Porter’s Five Forces is a model named after Michael E. Porter
that takes into consideration five market forces that play out
on any given company or industry. The five forces are: power
of buyers; power of suppliers; threat of substitutes; threat of
new entrants; and industry jockeying.
This model examines these forces thereby helping to
determine a given company’s strengths and weaknesses.
Porter’s Five Forces is also a way to view the potential risks to
which any given company may be exposed.
Porter’s is a valuable yet somewhat subjective tool. It is a
starting point meant to encourage further discussion.
What is Porter’s Five Forces?
Please note there is no official method to score the model.
This method is simply a way to further categorize companies.
Each market force is scored on a scale of 1 – 5 with 1
representing the lowest threat and 5 representing the highest
All five forces are totaled for a final score. The lowest possible
score is 5 and the highest possible score is 25.
implies a lower threat rating.
implies a medium threat rating.
implies a higher threat rating.
Power of Buyers
The buyers are consumers like you and me.
There are no real switching costs involved.
The company will refund the membership fee
“in full at any time if you are dissatisfied.”
Costco’s commitment is to its members
which is why it runs on razor-thin margins
(TTM net margin is 1.8%).
Customers reciprocate via loyalty (Q32014
worldwide renewals were 87.3%)
Customers shop at Costco because of low
prices and wide selection. But it’s not the
only warehouse in town.
In most retail, customers call the shots.
Score – 4
Power of Suppliers
Suppliers provide the commodities and
materials for what COST sells.
Generally speaking, COST sells its goods
before it has to pay suppliers. As this
continues, COST finances more inventory via
payment terms versus working capital.
COST is not reliant on any one supplier, has
never experienced difficulty obtaining
inventory and has many alternate sources
due to suppliers own risks.
Given the scale of COST’s business and rapid
inventory turnover it would appear that
suppliers enjoy the relationship.
Score – 2
Threat of Substitutes
Substitutes include Sam’s Club and BJ’s on
the warehouse side.
Sam’s Club brought in about $57.1 billion in
sales for FY2014.
The graph to the right shows COST (red line)
vs. Sam’s (blue line) sales back to 2004.
The longer this goes on, the lower the threat
of substitutes becomes as it demonstrates
that COST has its customers as its number
Online sales for 2013 COST was ~3% of
consolidated net sales; about $3.2 billion.
Don’t forget about Amazon.com.
Score – 3
Threat of New Entrants
Barriers to entry at this point in the lifecycle
are very significant. Economic barriers, tech
barriers, logistical barriers, get off your butt
and do it barriers. Is it worth it?
Competitors in the space have built up such a
large presence that it would be a very tall
order for another concept to just open up
shop and dethrone any of these main players.
Loyal customer base, inventory control,
product variety, scale, distribution, even
parking are all factors that work against new
entrants into the space.
Start-up costs are quite prohibitive.
Score – 1
According to IBISWorld COST plus Walmart
Supercenters and Sam’s Club control more
than 80% of the overall “warehouse club”
Even if we exclude the Supercenters it’s still
Sam’s Club and COST. Everyone else is
fighting for a little piece of the pie.
Lest we forget about ecommerce, this is the
new frontier in retail and Amazon.com is
blazing the trail. Prime is becoming more
COST and WMT are also investing in online.
COST online sales in 2013 were ~$3.2B, Sam’s
~$1.3B, AMZN $78B.
Score – 3
Power of Buyers – 4
Power of Suppliers – 2
Threat of Substitutes – 3
Threat of New Entrants – 1
Industry Jockeying – 3