A company is only as attractive as the industry they belong. It is key to understand the opportunities and threats imposed on the industry when doing company specific analysis. Michael Porter's Five Forces Model provides an excellent foundation for company and industry analysis.
The IbisWorld? Warehouse Clubs and Superstores September 18, 2007 report (IW) describes the barriers to entry as high due to the "Dominance of players currently in the industry, The cost of establishing or purchasing a retail outlet, weak product differentiation, and established relationships with suppliers." The top four companies in this industry account for over 90% of market share and industry revenue. And the trend has been that through market exit and acquisition the number of smaller firms is decreasing. The capital requirements of opening and maintaining a new store are relatively high compared to other similar retail establishments. Land acquisition and store construction costs can easily exceed $10M with additional funds needed for labor and operating stock. Weak product differentiation is prevalent in the industry with each warehouse carrying similar products and brands. Because of warehouse pricing strategies, suppliers are sometimes hesitant to provide goods to clubs to protect their already thin margins. This fact coupled with the pre-existing long running relationships between clubs and suppliers can prevent new or smaller players from getting comparable pricing and credit terms. These factors result in a positive outlook for pre-existing top four companies and a negative one for any pre-existing small or potentially new chains.
The bargaining power of suppliers to warehouse clubs is relatively weak due to the market dominance of the top four players as well as ...