Wednesday 17 December 2008

The Trouble With Woolworth's pt.2

With Woolworth's now defunct and a raft of other high street retailers on the ropes, what could possibly make the high flying supermarket chains, raking in bumper profits from their out-of-town superstores want to get involved in town centre retail? Wouldn't they be better to stick to their winning formula.

Yesterday I explained how the large scale expansion of the chains allowed them to drive down prices and corner the market. This relied on building new superstores all over the UK and in order to remain competitive all the chains had to engage in this mass expansion of infrastructure. The result of standing still would have been to share in Woolworth's fate. However as more and more stores were built the returns on this large scale investment became diminished as rival stores opened in close proximity to one another dividing the customer base between them. As a result of this saturation the price wars between the big supermarkets became ever more important in the battle for customers and profits. It is no coincidence that advertising for the major chains now focuses so intently upon price comparisons with their competitors.

The escalation of the price war has led to the supermarkets squeezing their suppliers to breaking point. In last Sunday's Observer it was reported that, "fears that scores of supermarket suppliers will go bust next year have led the country's major chains to draw up emergency plans to replace them". Clearly it is not in the interest of a supermarket chain to bankrupt it's own suppliers, so the war to drive down prices has reached its conclusion; the products simply cannot be made any more cheaply.

So where now for the supermarket chains? They can no longer build their way to new profits, and they can no longer undercut their rivals for a bigger share of the market. How then can they provide the ever greater riches that their shareholders demand? Well that of course is where those empty Woolworth's stores come into play...


Tomorrow: Tesco, Tesco everywhere.
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