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CreatingaCompetitiveStrategyforaDiscountRetailer1OverviewYourclientisthelargestdiscountretailerinCanada,with500storesspreadthroughoutthecountry.Let'scallitCanadaCo.Forseveralyearsrunning,CanadaCohassurpassedthesecond-largestCanadianretailer(300stores)inbothrelativemarketshareandprofitability.However,thelargestdiscountretailerintheUnitedStates,USCo,hasjustboughtoutCanadaCo'scompetitionandisplanningtoconvertall300storestoUSCostores.TheCEOofCanadaCoisquiteperturbedbythisturnofevents,andasksyouthefollowingquestions:ShouldIbeworried?HowshouldIreact?HowwouldyouadvisetheCEO?ClarifyEstablishunderstandingofthecaseSo,theclient,CanadaCo,isfacingcompetitioninCanadafromaUnitedStatescompetitor.Ourtaskistoevaluatetheextentofthethreatandadvisetheclientonastrategy.BeforeIcanadvisetheCEOIneedsomemoreinformationaboutthesituation.Firstofall,I'mnotsureIunderstandwhatadiscountretaileris!Adiscountretailersellsalargevarietyofconsumergoodsatdiscountedprices,generallycarryingeverythingfromhousewaresandappliancestoclothing.Kmart,Woolworth,andWal-MartareprimeexamplesintheUnitedStates.ApproachSetuptheframeworkOh,Isee.ThenIthinkitmakessensetostructuretheproblemthisway:First,let'sunderstandthecompetitionintheCanadianmarketandhowCanadaCohasbecomethemarketleader.Thenlet'slookattheUnitedStatestounderstandhowUSCohasachieveditsposition.Attheend,wecanmergethetwodiscussionstounderstandwhetherUSCo'sstrengthintheUnitedStatesistransferabletotheCanadianmarket.Thatsoundsfine.Let'sstart,then,withtheCanadiandiscountretailmarket.Whatwouldyouliketoknow?CreatingaCompetitiveStrategyforaDiscountRetailer2EvaluateEvaluatethecaseusingtheframeworkAreCanadaCo's500storesclosetothecompetition's300stores,ordotheyservedifferentgeographicareas?Thestoresarelocatedinsimilargeographicregions.Infact,youmightevenseeaCanadaCostoreononecorner,andthecompetitionontheverynextcorner.DoCanadaCoandthecompetitionsellasimilarproductmix?Yes.CanadaCo'sstorestendtohaveawidervarietyofbrandnames,butbyandlarge,theproductmixissimilar.AreCanadaCo'spricessignificantlylowerthanthecompetition's?No.ForcertainitemsCanadaCoislessexpensive,andforothersthecompetitionislessexpensive,buttheaveragepricelevelissimilar.IsCanadaComoreprofitablejustbecauseithasmorestores,ordoesithavehigherprofitsperstore?Itactuallyhashigherprofitsthanthecompetitiononaper-storebasis.Well,higherprofitscouldbetheresultoflowercostsorhigherrevenues.Arethehigherper-storeprofitsduetolowercoststhanthecompetition'sortheresultofhigherper-storesales?CanadaCo'scoststructureisn'tanylowerthanthecompetition's.Itshigherper-storeprofitsareduetohigherper-storesales.Isthatbecauseithasbiggerstores?No.CanadaCo'saveragestoresizeisapproximatelythesameasthatofthecompetition.Ifthey'resellingsimilarproductsatsimilarpricesinsimilarly-sizedstoresinsimilarlocations,whyareCanadaCo'sper-storesaleshigherthanthecompetition's?It'syourjobtofigurethatout!IsCanadaCobettermanagedthanthecompetition?CreatingaCompetitiveStrategyforaDiscountRetailer3Idon'tknowthatCanadaCoasacompanyisnecessarilybettermanaged,butIcantellyouthatitsmanagementmodelforindividualstoresissignificantlydifferent.Howso?Thecompetitor'sstoresarecentrallyownedbythecompany,whileCanadaCousesafranchisemodelinwhicheachindividualstoreisownedandmanagedbyafranchiseewhohasinvestedinthestoreandretainspartoftheprofit.Inthatcase,IwouldguessthattheCanadaCostoresareprobablybettermanaged,sincetheindividualstoreownershaveagreaterincentivetomaximizeprofit.Youareexactlyright.ItturnsoutthatCanadaCo'shighersalesaredueprimarilytoasignificantlyhigherlevelofcustomerservice.Thestoresarecleaner,moreattractive,betterstocked,andsoon.Thecompanydiscoveredthisthroughaseriesofcustomersurveyslastyear.Ithinkyou'vesufficientlycoveredtheCanadianmarket—let'smovenowtoadiscussionoftheUnitedStatesmarket.HowmanystoresdoesUSCoownintheUnitedStates,andhowmanydoesthesecond-largestdiscountretailerown?USCoowns4,000storesandthesecond-largestcompetitorownsapproximately1,000stores.AreUSCostoresbiggerthanthoseofthetypicaldiscountretailerintheUnitedStates?Yes.USCostoresaverage200,000squarefeet,whereasthetypicaldiscountretailstoreisapproximately100,000squarefeet.ThosenumberssuggestthatUSCoshouldbesellingroughlyeighttimesthevolumeofthenearestUnitedStatescompetitor!Close.USCo'ssalesareapproximately$5billion,whereasthenearestcompetitorsellsabout$1billionworthofmerchandise.IwouldthinkthatsalesofthatsizegiveUSCosignificantcloutwithsuppliers.Doesithavealowercostofgoodsthanthecompetition?Infact,itscostofgoodsisapproximately15percentlessthanthatofthecompetition.Soitprobablyhaslowerprices.Rightagain.Itspricesareonaverageabouttenpercentlowerthanthoseofthecompetition.CreatingaCompetitiveStrategyforaDiscountRetailer4SoitseemsthatUSCohasbeensosuccessfulprimarilybecauseithaslowerpricesthanitscompetitors.That'spartlyright.Itssuccessprobablyalsohassomethingtodowithalargerselectionofproducts,giventhelargeraveragestoresize.HowdidUSCogetsomuchbiggerthanthecompetition?Itstartedbybuildingsuperstoresinruralmarketsservedmainlybymom-and-popstoresandsmalldiscountret