Grocery Checkout Inc. (GCO), an online grocery delivery service, was established in 2005 by Nathan Felder and his colleagues at the University of Western Ontario (Western) as part of their business project. Presently, GCO’s investors have been persistently urging Felder for accelerated expansion, and he is contemplating several growth strategies. As the co-founder and CEO, Felder aims to assess which option would be most suitable for GCO and how it might impact his role in the company.
CGO was initially focused on providing convenient service to students without transportation. Founder Felder recognized the importance of quality and value to ensure the sustainability of the business. Consequently, CGO adopted a product/service differentiation strategy. In terms of the macro environment analysis, PESTEL reveals the following factors:
- Political Environment: As a Canadian controlled private corporation (CCPC) with a net income before tax of $35,805, CGO benefits from tax incentive programs supported by the Canadian government.
The tax incentive programs, including the small business deduction (SBD) and R&D tax credits with cash refunds, aim to reduce the company’s tax rate and provide financial support for GCO in technology developments. Despite recessions in recent years, the Canadian retail grocery industry has shown consistent growth, offering increased business prospects for GCO.
As a result of the economic downturn, people are attempting to cut down on expenses by dining out less often, driving less, and shopping less frequently. As a consequence, there has been a rise in demand within the food retail sector. Online food retail firms such as GCO are capitalizing on individuals’ attempts to save money on gas. While the current economic recession has brought certain benefits to the online food retail industry, it still poses potential negative repercussions for online businesses if the recession continues.
Social-Cultural Environment: The slow adoption of online grocery in North America is mainly due to customers’ concerns about not being able to inspect the quality of foods beforehand and the delivered products not meeting their expectations. However, if continuous efforts are made to provide high-quality products, customers’ doubts may be alleviated and they will recognize the convenience of online ordering.
Industry Analysis/External Analysis/Competitors Analysis: “Barriers to Entry: Entry barriers are significantly high in the retail grocery industry.”
The primary reason for this issue is the absence of distinction among the food options provided by current companies. These companies have failed to establish strong brand identities, leading to diminished customer loyalty. Consequently, customers are more inclined to experiment with various vendors. The sole barrier for new entrants into the market is the cost advantage enjoyed by established players. These companies have already built a larger customer base and can reduce their cost of goods sold through bulk purchasing.
The previously mentioned barrier for new companies may not be permanent because as these companies gain more customers, they may begin to order larger quantities from their supplier, decreasing their cost per unit. Unlike other grocery retailers, GCO does not obtain its inventory directly from farmers or intermediaries; rather, it buys products from contracted local food retail stores.
GCO’s virtual operating model eliminates the need for a large inventory and allows it to rely on regular-sized local food stores to meet its demand. With numerous food store competitors in Canada and GCO’s easily satisfied demand, the suppliers do not have strong negotiation power as GCO can easily switch to other suppliers. On the buyer side, GCO lacks a unique brand image and customer loyalty, making it difficult to discourage buyers from choosing other substitutes. Additionally, since most buyers only purchase to meet their household needs, their volume demands are small and can be easily met by other normal-sized food retail competitors. These factors give buyers significant power in negotiating with GCO and other food retailers.
This fact is reinforced by the absence of switching costs when changing retailers. All buyers need to do is go to another store, which may be farther away and result in slightly higher gas expenses. “Threat of Substitutes: This is influenced primarily by three factors: the buyer’s switching costs, the availability of substitutes, and the necessity of the foods. Regarding switching costs, buyers generally have low costs because they can choose to eat any other food to satisfy their hunger. The worst-case scenario is simply not liking the taste.
With a wide variety of choices available to satisfy hunger, there are numerous substitutes in the food retail industry. The necessity of a particular food is diminished due to the vast array of options. Therefore, the threat of substitutes is significantly high in this industry. Additionally, the level of rivalry is also high within the food retail sector, driven by various factors.
The food retail market already has high industry concentration, leading to intense competition among existing players. This competition is exacerbated by the industry’s growing rate of approximately 3% per year, based on the 2007 statistic. Additionally, it is difficult for food retail companies to create a unique product due to the characteristics of foods. As a result, they are unable to develop a brand image that could foster customer loyalty to their products.
The primary purpose of any typical food is to satisfy hunger, which determines whether another food can be a suitable substitute. Following this criteria, any typical food can reasonably be replaced by any other type of food, resulting in a wide variety of substitutes. Additionally, there are no switching costs between different foods or food retailers. This is because the worst outcome for a buyer when switching to a substitute is simply not liking the food they chose.
The switching cost for the switching food retailer case is simply the act of taking a few more minutes to drive to another store and incurring some extra gas expenses. Since the retailers are unable to distinguish their foods from other retailers and customers can easily switch to another retailer with minimal costs, the level of competition increases. Regarding internal analysis, the VRINE Model asks if something is valuable. The online ordering system is valuable, especially for two specific groups. It is beneficial for busy professionals as it saves them time on food purchases.
The online ordering/delivery system of GCO is valuable to students without vehicles as it can solve their problem of accessing food stores. Compared to other big players like Grocery Gateway and Amazon Grocery, GCO’s system is considered rare because it operates exclusively in the London region where there are no other competitors. Being a London-based company, GCO’s rare online ordering/delivery system stands out.
The persistence of this rarity is anticipated until GCO encounters competition in its operating region. The term “inimitable/non-substitutable” pertains to whether GCO’s online ordering/delivery system can be replicated or replaced. Given the existence of other companies providing similar services, it is probable that the system is not exclusive. Furthermore, since the system merely consists of software and a database enabling customers to place orders from a distance, it can be easily substituted. Concerning exploitability, GCO is believed to possess the ability to fully utilize its resources and capabilities due to its financial strength and production expertise. The company has consistently achieved profitability and is unlikely to face unforeseen financial challenges. GCO has also demonstrated proficiency in production and developed a robust business model. Options analysis includes considering Facebook advertising.
Issues – While GCO’s advertising campaign has been successful regionally, there is concern that out-of-state interested parties may not result in approachable customers. Additionally, the percentage given may not be completely reliable and could be overestimated.
Financial Feasibility – Assuming the given projection is appropriate, it would be more preferable to adopt the “pay-per-views” (CPM) model. This would result in a projected increase in net income of $89.61 compared to a decrease of $29.25 with the “pay-per-click” (CPC) model.
Projected Effects – Based on the calculations above, it is believed that GCO’s annual net income will increase by $32707.65.
Mobile Application? Issues – There is no supportive evidence suggesting positive effects of adopting the application. Additionally, smartphone users can choose to log in to GCO’s website through their cell phone browser, making the application redundant.
Financial Feasibility – Although there is an overhead cost of $10000 associated with the application, there are no reliable evidences to support any potential positive cash inflow in the near future.
Projected Effects – The cost of $10000 will be incurred by GCO for development of the application, but this expense would have been wasted due to the substitutability of the application. On-Campus Location? Issues – As Western students are the main customers, some of the projected sales might overlap with those who originally purchased online, therefore, the provided statistic may not be reliable and a cautious approach should be taken in considering the subsequent projection.
Financial feasibility is indicated by the data provided, suggesting that establishing a physical store on campus is financially viable. GCO is projected to incur a $140 thousand overhead cost and an annual cost of $144000 while generating an annual sale of $600000. Assuming that the online orders from the University of Western Ontario students and staff are unaffected by the new brick-and-mortar store, GCO can anticipate an annual increase in net income of $85500.
In addition, GCO can leverage its success at UWO and extend it to other universities. However, there are concerns about selling GCO. The goals were to grow the company and provide Felder with more financial stability, while also securing or improving his position within the company. While selling the company would undoubtedly achieve the financial stability goal and potentially expedite its growth, it would hinder the objective of enhancing Felder’s role in the company.
Financial Feasibility – Due to the emergence of numerous online grocery competitors, GCO may attract potential buyers, making it a valuable acquisition target. Felder is anticipated to sell GCO at a higher price, thereby alleviating his personal financial challenges.
Projected Effects – While selling GCO will address his personal financial difficulties, it may hinder Felder’s ability to impact the company’s objectives positively since he will no longer be its owner.
Despite this, Felder may still continue working for the company as an employee manager. The growth of GCO’s sales is expected to be affected by the economic recession. Without taking any action other than advertising, it is predicted that sales for the next few years will be limited to $1.5 million. From a financial perspective, sticking with the current strategy seems reasonable. Even though revenue growth will be slower and sales will be capped at $1 million, the low advertising cost of $10,000 compared to increased sales of $500,000 ensures a projected annual net income growth of $83,750. By following the status quo approach, it is anticipated that the company’s sales will gradually increase until reaching the cap of $1.5 million, resulting in an overall annual income increase of $83,750. Nevertheless, investors and Felder might not welcome this slow revenue growth and sales cap of $1.5 million as they desire faster growth and additional financial security.
