or similar merchandise is a competitive rival for a discount department store. Unfortunately, that is a large number of stores and can also move far outside of the geographic area in which the store is located. That is a deep concern for any discount department store, because it means that the rivalry it faces may not be as clear-cut as would be assumed. This is the case with many industries, as they often underestimate the rivals that they have and how many competitors they actually have to deal with as they work to grow and develop their business (Nickols, 2000). Every business has rivals, of course, but how many and to what degree can really vary based on the industry and how that industry is being affected by issues such as the economy (Porter, 2002).

Currently, the economy is not faring very well. With that being the case, there are more people shopping at discount department stores. That would seem like a good thing, but it is not necessarily as good as it would appear at first glance. Instead of being a boon for discount department stores across the country, it is simply another reason for more people to get into the market and try to take market share away from the companies that are already available. That is seen frequently when a particular type of business is performing well, and is not uncommon (Nickols, 2000; Porter, 2002). It can, however, be frustrating for a company that is focused on what it is doing and was not anticipating the need to focus too strongly on the competitors moving into the market.

Threat of New Entrants

In addition to the competitors that a company already has, there is the threat of new entrants to the market, (Nickols, 2000; Porter, 2002). That is a serious threat, because many of these new entrants can be companies or even individuals that the original company was not anticipating. With that in mind, discount department stores must be aware of larger competitors launching discount versions of themselves in order to be more competitive. In some parts of the country, there are department stores and then "outlet" stores that carry the same name. These have similar products to the non-outlet version of the store, but they are also less expensive. Many people shop there, because they assume that the products are just as good and those products are still tied to a brand or company name the individuals easily recognize. This is beneficial to discount department stores, but can harm them when their competitors begin to undertake the same strategy.

Another issue with the threat of new entrants is that they will bring lower prices, better service, or something else that the current companies are not able to provide or not good at providing (Porter, 2002). If that takes place, the company will not be able to meet its obligations as easily as it could have in the past. Naturally, that is disastrous for companies that are already offering discounted merchandise and that do not have a high level of capital with which to work. Still, many discount department stores today are finding that they are making more money than they did in the past and that they are able to stay afloat, even when new entrants are moving into the market. New entrants often have a high level of power, though, because they are new and different - at least until people visit there the first time and see that they are generally the same as their competitors. Once that has taken place, the new entrants are not as much of a threat to the current companies (Porter, 2002).

The Power of Buyers

Buyers hold the majority of the power in any business transaction (Nickols, 2000; Porter, 2002). A company may have something the buyer wants, but the buyer has the option (usually) to get that product or service somewhere else. When buyers can get things in more than one place, they tend to shop around. That is both good and bad for retailers, as the price that is offered and other factors often dictates which retailer the buyer will choose. Sometimes, convenience wins out and a buyer will simply purchase whatever is closest, because it is easier. At other times, buyers are more interested in getting the best deal, so they will focus on price or on what they are truly getting for the money - and a company has to be ready for what the buyer wants and needs (Porter, 2002). Companies that are not ready for their buyers and that do not understand the experience for which the buyers are actually asking will find that they do not get far in business.

Listening to buyers is vital, especially for a discount department store that often operates on low profit margins and plans to make up the difference in volume. Most discount stores of any type do not make much per product, but if they have many thousands of products for sale there is a chance that the customers will buy more products while they are in the store - thus providing more of a profit for the store. Normally, this is a sound strategy. However, in years where the economy is struggling, one of the biggest problems for a discount department store is that the buyer holds more power than ever. Buyers are spending less overall, even at discount stores, so the stores must focus on how they can bring in more customers, so that the number of products they sell overall does not drop significantly. By lowering the number of products sold per customer, it only stands to reason that more customers would be needed to continue to sell the same volume of products.

The Power of Suppliers

Suppliers also have a high level of power over stores that sell many different kinds of merchandise, because they often get all or most of their products from one or two suppliers. When companies get nearly everything in their stores from one supplier, problems with that supplier can be serious (Porter, 2002). Businesses with supplier problems have empty shelves, which translates to unhappy customers who cannot find what they need. Additionally, those customers will go somewhere else to get the items they could not find at the first store, and in stopping somewhere else they may find they like the second store better. That could result in the first store losing a customer, but the fault is actually lying with the supplier, who did not provide the store with needed goods. In that case, regardless of who is at fault, it is the discount department store that ultimately suffers. Some supplier difficulties are inevitable, but good relations with suppliers are critically important.

There are only a limited number of suppliers, and they must get all of their goods to stores on a set schedule, so those stores can continue to keep their shelves stocked. In turn, the stocked shelves bring in customers who buy the merchandise, allowing the store to pay its suppliers, who will then bring more goods, etc. There is a cycle to selling products in a discount department store, and that cycle can be interrupted by many different things. The suppliers, however, are some of the biggest players when it comes to who has the capacity to interrupt that cycle and cause a problem for the company and for the customers. That can make discount department stores nervous, and keep them from opening new stores in area where they feel they may have a problem with suppliers. While not the entire deciding factor when it comes to opening a new store, suppliers can certainly be one of the reasons why a discount department store may think twice.

Final Analysis and Final Questions

Overall, the dominant forces acting on the discount department store industry are economic and socio-cultural in nature. These are both external to the industry, and not something that can be controlled by the industry itself or the companies contained within it. This can be very frustrating, because the entire industry is basically at the mercy of the economy and of the people who fall into the correct socio-cultural category to shop there. As the economy changes, people may move out of that category, and that could result in lowered sales for discount department stores, at least in certain areas of the country. The economic and socio-cultural areas that affect the industry also interrelate and shape that industry to some degree. People who have less money are typically the most common customers of discount department stores, and those people often fall into specific social, racial, or ethnic groups, so both areas really should be addressed for a thorough understanding of the industry.