The Key Macro Factors that Have Influenced the UK Grocery Retailing Industry since the Early 1960s - Assignment Example

1. Assess the key macro factors that have influenced the UK grocery retailing industry since the early 1960s. The concept of organisational change is inherently intertwined with external threats and opportunities, which businesses must adapt to as part of strategic planning to continue long term growth. Senior and Fleming argue that the concept of organisational change has many faces, namely “convergent changes and transformational change that is organisation wide and characterised by radical shifts in strategy, mission values and associated changes of structures and systems” (In Thompson & Martin, 2005, p.41). Moreover, Johnson et al highlight that external macro-economic factors intrinsically impact strategy management and without accounting for macro economic factors in strategy development and management, a business will fail (Johnson et al, 2008, p.3). If we consider this contextually with regard to the UK grocery market; the move demise of the local high street store to the dominance of supermarkets in the past 20 years has radically transformed the grocery market ( Henry, 2008, p.77). For example, the DEFRA Economic Note on UK Grocery Retailing (2006) indicates that in addition to continued growth in the UK Grocery Retail sector; approximately “3/4 sales are made in supermarkets and superstores… with traditional small retailers now accounting for only 7% of sales” (DEFRA, 2006). It is submitted that a key element of this is effective interrelationship between corporate strategy management and exploitation of macro economic factors. This is further reiterated by Johnson et al, who opine that it is the environment which ultimately shapes organisational survival in the marketplace (Johnson et al, 2008, p.54). Indeed, the underlying basis of macroeconomic theory is the interrelationship between performance and behaviour in decision making regarding national economies along with a consideration of the various determinants of economic activity (Michl 2002, p.20). A principle macroeconomic model is the dynamic stochastic general equilibrium model, which explains economic growth, business cycles and monetary and fiscal policy, along with consideration of how the economy evolves over time accounting for random shocks (Colander, 2006, p.1). Moreover, Johnson et al underline the importance of the macro-environment as being the “highest level layer” in determining organisational success (Johnson et al, 2008) This proposition is further supported by the findings of DEFRA in the 2006 report, which highlights that transformational shift of the UK grocery sector from high street store to superstore is directly correlated to macro factors (2006). For example, DEFRA highlights the point that multiple retailing channels for groceries commenced in the 1950s as a result of urbanisation, mass manufacturing and the change to self service (2006). The result of these technological advances was the “inexorable rise of multiple supermarkets at the expense of independent stores” (DEFRA, 2006). Moreover, the desire for economies of scale perpetuated the one stop shop retail model for grocery retailing (DEFRA, 2006). This is further highlighted by the internet and the growth of multi-channel retailing. For example, the concomitant impact of the e-commerce business model has been the proliferation of multiple retail channels targeting consumers. Moreover, numerous market research projects report that although consumers regularly use websites for information gathering, the result is not always an online purchase. For example, research by Ahuja et al and Lee suggest that online purchasing ranges from approximately 24% (Ahuja et al., 2003) to 32% (Lee, 2002). This data indicates that consumers combine both online and offline channels in purchasing behaviour, with the consumer having ultimate control of the purchasing decision (Forsythe & Shi, 2003). Furthermore, Black et al undertook research into customer motivation in the use of a particular retail distribution channels and the results demonstrate four central factors shaping consumer behaviour in the multi-channel marketplace: 1) Characteristics of the consumer; 2) Factors specific to the nature of the product; 3) The mode of retail distribution channel; and 4) Factors pertaining to organisation (Black et al, 2002) Gupta et al (2003) undertook research into consumer habits and found that regardless of the distribution channel adopted by a consumer, ultimately customer loyalty is inherently reliant on the characteristics of the consumer regarding risk (Gupta et al, 2003). This is further evidenced by Chain et al’s study regarding the weight attached to the product and its concomitant impact on consumer patronage frequency (2004), which determined that this is intrinsically variable depending on the nature of the product. With regard to the UK grocery sector this is evidenced by the DEFRA report, which comments that socio-economic trends such as the increasing busy lifestyles, rising incomes and increase in the female workforce has further benefited the superstore retail model for grocery shopping (DEFRA, 2006). Additionally, a key instrument utilised in strategic planning and strategic management is PEST analysis, which is imperative in organisational management to ensure market environment is understood as part of market strategy (Brooks et al, 2004, p.451). The PEST analysis enables organisations to strategically plan and implement problem solving initiatives as part of management strategy and Johnson et al posit that the PEST framework is imperative in highlighting how macro factors impinge organisations (Johnson et al, 2008). Under the PEST analysis paradigm, the following elements within the marketing environment are important considerations: 1) Internal environment- staff, internal customers, office technology, wages and finance; 2) The micro-environment – external customers, agents and distributors, suppliers, competitors; 3) macro-environment – political, legal, economic forces, social forces and technological forces (Brooks et al, 2004, p.451). The following factors are relevant to UK grocery sector under the PEST analysis model: 1) Political Factors Competition law EU law Planning Law Inward Investment (DEFRA, 2006) 2) Economic and Social Factors High disposable income Disposal Income Alliances Branding Cheaper Car Travel Increasing power of consumers Economic Crisis Social Networking Pricing Mature Markets (DEFRA, 2006) It is submitted that the interrelationship of socio-economic factors has been particularly pertinent to grocery retail management. For example, the DEFRA report highlights that the mature market in particular coupled with planning restrictions for chain expansion has “driven multiple retailers to: - Fiercely compete for market share through price, range and service; - Diversify into non-grocery products and service; - Shift to premium products; - Enlarge existing stores and open high street convenience stores” (DEFRA, 2006). Indeed, it is precisely these macro factors that account for the variances in market dominance on a regional basis (DEFRA, 2006). 3) Technological Factors Multi-channel retail format E-commerce and home delivery of groceries Digital Technology Accordingly, it is evident that since the change in purchasing to the self service in the 1950s, the grocery retail model has undergone significant change in moving towards the superstore dominance. The above analysis highlights that the key factor in the trends in grocery retailing since the 1960s has been the impact of macro factors on consumer purchasing requirements; which in turn has driven strategy management towards a one stop shop model dominating the UK grocery retail sector. Q2) Analyse the current attractiveness of the UK supermarket and superstore segment As highlighted in the previous section, the UK grocery market is dominated by the UK supermarket and superstore retail model, which accounts for seventy five percent of UK grocery sales (DEFRA, 2006). Moreover, it is submitted that the central rationale for this market dominance is the interrelationship between macroeconomic factors and increasing consumer power (Baumol & Blinder, 2008, p.162). In particular, the digital era fuelled novel business opportunities and the continuous evolution of online business channels has made multi-channel retailing a reality, with the customer now placed at the forefront of business strategy. In turn this has reshaped business distribution and marketing models. This has propagated discussion with regard to the need for businesses to adopt customer relationship oriented approach in order to create value in marketing. For example, Weinberg at al’s recent report into changing consumer behaviour highlights that approximately 65-70% of consumers fall within the category of “multichannel shoppers” and increasingly have the highest purchasing power (Weinberg et al, 2007). Therefore, whilst the UK supermarket model is typically associated with groceries; the archetypal UK superstore effectively operates as a one-stop shop to address trends in consumer behaviour (Seth & Randall, 2000, p.177). In addition to the benefits of addressing the reality of busy UK consumer lifestyles; it has been the discounter formula and “uncomplicated store environment has been a more prominent feature than it has ever become in the UK” (Seth & Randall, 200, 177). Additionally, the ability to tailor retail outlets to consumer preferences has been a hallmark of the superstore success; which in turn presses the importance of presenting value in marketing for the contemporary consumer (Duggan, 2002, p.157). Moreover, East et al posit highlight the central reasons for consumer preference of superstores and supermarkets in the UK are location, good value, sales promos, wide choice and free parking (East et al 2008, p.220). In further considering marketing strategy within the competitive environment it is also necessary to apply Porter’s five forces analysis (Hill & Jones, 2007, p.46). For example, if we apply this to the UK supermarket model, a key factor has been the ability of supermarkets to be aware of their brand being inherently dependent on the public perception of branding (Burch and Lawrence, 2007, p.109). This also applies to the branding and choice of products stocked in store (Burch and Lawrence, 2007, p.109). For example, Burch and Lawrence argue that a significant factor in increasing the attraction of the supermarket and superstore in the UK grocery market is the strategy of co-branding (2007, p.109). Indeed, it has been argued that a central factor in attracting consumers to the superstore model has been the role of food and “the importance of quality in food purchasing and its acceptance by consumers in their respective societies…. That there has been an element of late renaissance in aspirations to and provision of quality British food”(Seth & Randall, 2000, p.177). As such, the economic power of supermarkets to address consumer preferences in purchasing decisions enables dominance in the market. Moreover, the Porter’s five forces’ model requires a consideration of the UK supermarket’s activities as a strategic business unit, which in turn requires an evaluation of the following factors: 1) Threat of Entry; 2) Power of Buyers; 3) Power of Suppliers; 4) Threat of Substitutes; and 5) Competitive rivalry (Hill & Jones, 2007 p.46) Additionally, if we consider other marketing models, the Ansoff Matrix is a marketing tool helping businesses to determine where and when to sell products and Cheverton posits that business growth is reliant on the nature of the market (Cheverton, 2004, p.142). An example of the Ansoff Matrix is below in Figure 2. Figure 2: Ansoff Matrix, Source: www.strategyiseverywhere.files.com accessed February 2010. If we consider the Matrix in context of UK supermarkets, it is evident that the macro factors shaping the UK grocery market have significantly contributed to a retail market model dominated by the superstores under the “market development” aegis (Capon, 2009, p.258). As a result, the market development has enabled market penetration by the major players in the UK such as Sainsburys, Tesco and Waitrose. In continuing diversification and product development, these superstores not only add value by stocking brands that tie in to consumer preferences; they also aim to retain customer loyalty. For example, in applying the Ansoff Matrix marketing strategies to the example of the success of the UK supermarket, Capon posits that appurtenant to product development has been the widespread implementation of loyalty schemes, which in turn fuels profitability (Capon, 2009, p.258). Q3) Analyse the strategic directions and methods employed by Tesco in pursuit of growth. Consider the motivations for growth, the basis of choices made and the success of these choices. The DEFRA 2006 report highlights that Tesco has been one of the most successful supermarket chains in exploiting the multi retailing format (DEFRA, 2006). Moreover, the DEFRA report highlights that whilst Tesco’s market share is inherently dependent on location, it ultimately is “commanding, and steadily increasing, 30% share of the non-convenience UK grocery market” (DEFRA, 2006). Additionally, in addressing the constraints of the “mature market” and planning restrictions in the UK, Tesco has made significant inroads into the convenience retailing sector with the increase of high street and local “Tesco Express” in prime locations for passing trade (DEFRA, 2006). It is submitted that a significant element of Tesco’s success is the ability to spot gaps in the pre-existing saturated “mature market” for profitable gain (Sadler & Craig, 2003, p.231). Additionally, Tesco has been able to continue growing by continuing its core aggressive discounting policy from the 1970s, whilst implementing new marketing initiatives to increase the perceived value presented to customers in persuading them to continue shopping at Tesco (Sadler & Craig, 2003, p.231). To this end, Tesco has been able to sustain growth and profitability in a saturated sector through continued innovation in service offerings (Sadler & Craig, 2003, p.231). Moreover, a significant element has been the ability of Tesco to adapt to consumer habits in the multi-channel retail marketplace. For example, Vargo and Lusch argue that the underlying basis for marketing is rooted in economic principles of exchanging goods for value (2004). It is precisely this concept of “value” that has been at the heart of marketing strategy in persuading consumers to exchange value for goods in conventional business strategy. However, as the business models continue to evolve in line with changing consumer habits and retail channels, Vargo and Lusch point to the fact that economical basis for traditional marketing strategy has been forced to adapt to remain relevant (2004). Additionally, Vargo and Lusch further refer to the arguments of Achrol and Kotler that the: “very nature of network organisation…..and the potential impact on the organisation of consumption all suggest that a paradigm shift for marketing may not be far over the horizon”(in Vargo and Lusch, 2004). They highlight the point that marketing has been forced to move away from the focus on tangible goods in light of the increasing consumer value attached to intangibles, thereby underpinning the “paradigm shift” in providing value in marketing. A significant part of this has been the move away from the economic model to the recognition of marketing as a social and economic process (Vargo and Lusch, 2004). In evaluating this “paradigm shift”, Gronroos refers to the fact that customer relationship economics presses the need for considering alternative marketing strategies and supports the importance of customer relationship marketing to address what consumers attach to the concept of “value”. Indeed, he argues that “relationship building is paramount”; which questions the relevance of the traditional Four Ps in providing value in context of marketing (1997). Moreover, the empowerment of the consumer as a whole has led to market segmentation and a changing consumer market, forcing retailers to adopt a multi-retailer strategy (Levy & Weitz, 2008: 27). This in turn has led commentators to recommend the organisational use of customer relationship management strategies (CRM) to ensure value and address the challenges of the multi-channel retail marketplace (Levy & Weitz, 2008: 27). As a result, there is clearly a need to increase the perceived value in marketing strategy, which is supported by the arguments of Webster that marketing has become more than about securing sales, but rather instrumental in customer loyalty and corporate branding. Webster asserts that “the business is increasingly likely to be a network of strategic partnerships”, which highlights the point that a brand and corporate strategy is increasingly defined by the customer in the contemporary marketplace. This in turn correlates to the arguments of Nunes and Cespedes in highlighting the point that the conventional economics based model of marketing has dramatically shifted whereby the customer is increasingly autonomous in determining value. In distinct contrast to the power of retailers in the 1980s and mid 90s, “today’s customers “channel surf with abandon” highlighting the need to implement a new logic for channel strategy; which reiterates the need to be innovative in creating “value” to retain customer loyalty in contemporary marketing strategy. This again reinforces the point that Tesco’s ability to sustain growth in the competitive grocery sector has been the continuous innovation in service offering to adapt to the contemporary consumer (Burch & Lawrence, 2007). Prime examples of this include the development of Tesco’s in house brand and the use of customer loyalty schemes; which boost profits in the long term (Capon, 2009, p.135). Moreover, Tesco’s strategy management and effective implementation of customer relationship marketing (CRM) has expanded the brand beyond the UK grocery market. For example, CRM essentially stems from relationship marketing and early works of Berry (1983) and Reichheld (1996), which indicated that a 5% growth in customer retention rates culminated in a mean customer lifetime value figure ranging between 35% to 95%, with knock on effects on profit margins (Ryals & Knox, 2001). There are many definitions of CRM but in broad terms, CRM is defined as an all embracing approach which integrates sales, customer service, marketing, field support and other functions that touch customers (Christopher et al, 1991). Moreover, Galbreath posits that effective with effective CRM activities “an enterprise performs to identify, select, acquire, develop, and retain increasingly loyal and profitable customers”(Galbreath, 1998 at p.14). For example, this is further evidenced by Tesco’s customer orientated marketing strategy, spearheaded by the famous tag line “every little helps”. Additionally, they were one of the first big companies to begin a low priced own label range of goods and loyalty card system under different categories in an attempt to retain its customer base. Moreover, in the CRM focus, Trapp highlights the importance of CRM in developing an insight into customer preferences and comments that “”Insights” is the word in of the moment in consulting circles. Everybody seems to want that extra little bit of information that gives them an advantage over its rivals. Much has been made in recent years, of how, for example, Tesco seems able to anticipate warm weekends and get the right amounts of beer and barbecue supplies into its stores while its rivals sell out. It’s largely down to analysis” (Trapp, 2007). If we further consider this in terms of effective customer relationship management “at the core, CRM is an integration of technologies and business processes used to satisfy the needs of a customer during any given interaction. More specifically, CRM involves acquisition, analysis and use of knowledge about customers in order to sell more goods or services and to do it more efficiently (Bose, 2002). Moreover, the “customer” includes a wide definition including vendors, channel partners, or virtually any group requiring information. This is further evidenced by Tesco’s CRM strategy and implementation via partnership with Accenture in Korea (www.accenture.com/global/services/By_Industry/Retail/Client_Successes) Accenture provided the CRM support technology for the retail joint venture between Samsung and Tesco to break into Korea’s competitive retail market, by creating a Homeplus discount store chain, which has now proliferated to 30 locations across the capital of Seoul (www.accenture.com/global/services/By_Industry/Retail/Client_Successes) Accenture highlight that there were significant existing players and barriers in the Korean market place with intense competition across all sectors. Other barriers facing the partners were a limited number of potential store locations and a high cost of site acquisition(www.accenture.com/global/services/By_Industry/Retail/Client_Successes). Korean retailers also face the difficulties of high cost supply chains and high store maintenance costs, and therefore Tesco had to implement a retail concept which would fill a niche marketplace and deliver to the Samsung joint venture the growth it needed to achieve goals geared towards the Korean market place. To this end, it engaged Accenture for its CRM best practice and capability in Korean and global retail markets, which has proven successful in the growth of the Homeplus stores in Korea (www.accenture.com/global/services/By_Industry/Retail/Client_Successes) . Accenture highlight key factors in the success of the Korean venture being linked to effective CRM. Firstly, the CRM strategy operated in four distinct phases, firstly by undertaking extensive research to gain customer insight (www.accenture.com/global/services/By_Industry/Retail/Client_Successes). Secondly, after confirming Samsung and Tesco’s strategy and objectives in the marketplace, Accenture profiled potential customer segments to define the right market. In Phase 2, Accenture undertook a customer segmentation exercise by assessing the value of various segments based on their size, spending patterns and growth potential. (www.accenture.com/global/services/By_Industry/Retail/Client_Successes) Accenture then identified the most attractive of these target segments and developed the value proposition based on this profile, delivering to their preferred products, pricing, brands and service levels (www.accenture.com/global/services/By_Industry/Retail/Client_Successes) Additionally, it is submitted that segmentation of the traditional marketplace has become increasingly shaped by consumer trends, which has pressed the need to integrate CRM as part of business growth strategy. This in turn has created a novel marketplace, where the consumer is effectively the market, thereby creating novel business opportunities, which Tesco has effectively exploited to continue sustained growth. Bibliography Achrol, R (1991). Evolution of the marketing organisation – new forms of turbulent environments. Journal of Marketing, pp. 77-93. Ackerman, F., Eden, C. & Brown, I. (2005). The Practice of Making Strategy. Sage Ahuja, M., Gupta, B. and Raman, P. (2003). An Empirical Investigation of Online Consumer Purchasing behaviour. Communications of the ACM 46, 145-151 Berry, L. L. (1983). Relationship Marketing. In L. L. Berry, G.K. Shostack and G. D. Upah (eds). Perspectives in Services Marketing, American Marketing Association, Chicago III Baumal, W. & A. Blinder (2008). Macroeconomics: Principles and Policy. Cengage Learning. Ranjit Bose (2002). Customer relationship management: key components for IT success. Industrial Management and Data Systems 102/2 [2002] 89/97 Black, N. J., Lockett, A., Ennew, C., Winklhofer, H. and McKechnie, S. (2002). Modelling consumer choice of distribution channel: an illustration from financial services, International Journal of Bank Marketing, 20 161-173 Brooks, I., Weatherston, J., & Wilkins, G. (2004). The International Business Environment. Pearson. Burch, D. & G. Lawrence (2007). Supermarkets and agri-food supply chains: transformations in the production. Edward Elgar Publishing. Capon, C. (2009). Understanding the Business Environment. Pearson Cheverton, P.(2004). Key Account management. Kogan Page. Colander, D. (2006) Post Walrasian macroeconomics: beyond the dynamic stochastic general equilibrium model. Cambridge University Press, 2006 Duggan, K. (2002). Creating Mixed Model Value Streams: practical lean techniques for building to demand. Productivity Press. East, R., Wright, M., & Vanhuele, M. (2008). Consumer Behaviour: Applications in Marketing. Sage Publications Limited Galbreath and Tom Rogers (1999). Customer Relationship leadership: a leadership and motivation model for the twentieth first century business. The TQM Magazine Volume 11 Number 3: 1999: pp. 161-171. Gronroos, C. (1994). Keynote paper: from marketing mix to relationship marketing- towards a paradigm shift in marketing. Asia-Australia Marketing, Journal Volume 2, No.1. Gupta, A & Walter, Z. (2003). Risk profile and consumer shopping behaviour in electronic and traditional channels. Decision Support Systems 38, 347-367 Henry, A (2008). Understanding Strategic Management. Oxford University Press. Hill, C., & Jones, G. (2007). Strategic Management: an integrated approach. South Western College Publishing Johnson, G., Scholes, K., & Whittington, R. (2008). Exploring Corporate Strategy. Pearson. Lee, P. M. (2002). Behavioural Model for Online Purchasers in E-Commerce Environment, Electronic Commerce Research, 2 7-85 Michl, T. (2002) Macroeconomic Theory: A Short Course. M. E. Sharpe Nunes, P., & Cespedes, F. (2003) The Customer has escaped. Harvard Business Review Reichheld, F. F. (1996). The Loyalty Effect, Boston, Mass. Harvard Business School Press. Ryals, L. & Knox, S. (2001). Cross Function Issues in the Implementation of Relationship Marketing Through Customer Relationship Management. European Management Journal 2001, Volume 19, No.5, pp.534-42. Sadler, P. & Craig, J. (2003). Strategic Management. Kogan Page. Seth, A., & . Randall (2000). The Grocers: The Rise and Rise of the Supermarket Chains. Kogan Page. Thompson, J. & Martin, F (2005). Strategic Management: awareness and change. Cengage Learning Trapp, R. (2007). How Customer Relationship Management Systems can be of benefit to your business. The Independent at www.independent.co.uk/news/business/sme/how-customer-relationship-management-systems-can-be-of -benefit-to-your-business-451821.html accessed February 2010 Vargo, S., & Lusch, R. (2004). Evolving to a New Dominant Logic for Marketing. Journal of Marketing Volume 68, 1-17. Weinberg, B., S. Parise & P. Guinan (2007). Multichannel marketing: Mindset and program development. Business Horizons (2007) 50, 385-394. Read More