The Bargaining Power Of Suppliers
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Published: Tue, 02 May 2017
In an Industry, there are always going to be changing competitive pressures. Michael Porter (1979) highlighted these pressures in his 5 forces model. (Porter, 1979, P.)
4.1.1 Threat of New Entrants
The threat of new entrants to an industry establishes the capability to obtain market share, and other vital resources. As Porter (1979) argues that the emergence for threat of new entrants relies upon the barriers to entry that exists. If barriers are high, newcomers can expect rigorous retaliation from its competitors, therefore, threat of entry will be low. (Porter, 1979)
The UK Window Coverings market is highly vulnerable to the underlying economic trends affecting the housing market, therefore has an impact on consumer spending and also bring household spending under pressure due to the fact that less people will purchase curtains and blinds within their households, this having an impact on the Window Coverings market. This brings an impact on the market value. Market value peaked in 2007 at £1.34 billion before declining by over 15% over the 2008/09 period. The key fundamentals affecting this decline have been the fall in housing market since mid 2008, this having an impact on consumer confidence and spending on home furnishings Industry.
Curtains play a major part within the Window Coverings Sector and accounts for an estimated 48% of the market value. Furthermore, it is estimated that blinds play a major share of 30% of the market. The blinds market have undergone a difficult time within the conservatory field of the market and a gradual replacement cycle. Nevertheless, blinds do remain very demanding within the market with its unique premium ranges of fashionable styles and materials, offering a relatively lower price. (AMA Research Report, 2012)
It is suggested, that barriers to entry is becoming a major concern for new entrants who wish to enter the retail market. This has become evident of the fact, that raising the required capital and resources for new entrants is difficult due to having fixed costs and highly advanced development of supply chains. Furthermore, an example of large retail chains such as John Lewis, Tesco and Wilkinson who have long-term investments in the distribution of supply chains.
There are other factors that may be of concern to new entrants. These are barriers to economies of scale and product differentiation. Economies of Scale is achieved by giant retail supermarket chains that utilise the strategy of ‘bulk-buying’ products and differentiate themselves from their competiton in achieving better quality of products, development of products, lower prices, and accessing better distribution channels.
4.1.2 Bargaining Power of Suppliers
It is suggested, that the required cost of resources and capital and equipment needed in order to produce the products and services is exemplified by the suppliers’ power and pressures of bargaining. Suppliers are very powerful if they are the only source of the critical materials needed to produce the product or if they have very little price competition for the materials being purchased. (Rockford Article, 2012)
As there is a higher number of suppliers and higher concentration of buyers (blinds retailers) in the UK blinds industry it is relatively clear that suppliers have less bargaining power in the face of major supermarket retailers. Most blinds retailers even have their own factory to manufacture blinds. Their raw materials are manufactured within UK, although some suppliers may manufacture their raw materials from China in order to receive them at a cheaper cost. Suppliers in this industry tend to have very little power. (Rockford Article, 2012)
4.1.3 Bargaining Power of Customers
The bargaining power of customers is characterised by the cost of products and services buyers are being charged by retail businesses. Furthermore, buyers tend to possess higher bargaining power if they have a wider range of products to choose from, that offers the same quality, price and satisfaction level in order to meet and satisfy their demands. The power of buyers can also influence cost and investment because powerful buyers can demand costly service. (Rockford Article, 2012)
The bargaining power of buyers determines the prices that businesses can charge for their products and services. Buyers have a high bargaining power if they have multiple choices of products that can provide the same satisfaction or if they do not place a high value on the satisfaction provided by the product. The power of buyers can also influence cost and investment because powerful buyers can demand costly service. (Rockford Article, 2012)
The bargaining power of buyers in this industry is quite high, not on any individual level but as a whole the markets must be responsive to the needs of its customers, the cost and quality of products offered are important to the buyers. The buyers are low in numbers as mostly replacement sales , low switching costs and homogenous group of products means that consumers have the power to look for alternative supply companies without affecting product quality or cost. Since the recession hit in 2007, more power has shifted into the hands of buyers. (Rockford Article, 2012)
It is suggested, that due to declining housing constructions and renovations that occurred in 2009, the home accessories sector has experienced a significant fall within the past 5 years. This has brought a negative impact to the housing market and a decline in demand in the period of 2009 to 2010. This affecting the industry revenues with a drop by 27.2% to £2.11 billion. (Carpet, Rug & Curtain Retailers Industry, 2012)
Construction levels have fallen in subsequent years, contributing to further industry declines in 2010-11 and 2011-12. Furthermore, it is predicted that the revenues will decline by a further 7.5% in the period of 2012 to 2013. (Carpet, Rug & Curtain Retailers Industry, 2012). A significant decline in the field of housing renovation has greatly reduced the demand for the upgraded segment. (AMA Research Report, 2012). Hence, there is a demand for the housing construction markets’ products within the divisions of new carpet, rugs and curtains. (AMA Research Report,2012) This shows how retailers responsiveness and flexibility towards consumer is needed in the blinds market industry.
4.1.4 Threat of Substitutes
The threat of substitute products has an influence on prices because buyers can choose a different product to provide the same satisfaction. This is a strong threat if there are alternative products that can provide the same satisfaction and may drive customers to switching to alternative products. (Rockford Article, 2012)
The threat of substitution is classified as being high within this industry. Consumers are able to substitute to other major retailers, smaller stores and niche product outlets. Within the blinds Industry, the substitute of products is weakened by the emergence of electric blinds within the Window Coverings market. The range of product areas to be covered are ready made curtains, fabric and custom-made curtains. In the blinds range, the product areas to be covered are Venetian, Vertical, Roller, Pleated, Roman, and soft blinds. (Mintel Report, 2012)
Retailers have a wide range of products and services that have close substitutes, this effects price elasticity of demand because the market is sensitive to price. The demand for a particular brand or retailer will increase or decrease concurrent to the movement of price in comparison to its competition. Thus retailers are trying to increase the quality of products and services resulting in a constant need to differentiate products and services from competition to make them less price sensitive or offering good promotion on the purchase.
4.1.5 Rivalry amongst Competitors
The supermarket industry is a semi-consolidated industry with relatively low levels of product differentiation. Therefore many of these firms as we already know engage in a “value for money” based competition that consists of price, promotions, location, convenience combined with a range of products/services (Mintel Report, 2012). The result is slow growth and high levels of rivalry as companies will try to obtain market share off each other, the economic outlook for the market industry has seen an increase in VAT, public spending cuts, long term interest rate increases and impacts on consumers’ levels of expenditure. As wage growth is squeezed consumers revert to saving this increases pressure of competition. Declining demand excites rivalry among established companies and dampens industry profits. (Mintel Report, 2012)
Consumers are now moving towards smaller homes as mortgages for first-time buyers is getting as hard to get as well as increase in rental value of houses across UK. The proportion of households living in two-bedroom homes is rising fastest, while one-bedroom homes are also on the increase. At the same time, the proportion with 3+ bedrooms is slowly decreasing. Again, this is an indicator that houses are getting smaller, which in turn will affect demand for the quantity of blinds that any home will need. (Key Note Report, Home Furnishings 2011)
Following the onset of the banking crisis, consumers began to cut back on spending but saved more. In subsequent year’s savings ratios have decreased as inflationary pressures have diverted more spending into essentials and hampered any intentions to make savings. In periods of economic uncertainty like this big-ticket purchase like blinds are the first to feel the pain and usually the last to recover, with consumers making things last longer and putting off buying new. But, at the same time, thriftier consumers begin to change their behaviour, going out a little less and becoming more home-centric. This ‘retreat to the home’ can make people more aware of their surroundings, especially if they opt to eat out less and entertain more at home. So this is a trend that blinds retailers can tap into to help trigger a desire to replace old or worn window covering.( Key note Report, 2011)
The government’s Green Deal scheme will be launched fully towards the end of 2012. The idea is to incentivise homeowners and landlords to improve the energy efficiency of their buildings and reduce energy bills. Homeowners will be able to make improvements with no upfront costs and then pay for them through the savings they make on their energy bills. While the most obvious beneficiaries will be insulation products, the Green Deal could possibly help other home improvements areas such as energy saving blinds that helps conserve heat within the home. (Mintel Report, 2012)
The Institute of Sustainability is an organisation which has charitable status and was founded in 2009 with a view to supporting cross-sector collaboration and innovation in the delivery of sustainable places to live and work. It has released a series of guidelines, part funded by the European Regional Development board (ERDB) to produce practical advice on low carbon refits. Retrofitting and refurbishing existing housing stock is an important factor in reducing carbon emissions. The Institute points out that if the UK is to hit its carbon dioxide emission targets, improvements to the home form an important part of this. It also highlights that there are significant business opportunities to be earned from low carbon refits. (Mintel Report, 2012)
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