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House of Fraser and the United Kingdom’s Department Store Industry Case Study


Introduction

Department stores majorly sell a variety of products from a large retail premise. The range of products offered by the department stores includes furniture, home appliances, cosmetics, jewelers, toys and clothing.

The department stores resort to selling a range of products as a protection measure incase sales of a single product fall in the market. This perhaps makes the difference between department store and specialized chain stores (Wittner 2003, p. 320).

Five giants that control 89 percent of the market share categorically dominate the department stores industry in the United Kingdom. Other minor companies control the 11%.

The dominant company in the department store industry market is Marks and Spencer, which has an outstanding market share of 55%. John Lewis, Debenhams, House of Frasers and Harrods control 15%, 12%, 4% and 3% respectively. It is estimated that department stores industry generated about 15.1 billion pounds to the UK financial system in the year 2007.

Debenhams

With about 140 department stores across UK, Debenhams chose to specialize in fashion other than putting more weight on home wares. The customized products offered by the company merely target the middle mass market. Although the products offered are of high quality, Debenhams chose to offer them at affordable prices (Peteraf 1993, p. 180).

Debenhams perhaps have the best designers considering that its styled clothing and collections have attracted quite huge number of customers. The company as well has managed to sell products of its own label. In the year 2009, John Lewis witnessed an increase of 0.2 % in sales in the company.

Marks and Spencer

Marks and Spencer has about 685 department stores across the United Kingdom, which makes it the largest company having great control in department stores market. The products offered by M&S include among others food, clothing, home wares and electrical appliances. The company typically sells its product to the middle class market.

In addition, M&S as well sell food products, which accounts for half of sales generated by the company. The main factor differentiating M &S Company from other companies is its ability to sell its own label brand pertaining to food products. Although the company had done well before recession, the year 2009 dawned with a loss of 3.4% in sales.

This compelled the company to close about 30 stores, which were assessed to have performed badly. As a result, the company decreased its capital expenditure by approximately 400 million pounds. Its marketing expenditure as well went down by 20 million pounds.

However, the company still enjoys high level of loyalty that is mainly attributed to its quality products as well as high visibility linked to its diverse stores in several locations in UK.

John Lewis

John Lewis has about 26 department stores, which majorly focuses on home wares. The company has been able to charge premium price on its products because of the warranties offered to customers. John Lewis has the capacity of retaining employees for long enabling it to get insight knowledge about the products offered competitors.

This enables it to advise customers on products proficiently as compared to other firms in the market. The company claims that 30% of the sales made are attributed to quality products with its own label. Unfortunately, John Lewis made a loss of 20% in the year 2009.

Harrods

Harrods has uniquely set one department store in Knightsbridge in London, which exceptionally accommodates about 300 department stores making it one of the tourist destinations. The company offers its products at premium price although with high levels of customization.

Harrods offers a range of products including jewelers, bicycles and other products. Harrods benefits from the loyal customers who find it difficult to shift their loyalty to other department stores. In the year 2009, Harrods recorded an increase of 9%.

House of Frasers

With 66 stores across UK, House of Frasers happens to be the oldest department store. The company sells a variety of products including cosmetics, electrical, clothing, home wares and perfumes. While emphasizing on fashion clothing, the company partly targets the upper mass market. This perhaps assists the company to charge premium price on its products.

Recently, the company has been offering luxurious products in an attempt to change its image. The products comprise of Vero Moda from Denmark and Kenneth Cole from U.S.A. This considerably differentiates House of Frasers from other department stores in the industry.

Nevertheless, its products’ prices are alleged to be given quite a large margin that does not reflect proportionality between premium and value of the products. The company closed the financial period 2009 with an increase of 16% in sales indicating a growth (Porter 1990, p. 48).

Strategic group map indicating House of Fraser’s competitive position within the Department Stores Industry in UK

The following strategic group map will help to identify some similarities and differences among various department stores in the UK in relation to different variables that indicate a firm’s competitive advantage.

Department store(market share) strategy price Breadth of products Quality/styling Number of stores 2009 increase in sales in relation to 2008 sales
House of Fraser 4% Broad differentiation premium Extensive Good/Superior 66 16%
John and Lewis 15% Focused differentiation premium limited Good 26 -20%
Debenhams 12% Broad differentiation average limited Good/superior 140 0.2%
Harrods 3% Broad differentiation Above average extensive Good 1 (accommodating 300 stores) 9%
Marks and Spencer 55% Broad differentiation average extensive Good 685 -3.4%

The UK department stores industry is unique due to its exceptional feature relating to targeting of both middle and upper classes in the market. At no point did any company attempt to target the lower class market. Most of the companies target the middle class market. However, House of Frasers focuses on the upper mass market (Hollingsworth 2000, p. 599).

While other companies try to target the middle class by offering quality products at a premium rate, House of Frasers endeavors to provide superior products with a large margin premium as compared to other department stores in the industry. Perhaps the large premium charged by the company can be justified by the exceptional products that have little presence in the UK such as Vero Moda from Denmark and Kenneth Cole from U.S.A.

A number of luxurious products offered by the House of Frasers have completely changed the image of the company since many customers accepted the products at such high price levels (Besanko & Dranove 1996, p. 79).

However, other department stores are selling superior products at an average price, which might result to House of Fraser facing stiff competition. For instance, Debenhams is known to be selling superior products at an average price. Perhaps such a company might be able to win more customers during recession (Kanniainen & Keuschnigg 2005, p. 305).

This denotes that unless House of Frasers wins customers’ loyalty, it is most likely to witness a drop in sales during economic recession (Hall & Soskice 2001, p. 80). This would occur given the fact that other firms are able to sell the same products of high quality at considerably reduced prices.

Nevertheless, the unique position held by House of Frasers, which has enhanced its image, is more likely to increase its sales. The department store’s broad differentiation strategy pursued by diversifying its investment in a wide range of products will ensure that its risks are spread (Ghemawat 1991, p. 112).

The department store’s broad differentiation strategy pursued by diversifying its investment in a wide range of products will ensure that its risks are spread

Porters Five Competitive Forces

House of Frasers has successfully penetrated into the market with its fashionable and luxurious products in the department stores market. However, it is facing competitors who are offering superior goods and services in the market.

Industry rivalry: high

Every department store in the market is attempting to offer goods of high quality at a premium price. Although House of Frasers has positioned itself uniquely in the market by offering luxurious goods, it still faces stiff competition from other department stores selling superior products such as Denham. For House of Frasers to grow in terms of sales, it would be wise if it conducts extensive promotions and advertising (Porter 1980, p. 87).

Threat of substitutes: high

House of Frasers engages in a number of products that have substitutes from other department stores such as John Lewis, Debenhams, House of Frasers and Harrods, and Marks and Spencer. During economic recession, customers are likely to switch to other cheap goods offered by other firms (Porter 1980, p. 87).

Supplier bargaining power: low

Low bargaining power tends to feature in the market because various suppliers offer different and unique products.

This gives the department store a chance to negotiate on fair grounds regarding the price on which to buy the brand since various suppliers cannot coalesce to fix certain prices for all heterogeneous goods offered in the market. However, department stores get chances to fix certain premiums to customers (Ghemawat 1999, p. 78).

Threats of new entrants: low

House of Frasers posses a unique position in the market that many department stores may find it difficult to maintain. For instance, the luxurious products sold by House of Frasers require huge capital. It has loyal customers who have seen House of Frasers operate in the market for long.

Other firms have also developed loyal customers making switching costs to new firms a bit high. The level of superior products offered at the market might also limit the number of new competitors (Gompers & Lerner 2004, p. 201).

Buyer bargaining power: moderate

Although there are low switching costs in this market, customers sometimes find themselves tied to one department store due to differentiation existing in the market. This has been enhanced by different brands offered by every company in the market (Amable 2003, p. 22).

Attractiveness for Glasses Direct

From the Porters’ five forces model, it is clear that several aspects attract investors investing in department stores. House of Frasers is safe due to several limitations such huge capital and high level of specialization required in the market.

However, it also emerges that it is difficult for House of Frasers to gain a large portion of market share because of the strong loyalty developed by customers on the other companies in the department store market. Nevertheless, due to emergence of price sensitive customers, House of Frasers would be able to gain more profit as well as loyalty by selling quality products at relatively cheap prices.

The industry as well enjoys the advantage of not having a threat related to substitutes. This makes the market less competitive and therefore, less effort is required to wrestle out the few existing rivals (Oster 1994, p. 12).

Relationship between glass direct strategic group and its organizational focus

From the House of Frasers analysis, it is clear that Glasses Direct owns a small percentage of the market share. It is also apparent that House of Frasers faces stiff competition from strong contenders, who have been in the market for long.

In an attempt to respond to their competitive advantage, House of Frasers endeavors to produce quality products to attract consumers with low disposable income. At the same time, they are incurring heavy costs to expand its customer’s base (Michael & McGahan 2007, p. 4).

Mobility barriers that hinder rivals from entering House of Fraser’s competitive domain

Given the fact that House of Frasers is offering unique products in the market, which indeed have less presence in UK, it will perhaps become difficult for other department stores to enter its competitive domain.

Such products include Vero Moda from Denmark and Kenneth Cole from U.S.A. In addition, the luxurious products that define House of Frasers will as well act as a hindrance factor for any firm to compete effectively with it (Casper & Matraves 2003, p. 1870).

List of References

Amable, B 2003, The Diversity of Modern Capitalism, Oxford University Press, Oxford.

Besanko, D & Dranove, D 1996, Economics of Strategy, John Willey & Sons, Nueva York.

Casper, S & Matraves, C 2003, “Institutional Frameworks and Innovation in the German and UK Pharmaceutical Industry”, Research Policy, Vol. 32, no. 1, pp 1865–1879.

Ghemawat, P 1991, Commitment, The Dynamic of Strategy, Free Press, New York.

Ghemawat, P 1999, Games Businesses Play: Cases and Models, MIT Press, Cambridge.

Gompers, P & Lerner, J 2004, The Venture Capital Cycle, MIT Press, Cambridge.

Hall, PA & Soskice, W 2001, Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, Oxford University Press, Oxford.

Hollingsworth, RJ 2000, “Doing Institutional Analysis: Implications for the Study of Innovations”, Review of International Political Economy, Vol. 7, no. 1, pp 595–644.

Kanniainen, V & Keuschnigg, C 2005, Venture Capital, Entrepreneurship, and Public Policy, MIT Press, Cambridge.

Michael, P & McGahan, MA 2007, “An Interview with Michael Porter”, The Academy of Management Executive, Issue 16, no. 1, pp 2-44.

Oster, SM 1994, Modern Competitive Analysis, Oxford University Press, Nueva

Peteraf, MA 1993, “The Cornerstone of Competitive Advantage: A Resource-Based View”, Strategic Management Journal, Issue.14, no.1, pp 179-191.

Porter, ME 1980, Competitive Strategy: Techniques for Analyzing Industries and Competitors, The Free Press, London.

Porter, ME 1990, The Competitive Advantage of Nations, London, MacMillan Press.

Wittner, P 2003, The European Generics Outlook: A Country-by-Country Analysis of Developing Market Opportunities and Revenue Defense Strategies, Datamonitor, London.

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IvyPanda. "House of Fraser and the United Kingdom’s Department Store Industry." July 2, 2019. https://ivypanda.com/essays/house-of-fraser-and-the-united-kingdoms-department-store-industry/.

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IvyPanda. 2019. "House of Fraser and the United Kingdom’s Department Store Industry." July 2, 2019. https://ivypanda.com/essays/house-of-fraser-and-the-united-kingdoms-department-store-industry/.

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IvyPanda. (2019) 'House of Fraser and the United Kingdom’s Department Store Industry'. 2 July.

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