Saturday, July 19, 2003

Competition matrix As we've noted already, no sooner have the Safeways and Krogers wiped out or gobbled up smaller supermarket chains than their supremacy has challenged from outside the supermarket industry. Big general merchandise chains like Wal-Mart, discount shopping clubs, one-stop drug chains, and ever bigger convenience stores are all providing new sources of competition, another set of shelves for that carton of Tropicana Orange Juice or that package of Oreos. What's happening here is one of the products of our current economy. Beyond just competing in your slot without historical and acknowledged peers, companies are more and more competing against a complex matrix of potential rivals. Just as Kroger's is getting to the drug business, CVS is getting into the grocery line. And Wal-Mart is getting into both. This situation makes most retail oligopolies inherently unstable and, in general, more and more desperate. Just when you thought you were one of the last players standing, there are players outside the industry threatening. Video stores provide a clear example of this matrix. As a whole, the video market has reached its limits and is showing next to no growth; therefore a zero-sum game. If Blockbuster and Hollywood Video are up, then other stores must be doing worse, and, in fact, local video stores are rapidly going out of business as both of those chains continue to expand. But add a dimension. There are a hell of a lot of competitors outside the narrow video sales and rental industry category. Some convenience stores, supermarkets, and other retail stores rent videos; big retail chains like Best Buy, Borders, and Wal-Mart sell videos. Plus there are hundred of places to purchase them from online. Even local libraries allow you to borrow them for free. Meanwhile, Netflix offers a Web-based alternative to schlepping to the rental store that a growing number are finding desirable. Video stores are being attacked on all fronts, and while Blockbuster and Hollywood Video may have won the battle against other dedicated video chains and the mom-and-pop stores, they are now fighting against opponents with similarly deep pockets and large bases of loyal customers. But the video sales and rental chains are not just competing with other retailers, they are also looking over their shoulder at video on demand (VOD). At some time in the next decade, it seems almost certain that consumers will be easily able to conveniently download a movie for home viewing for a few dollars without requiring a trip to the video store. (It's already happening illegally for college students, though at some inconvenience in terms of time required.) VOD service will be far more flexible and easy to use than today's pay-per-view. VOD has the promise to throw the whole world of video retail and rental upside-down, since the inconvenience of trips to the video store is one of the biggest annoyances of the whole rental issue. Yes, we know this is one of those oft touted phenomena that has been "just about to happen" for a decade; but with the high-speed interfaces in place, the growing trend of pirate downloads (music and movies) off the Web, and an array of major players in cable pushing VOD (especially AOL-Time-Warner which owns lots of content), this trend should at last be taken seriously. Finally, videos compete with other forms of entertainment (broadcast TV, pay cable TV, computer games, movies in theaters, listening to music). Computer use and Internet surfing have already had a major impact on the profits of the video market. In short, marketers in every category have to worry about a lot more than competition from others unmistakably in the same business. The video industry competition matrix Video industry Blockbuster Hollywood Video Small chains... Netflix Retailers Wal-Mart, etc. Borders, etc, Best Buy etc. Amazon, etc. Video on Demand (future) Comcast AT & T Canlevision Others... Alternatives Video games Broadcast TV Cable TV Others... As the table shows, grabbing up all the shelf space in the video rental business is a start, but it's not enough. That's why Blockbuster has desperately tried strategy after strategy: renting video games, seeking electronic gear in its stores, investing in online video rental, even peddling popcorn. The point is that, in a matrix, you have more rivals than the ones in your nominal industry. It's not hard to see a similar phenomenon in the pharmacy industry, where major pharmacy chains have almost wiped out the local drug store, only to be faced with competition from other quarters. The competition matrix might look something like this: Prescription drug competition matrix Drug Stores CVS Walgreen Rite-Aid Others... General retail Wal-Mart Target Others...   Supermarkets Safeway Krogers Albertsons Others... Online drugstore.com americandrugsrores.com cvs.com Others... Competition matrices abound, and they seem to be developing faster than ever, as companies seek to expand from their base competence. In retailing, it's especially easy to compete because once you have a store, the startup putting in pharmacy or cafe, is much smaller than that of starting one from scratch. And it might be worthwhile even if it just breaks even, if it causes your store to be an even more desirable destination. In contrast, fewer powerful companies from other fields are likely to start manufacturing cars or colas. But even in these cases, Ford and Pepsico have to keep worrying about new alternatives that may eclipse their product categories. The competition matrix does not invalidate oligopolies. In fact, it makes them all the more imperative. Companies have to be leaders in their field to fight off encroachments into their specialty. That takes serious consolidation and financial power. After all, the Wal-Mart and Safeway pharmacies hurt the little guys more than they do the CVS's and the Walgreens. 7:04:50 PM

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