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.
However, economic factors are truly the most critical where an understanding of the industry is required. Socio-cultural issues do matter, but they are not as significant as the economic issues that are faced by the people who most commonly shop at discount department stores. There are always anomalies, of course, such as rich people who purchase what they can from the dollar store, or people living on welfare who insist on something that is high-end. These are not common, and not the kinds of people the discount department store industry is trying to target. Instead, the industry must remain focused on the economic categories that research has shown them are more likely to buy their items from discount department stores. That way, the store has the highest chance of staying within its demographic and being successfully selling to the people who, demographically, fall into the target market on which the store has determined it needs to focus.
The key success factors for operation in the discount department…