Threat of Substitute & Bargaining Power of Supplier

3 March 2017

Threat of Substitute In Porter’s model, substitute products refer to products in other industries. The price elasticity of a product is influenced by substitute products. As more substitutes become available, the demand becomes more elastic since customers have more alternatives. Generally, substitute is able to reduce demand for a particular product because there is a threat of consumers switching to the alternatives. (Porter M. 1980) Chains of convenience stores are emerging in the market such as 7-eleven, Circle K and VanGo.

Their products become substitute of supermarket. Convenience stores selling some Fast Moving Consumer Goods (FMCG) like soft drinks, dairy products, packaged foods. Those FMCG are also sold by supermarkets. Many people buy raw food like fresh vegetables and fresh meat to cook at home. So another substitute are food of restaurants. Also, products of bakery are a substitute of bread in supermarket. In addition, most of the local pharmacies selling medicine, personal care, baby care and toilet/ pocket papers are substitute products of supermarket.

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Products in wet market such as grocery and fresh meat are also substitutes of supermarket’s products. Bargaining Power of buyers. Buyers are the people/ organizations who create demand in an industry. Buyers can be divided into two types in supermarket industry- price sensitive(larger Ed) and non-price sensitive( Smaller Ed). Price sensitive people are those housewives and non-price sensitive people are those white-collar. Generally, the bargaining power of buyers is weak but that of non-price sensitive one is even weaker.

For the non-price sensitive group, their opportunity cost spend on comparing price is large. On recent years a important change in shopping culture, people like to buy all of the things inside the supermarket instead of shopping from one small retail to another. There are many buyers and a few sellers (brand of supermarket) in the industry. And many of those supermarkets are associated to each other. E. g. ParknShop is associated with Taste, International….

Although some of the products are standardized that buyers can buy from substitutes, there are a wide range of products provided by supermarket. Those products cannot be provided by substitutes like convenience stores or bakery. Furthermore, some supermarkets integrate backward as suppliers to produce products which only can be sold in that chain of supermarket. E. g. Wellcome’s First Choice and No Frills The supermarket industry is key supplying group for customers since supermarkets are located available in everywhere and easy to reach unlike those conventional wet markets.

As these two largest supermarkets are so important to customers, they usually charge the prices much higher than the marginal cost. The industry’s product is important to the quality of the buyers’ products or services. For example, nutrition value and expire date are indicated on the food packages that substitute products in restaurant, bakery, wet market cannot provide. Products selling in supermarket pass quality test so it is more guarantee to buy products from supermarkets. 2. Bargaining Power of Supplier

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