The Retail Market of Several Strategic Groups as Tesco, Asda, Sainsburys, and Morrison - Case Study Example

Question: The retail market consists of several strategic groups. One strategic group in the industry consist of Tesco, Asda, Sainsbury's and Morrison a. Give reasons why they are classified as part of the same strategic group. The retail scene is United Kingdom has always been a hotly contested arena, most of the players have long legacies, and have grown along with the changes in the society. The food and drink retail industry represents one of the largest industries in UK. Many of the players who began operations as small food dealers and grocers have emerged to control the retail scene. The four major supermarket chains of Tesco, Asda, Sainsbury's and Morrisons control almost 70% of the market. They can be classified as a strategic group is because they are the only ones who operate superstores with large selling floor spaces. The fifth largest is the Cooperative group that has a group of convenience stores and smaller shops. Over the last few decades the UK grocery market has become a supermarket-dominated business (Ritz 2005, p 22-23). The dominance of the groups in terms of supply chain efficiency, ubiquitous stores and huge product range make entry of new players in the market difficult. Asda's positioning strategy is to be UK's cheapest supermarket grocer. The economic slow down has suddenly made a cheaper supermarket a more attractive proposition to the consumers. Morrison began as a butter and egg merchant, and went on to be a leading supermarket chain. It was by taking over the Safeway chain that Morrison began to make its large-scale presence. In fact, Morrison was forced to sell more than 50 stores it took over to avoid local monopolies. Some of the stores were also sold off because it did not fit in with the group's large format identity. Sainsbury group has a history of more than 150 years. Good quality at reasonable prices was the hallmark of the group from its first store. During the course of years, Sainsbury found itself sandwiched on one side by the cheap stores and on the other side by the up market stores like Waitrose. Tesco cornered the status of being termed the first superstore. The supermarkets grew when RPM (Resale Price Maintenance) was abolished, thereby giving the option of more discounts to the customers. Lower prices are the key strategy for the supermarket groups. All four groups own superstores, have lower prices or reasonable prices as a strategy and are perceived as one strategic unit by customers as well as in the Industry. b. Analyse the microenvironment that these companies must operate within. Strategic Analysis of the UK supermarket industry UK retail industry is a supermarket-dominated business. Smaller players exist in the periphery of the business. The supermarkets control the suppliers. Cheaper products that are provided by developing countries also threaten the suppliers. The supplier margins have consistently eroded with the power of the big four. Though food remains the main focus on the big chains, as customer spend more time in the stores, the non-food portfolio that they hold also become profitable. The supermarkets have diversified to add products like clothing, electronic goods, mobile phones and even banking products and legal assistance. The consumer movement has also ensured that the supermarkets focus on remaining green. This is true in case of a reluctance to use Genetically Modified food to carbon labeling of electronic goods. The supermarket chains are also experimenting with alternate store formats to target different type of customers. Continuous innovation and fast response to market conditions are a given in the industry. THE PESTEL Analysis: Political factors affecting the Industry: The political climate that could influence include policy decisions, EU, Euro, taxation policies etc. A couple of issues that could alter the political pressure on the supermarkets include pressure from the farming community which claim that they are getting squeezed by the bargaining power of the supermarkets and as the weakest link in the chain they suffer the most. The European Parliament has also taken up this issue5. The dairy industry is too up in arms against the superstores, which control around 65% of the household milk purchase. They claim that though the price of milk has marginally increased in the last decade, the price that the farmer gets has fallen, thereby compelling many to exit the industry. Complaints and criticism rage against Tesco, Asda and the other supermarkets over their control of the supply chain. Suppliers feel abused as they get pressed for leaner margins in the price wars. Another issue that is gaining traction in some areas is the issue of a single chain owned towns, which will soon come under scanner. In fact, the competition test has been devised for the local councils as a guideline to grant permissions for supermarkets. As supermarket chains like Tesco operate in different countries, laws in those countries could also impact them. Complaints of price fixing among the leading groups could also invite adverse policy decisions. Economic factors: Discount food stores like Aldi and Lidl have been favored by customers to decrease their spending, and the larger supermarkets are seeing a reversal in their traffic. Tesco has already announced its own discount range; the idea is to keep its customer base. The discount range is also expected to bring the retailer returns in the long run. With commodity prices also on the downturn, it could be that the discount range could give even lower prices in the next year than during the current year. The credit crunch may also affect the financial product divisions of the supermarkets. Social factors: Social factors like more of the aged can change the product mix in the store. Many superstores like the Asda recruit the aging population, thus tapping into this labor pool. Customers with specific requirements are also part of social changes, for example customers who would prefer their gadgets to be environmental friendly or use organic products etc have an impact on the stores. Technological factors: The impact of technology works in two ways. As more advanced gadgets enter the market, so do they get added up to the product lines in the stores. Technology also enables superstores in increased stock tracking, bar-coding, electronic shelves, scanners etc and helps reduce costs. Better inventory management helps the stores reduce lead times. Better customer profiling based on extensive CRM also helps the superstores. Technological innovations have for example helped Tesco implement the 'I don't queue' project. The technical team developed thermal sensors to register visitors entering and exiting stores, based on which they create an approximation of the number of people likely to arrive at the billing counter at any point of time. This helped to have optimum number of billing tills open at any time, when the traffic was more, more counters were open, at other times, and the staff was used for customer care within the store. Environmental factors: Superstores in UK are influenced by environmental factors and are moving towards greener operations. All supermarket chains are moving towards more use of paper bags. Tesco for example focuses heavily on environmental friendly initiatives. The group joined hands with the Climate Group to create the together campaign, wherein Tesco committed to selling 10 million compact fluorescent light bulbs (CFL s) in 2007-08. Tesco halved the price of energy saving bulbs. They promoted the program heavily. With buy one get one free, buy one for a pence limited time offer etc. In a little more than a year, the campaign achieved its goal. The company is now working on a carbon labeling system for products from bulbs to Television sets to enhance the movement. Legal factors: The legal environment that influences the supermarkets includes Consumer laws, competition laws, employment laws, health and safety laws etc. Local monopolies rule is one of the trickiest and toughest laws for the superstores. Morrison was forced to sell of a number of the stores it took over from Safeway based on this law. There are also laws that restrict working hours. Fair trading laws are also binding on the chains. Competition authorities carefully monitor local pricing by national supermarkets, last year Tesco had to assure the commission that it has a national pricing policy. The superstores come under the scanner regularly, as they are perceived to be a large Goliath. NGO action groups have come up with reports that leading supermarkets in UK are exploiting female workers in developing countries by paying them low wages and having less than optimum conditions in factories11. They have urged the UK government to set up independent supermarket regulator, a plea that could have far fetching impact for the supermarkets. The Food Retailing commission has also brought in rules banning some of the practices like changing agreed price of suppliers and payment terms without notice. c. What are the reasons for the market leader success Why is Tesco the market leader Tesco has established its market leader positioning in the UK supermarket scene. Though its international operations are significant, it the leadership in the UK markets that gives the group its commanding power. The key factor that has contributed to the continuous success of the group can be defined by its corporate goal- Focus on the customer. During the 1990s recession, Tesco interacted with 250000 customers, and according to its Chairman learnt a valuable lesson, that to the customer what mattered was value (Dean, 2005). From then on, the group has focused on customers, rather than on competition. According to Tesco's stated policies at the core of their strategy is their effort is to increase convenience, give better prices, offer large and small formats to suit customer interests, and offer value at all times. Operational efficiency for better prices: One of the first superstores to opt for the Self-service model, this gave Tesco the initial thrust to improve efficiency of operations. Economies of scale allowed for bulk purchase and lower prices, TESCO gained with the abolishing of RPM, a move they capitalized on to project as a win for the right of the customer for lower prices. While this rule was in force, Tesco used customer loyalty stamps to give effective discounts to its customers. Tesco replenishes stores three times a day, arguably the only retailer to do so. To do so Tesco developed a continuous replenishment system, which allows for lead times as short as six hours in delivering a product to the stores. This helps avoiding delays and enhances product availability. Convenience as a marketing platform Initial strategy of the group was focused only on prices, but as customer profile changed, they began to take great efforts on the interior of the stores too. Retailing petrol was a bold measure that brought in customers in cars to the stores in large numbers, today Tesco is one of the largest petrol retailers in the country. Ahead of the customer curve Tesco has also been very proactive in identifying and aligning with key customer trends. Tesco also pioneered in the healthy eating initiative in 1985 by providing nutritional information on its own brands and other brands of food. They also created niche brands under the umbrella like the Tesco Metro, which is a highstreet version. Tesco Express combines petrol stations with essential grocery retailing. Tesco Extra handled both food and non food items. Tesco also focuses on environmental friendly initiatives. They joined hands with The Climate Group to create the Together campaign which focused on selling energy saving bulbs, which again spurred on Tesco's focus on alternative energy promotion. Knowledge is Power Tesco Clubcard gave the group an insight into its massive database of customers, about their lifestyle, preferences, shopping pattern and success of its promotional efforts. Customer is the King Some of the most successful practices were to have staff pack the bags for customers and take these to their cars, opening checkouts if the queues lengthen, adding pharmacies to its stores etc. Even when Tesco failed to win a battle, as in the Levi's jeans case where they priced the jeans below Levi owned stores, they emerged as a champion of the customers, at the vanguard of offering them better value. Their Internet version too is successful. They have also been sensitive to diverse group of customers by offering 'free from' products for special group of customers. Tesco has a detailed blue print on aisle displays and product grouping to aid the customer experience. The locating of a product has to be simple. Therefore the planning group at Tesco plans out checkout counters, entrance and exits, racks and display so that it is simple and convenient to the customer as well as internal customers like employees and suppliers. Tesco highlights a promise to its customers 'Always one in front' when it comes to billing which means that there will not be more than one person before a customer in any checkout queue. Valueline at Tesco was part of a customer focus, so is the group's effort to give the customer the advantage of 24 hour shopping. Expansion as a growth strategy Tesco has also taken steps to expand abroad. The chain has acquired stores in Japan, China, Taiwan, Poland, Slovakia, Ireland, Turkey, South Korea and Malaysia amongst others. With the impetus of its foreign operations, Tesco announced a profit of over 2 billion for 2004 - the first UK supermarket to break this barrier. d. Compare and contrast any two of the companies in the strategic group. Tesco & Sainsbury Tesco's march to overtake Sainsbury has been at a slow but steady pace. During the 1980s and the 90s, Tesco gained steadily, though it trailed behind Sainsbury. Tesco overtook Sainsbury as the market leader in 1995 and has since then consolidated their lead. Tesco has been particularly aggressive in its promotional, marketing and acquisition strategies. Current Market position Tesco: Owns a total of 3728 stores, and has a combined earning of 51.8 billion pounds. The group is the third largest grocery retailer in the world (www.tescoreports.com, 2008, "http://www.tescoreports.com/areview08/about-markets.html"). The group is present in 13 markets, and has a combined space of 76 million square feet of selling space. Sainsbury: Owns a total of 785 stores, including its convenience stores (www.j-sainsbury.com, 2008, "http://www.j-sainsbury.com/ar08/index.shtml"). The group also offers complementary products in addition to its core business of food retailing. Market Leadership Strategy Sainsbury's complacence as a market leader is considered to the reason for its fall from grace, while Tesco is perceived to define and redefine the market as a market leader. Early years, different styles Sainsbury has been the market leader in the grocery business since 1922, till the 1990s. During the early years of the twentieth century, Sainsbury was innovative and had its own brands compete against each other. Each of the stores had a distinct identity. The stores had tiled walls, mosaic floors and marble counters. The staff wore aprons. It is believed that the last words of the group's founder, John James Sainsbury, was to keep the stores well lit, which again enhances the Sainsbury perception that quality was to be reflected in the stores. Contrast this with Tesco's where the idea was always to pile high and to sell low. It was a lot later that Tesco went in for better interiors. Consistent Positioning platform Sainsbury achieved success with its own labels, which offered the quality afforded by the national players at a lower price. But Sainsbury lost its focus on what made it different during the price war between Tesco and Asda. It was locked between the discount supermarkets and up market stores. The lack of a clear identity for the group stood in its way of creating and retaining a large customer base. Sainsbury's market platform was good quality at affordable prices. Along the way, they have often got locked in price wars with other superstores. A Sainsbury Autumn Value Promotion was met with Tesco's Value range. Sainsbury has failed to create a competitive market position around the price platform and ended up being neither a discount supermarket nor a quality oriented chain. Though the promotional and customer initiatives adopted by all of the supermarket chains are fairly similar, Tesco had always tried to create an image of being responsive of customer needs. Tesco created an impressive market leader reputation with its Club card, a customer reach initiative that helped it profile thousands of customers, learn about their shopping habits and preferences and evaluate every promotional program. Sainsbury had initially dubbed the move to be ineffective, only to be made to offer their store card later, but this was a clear case of too little, too late. Market Responsiveness Another key strength of Tesco is its ability to adapt to a number of formats. Each store type is targeted to different customer profiles, enabling the group to offer a diversified bouquet of stores to cater to different market segments. Sainsbury has been conservative in the store formats. Moreover, Tesco's acquisitions have afforded them the advantage of location, and in retail format, location is of strategic significance. Tesco handles a large product range and their buy in bulk strategy enhances their sell for lower prices platform. Sainsbury on the other hands stocks own brands or other popular brands. While Tesco is about price, which they are consistent about, Sainsbury is also about quality and is focused at the middle class, somewhere the group has failed to marry the two promises effectively. Sainsbury had a single-minded focus on food, while Tesco experimented with non-food retailing and even selling personal finance. To Tesco, the growth of the non-food categories gives enough fodder to have a fast growth trajectory. Tesco Direct, the new initiative has also given results ahead of expectation. Though Sainsbury had a different non-food initiative in hypermarkets, the British Home Sales, it was kept distinct for a long while. Sainsbury grew organically, while Tesco grew with acquisitions. Under financing is considered to be a key bane of the group which was largely controlled by the founding family for a long time. Tesco's international strategy has paid off. The group is now the market leader in Malaysia. They have impressive records in China and Japan, and making their foothold in US. The group plans to open 11.5 million square feet of retail space in the next year, 80% of which is for the international market. Tesco exploits technology to ensure convenience and simplicity, as it is seen in the 'one in queue' promise to real time inventory management. Sainsbury's investment on technology was a dismal failure though it did cost a lot to the group to have the initiative in the first place. Strategy summation Tesco is clearly aligned around its key strategy- Every little helps. They are devoted to small improvements that add up to big impact. Tesco keeps the big picture in focus, especially with their community initiatives. This focuses on environmental, community and health projects. Tesco's strength is what the group has rightly pointed out as its focus; they change as the customer changes. Tesco is a market leader because the journey has been by holding the customer's hand. 'Strategy is the direction and scope of an organization over the long term, which achieves advantage in a changing environment through its configuration of resources and competencies with the aim of fulfilling shareholder expectations' (Johnson, Scholes and Whittington, 2008). For Tesco the challenge is to manage the position as a market leader and to ensure that over years, its acquisition strategy should not affect the profitability or operating efficiency of the group. Takeovers of the key UK groups by international retail giants could also enhance the competition in the market. According to a research analyzing the retailing industry of UK by Euromonitor International, the move towards consolidation will continue to impact the retail industry in UK for some more years (Moreau, Euromonitor International, 2004). For Sainsbury the future needs focus. The group has identified key strategic initiatives as a base for its onward journey. Great food at fair prices, accelerating growth by non food retailing, additional channels like Online as a growth option, growing supermarket space and property management are some of them. All of them lack a decisive power to give a single strong platform on which the brand can operate. It will be tough for the group to aim for leadership if it is on a cost leadership platform. For Sainsbury the growth could come from totally unexpected quarters. The online could give the group create a great customer tool. Introducing self-checkout machines can also help the group get the convenience factor in their stores high. Sainsbury will have to invest in greener issues with a vengeance to have a community oriented leadership position. Ethical issues are also a good platform for the quality at good prices platform, with focus on organic food, ethical supplier management, and ethical treatment of staff and vendor. The recent buy fair trade bananas is a good case in point. Citations Dean, Malcom, 2005, 'Supermarkets can offer us useful tips on how to improve public services', The Guardian, viewed 2/12/2008, www.guardian.co.uk/society/2005/feb/09/comment.guardiansocietysupplement Johnson, Gerry. Scholes, Kevan. and Whittington, Richard 2008, Exploring corporate strategy 8th Edition, Prentice Hall. Moreau, Raphael 2008, Euromonitor International, viewed 1/12/2008, 'www.euromonitor.com/Articleas.aspxfolder=Consolidation_re_shapes_uk_retailing&print=true' Ritz (2005) Store wars, Business Review, Vol. 11, April, pp.22-23 www.tesco.com, 2008, viewed 1/12/2008, http://www.tescoreports.com/areview08/about-markets.html www.j-sainsbury.com, 2008, viewed 2/12/2008, http://www.j-sainsbury.com/ar08/index.shtml Read More