The Economist (January 29, 2011, pg 64) describes how a collection of small stores are uniting as a co-op to develop customer loyalty cards, negotiate with branded manufacturers and offer electronic discounts to preferred customers. The article comments on the fact that large supermarkets like Tesco use customer information to recreate a connection to the customer. But small stores already have this connection, so their use of information is to get even closer, electronically, to the customer. The success of these small shops suggests that information systems may not provide an advantage for large supermarkets – the same tools may make the smaller shops more competitive. Which of these models will win out in the long run – small shops located closer to customer locations or large supermarkets ? Will the economies of scale that large shops take advantage of be compensated by flexible distributors who can play that role for co-ops ?
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Global Supply Chain Musings 
Geography plays a large role in this industry. In Japanese cities, physical space is often at a premium. Consumers have smaller homes and apartments, and purchase smaller quantities of goods. This mode of consumption aligns with the smaller grocery stores’ strategy of creating a co-op. It is a good strategy that could compete with supermarkets, because it also combines with the advantages of a smaller footprint in a place where real estate is expensive. In the U.S., consumers purchase larger quantities to store in the home, and the difference in real estate cost between large and small stores is less significant than it is in Japan. This strategy is better suited to the Japanese market.
As Jonathan mentioned above, geography plays a huge role in the success of most grocery stores. Convenience is key to most consumers these days, so if there is a smaller store that offers the products they need in a location closer to home or work, most people will go to that store. Others find it easier and more convenient to go to a larger store and stock up on goods once a week or once every couple of weeks. The model that wins in this situation will be the one that consumers find to be the most convenient for them, regardless of the loyalty cards, special discount emails, and other electronic communications that the stores send out.
I have to agree with both Elizabeth and Jonathan. Regardless of the cost savings that a supermarket might offer, customers aren’t going to go out of their way to go to that supermarket if they can go to the small grocery store right next to them. If grocery stores, both big and small, take a look at how many of their customers come from within a certain radius and utilize that information to their advantage, then information systems will be able to play an important role in helping the grocery stores maximize their profit. Location will win every time though.
Though supermarkets compete on price, for small local stores the competing point is customer relation that is build up through personal interactions and something that supermarkets still lagging. With rising fuel prices and congested roads customers find it convenient to order from local store that can provide home delivery as well at no extra cost. With few small stores forming co-op will give these stores bargaining power with mfg companies as well. The missing link between local stores and customer is the proactive communication of various discounts/ schemes /products by local stores. For example in India various stores located in housing socities would receive orders to be delivered at home by phone from customers but not vice versa i.e.local stores informing customers of available products or discounts and prompting pulse buying. With co-op and robust communication systems local stores definitely have an edge over supermarket in long run.
(Since I am from Japan, I am happy that Jonathan mentioned Japanese situations.)
In terms of low price with economy of scale, using E-commerce like Amazon would be a clear answer in the future. I think the important point other than low price is a new added value for customers. If the stores can provide the information or functions on their products, the customers will be satisfied with them, and I believe that the internet is difficult to convey the complicated and lived information on the products. Therefore, I think combination with small stores, which already have local networks, and internet seems suitable in the long run for the benefit of customers.
In response to Caroline, Jonathan, and Elizabeth, I also think that geography is a huge factor in determining this. However, I think that people would go a little out of their way if it meant cost savings. The key word here is “little.” Obviously, convenience is key, but some people will only see that Product A is cheaper at Supermarket B than Small Store C, and will go out of their way to get those savings that are afforded to the supermarket because of economies of scale. Where loyalty programs and the like will really come to sway customers is where they are of reasonably similar distance between the two types of stores. However, in line with the others, I think that if one type of store is much closer than the other, location will ultimately win.
We are all customers and I believe all of us are calculating a total cost before we decide to go to a supermarket or a nearby grocery store. The total cost may includes product prices, transportation costs and other invisible costs such as the time and efforts we have to put into it. It is absolutely a good idea for small grocery stores to co-op to compete with big supermarkets. But we should also see that in order to compensate for their location disadvantages, supermarkets like Walmart are also seeking ways to be more convenient for their customers. Nowadays online shopping has become a more and more popular way in all parts of the world and all kinds of products, including daily groceries. Who is going to win the game is who can offer its customers the biggest total benefits.
I remember my dad always shop monthly groceries at local Marwadi shop,which offers hihq quality and customer care -maintaining the relation overtime .thought it is slightly expensive we never stopped buying.
As local.stores form a co-op they can have better offering capacity on price and best practise and can take advantage of volume and offer customer relationship like a small.retailer .thus win win situation..
Customer Relationship being intangible is hard to measure.nevertheless it cannot be eliminated from the picture asoverlong run relation matters.
In my opinion, the model that will ultimately win out may be different for rural versus urban consumers. Due to traffic and convenience, city dwellers may be more likely to prefer the smaller stores located nearby especially if the coop formation can mean more competitive prices. Rural consumers, on the other hand, may tend to prefer bulking up on goods during their weekly or biweekly trips to town, and in these circumstance, big box stores may prevail.
The move of smaller stores united together may not lead to a higher competition between large supermarkets and them, but to divide the customers (based on locations) into two groups. Customers that live in urban area and do not want to spend much more time (and more transportation costs) to get to large supermarkets will more likely to become regular customers of small local groceries stores, as well as customers live in rural area will more likely visit large supermarkets often. The co-ops did not change the competition focus to the pricing between two types of stores, but to further emphasize the strength of local stores- great customers services and relations; while supermarkets still have their selling point- lower price (especially when you buy more at a time). Therefore, I think try to beat out the other type of stores is not necessary when both local stores and supermarkets are able to keep most of their loyal customers base, and since the pie is big enough, there are plenty of market shares for both types of stores to take.
Large supermarkets will win in the long run. First, good’s price in large supermarkets are cheaper than that in small stores because of economies of scale. Large supermarkets take advantage of the cheaper price to have large number of customers. Second, large supermarkets have larger SKUs than small shops. Large supermarkets would be more profitable than small shops because customers buy not only discounted goods but also goods with nomal price. Customer would buy normal priced goods if a store offers a wide range of choices.
From logistics viewpoint, large supermarkets would have more efficient transportation. Visiting a lots of small shops has longer driven miles and takes longer time than doing so large supermarkets, supposing that number of small shops is larger than that of large supermarkets.
I believe the answer to these questions depends on the market in question. The article the Economist published discussed this situation in context to the Japanese market. While I cannot say that I am an expert on the Japanese grocery market, I would assume that trends though would be different from grocery trends in the US. Based on classmates’ previous comments, I gathered this assumption is correct. I believe that the winner in each market will vary depending on consumer trends and priorities. For example, I typically go to the grocery every two weeks on Sunday and expect to have cost savings by going to a large supermarket. However, if I find myself short of an item during the week, I tend to stop by a smaller grocery store where I may expect to pay a premium, but I know that the service will be exceptional and time will be saved. Would I change my buying patterns if the smaller stores further increased specialized shopping experiences? I’m not sure of the answer, but I know that I would choose the option that best utilized my resources (time, money, enjoyment…). I believe that the answer lies in the preferences of consumer’s in the market.
I absolutely agree with Mary. Based on my experience (I lived in Japan for several months), the environment of the market in Japan is different with the US market. Many people who I knew in Japan went to a large supermarket when they planned to buy large amount of items, and visited a smaller grocery store when they needed to buy a couple of small items (usually non-expensive items). People generally did not really care about loyalty cards or shop discounts when they buy a few non-expensive items because discounts are pretty small amount. Therefore, I believe small stores are better to focus on offering conveience rather than competition on prices.
Ten years ago, a lot of small citis and rural areas back in China only have small grocery stores. Shop owners know their customers well, because all of them are neighbours living close to each other and knowing each other very well, Although big supermarkets have been introduced to China to a large number of cities nowadays, many citizens in small cities still prefer to go to their original small grocery stores. Even though the choice is limited and the price is higher. Because they have developed a long term relationship during the years.This is quite similar as the article mentioned, small grocery stores have already had this connection with their customers compared with large supermarkets.
However, as the more advanced information system being introduced in the supermarket, the large supermarket can provide better service through lower price and better understanding customers’ needs. I think in the long term, with customers getting aware of the economy efficiency, both small grocery stores and large supermarkets will have their own loyal customers. The competition between the two kinds of shops is actually very good for customers to better satisfy their needs.
I believe large supermarket will win in the long run. Large supermarket offers cheaper prices and wide product range. Although going to small stores is much more convenient for families, they cannot always buy all the stuff they want at one small store. In China, small stores used to lead the grocery retail industry. They knew all about what their customers were interested in. On the other hand, small stores were convenient for those who didn’t own a car because they often opened near community. Now most family owns at least a car and they can go wherever they want. If a large supermarket is just a little bit further than a small store, customers are willing to choose large supermarket because cheaper price is their concern and wide product range enables them finish grocery shopping at just one place.
Supermarket chains are definitely going to have an upper hand in this battle that has ensued between supermarkets and co-cops. There are a few reasons for this claim, the most evident one is the fact that coordination among these co-ops will be a challenge and decision-making may be an impediment too. In addition, the supermarkets have well established information capturing systems enabling better customer profiling and forecasting. The supermarkets, with their state-of-the-art procurement and vendor management systems, are going to take the battle to the next level wherein customized shopping coupons and discount offers will keep these customers from visiting these co-ops. However, a sustained approach by these co-ops to ensure quality of service and better information systems may turn out to be a substantial reason for customers to switch sides. This competition will eventually lead to optimization in all areas of retail business, driving prices down for the end customers.
Convenience will always be the key factor in developed countries, for this reason I believe the large supermarkets will continue to have the upper hand. The economies of scale and predictability of demand will only get stronger as these large supermarkets tap into e-commerce (as mentioned by Yuji) by using loyalty programs. Once data is collected on shopping habits by these major supermarkets they will be able to deliver items to your house as they explore new replenishing programs for basic grocery items. In addition, as the systems get more sophisticated large supermarkets will have the capital to invest into analytical projects to better sale items and because of their large buying power be able to offer a larger variety.
I might deviate slightly from the article’s focus on Japan (my apologies) and I want to give a few insights from a German perspective: In Germany there are neither small grocery stores, nor gigantic Walmarts. A large majority of customers buy their groceries at so called “discounters” (= Aldi, Lidl, Netto,…). Aldi and Lidl have a market share of 37% (http://www.forbes.com/sites/walterloeb/2013/10/30/why-aldi-and-lidl-have-what-it-takes-to-beat-the-best-and-the-biggest/) and they combine the advantages of a large supermarket AND a small grocery store:
1.) Very close proximity to customer. There is basically an Aldi in every smaller city (–> 4,200 Aldis in Germany, while Germany is smaller than California). Very convenient for customers.
2.) Very cheap prices: Low # of SKUs, very tight cost control
3.) System of warehouses and good logistic systems (pooling advantages in warehouses)
For Germany the solution is therefore something “in the middle”, between really big and rather small, which delivers optimal convenience, good quality and low prices for the consumer. Vouchers do not play a big role in Germany, promotions do. Therefore, the whole “building a connection with the customer”-strategy would rather not work there.
In the Pacific Northwest, many customers will shop at the smallest, most “local and authentic” place possible. These people avoid the large chain stores as much as possible. If the smaller stores were to join together in co-ops, they could gain the economies-of-scale advantages that large stores already have.
My hometown is a small rural city in Japan. When I was a child, there were many small stores there. Now, the number of small stores has decreased. Large supermarkets have won out due to several reasons such as low price, varieties of the products, and convenient. But, I believe that the small shops can be competitive in the long run if they can utilize the loyal connection well. Small shops can know the customers well not only electronically but also in person. By utilizing the information and relationship, I think they can offer more added value service and products for each customer and can establish trust one by one. I believe the thriving of the small shops will lead to the abundance of the community not only materially but also spiritually. I want to cheer for the small shops in my town.
Large supermarket will win out in the long run. Small shops are taking advantage of local distance and strong customer loyalty. However, these two main advantages could be replaced in near future.
– Local Distance: The reason consumers shop in small shops is low transportation cost. What if e-commerce is able to provide fresh grocery? Are consumers still willing to purchase grocery in local small shops?
– Customer Loyalty: Human connection is an important element of customer loyalty in small shops. But does it really help in long run competition? Does the electronic discounts in small shops have enough scale to help them win out in long run competition?
The small groceries have more advantage from the long run. First, we live in a fast developing world, the factor of time is more crucial to others for now and the future. Obviously, this is a location problem. Second, from the warehouse level’s perspective, what we want, no matter big supermarket, groceries and customers, is little inventory. But to the big supermarket, it is very difficult to keep it low, people choose to shop there because of the variety and this needs a lot of inventory. For customers, we can keep some products which can be kept for a long period, but we buy most of our daily products in a high frequency, people tend to choose a grocery store which is located near them.
Large and small shops each come with their own advantages and disadvantages. While large shops offer lower prices on items as a result of economies of scale and can be more convenient in that they offer a wider variety of product in one location, they are also more impersonal, take up more space, and usually must be located further from residential areas. On the other hand, small shops are able to make personal connections with their customers while taking up less space and being closer to residential areas. However, their prices are usually higher and a smaller variety of stock is kept on-hand. As a consumer who has shopped in both large chain stores and small specialty shops, I believe that as long as a given area has numerous drivers (or good public transportation), room for development, and indifferent customers, large shops are likely to be more successful in the long run. However, there is definitely a niche for small shops, particularly in cramped cities or those where walking or cycling is more common than driving or taking public transportation, so I doubt they will ever die out completely. There are also a growing number of people who refuse to shop at larger, chain stores out of a desire to preserve the culture of the local community, thereby increasing business to small shops.
I think large and small grocery stores both have their own trade off. For large stores, they have higher bargaining power, so they could get better price when purchasing from the distributor. Also, they could have more products carries in the stores. Furthermore, the large grocery stores could possibly have more ways of transportation, the logistics could have higher efficiency. However, the large stores are more restricted by location, and customers might want to go for the closer stores for daily necessities. And some of the locations is not price sensitive.
For small stores, after they co-op together, they will also have higher bargaining power, so the selling price will be lower. Also, small stores will be more convenient, they will be closer to the customers, and there will be less transportation concerns for the customers. However, the products carries in small stores is very limited, and the quality of products may vary.
However, I think in the long run, the large grocery stores will have higher chance to success, since they have higher bargaining power, more product selections and stable product quality.
In China, small grocery still plays an competitive role in the market. In some ways, small grocery is more convenient to residents than supermarket. Mostly, small grocery are located just under the residences’ house so that every time if a customer have some needs, they just go downstairs and buy what they want. Therefore, the small grocery enjoy a huge market share.
However, in the long run, the supermarket wins because they follow today’s supply chain strategy. Although small groceries have their customers’ loyalty, they never make their sales as an industry. In other words, they do not have the scale of selling. Therefore, in some ways, small groceries do not have the ability to enlarge their revenues and maximize their profits. In the supermarkets’ view, they have a large scale of selling, they have the industry. Therefore, they wins because they follow today’s supply chain strategy.
As far as I am concerned, forming co-op will give these stores bargaining power. It makes the small groceries own larger scales of sales and in the same time, keep the customers’ loyalty.
As everyone has mentioned, there are tradeoffs on both sides. I think on the long run, supermarkets will be more benefited from the situation, since as it was stated in the post, small retail stores already have a connection with their customers, technology will be useful, but not as much as it will be for a bigger supermarket. Although, as someone said, people tend to look at total costs (transportation, price, etc), in comparison, more people visit a large supermarket, rather than a small convenience store, making it more easy to take advantage of a co-op. People will sometimes won’t even remember they have a loyalty card when going to shop for just milk or bread at a small market, as opposed to visiting a large supermarket where you know a good discount can be gained if you use your loyalty card.
After review my classmates’ comments above, I found some very interesting thoughts. I agree that geography plays an important role in grocery industry. I also think that population and customer behaviors are important too. For places with intensive population, small grocery stores may have better advantage being closer to people such as 7-11 and other small community grocery store. For places have large landscape with small population, large supermarket might be better choices for those residents who live in the county since they live far away from the supermarket, they more prefer one-stop shopping and store grocery for couple days even weeks. Supermarket with big variety and large amount discount satisfied the needs. That is also the disadvantage of small grocery stores, due to their limited size, small grocery store couldn’t hold large quantity of products with large varieties. So from time to time, the small grocery stores will fail to meed with customers’ demand. But based on the information from the article above, the small grocery stores are making up for their disadvantages with co-op customers loyal cards to improve customer’s satisfaction and customer loyalty.
I believe it will depend more on the region that these shops are located then anything else. In some regions the small shops will thrive and in others the supermarkets will. The reason for this is the location and culture of the area. In densely populated areas there are a lot more local shop owners in the area, which allows a shopper to go from one specialty shop to the next to get the items they want relatively quickly. However it is very hard to build a massive supermarket around these areas as they are already developed. People are loyal to businesses that treat them right and it is hard to get people to change shopping places or habits if they have no desire too and if it is out of their way to go there to shop.
On the other hand in rural areas it is a lot easier to build a supermarket that will service a large area in which most shoppers will drive there or take the bus instead of walking. Parking lots are large and provide a convenience for most drivers over limited parking spaces along the streets in most towns. The incentive of customer loyalty programs and discounts gives many of these customers a sense of buying smart and saving money. Although this can be countered by the small shop owners in the rural areas, if they ban together and provide specials and sales to counter the big supermarkets. By utilizing information systems, small shop owners can counter the large supermarkets in providing customers with the tools that give the same effect in the supermarkets. In the end I believe it will depend on what region a store is in and the actions taken to see what will actually succeed in the long run.
Nowadays, most supermarkets have been using these customer loyal ID card for a while. As far as my observation goes, I believe it will achieve more success for the large supermarkets. The reasons as follow. Firstly, most of the customers go to large supermarkets mainly driven by the cheap price as well as variety categories of commodities than the small retail supermarket. So as long as these big supermarket could analysis customers needs based on the data collected from these cards, it could help the big supermarket prepare inventory better, achieve higher service level and thus generate more profit. Secondly, since large supermarket usually located in suburbs, it is very important for these company to drive the customer traffic towards them, and offering large discount is one key factor. As I could recall from Professor Shanthikumar’s presentation at last Friday’s conference, we could shape the market demand by introduce discount at certain time frame. And this is one of the best example of such method. By recording customers preference and purchasing habits from these ID card, large supermarkets could adjust and decide the discount time to the consumer, thus have better sales revenue, more importantly, shape the customer’s demand to achieve higher service level.
In grocery industry, the key is to predict the demand using available shopper data from loyalty cards and manage the supply chain in a way that helps to meet and even create demand. Historically, big grocery companies have been good at plowing through the big data and predict demand in an aggregate level wherease smaller shops knows their customers betterr in a micro-level. Big stores have the scale and power to take advantage of economy of scale, but smaller stores have not. If the new coops plan pulls through as hoped. The winning party will be the coops small stores which will enjoy the newly-found economy of scale and maintain their intimacy with customers.
The concept of having Small store co-ops would be more suited if the consumer’s location is closer to these small stores and also when the consumers require lesser quantities of the commodities. In the United States, most of the consumers come to the grocery store to buy groceries that last for a long duration of time and also have large quantities of the product. By having small stores, the quantity needed would be imbalanced considering the demand of the customers.
Also, the grocery retailers like Walmart, etc have a Central Distribution Center that ensures less uncertainty of demand of products needed by the retailers and ensured demand from the manufacturers.
I believe those large supermarket still has its advantage. Although small shops are closer to the customer’s living area, the variety of stock is limited due to the geographic constraint. Supermarket can focus on the product differentiation and provide a large variety of products to differ its products from ones in small shop. It is likely that customers go to small shop more often, but if large supermarket can shift its to scope from daily consumer products to products with high margin, supermarket is still competitive.
In my opinion, as a customer myself, I would go to small shops and buy get some quick shop products if I need them because it has a geographic advantage. However, when I am free and need to get a lot of goods I might go to larger supermarket which have a variety of products. However, I think this co-ops of small stores are going to compete with supermarkets since they have all the information about customers buying habits.
To remain competitive with large supermarkets, I believe the small shops co-ops creates a unique atmosphere that many consumers will enjoy. I agree that geography may play an important role, but there are many consumers with changing attitudes on the subject of small business. Large supermarkets utilize economy of scale to introduce low prices, for common goods. Some consumers want unique items or do not agree with the amount of small shops forced out of business by large corporations. The “Buy Local” movement may be gaining strength as the number of vacant shops and community business structures change.
I totally agree with you Ryan. There are a lot of buying local initiatives developing in recent years, because more and more customers want to buy healthy products and support local manufacturers and shops. It is interesting that for example in New York there is a community running different grocery shops with local products. They focus on fair trade and every member has to work in the stores for a few hours one times a month. Hence they are able to sell their products very cheap to their members and in addition strengthening the local markets. Other initiatives especially in Europe are the introduction of local currencies with local grocery stores and craftman accepting the currency. Target is to support smaller shops and keep the money in the neighborhood.
I personally would love to see an increase in the local smaller stores. I feel that the competition has one big factor in the near future that will decide who comes out on top. That is online grocery shopping and home delivery. If there is a continued growth in this type of grocery shopping I foresee that the large supermarkets will take control due to their ability to more effectively ship to a large number of consumers.
In the long run I believe small shops located closer to customer locations will have the advantage. They already have loayalty of their customers and those customers will be reluctant to change since they already know the layout of their local store. Economies of scale may compensate for large supermarkets, but the small shops will stay competitive because of their unique advantage.
There is a recent trend trying to live healthier and refocus on a more human economy with fair prices, more local products and a more personalized shopping environment. This creates new market opportunities for smaller shops that are able to meet this new demand better than large shops. If this trend is getting momentum, low prices are not the biggest buying criteria any more. Hence economies of scale are not as important as they are for large shops. As the trend focuses on buying more local and healthy products, flexible distributers would need to meet this demand to have a chance to supply to the small shops. Which systems will win out, depends on the amount of consumers changing their buying criteria in the future. By the way, every affair concerning big groceries will increase this trend.
I believe the large supermarkets will win in the long run. (As this was posted in 2011), we are seeing the big box stores popping up everywhere. The distance isn’t much of a factor anymore for consumers, it is no a loyalty issue and a cost issue. Although the smaller stores could win on loyalty, I believe cost overall takes prescidence and the economies of scale that large shops takes advantage will ultimately make them succeed.
Geographic advantage of co-op small grocery stores does help them attract more consumers. But in the same time we could not ignore other services which would only provided by large supermarkets. For example, it is much easier to return a product you don’t satisfied with to a supermarket than a small grocery store( at least in China).Because they normally have a robust long time cooperation with the upstream suppliers, ensuring that some of the returned goods could go back to the factory. Also, as we discussed in class, if the customer has a car and has enough room to store his things, buying in a farther supermarket may be as convenient as buying in a closer small grocery store. In this case, he probably wants to choose a lower price.
The supermarket chains are definitely going to have an advantage over co-ops. The most crucial fact behind this claim is that the co-ordination among co-ops would be very challenging. Furthermore, supermarkets have a well established infrastructure and hence are more accurate with demand forecasting. Also ,they offer huge discounts as economies of scale facilitates them in doing so.
However, a sustained approach by these co-ops to strive for a high customer service level and updated information systems clubbed with the ease of access (due to the geographic locations) might become a key reason for customers to switch sides.
The small grocery stores will have a hard time competing with larger stores such as Walmart , K-Mart etc as they cannot compete on the everyday low prices like the big stores. Larger stores have the advantage of economies of scale which cannot be acieved by smaller stores. I believe people would visit the small local grocery stores for their emergency needs and for buying things in small quanitity but for bulk purchases they would prefer going to larger stores – that is they may visit the local store 4 times a month but a big store such as Walmart once a month. The local stores can gain advantage by giving price discounts and free home delivery on purchase of products over a certain amount. In this way they can attract customers.Besides local stores have another advantage of keeping products that are high in demand in that locality. If we take the grocer store situated near Purdue university we see that they keep stocks from various parts of Asia thus attracting a lot of Asian customers.
As most have said thus far, as people are getting busier and busier, convenience is king. Why stop at 3 different stores when you can stop at just one. Of course price will play a role as many people are willing to deal with the opportunity cost of traveling to another store to save money. I do believe though that the co-op idea generated by the smaller stores is a good idea and really it’s their only way to compete with the larger players who can offer everything in one place.
I still hold the point large supermarkets will win in the long run. As a consumer, I definitely will choose a weekend shopping all the goods I need for the next week in Walmart or Target instead of small markets. It is more convenient to do so. Another reason for that is discount force by far is much more strong is large supermarkets than small ones, even though the small ones form co-op.
However, if a small market gives rich chioces for unique goods like local goods which are not easy to obtain in large supermarkets, I will come by a lot.
I think big supermarkets have more competitiveness, because the co-op retailers have to handle coordination problem, such as profit share, cost share. Since their internal bargaining power are close, it may hinder their decision to achieve whole-situation optimization. What’s more, this structure will decrease their decision-making efficiency. Thus, customer information collecting and sharing system may not be such innovative as it looks.
In terms of competitor power, large supermarkets have an economies of scale advantage because they have a higher purchasing power from the suppliers. However, if local stores band together and can create the same level of purchasing power from suppliers, then they will essentially have two competitive advantages, locality and low cost. If this happens, larger stores may try to acquire smaller stores in order to improve their ability to be local. If they are able to become local, then large supermarkets will have the locality, the variety and the purchasing power to beat smaller local stores.
People prefer to go to the larger supermarkets to buy stable products because they can buy them by bulk and at a cheaper price. However, smaller grocery stores can compete by having “specialties” in their stores. In an article by FoodDive, smaller companies bring in a “neighborhood connection” and sell products made by nearby companies. Additionally, 46% of respondents in a poll by Albuquerque Business state that they are more likely to shop in a local store than a big store so that they do not lose the local feel of their neighborhood.
The comparison of the small shop owners to the large organizations is an interesting read but the question to be asked should be which segment would bring a better value to the final customer. In the current scenario the larger organizations have an upper hand as they are utilizing data to reach the customer more effectively and also help the customer in planning and executing their purchase. This could be in terms of bettering the consumer buying experience or offering a better price due to economies of scale. When the small shop owner group is able to adapt to the the technology and provide a similar or better value to the customer then the customer might incline to this segment. The challenge of course remains in maintaining this group and seeing to it that the customer needs is always placed at a higher priority over the individual group members needs. This is one of the key reasons why in the current market scenario we see larger organizations buy out smaller shop owners as they already have the personal connection with the customer.
This depends on the geographic features of a place. If the community is densely-populated, like Asian countries: China, Japan, small co-ops with flexible/central warehouse would be able to compete with supermarkets. While, the United States is like a different story. Thus, based on different circumstances, company should come out different plans.
I agree with Christine that large supermarkets have more buying power for economies of scale and they have competitive advantage over small shops. Even though the small shops band together to increase their buying power for economies of scale to compete with large supermarkets, large supermarkets would take any measures to prevent this coalition. They could buy smaller shops like Christine mentioned or form smaller shops closer to customers. Additionally, banding with other small shops would require complex coordination issues and related costs with it. On conclusion, big supermarkets would take every precaution to prevent this competition and win in the long run.
People are more and more looking for convenience in their routine. This is one of the reasons e-commerce is gaining so much power, even to compete with large retailers/supermarkets.
The main advantage large chains have nowadays is smaller prices, basically by bundling volume, getting discounts for that and also having a efficient distribution system.
Meanwhile, smaller players, closer to costumers, offer the same, of even better, convenience for shoppers – by being closer, knowing your preferences better and offering better services.
If smaller players unite to enjoy the same benefits as large players, it can be a huge impact for those large chains. However, as Christine mentioned, biggest names such as Walmart, Tesco and so on, end up buying and closing those small players so that they cannot become a threat.
The co-op act of small grocery stores is a success, but not much more than a success to start closing down the gap between them and huge supermarkets. Consumer’s decision between visiting a large superstore and a small grocery store is usually ordering cost (distance, lead time, fuel cost) vs inventory cost (storage space, perishable goods). Co-ops by small grocery stores attempt to break the simple balance by offering cut in product price itself and simultaneously lower inventory cost even further; however, considering the relatively redundant physical storage space among common US households, cabinets and refrigerator, and higher rate of consumption, especially for those with more than one kids, the inventory cost advantage regarding a decision of visiting small grocery stores next door is most likely offset by the larger ordering cost incurred by frequent orders.
Whether formation of co ops by grouping small locality shops will give the supermarket chains a run for their money is yet to be seen however this idea is novel and deserves a thought because in today’s contemporary world with the advent of supermarkets what is missing between buyers and sellers is the goodwill and bonhomie that kept customers glued to there preferred shops earlier. Now the primary differentiator is price and people are travelling miles sometimes to avail the price advantage. However if customers get almost the same price advantage closer to their homes where they would not need to travel and the locality would also be familiar and with the DC’s chipping in the small shops have a game in their hands.
The competitiveness of the grocery store is highly depends on the geography location. As a lot of people mentioned before, in some country, such as Japan, and those country with small land area, all people live in big city, with limited space which will make the big supermarket unnecessary. People tends to go small convenient shop to buy some daily grocery, 711& Familymart are really convenient at Japan and China, people can get lunch or dinner box from there so there is no need for them to shopping whole bag of grocery from supermarket. Plus the online shopping also become more popular, if not in emergency, people can shopping online and just wait two or three days for goods to deliver, also some grocery store offer one day delivery, in these situation, big supermarket does not have that much competitiveness. However, at US, people is not live crowed in city center, at mid-west, big supermarket such as Walmart, is more competitive than those small grocery. Supermarket will have all the products we need, plus with a relative cheaper price, one family can shopping once a week or even every two weeks to get everything they need all in one time. Based on different geography location, company should come out with different plan on what size of the market should be.
I would say this depends on several factors. Like Emily mentioned, the geographic location is important. In the U.S., small towns or even specific neighborhoods (neighborhoods in Chicago, Manhattan, etc.) where people have a relationship with their neighborhood small grocery store, the small shops will win out because these customers won’t take an Uber or taxi to go to a large grocery store a few miles away. However, as Sarinah mentioned, the larger groceries store have economies of scale to compete on the lower prices for the standard products that consumers buy. So far small neighborhoods where consumers go to the same grocery store for years, the small shops have an advantage. In suburban areas or wealthier neighborhoods where consumers have a car and time to choose where to shop, the large shops have an advantage.
In my opinion, whether small shops near customers or large supermarkets will win depends on the habit of the customers in the area and also the density of population in different locations. If this situation happens in densely populated cities, co-op development for small stores would be a great idea because they are tied together with the customer nearby. These stores provide convenience to customers. On the other hand, large supermarkets in places that population is scattered can provide large quantity of products at lower prices since their customers will not be able go shopping every few days. Which model will win in the long run is difficult to predict.
From my perspective, those two models would develop towards the same direction, to serve the customers better. For large supermarkets, they have abundant customer data, the logistic system with a wide scope of coverage, and product variety and pricing advantages. In the future, more demand forecasting based on individual customer record would make their service more customized, to compete with the friendly small shops nearby. For small shops, they already have exceptional relationships with the customers and the co-op will promote their product assortments and price advantages to cope with those large supermarkets. Consequently, in the long run, customers would have more choices from both supermarkets and small shops and the competition would become fierce. This requires both players to keep innovation and find new drivers of profit.
While large supermarkets already have access to customer data and this data is already being leveraged, small markets can introduce the utilization of available information system to get them at least somewhat closer to the competitive edge (Customer’s convenience).
However, the economies of scale enjoyed by large supermarkets will always be a massive barrier ahead of small local stores. No matter how hard and smart they can negotiate, they will never be able to achieve similar COGS as those of large supermarkets, and therefore, they will have to always rely on the convenience of their location and relationship with the customer instead of relying on offering competitive prices.
Co-op small stores could take an advantage of information system due to geography. Some shoppers would tend to choose a store just across the street rather than drive five minutes to the supermarket if the price difference is just very small. Small stores tend to bring more closer connection with customers because the store probably service small pool of people and staff could recolonize them and talk to customers just like friends.
However, customers are smart. When customers need to buy large quantity of products, they would choose to go to supermarket due to economic scale power of supermarket. It’s hard to break this power for small stores. Co-op small stores need to define which type of customers are their target customers then promote specific function or products to them to compare with supermarket through their network and information system.
I think small shops and supermarkets have their own advantages. If the customer can buy the product in a nearby small shop, why does he need to go to a far way supermarket? But, if the customer needs a large quantity of the product, he would prefer the supermarket since the economics of scale. Supermarkets can corporate with local small shops, to achieve the win-win situation.
In the long run, I believe that the large supermarkets will win out because the advantages they get from economies of scale are much greater than those achieved from the proximity to customer and their preferences than smaller shops can achieve. I do think that the distribution network for larger grocers will continue to become more flexible as large chains seek to increase their offerings of local foods and specialized products. Where I feel that the smaller stores and co-ops have the biggest opportunity is in the organic and local food markets. These types of stores are typically tailored to the communities in which they are in, and can tend to the specialized needs of those customers much better than the large chain supermarkets can. However, these ideal markets are few and far between, and therefore the “basic” offerings that large grocers can offer is typically acceptable for the majority of consumers.
I think this issue presented has number of angles that must be examined. First, we must examine the importance of being “closer” to customers. An argument can be made that even with the use of information systems for smaller stores, customers will only shop there when the discounts are present. By normally being higher in price and with less variety to offer, these smaller stores attempt to get closer to the customer to build loyalty. But in my opinion and speaking based on my own shopping habits as well, the customers with the most to spend prefer variety of selection along with savings in their own time of not having to chase discounts at the smaller stores, even though they may be closer. I think the economies of scale of the larger stores will ultimately win out as they are able to capitalize on lack of customer loyalty in favor variety and simplicity. The only areas where the smaller stores that use their Co-Op system can succeed may be in very large cities where customers normally live very close to the stores themselves. Where customers are very close to the stores and normally don’t drive, customer loyalty may be an important consideration and differentiator.
When this article was written back in 2011, the market was dominated by brick n mortar stores and it has changed in the last 6 years tremendously. We are already seeing the effects that large supermarkets are having on the market. Smaller supermarkets are shutting down stores and the bigger ones are growing. I think it is safe to say that information systems did provide an advantage for large supermarkets.
Going back to the example of Tesco in the article (“http://www.economist.com/node/18010719”), their loyalty card system was developed by the same company that did it for the co-op in Japan. Through my experience of working with Tesco, I know that there was a lot of development that happened in-house to bridge the gap between customers and Tesco. A lot of data analysis that happens today in e-commerce where a customer’s need is tailored using their buying habits was already put in place in the loyalty card system back in 2011. There were times when customers used to receive special coupons to buy personalized baskets at a personal discount just to return back to Tesco.
Over the years we have seen that a strategic investment in information system by large supermarkets has now turned into an infrastructural investment which for small co-op is difficult to implement.
Amazon buying whole-foods gives a clear indication that big players are coming closer and closer every day to customers, have the ability to buy-out smaller players and have the economies of scale that these guys can achieve by bundling or buying in bulk cannot be matched by a flexible distributor or co-op. Combination of reduced prices, efficient distribution, variety of products and tailoring each customer’s needs provides a big competitive advantage to large supermarkets and cannot be challenged by other players.
It depends on geography. In China, people don’t need to go to a supermarket to buy food. Since the family in China are not as big as that in the US, and small stores are more convenient for people to shop. In the US, a supermarket is necessary. People usually go to the supermarket once a week, not like people in China. Moreover, in China, there isn’t enough space for supermarkets. Small shops are better since the cost of floor area is lower.
In the long run, small shops located closer to the customer will win out. Many large companies such as Target and Walmart are starting to implement these small store concepts in urban areas. Most customers want convenience and are willing to make sacrifices for this time saving factor. The sacrifices they make are limited product selection and higher prices. Co-ops is one way to tackle the issue, however I feel smaller, strategically located, big-box stores will be the new trend. They offer the cost efficiency of large retailers with the benefit of convenience and potentially a tailored shopping experience based on the region.
Although the article was written six years back, I think it’s relevant today more in India in the wake of recent demonetization and the rise of mobile payments even in the rural parts of India. 98% of the grocery retail happens in mom and pop stores generally referred as Kirana stores and most of the stores are less than 500 sq. ft. But Indian consumers are slowly moving towards more organized retail channels like supermarkets. There is a constant debate going on India whether to allow FDI in retail sector which supposedly is considered as a detriment to the livelihood of millions of mom and pop store owners. The co-op concept if implemented by big retail companies looks like a solution rather than a problem to me. Big superstores and eCommerce companies can benefit by extending their reach to more parts of the country if they can create a co-op of local stores under one locality and use them as a proxy delivery channels.
Small stores uniting as Co-Op is very competitive compared to large supermarkets. In India, small stores constitutes the major part of the grocery market. Customers prefer to buy groceries near to their home and usually they have personal connections to the (locals) shop owner. Although, the cost of the products cannot be obtained as low as the super market, small stores attract the customers in different ways. If a customer purchases regularly in a particular stores, then the shop would offer some exclusive individual deals. For example, people have the practice of purchasing all the groceries once per month. So, the store owner offers a price cut to the total cost. If the small stores are successful in uniting as Co-Op without thinking each other as competition, then small shops have advantage over supermarkets. Also, if the stores are nearby, then customers can purchase items whenever they want by making a short trip to the small store instead of making a long trip to the nearby supermarket.