Grocery Checkout Inc. (GCO), an online grocery delivery service was founded in 2005 by Nathan Felder and his fellow teammates at the University of Western Ontario (Western) as part of their business project. Recently, investors of GCO have been pressuring Felder continually for faster growth, and he has a number of growth approaches under consideration. As the co-founder and chief executive officer (CEO), Felder wanted to reflect on which option would be the best fit for GCO and how it might affect his role in the company. Company’s Strategy
CGO originally focused on convenient service, as it was founded on the idea to serve students without transportations. Felder believed that the business should also focus on quality and value to be sustainable and therefore adopted a product/service differentiation strategy for CGO. Macro Environment Analysis – PESTEL Political Environment: As a Canadian controlled private corporation (CCPC) with only $35,805 net income before tax, GCO’s operation is encouraged by the Canadian government through various tax incentive programs.
The tax incentive programs include small business deduction (SBD) which reduces the applicable tax rate for the company and the R&D tax credits and cash refunds which could ease the financial burdens on GCO in technology developments. Economic Environment: Based on the statistics provided, the Canadian retail grocery industry has been growing continuously. This growth in the market and demands benefited GCO through increasing business opportunities. In the recent years, the macro-economic environment has been suffering from recessions.
As a result of that, people attempt to cut spending to save money by actions such as dine out less, drive less and reducing shopping frequency. This has led to further increase demand in the food retail industry and online food retail companies like GCO enjoys from people’s attempt to save gas money. Although the economic downturn has benefited online food retail industry in some ways, there is still potential negative effects to the online business in the subsequent years if the recession continues.
Social-Cultural Environment: Online grocery have been slow in North America primarily due to the fear of unable to exam the quality of foods before hand and the delivered foods do not meet their expectation; however, if customers’ doubt may be comforted through continuous commitments to provide high level quality products, the convenience of online ordering will be recognized by the public. Industry Analysis/External Analysis/Competitors Analysis “Barriers to Entry: Barriers to enter is quite high in the retail grocery industry.
This is primarily caused by the indifferent characteristics of the foods which may not be differentiated through proprietary competences of the existing companies. As the existing players may not develop unique brand images, customers have rather low switching costs and therefore are more willingly to tryout different vendors. The only entry barrier the new companies may experience is the cost advantages enjoyed by the existing companies as they have already established a comparatively larger customer base and may therefore lower their cost of goods sold through vast quantity purchasing.
However, not even this vary barrier to the new companies may last forever, as the new companies gradually developed their customer base, they may start ordering huge quantity supplies from their supplier and hence lower their per unit cost. “Supplier Power: Unlike other grocery retail store, GCO does not acquire its inventories directly from the farmers or other intermediates. Instead, it purchases its products from the local contracted food retail store.
Also, as GCO operates in a virtual way that it is not required to establish a huge inventory level to fill its shelf like regular brick-and-mortar stores, GCO’s demand may be satisfied by any regular sized local food store. Due to the vast number of food stores competitors in Canada as well as GCO’s rather easy to satisfy demand, GCO’s suppliers do not possess strong negotiation power for GCO may switch to other supplier with little costs. Buyer Power: As GCO’s products aren’t any different from the products sold by other online sellers and local brick-and-mortar stores, it was unable to establish a brand images and to bound buyers to give up other substitutes for their proprietary products. Also, since the majority of buyers are only purchasing to the extent that to satisfy their household demand, their demands in volume are rather small and may be easily satisfied by any normal sized food retail competitors of GCO. These two factors together have provided the buyer a strong power in negotiation with GCO as well as many other food retailers.
This fact is further strengthened by the fact that there is literally no switching costs in switching retailers as all the buyers would have to do is to go to another potentially more distant store and incur little additional gas expense. “Threat of Substitutes: This is most strongly affected by three factors, the switching costs to the buyer, the verity of substitutes and the necessity of the foods. In terms of the switching costs, the buyers’ switching costs are generally very low, since they may choose to eat any other food to satisfy their hunger and the worst possible scenario is just they hated the taste.
Moving to the verity of choices, since the primary objective of eating is to satisfy hunger, there are many other choices offered to the buyers that will also achieve the same objective, the verity of substitutes is vast. As the verity of substitutes is vast, the necessity of the particular food is rendered pale. Based on the aforementioned factors, it is clear that the threat of substitutes is very high in the food retail industry. “Degree of Rivalry: The level of rivalry is very high in food retail industry and this is caused by a number of reasons.
First of all, there is already a very high industry concentration in the food retail market which results in a fierce competition among existing players. This intense competition is further worsen by the growing of industry which is approximately 3% per year based on the 2007 statistic. Second, due to the characteristics of foods, it’s very hard for the food retail companies to come up with a proprietary product to differentiate itself from other competitors’ offers and hence unable to develop a brand image which could develop customers’ loyalty to their products.
Also, since the primary purpose of any typical food is to satisfy people’s hunger, it is the criteria used to determine if another food may be a qualified substitute. Based on the aforementioned criteria, any typical food may be reasonably expected to be substituted by any other type of food and therefore results in great verity of substitutes. Third, there are literally no switching costs between food or the food retailers. This is because the worst possible thing can happen to the buyer in the case of switching to a substitute is that they hated the food ever since.
In the switching food retailer case, the switching cost is merely taking a few more minutes and drive another store and incur some additional gas expenses. As the retailers are unable to differentiate their foods from other retailers and the customers are freely to switch to another retailer with immaterial switching costs, the degree of rivalry is driven up. Internal Analysis/ VRINE Model “Value- Is it valuable? The online ordering system is valuable, particular to the two targeted groups. It is valuable to those busy professionals as the service could save them from wasting time on food purchases.
The system is also very valuable to the student without vehicles as the delivery could resolve their problem with accessing the food stores. “Rare- Is it rare? GCO’s online ordering/delivery system may be considered to be rare. Although there are also many other big players in the online ordering/delivery business such as Grocery Gateway and Amazon Grocery, none of them are located in the London region. Since GCO is a London based company and there are no other competitors in the London region, it is reasonable to say that the online ordering/delivery system of GCO is rare.
This rarity is expected to remain until GCO encounters a competitor in its operating region. “Inimitable/non-substitutable- Is inimitable and/or non-substitutable? Given the fact that there are already other companies offering online ordering/delivery service, it is more likely than not that the online ordering/delivery system is not inimitable. Also, since the system itself is merely a software/database that allows customers to place their order without physical presence, it is believed that it may be substituted easily. Exploitable-Is it exploitable? It is believed that GCO is able to exploit the full potential of its resources and capability based on its financial power and production knowhow. GCO has demonstrated positive profitability in its operations in the past several years and the odds of GCO encountering unexpected financial difficulties is remote. GCO also presented its production knowhow through the demonstration of its operations and developed strong business model. Options Analysis Facebook Advertising?
Issues – As a regional company, even GCO’s advertising campaign has been successful, out of state interested parties may not necessarily institute approachable customers and the percentage given may not completely reliable and subject to overestimation. Financial Feasibility – Assuming that the given projection is appropriate under the circumstance, it should be more preferable to adopt the “pay-per-views” (CPM) model with a projected increase in net income of $89. 61 in comparison with the decrease in net income of $29. 25 by the “pay-per-click” (CPC) model. Figure) Projected Effects – Based on the number calculated above, it’s believed that GCO’s annual net income will increase by $32707. 65. Mobile Application? Issues – There are no supportive evidences suggesting positive effects of the adoption of the application. Furthermore, the smartphone users may also choose log-in to GCO’s website through cell phone browser which renders the application redundant. Financial Feasibility – An overhead cost of $10000 is to be incurred; however, there is no reliable evidences to support any potential positive cash-inflow in the near future.
Projected Effects – GCO will incur a cost of $10000 in the application development; however, due to the substitutability of the application, the expenditure would have been made in vain. On-Campus Location? Issues – Since Western students are their primary customers, part of the projected sales may overlap with those originally purchasing online, hence, the statistic provided may be unreliable and the consequent projection should be considered conservatively.
Financial Feasibility – Based on the given data, establishing an on-campus physical store should be financially plausible. It is expected that for GCO to initiate the project, GCO will incur an overhead cost of $140 thousand and an aggregated annual cost of $144000 while generating an annual sale of $600000. Projected Effects – Under the assumption that the newly established on-campus brick-and-mortar store does not affect the online orders from the University of Western Ontario students and staffs, GCO should be able to expect an increase in annual net income of $85500.
Additionally, GCO may capitalize its success on the UWO campus and expand it to other universities. Selling GCO? Issues – The objectives were to grow the company and provide Felder with additional financial security while securing/bettering his role in the company. Although selling the company will certainly achieve the financial security objective and in some way accelerate the speed of company’s growth, the objective of bettering Felder’s role in the company is to be frustrated.
Financial Feasibility – As many competitors are currently developing an online grocery model, GCO might be a valuable acquisition target for those companies. It is expected that Felder will be able to sell GCO at premium and successfully relief himself from the personal financial difficulties. Projected Effects – Although selling GCO will resolve the personal financial problem, this will impale the objectives of positively affect Felder’s role in the company as he will no longer be the owner of the company.
Nevertheless, Felder may still remain in the company as an employee manager. Status Quo? Issues – GCO’s growth in sale is expected to slow down as a result of the economic recession. If no actions are taken other than the advertisement, it is projected the sales in the upcoming years would experience a cap of 1. 5 million. Financial Feasibility – Adoption of status quo strategy seems financially plausible. Although there is not going to be faster growth in the revenue and the sales will be capped at $1. million, the low advertising cost of $10000 in comparison to the increased sale of $500 thousand guarantees a projected growth in annual net income of $83750. Projected Effects – Under the status quo approach, it is expected that the company’s sale will slowly grow into the cap of $1. 5 million and have an overall effect on the annual income of $83750. Whereas, the slow growth in revenue as well as the sales cap of $1. 5 million is most likely unwelcomed by the investors and Felder as the prior ones desire a faster growth and the later one is in needs of additional financial security.