Market structure - Essay Example

Currently in UK there are estimated to be more than 100,000 traditional grocery stores. They are splitted into four sectors: supermarkets and superstores, convenience stores, independent grocers and other outlets. In 2006 supermarkets and superstores, such as Tesco, Sainsbury’s, ASDA and Waitrose were dominating the Internet grocery market with i?? 1,660m of i?? 1,835m total sales at current value in 2007. (Key Note 2007) Since there are so few big firms competing on the Internet grocery market the market is categorized as being oligopoly on the scale from perfect competition to monopoly.

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Characteristics of oligopoly are that there are few big competitors who share large proportion of the market, they are the price makers and the entry barriers are really high. “For major retailers considering becoming involved in the Internet grocery market, there are some formidable barriers to entry. These include high start-up costs, efficient stock-picking and replenishment systems, comprehensive delivery networks and user-friendly website design.

” (Key Note, 2007, p1) I totally agree on this statement and in addtion, the firms that are dominating the Internet grocery market are the same as are dominating the “normal” grocery market, so with this entry barrier it’s a really hard work for those who are going to enter the market and compete with the big players. But there should be easier for niche and specialist grocery retailers to come into the market because the firms that are competing on that area of the market do not have such a market power.

Demand curves for firms on oligopoly market, and therefor on the internet grocery market , ususally tend to be downward sloping, relatively inelastic and companies are usually hugely interdependant on each other changes in prices and amount of their advertising. (Sloman and Hinde 2007) The goals of the firms on the market are providing their customers with excellect services and productions and maximize their shareholders wealth. They have been doing that in recent years and amongst other things the sales from the online part of the grocery stores have helped them reaching their goals.

The phenomenon of e-commerce has gained acknowledgement all over the world, as it has enabled retailers to provide customers more effective and efficient services as it has helped many retailers to reduce costs, enhance business transaction, encourage trading across boundaries, directly linked buyers and sellers, allowed digital information exchange between buyer and seller, etc. (Quader & Quader, 2008, p177) Like was mentioned before the price decisions are mainly dependant on the competitors on the market, i. e. if one of the competitors on the market changes its price the others do.

But theres’s a theory of non-collusive oligopoly market, which I assume the Internet grocery market to be. It is kinked demand theory, which explains how it is even when there is no collusion at all between oligopolists, prices can nevertheless remain stable. Consumer demand for online sales has been growing steadily and expanding range of companies are responding to the demand. That counts for the Internet grocery market as other markets. ‘The amount of groceries sold over the Internet is expected to double in the next five years, according to new research that suggests that one in ten shoppers will no longer visit a supermarket by 2012.

‘ (Butler, 2007) If this forecast proves right, the sale will go up to i?? 5 billion in four years’ time. Although i?? 5 billion is a quite an amount, it will only be 3 per cent of expected i?? 156 billion of the total grocery market. ‘Expansion of the Internet grocery market is dependent on a number of related factors, including household ownership levels of computers, access to the Internet by households, the length of time spent by households on the Internet and the spread of broadband usage. ‘ (Key Note, 2007, p14)

The main force in increasing demand of the Internet grocery market is people’s rapidly growing access to the Internet. In a report from the Office for National Statistics (2008) released in August 2008 it shows that 16. 46 million households in UK had Internet access, i. e. 65% of all households. People will always need the goods from this market, i. e. food and other necessity goods, and with ever increasing use of the Internet and reported safer alternatives to do business over the Internet there is highly likely that demand will increase over the years to come.

Other factors that could affect demand for this market to some or little extent is oil price and transportation cost . People might rather want to get goods delivered home instead of traveling in its own vehicles or using public transportation. In order to meet the demand companies will increase its postcode coverage for their delivery to be able to satisfy the customer’s demand. In 2007 Tesco covered around 98% of UK postcodes, Sainsbury’s around 83% and ASDA around 60%.

(Key Note, 2007) Companies have started to increase its postcode coverage for example Tesco has plans to increase online sales by opening online-only stores, small depots that will be base for deliveries of goods that have been ordered over the Internet. New companies will enter the market, but like I have already mentioned it will be difficult to compete with the big players on the market but niche and specialist suppliers should have easier entry to the market because those players do not have such a big market power as the big supermarkets, Tesco, Sainsbury’s and ASDA.

Those are the headlines hitting the news every day. There’s no coincidence that these headlines are knocking on our door every day. The world economy is in crisis because of the financial crisis which started in 2007 because of the sub-prime mortgages in USA. This crisis has resulted in collapse of some of the biggest financial institutions in the world, like Lehmann Brothers. Some countries have also had real troubles and are on the edge of a bankruptcy. The British economy isn’t excluded from the trouble.

Most specialists say that Britain is heading into “technical recession”, which is two or more consecutive quarters of declining gross domestic product. In a press release, “The great crash of 2008”, from the National Institute of Economic and Social Research (2008) released 22 October 2008 is said: ‘The British economy will suffer next year as it experiences the worst setback among the G7 countries. This reflects an especially pronounced reverse to consumer spending, which will fall by 3. 4 per cent in 2009, easily the biggest decline among the G7. ‘ This will affect the Internet grocery market like any other market.

Because of the nature of the market it won’t hit it as hard as other markets, that’s because the Internet grocery market offers goods that are necessary to people. People won’t survive if it doesn’t get its food. But, because consumers will have less to spend they will diminsh their consumption of convenience goods, which the companies on the Internet grocery market have been heading into. This will result in diminishing revenues for the companies on the market which will have to react by reducing cost and to do that they will have to dismiss people from their job.

That’s quite clear that with growing consumer demand for online sales facilites the market will expand in coming years. Despite the fact that the British economy is heading into recession the market will probably grow enormously in the long run, perhaps not quite as fast as forecasts are predicting and have been mentioned in this report. Further update of broadband technology will help the market to grow. Faster broadband speeds will enable quicker and easier access to Internet sites and that should allow grocery retailers to develop their online sales facilities.

With the possible grow on the market it’s highly likely that some new players will enter the market, though it’s more likely to be niche and specialist grocery stores. There have though been speculation about Marks and Spencer entering the internet grocery market but they have always rejected that. With the recession in the economy knocking on our door it’s likely that some of the big companies on the market will try to integrate horziontally by merging with or acquire some of the niche and specialist grocery stores. It’s one clear thing, that there are interesting times ahead on the Internet grocery market in UK.