Business

UK retailing has been considered a profitable business as opposed to other Western world counterparts based on several factors. The article, however, focuses on two factors margin on sales and return on capital employed (ROCE).

In the margin of sales, the UK clearly has a large profit margin as compared to other countries based on several factors. However, ROCE shows that the UKs higher margins only serve as a buffer to higher cost of capital that is needed to set up and get the businesses running. Analyzed in the Five Forces Model the UKs retailing industry can be seen in a better light.

In terms of the bargaining power of buyers, supermarkets have banded together resulting in an oligopoly to dictate prices across many supermarket brands across the country, which results to low bargaining power. In terms of the suppliers bargaining power, the article states that they are more experienced and skillful in extracting better terms from suppliers, thus resulting into high buying power. In both cases, integration into the retail business is difficult if new entrants are not integrated into the oligopolistic group which has all the technology and knowledge to jack up margins. This results into a low threat of new entrants especially with the high capital requirements as is the case for buying sites and building superstores. Although, while in the oligopolistic group, there would be no switching costs since they carry most of the brands consumers require anyway. This analysis leads to high threat of substitutes since retail stores have multiple products in their shops and are rarely exclusive to one shop. Competitive rivalry is high since there are a number of large competitors, and are intense because the market is already mature, have high fixed cost that push them to increase sales, have high redundancy costs in exit barriers, and are mostly undifferentiated.

Because of these factors, it is evident that the profitability of the retailing industry is fair and not excessive especially because the high margins only serve as mitigation to the high costs.