The performance of an industry is a good reflector of how individual companies can also perform in the sector. The retail sector is one very common industry worldwide for its essential services to customers mainly because it provides basic goods and services needed for daily living (Wamba et al., 618). Without the retail industry as postulated by Ailawadi, Norm and Paul (233), it would be quite difficult for people to access goods and services because one main role of the sector is break bulk and ensure that household goods are available when they are needed for consumption i.e. filling the gaps of place, time and form utility. This paper focuses its discussion on the Retail industry in America and specifically the home appliances retail industry in which the case study company, Sears, belongs.
This paper analyses whether the industry can survive and breakthrough in the developed highway economies, with increasing pressure from developing countries or whether it is also destined to be a sunset industry. This paper critically analyses the five Porter’s forcesof competition and later a company analysis for Sears holdings. According to Porters (47), a company’s’ main objective is to gain a competitive advantage in the relation with competitors by either selling its products at a lower price or making their products unique in the market. With regards to price, the industry can sell their products at market friendly prices while they maintain their quality and productivity.
Rivalry Among Established competitors:High competitive rivalry causes a firm to establish and maintain customer’s loyalty, minimize its prices and achieve efficient distribution. Sears holding industry growth has captured using the five-year growth of revenue for its respective firms. It has an 8.5% decline in revenue over the past five years. About 270 firms of which 79 have a market capitalization greater than $1 billion compete with Sears.Sears Canada competes in Canada with Hudsons’ Bay Company and certain US-based competitors, that may be expanding to Canada.
Sears holdings faces stiff competition among other online and catalogue businesses such as Walmart, Home depot, Macy’s and Target which handles similar lines of merchandise. Success in this competitive of this competitive market places is based on factors such as product quality and assortment, service, and convenience, price and ease of use in addition Sears holding is also influenced by a number of factors including the cost of goods, economic conditions, inflations, currency exchange fluctuations and catastrophic events (Vault.com, 1).Rivalry among established companies causes medium pressure that is; grocers could potentially enter into the retail side; entry barriers are relatively high, as Sears Holdings has an outstanding distribution system, locations brand name and financial capital to fend off competitors; sears holdings often have an absolute cost advantage over other competitors.
The Bargaining power of Buyers:The bargaining power of buyers is the impact that customers have on a producing industry. Generally, when the buyer is strong the relationship to the producing industry is near to what an economist terms as a monopsony- a market in which there are many suppliers and one buyer. The buyer sets the price under these conditions but frequently there is some asymmetry between a producing industry and buyer. The bargaining power of customers is also described as the market of output: the ability of customers to put the firm under pressure which would, in turn, affect the customers’ sensitivity to price changes. The buyer has a high bargaining power if they have many alternatives and a low bargaining power if they act independently that is a large number of consumers tend to act with each other to ask companies to reduce prices leaving the company with no choice due to a large number of customer’s pressure.
Due to the presence of many similar service providers, the customer may switch to the other firm if they find their products better in terms of quality and prices. The buyers’ power is high as many substitutes are made available to the market. Sears Holding Corporation is considered a retail store that caters to the moderate and more educated and well off clientele as to compare with its rivals (Barbash and Barbaro, 44).The bargaining power of buyers causes low pressure on the firms’ activity that is an individual buyer has little to no pressure on Sears’s holdings industry. Consumers can shop at a competitor who offers the same type of merchandise at fare prices, but the convenience is lost.
Bargaining power of suppliers: Bargaining power of a suppler means how strong is the position of a seller and how much control they have over the increasing prices of raw materials. Suppliers have a high bargaining power when; suppliers are concentrated and well organized, their products are most effective and unique and availability of few substitutes. When suppliers have more control over supplies and its prices, this becomes less attractive and the best way is to establish a win-win relationship with suppliers.A producing industry requires a lot of raw materials including labour, components and other supplies. This requires them to form a good buyer-supplier relationship between them and the industries that provides them with raw materials. A supplier with a high bargaining power can exert influence on the producing firms, such as selling raw materials at a high price to capture some of the industries profit.
Sears holding cooperation has diverse range of suppliers to meet its requirements (Daniels, 21). Due to this, many suppliers have to give discounts to their customers in order to meet the challenges imposed by other suppliers in the market and also to remain in business. Strong supplier relations have been integral to sears and Kmart. Because of these suppliers, Sears holding corporations is not only able to find other suppliers that can provide its supplying needs but also it is able to offer products that are of high standards. The bargaining power of suppliers possess low to medium pressure; since Sears hold so much of the market share, they offer a lot of business to manufacturers and wholesalers this gives it a lot of power because by Sears threatening to opt to switch to a different supplier would create a scarce tactic to the suppliers.
Threat of new entrants and entry barriers: The possibility that new firms may enter the industry directly affects competition. The profitable market attracts new firms resulting into much new entrances which decreases profitability for all firms in the industry. In theory, any firm should be able to enter and exit the freely and profit should be nominal. On the contrary, industries possess characteristics that bars entry from high profit level of firms in the market and inhibit additional competitors from entering the market for example when a firm profit increase, it is expected that additional firms would enter the market to try and take advantage of the high levels of profit which would in time drown profits for all the firms in the industry.
Barriers to entry can be strategically put in place by specific industries to reduce the rate of entry of new firms thus maintaining a high level of profit for those already in the industry. Barriers to entry may also arise from several sources such as; government created barriers-the government restricts market entry through granting of monopolies and regulations. Organization’s economies of scale, products specificity and expertise knowledge. Barriers to exit also exist to limit the possibility of a firm to lead the market. Being unable to lead the industry, a firm is compiled to compete among its rivals.Threat of new entry is high when there are few economies of scale put in place, customers can easily switch – low switching cost, products are not differentiated and the capital requirement to start the business is are little.
In retail industries, Sears holding cooperation is protected by numbers of barrier entry which make it difficult for new business entrance to rise and compete against them, that is, a requirement of huge working capital, adequate and the right workforce supplies and distribution channels (Wamba et al, 620). This barrier to entry thus prevents other firms from competing with companies such as Sears holding cooperation. The threat of new entrance possesses medium pressure, this is due to the fact that entry barriers are relatively high as well as Sears holdings have an outstanding distribution system, financial capital to send off competitors, a well-established brand name and it is located in many counties. Nevertheless, grocers would potentially enter into the retail side.
Threat of substitutes: A products’ price elasticity is affected by substitute products available in the in the market. Generally, there is a high level of threat when it comes to substitute products. Factors such as little requirements in terms of capital to enter into the market, insecurity of your main economies can lead to the entry of new firms in the market that can destabilize your market and market your position completely weak. Putting up very strong entry barriers ensures the protection of your position and your firm remaining remains very strong in the market. This will lead you towards taking a full advantage of the market, therefore, being easy to manipulate the market to fit individual desires and needs.
Firms thriving in a sector is another factor that can facilitate new entry into the industry. The new entries most of the time come to dilute the market by interfering with your previous profit margin and customer relations as well. This can divert most of your customers’ attention and raise their curiosity towards the new company. The threat of substitutes is a high threat to Sears Holding cooperation’s profit margin being a retail supplier faces the challenge of new entry as well as competition from the existing major retailers in the market. Some companies competing for a market opportunity with Sears Holdings include Walmart.
Value chain analysis: First, it is important to have a little understanding of this company. Sears is an American chain of department stores based in the Sears tower in Chicago with its headquarters in Hoffman Estates in Illinois. The company began in 1925 as a mail order catalogue company and its key people at the time included Richard Warren Sears and Alvah Curties Roebuck (Barbash and Barbano 24). The company offers a big selection of home appliancesnamely electronics, apparel productssayfootwear, house ware, clothing, Jewellery, beauty products; and automotive products. It is also mainly concerned with the furnishing of homes and offices as well (Sears, 1). Major proprietary brandsinclude Kenmore, DieHard and Craftsman, which are considered most trusted in America (Vault.com, 1). Sears is also among the biggest provider of home services and is said to receive and make nearly 15 million installation and service calls every year.
It is the fifth largest American store company operating divisions in Canada and Mexico among several outlets within its brands. The company uses chain stores and superstores to distribute its products and services to the end users. The company uses a social media platform ‘shop your way’ to market products where it promises rewards for shopping at Sears or Kmart, one of the Sear’s subsidiary. Other subsidiaries include Roebuck which is a full line and specialized retail store in the entire US. More distribution avenues by the company include specialtycatalogues, and the online models for example Sears.com and landsend.com.Sears carries a competitive advantage in installation and repairs services and hard line merchandise i.e. electronics, tools and appliances. The two sectors contributed more than 52% of total revenues in 2016 (Market watch b, 1).
Nevertheless, potential competitors and rivalry among established companies pose medium pressure to the industry while bargaining power of buyers and availability of substitute products in the market pose very low pressure. The top of its three competitors includes Target Corporation, Wal-Mart stores Inc. and Amazon (Market watch b, 1), but this discussion focusses on Walmart. Compared to competitors such as Walmart and Amazon, the company lacks competitive advantage in the food and drug products as well as the apparel section, sectors are thought to be responsible for the great losses the company incurs.
In conclusion, the major threat for Sears Company is the major problem of competition. However, the company also has major opportunities to expand its base in emerging markets such as China, India, or Japan. Generally, China, India and Japan markets offer a great potential of growth of success to high end products especially in apparel and house hold appliances and by expanding its product lines in the countries, Sears has a great chance of making profits.
Financial ratio analysis: Sears and Walmart:Sears Holdings Corporation is headed toward bankruptcy as seen in its shortcomings and negative earnings. Sears had earnings growth of -451% for a 5-year period making it unable to maintain its market share as well as opening its margins (Market Watch b, 1). Shortcomings such as high leverage with a low credit rating have also followed Sears holdings. Many stores have been closed down because of massive losses. Besides, its advertising expenses have been strategically decreased as decline in sales remained being experienced. In the financial year ending 2016, the company spent more than $800 million on advertising, compared to 1.1 billion in 2015 and 1.5 billion USD in 2014 respectively (Sears, 1).In the just ended fiscal year of 2016, the company made a 19% loss because of dropped sales revenues most of which was from the Canadian subsidiary which contributed a $2.1 billion loss while Kmart contributed $1.1 billion loss.
According to Vault.com (1), the processes led to more than 30% reduction in the net loss from the declining, sales, administration costs and low payroll costs. However, in 2016, cash inflows increased by 56% because of changes in the working capital resulting from increased inventory balances. The figure below has data on sears liquidity ratios.
From the current ratio, Sears has a positive though small proportion of assets and liabilities is likely to perform better since its current assets are above the current liabilities. A quick ratio is obtained by summing up cash, cash equivalents, current receivables and short term investments then dividing by current liabilities. With a value of 0.16, the performance is generally bad since liabilities outweigh the cash equivalents. The same applies to the company’s cash ratio. Walmart has an almost neutral and therefore stable current ratio though quick and cash ratio are also at a stake.
Walmart is the third largest retailer in the US making more profit than its rivals Kmart and Sears by 1990 it becomes the largest US retailer by revenue (Market Watch a, 1). Walmart generates about $40 Billion sales revenue. Walmart is advantageous over its rival, Sears, due to its large customer base and best prices being a low-cost retailer in the industry. This could be because Walmart operates manyhypermarkets and discount departmental stores and grocery stores.Walmart was founded in 1962 by Sam Walton. Walmart has about 2.2 million employees and about 12000 stores in nearly 30 stores in 26 countries by operating in both United States of America as well as in Canada just like Sears Holdings.
Walmart stores incorporative deals in products such footwear for both the gender and all ages, jewellery such as necklaces, earrings, nose-rings, toys for kids of all ages, health and beauty suppliers such body lotions as well as over the counter drugs and steroids, grocery, electronics, and home furniture. It provides services such as MoneyCard, pick-up Today and Walmart.com/Walmart pay which helps in the delivery of their products. The following rations relates to Walmart.Walmart revenue has grown in proportion to various estimates averaging around 6.64%, the growth rate is consistence with Walmart’s continued ability to gain market share and expand internationally. As the economy re-bounce, the consumer has more disposable income that leads to more increased purchases. Walmart has historically outperformed the retail industry in areas like inventory turn-over, receivable turnover, receivable collection period and payable turnover, a trend expected to continue further till 2017 (Market Watch a, 1). In general, Walmart has a good financial performance than Sears and in conclusion, Sears, unless a good strategy is adopted, may be unable to compete in the future within the retail sector.
This section details the business level and corporate level strategy recommendation. In the first place, it can be noted that Sears holding has a very good corporate than business strategy it being strong in terms of working capital and workforce as well as distribution channels aspects that make the company carry a likeable corporate strategy. This is however contrary in terms of the business strategy where threats of substitute products and new market entrants pose a great challenge especially in the grocery retail side. Definitely, the threat of substitutes is a high to Sears Holding cooperation’s profit margin in the market. As analysed in earlier sections, the company lacks a competitive advantage in the food and drug products as well as the apparel section, sectors are thought to be responsible for the great losses the company incurs. This guides the business recommendations herein.
It is recommended that Sears company diversifies its product offerings especially in apparel and food/grocery sectors to gain from the rising number of high-end consumers in the US. These product linings could also be based on brand extensions so that the new line products benefit from the parent brand. There is need for more research and development by the company in terms of demographic targeting because presumably its target market segments are slowly becoming unsustainable with changes in technology distribution patterns. Another recommendation is on the international market penetration paradigm. In this sense, it would be important for Sears to think of the huge market potentials in emerging destinations such as Japan, India and China whose blending would work well with a focus on wealthy high-end products in the high-end and apparel category. These recommendations are set to correct problems with quick ratio as well as the cash ratio whose performance in relation to competition was not very good.
In terms of competitiveness in the food sector, Sears company can perform well by considering some few recommendations. The first recommendation in this respect is that the company may think of considering changes in market segmentation through an alteration of the marketing strategies. Segmentation in terms of food products may need to concentrate more on fresh food categories such as fruits, vegetables, juices and others. There has been a shift in the market about a focus on fresh food as well as organic components of foods which the company can take advantage of to lead the competition in this category. It is also recommended that Sears company looks into aspects of the four Ps of marketing say for example lowering price to be affordable to younger generation of customers in universities as well as diversify product characteristics in terms of sustainable packaging, variety of tastes and increased diversity in distribution towards methods most appealing to the new market segments for example delivery at social settings incorporating this with complimentary activities such as swimming pools.
A human focus on the marketing strategy is also important for Sears company. This is to mean that there is dire need for the company to focus on internal opportunities to minimize threats mainly through developing its talents and through benchmarking. On talent development, this study recommends that Sears finds methods for employee involvement and appreciation of macro decisions in terms of competitiveness. Their input would be a turning point towards improving acid test ratio, cash ratio and generally reduce liabilities. Developed staff through internal training, benchmarking, inclusive in-house fact finding discussions and better terms of service would be a positive step in this process. Good employee relations raise motivation levels among employees hence elevated level of innovation that would bring forth a difference in the competitive structure of the firm. Additionally, regarding benchmarking, the company may get motivation by learning from industry leaders a good example of which include Morrison or Walmart. Although this may be perceived as a demeaning action, it is relevant to learn how successful companies in the sector carryout their processes, their strategies and their stronghold points.
Finally, the study recommends improved supplier relations to reduce their bargaining power towards the goods and services they supply. This is hand in hand with improved relations also with company distributors which is likely going to enhance quality of supplies as well as sustained availability of products in the right form and at the right time to fill the gaps of time, place and form utility ahead of the competition. With food products for instance, product availability is seasonal and therefore availability of this during the seasons of scarcity define the company that wins the competition. Good relationship with suppliers would allow Sears to have sustainable and continuous supply of goods more so the fresh food supplies. It is therefore recommended that the company thinks of priorities of enhancing the relationships for example through offering better prices, prompt payments and reduced bureaucracies when dealing with supplier orders and procurement cycles. In other words, the company still has many opportunities both internally and externally to excel within the market and competition if most of the recommendations are implemented in good time, with a positive mind and generally with passion to breakeven and realize profitability from all its product extensions.
Financial Ratios for Sears Holdings
Walmart financial Ratios
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