Key Trends in Retailing Industry of the UK - Essay Example

Analyse a key trend (which can be demographic, environmental, technological or economy related and assess its current and possible future impact on abusiness sector of your choice The UK Retail Sector Word count of work excluding, referencing, cover page and table of ontents: 2863 May, 2009 Table of Contents 1.0Introduction 1.1Overview of the Sector under Review- the UK Retail sector 2.0 Growing Trend of the PESTLE framework and How its affects the UK Retail sector 2.1Political Trend 2.2 Economic Trend 2.3 Socio-Cultural Trend 2.4 Technological Trend 2.5 Legal Trend 2.6 Environmental Trend 3.0 How understanding of the external environment can help a firm improve on its competitiveness 4.0 Conclusions and Recommendations 1.0Introduction This report focuses on the impact of the PESTLE framework on the United Kingdom retail sector. Focusing on this sector has a number of important advantages. Firstly, in the UK, the sector is dominated by few players such as TESCO, J Sainsbury, Morrison and some other key players. However of late, there has been an increase in the number of small businesses and entrepreneurial activities within the sector. Growing trend in the current global financial crisis, concern for green marketing, changing taste, cultural preferences and socio political situation of the UK have greatly affected the sector. This report is structured into four sections. Section two of the paper presents a brief overview of the UK retail sector, using some key players such as Tesco, J.Sainsbury, Morrison and Mark and Spencer. The third part of the report focuses on how the sector is affected by factors in the PESTLE framework. Part four of the paper provides an argument in support of how an understanding of these factors by a firm can create a competitive advantage. The section also provides a brief conclusion and recommendation. 1.1Overview of the Sector under Review- the UK Retail sector Like macroeconomic analysis the analysis of the industry is important because it enables the analyst to make abnormal profits arising from information asymmetry between the proper analyst and competitors who fail to carry out a proper analysis. Just as it is difficult for a firm to do well in a poor macroeconomic environment, so too is it difficult for a firm to perform well in a troubled industry. (Bodie et al, 2002). Similarly, as performance can vary across countries, so too does it vary across industries. (Bodie et al, 2002). This section examines the activities of key players in the UK retail sector. It focuses on the activities of some of the major players such as TESCO, Morison, J.Sainsbury and Mark and Spencer (Report 2008). Tesco PLC is an international retailer. The principal activity of the Company is food retailing with over 2,000 stores in the United Kingdom, the Republic of Ireland, Hungary, Poland, the Czech Republic, Slovakia, Turkey, Thailand, South Korea, Taiwan, Malaysia, Japan and China. Tesco offers simple travel insurance, food retailing, Tesco personal finance, Telecom, and recycling facilities to the public. J Sainsbury Plc is a United Kingdom-based food retailer with interests in financial services. The Company is principally engaged in grocery and related retailing, and financial services (Report 2008). Wm Morrison Supermarkets PLC is engaged in the operation of retail supermarket stores and associated activities. Its business is mainly related to food and grocery. During the fiscal year ended February 4, 2007, it operated 368 Morrisons stores, with 10.5 million square feet of retail space. Through its stores, Wm Morrison Supermarkets PLC offers a range of goods, which include fresh foods, groceries, home and leisure products, beers, wines and spirits (Report 2008). 2.0 Growing Trend of the PESTLE framework and How its affects the UK Retail sector In business, environmental analysis is an appreciation of the activities of an organization in relation to its environment (Lin& Lee 2006). Such analysis has become imperatively necessary in the light of increase competition as present, subsequent operations and strategies direction will be dependent on the result (Lin& Lee 2006). According to wikipedia, it is a process by which a business gathers information from the environment to achieve a sustainable competitive advantage. In analysing the environment, the tool kits frequently used include The PESTLE Framework SWOT Analysis Porters five forces Competitors analysis Core competence Macro environmental influences can better be explained by the use of the PESTEL framework. According to Johnson et al (2006) the PESTEL framework is a framework that can be used to categorise the factors that influence the business environment of an organisation into six main types including: Political Influences, Economic influences, Technological influences, Socio-cultural Influences, Environmental influences, and Legal influences. Figure 1 Layout of the PESTLE model adapted from Johnson et al (2007). The PESTEL framework can only be used to look at the future impact of environmental factors and that this impact might be different from the past. Thus an understanding of how the factors in the above framework may drive change is only a starting point (Johnson et al 2007). There is a need for an understanding of the key change drivers and this will be explained in sections that follow. The following factors will be considered under this section. We will consider the global economy as a whole, the domestic macro economy, demand and supply shocks, government policy and business cycles. Having said this, the study will now consider each of these factors more closely 2.1Political Trend The PESTLE framework outline in figure 1 stipulates that a company is indifferent to the political environment. The political situation of the UK is a stable one, it support of the US egoistic policies under the pretext of democracy, the war on terror, the teeth for tat with Iran scare potential investors. Today, the present republican government lost in the last election because of the war in Iraq, current faith of world politics depends on the US and the United Kingdom (UK) with the two countries likely to be targets of terrorism attack. These institute great fear especially in the minds of retail sector investors. 2.2 Economic Trend Bodie et al (2002) states that the international economic environment might affect a firm's export prospects, the price competition it faces from competitors, or the profits it makes on investments abroad. Although economies are linked to each other in a global macro economy, there exist considerable differences in the economic performance across countries. (Bodie et al, 2002). The global economy remains on track for continued robust growth in 2007 and 2007 although only at a moderate rate than in 2006 as can be seen from figure 1.1 below. The 2008 outlook also reports that downside risk to the outlook seems less threathening that at the time of the September 2006 outlook. This is because oil price declines since last august and generally worsen global financial conditions have helped to limit spillovers from the corrections in the US housing market and to contain inflation pressures. (IMF World Economic Outlook, 2008). For example, high unemployment rate, high inflation rates, low GNP trends and slumps in the business cycle will imply low disposable income, more dependence by the citizens on credit facilities, borrowed funds and thus alternative sources of finance. The US dollar is falling at an increasing rate, this will mean an increase in the currency exposure for UK retail firms operating in the US market. Although, the ability to forecast the macroeconomy environment can lead to speculative investment performance, it is not enough to forecast the macroeconomy well. (Bodie et al, 2002). It is important to forecast the environment better that competitors in order to make abnormal returns. (Bodie et al, 2002). Some of the pertinent variables that need to be taken into consideration include: Gross Domestic Product (GDP), Inflation, Employment, Interest Rates, Budget Deficit and Sentiment. For the year to March 2008 the consumer price index (CPI) in the UK rose by 3.1%, up from 2.8% in February 2007. (National Statistics, 2007). Food and non-alcoholic beverages contributed most to the upward movement in the CPI annual rate with Shop-bought milk prices witnessing an increase above 2% in March in contrast to a fall of 8% in 2006. (National Statistics, 2008. Bread, cereals and meat witnessed small upward effects while downward movements in the index were contributed by fruits. (National Statistics, 2008. In addition, upward effects on the CPI were contributed by recreation and culture, transport, furniture, household equipment and routine maintenance while a large downward effect came from housing and household services, owing to a greater extent in the fall in the price of gas and to a lesser extent to a drop in the price of electricity. (National Statistics, 2008. See figures 5, 6 and 7. In the case of the retail price index upward pressure on the annual rate was contributed mainly by household goods, electrical appliances and food while minimal contributions came from housing and motoring expenditures. (National Statistics, 2007). On the other hand large downward contributions cane from fuel and light as a result of gas and electricity. (National Statistics, 2008. See appendix 1 and 2 High interest rates result in a reduction in the present value of future cash flows thus reducing the net present value of investments as well as the attractiveness of investment opportunities. (Bodie et al, 2002). Real interest rates therefore remain key determinants of business investment expenditures. (Bodie et al, 2002). Since interest rates affect interest payments, the demand for housing and high-priced consumer durables such as automobiles is largely determined by interest rates. (Bodie et al, 2002). The lower the interest rates, the higher will be the demand and vice versa. The figure 2 above shows the movements in interest rates based on data from the Bank of England. It can be seen that the interest rates have been falling over the last 10years with an average figure of about 5%. This means that investment opportunities in the United Kingdom are becoming more and more attractive over the years. 2.3 Socio-Cultural Trend Under the social factors for example, population demographics have a great impact on the future of the retail sector activities in the UK. An increase in social crimes, immigration and emigration will affect the activities of the company. A social welfare policy of the government is also another important consideration. The population of the United Kingdom has been increasing in the past years as a result of an influx of population from other countries in search for better life. London and other major towns in the UK are quite congested pushing the local government to spend more on social amenities 2.4 Technological Trend Technology is the order of the day in the current state of things supermarkets and other retail outlets must operate with the latest technology. For example, companies must dance to the tune of changing technology. The Tesco Metro stores in China are a good example. Under technological factors, I consider government spending on research and development, Government spending on research and technological focus efforts, new discoveries and developments, speed of technological transfer as having an impact on the activities of TESCO not leaving out technological obsolescence. The UK provides fertile grounds for technological development due to huge government spending on research and development. 2.5 Legal Trend Under legal factors, companies are affected by all the country and environmental laws. Laws pertaining to waste disposal minimum wages, competition law, health and safety not leaving out product laws relating to quality and products certification. Operators of supermarkets must comply at anyone time to these laws or face government penalty. In addition, retail participants in the UK retail industry must comply with industry standards and norms as the UK population is an informed one. Complying with industry standard means becoming more socially responsible. For example, TESCO recently opens its first energy efficient and environmental friendly store, they offer recycling facilities. Other major participants such as Morrison supermarket and Mark and Spencer have started community tailored programs. (See their 2008 Company's Review Report). 2.6 Environmental Trend Today with increasing call and consumer's preference for green marketing, companies must develop environmental friendly products, products that are environmentally certified. Facilities and provision to collect old electronics, recycling facilities must be put in place to scrap off these items. In the absence of these options, companies will be considered socially irresponsible. Under environmental factors I consider waste disposal, energy consumption and environmental protection laws in the UK to have a great impact on the retail industry. Today, it is popular to hear words like "I am not a plastic bag", Tesco opening its first energy efficient store. This factor is pushing major players in the industry to be more environmentally friendly in their activities, respect industry standards and norms as failure to comply will be interpreted as irresponsibility. 3.0 How understanding of the external environment helps a firm to improve on its competitiveness An organization does not exist in isolation. Under the resource based view, it is thanks to the environment that new resources are sourced out; stakeholders interactions facilitated, new partnership develop and created. Through an understanding of the external environment, organizations take advantage of the resources available to them; define the nature and structure of its activities. In order to maintain service, quality and logistic standards, companies periodically audit their environment and compared to overall corporate performance through benchmarking. Those companies that fail to take advantage of these resources will lag behind. Today, the requirements of an organization's stakeholders including, customers, employees, suppliers, shareholders, government, etc are on a continuous rise. It is only through an environmental assessment that companies understand and take advantage of this. In addition, , to providing an annual report to the company's shareholders organizations are expected to provide alongside a corporate social responsibility report that details how they interact with society and the environment in which they operate. Failure would be interpreted as irresponsibility. Major players in the sector such as Tesco have taken an edge over other corporations by being more socially responsible and friendly. Being aware of this environmental pressure, the management of TESCO is doing the right thing at the right time, in the phase of a series of environmental problems and consumers call and pressure from other stakeholders for organization to be more socially responsible in their activities. The management of TESCO has redefined its corporate governance structures. Corporate governance represents the set of policies and procedures that determine how an organization is directed, administered and controlled. It sets the broad framework or parameters within which the people in the organization must operate (Keeling, 2008). Like wise other major players like Wal-Mart, Sainsbury and others. A stakeholder approach to managing the economy is reflected in the writing of Hutton (1996) and British Prime Minister Blair has spoken of the 'stakeholder society' (Bishop, Connors & Sampford, 2003). Stakeholder theory is invoked to contribute to the effectiveness of the public organization or the policy program. At another level, 'stakeholders' are a given. They are recognized because of statutory requirements, because there is a political imperative behind their involvement. Through corporate social responsibility participants in the UK retail sector intends to improve on their performance. Today, customers have become more concern about CSR and as such tend to promote the products of companies that have improved CSR structures. Employees too would love to work in a company with well-developed corporate social responsibility structures. A study by Bansal and Roth (2000) on 53 firms in the United Kingdom and Japan revealed that there are three motives for engaging in CSR: competitiveness, legitimation, and ecological responsibility. Therefore a company that has a good CSR policy is likely to be more competitive than one that has a poor CSR policy. In addition, such a company will quickly gain legitimation which will go a long way to increase acceptance of its products by the community and thus increase its sales performance as well as overall profitability. Many customers today have increased their concern for CO2 emission. In response car makers have began manufacturing hybrid cars that emit lower levels of CO2. For example, German car makers, BMW, Porsche, Volkswagen and DaimlerChrysler displayed cars with low-emission diesel engines and hybrids that use electricity to augment traditional fuel motors, as well as hydrogen fuel cell concepts that BMW is researching. (Mildenberger and Ashuman, 2000). No wonder, TESCO has geared its operations towards this direction by opening its first energy efficient store. Others are offering their customers free recycling activities, reusable plastic bags etc. 4.0 Conclusions and Recommendations Environment analysis has become an important way and method in analyzing a firm position. Through an environmental analysis we understand how a firm's competitive position is affected by different forces. More and more companies are engaging in corporate social responsibility reporting, which helps major stakeholders to better understand how the company interacts with its society. (Sacconi, 2004). It is only through environmental scanning and analysis that we can portray this better. From the foregoing caption, the management of TESCO being aware of the role of environmental factors in its activities have redefined its mission and objectives, positioning the TESCO brand in relation to these factors. No wonder, today we hear of TESCO opening the UK most energy efficient store, this is a new market strategy, and others will emulate and follow with time. Thus, TESCO is affected by all the factors outlined in the framework. One can conclude that major stakeholders of an organization have increased their concern on how the activities of the organization affect the social and environmental setting in which they operate. As a result there has been an increase in the requirements from companies. 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