Opt Group of Companies Pricing and Non-Pricing Strategies - Example

ANALYSIS OF CO-OPT GROUP OF COMPANIES – PRICING AND NON PRICING STRATEGIES INTRODUCTION Co-operative UK traces history of development of growth from a small shop in Lancashire. In 1844 when Rochdale Pioneers Society was developed as society for cooperation (The Co-operative, 2013a) and years of improvement in various dimensions and businesses joined hands forming Co- Operatives Group on the largest groups in the world based on sharing mutual common values. The Co-operative Group has been involved in retail businesses with wide variety of services from food, clothing, healthcare and associated services, financial and legal services and finally to extent of funeral services (The Co-operative, 2013b). At present Co-Operatives Group is regarded as the UK largest group with respect to mutual businesses that has ownership of nearly £7.2 million Consumers (The Co-operative, 2011). Currently around 4,800 retail trading outlets operate under Co-Operatives group which generates an annual turnover of approximately more than £13 billion. For the stated contribution, Co-operative group provides employment opportunity to over 100, 000 people (The Co-operative, 2013b). The Co-Operative Group business is ranked as the UK’s fifth largest retailer, leading convenient store and funeral service providers as well as the Britain’s largest farming operations. In addition, The Co-Operative Bank, Britannica and the Co-operative Insurance are major service providers (The Co-operative, 2011). Given below is the composition of business of Co-Operatives Group: (The Co-operative, 2011) Some key statistics about the success of The Co- Operative group are highlighted below: It is the UK’s fifth largest food retailer with 2,801 stores all around UK and at-least one store in every postal serving 60% of UK customers. It is the third largest Pharmacy Chain in UK with total 750 community pharmacies. Approximately 18% of all funerals services in UK are served by The Co- Operative group. It is among the top 50 car dealers in UK. Year on Year Performance with businesses, employees and member are referred below marking the growing strength of the The Co- Operative Group in UK: (The Co-operative, 2011) Hence, appreciable performance of the group forms the rationale for the assessment of the strategies, particularly pricing and non- pricing strategies, of group nationwide. The assessment will analyze the strategies to cater the growing competition, the economic challenges in order to increase the profitability and market share of the group in comparison with market rivals. The underlying report follows the following structure to systematically develop the Group’s structure: The first section discusses about the introduction of the group understudy and rationale for the selection of the group The second section assesses the structure of UK market as domestic market for the Co- Operative Group. The third section explores the pricing and non-pricing strategies of the Co- Operative Group. Fourth section reviews the competitive position of the Co- Operative Group in local market of UK. Finally the report provides discussions about the identified strengths that led Co- Operative Group among the leaders in many of its domains and also referring to areas of improvement. SECTION II: UK MARKET STRUCTURE RETAIL INDUSTRY CONDITIONS AND COMPETITIONS The underlying section provides the assessment of local market structure of the Co- Operative Group that is retail market of UK. Upon introduction to market and identification of the characteristics, the section will develop the assessment based on alignment and contradiction to the market structure based on economic theories. 2.1- UK MARKET STRUCTURE UK economy is a vast subject in itself having a large number of extensions. On overview of the UK economic indicators at three time durations have been presented below: (UKCES, 2012) The retail segment of UK market is among the major contributors of the UK economy. According to an estimate it accounts for approximately 8 percent of GDP of UK. The sector has witnessed tremendous growth from mid 1990’s to 2007 until the recession hit the economy in 2009 with financial crisis and tumbling the market. Further, the sector’s contribution to the economy can be viewed from the fact that it contributes almost 10% of employment to the UK economy. The output contribution of retail sector to the whole economy in recent years along with forecasted change in the current and future have been given below: (UKCES, 2012) The overall retail performances of the recent past as well as the forecasted performances have been presented below: (UKCES, 2012) Despite the jerks in economy that affect almost all businesses, the retail sector was able to maintain the performance graph well particularly because of few major players of the retail sector. The major retail competitors of Co-operative Group as identified in accordance with market share are as follows: (Grocery News, 2013) The composition of the market share reflects that the UK retail market is highly concentrated with the top four composites forming almost three-fourths of the entire market. Moreover, it can also be clearly viewed from the above statistics that approximately 50% of the market is concentrated around the top two constituents of the market. Based on such assessment, the market structure of the UK retail industry can be regarded as an oligopoly form of structure. Oligopoly market structure is described as a form of market structure that has some deviation from monopoly and monopolistic structures. Some defining features of the oligopoly market structure include: An oligopoly is a market structure that is driven by few market players i.e. high level of market concentration. Based on the concentrated market players’ the decision making is highly interdependent. Since few firms have the market driving power therefore, firms cannot make decisions independently. Further, actions of each dominant competitor are faced with reaction. Hence, business strategies are also interdependent on competitors’ conditions as well as expected response. The high concentration ratio gives power to players of high extent and to maintain their powers business are always prone to muscle pulling for new market entrant. Hence, resulting in high market entry barriers. To mention, the muscle pulling from market player is based on the extended advantage of economies of scale, key resource ownership, high set up cost as well as control over various element of supply chain resulting in high cost of business operation specifically for new entrants. Each firm in the market sells the branded product under its brand umbrella; hence, the competition within rivals apart from pricing also originates from large number of other factors. All the above features of oligopoly are reflected in the retail market structure of the UK. For instance, in case of Tesco that enjoys nearly one third of the entire market share. Every other market participant is dependent on the decisions and operational conduct of Tesco. Further as the market share is strongly held by the firm, the control over key resources is also dominant hence posing all time threat to other competitors and strong retaliation to new entrants. Co- Operatives Group, though not being among the leading four players; however, still shares approximately 6.5% of the total market share. Therefore, the market also receives impact from these players as well; as also evident from the market share image above that small players are increasing the market share whereas leading competitors are on way to loosing it. The change in market share is hence in line with the Kinked demand curve. The Kinked demand curve provides the relationship of the demand curve based on the changes in prices and identifies the variation the responses’ elasticity reflected in the graph below: (Economics Online, n.d.). The graph refers to market response that remains inelastic at certain price level. It is an instance where the price is lowered. Lowering price within certain level from P1 to P2 results in elastic demand while in another case where the price is increased the demand from the market also responses with elasticity as in case of price rise to P1. Hence, keeping this feature of the Kinked demand curve model even in case the cost of output rises for the firm the market players tend to remain to the closest possible to the existing price as presented in the image below: (Economics Online, n.d.) The strategy or the feature referred as price stickiness in oligopoly. The feature shows high level of alignment in inverse proportion to the level of differentiation. The retail market products since have low level of differentiation therefore demands from the market and price of output reflect considerable alignment with the Kinked demand curve. In order to gain, sustain and increase the market share businesses are to compete with two broad factors of price and non-price (Economics Online, n.d.). On contrast to the fact that UK retail industry reflects considerable feature of the defined demand trend; the criticism to the theory is also reflected in the market. For instance, since the demand is referred to alter its elasticity based on the prices; therefore, the rationale approach refers that customers shall develop demand for price leaders. In such case other market players are to increase respective shares and thus it would result in the beginning of price wars and business tends to lower the price to levels that despite gains market shares yet affects the profitability negatively. The implication to this condition remains that since price wars can alter the demand trend; therefore, it may refer that any one (even the new entrant) can capitalize on the basis of the market dimensions. Such as new entrant with limited business operations have low cost as compare to expanded leading business; hence can take the advantage (Economics Online, n.d.). Despite, in reality though business are competing on price factors yet focus is also maintained to compete on other factors earlier stated as non price factors. It is for the reason that collisions of price wars finally result in losses to the firm. Such as the price war between Sony and Amazon has resulted in price cuts to around 97% that raised concerns for not only for the businesses but also for the authors (Flood, 2012). Further, such collisions also result in restrictions and penalties from regulators such as competition commission. Hence, businesses prefer to maintain the competition on non-price factors such as loyalty, product quality, extensive advertising of differentiating features, increased services for providing complimentary services or products etc. The economic model of UK retail industry along with industry is following the economic model of Oligopoly. The industry is following the combination of price and non pricing factors as strategies. Such as Morrisons added 20 new stores in 2012 with location advantage of larger produce selection (Grocery News, 2013). Further, industry on following price wars are still found as the most recently the industry leader Tesco announced that to enter price war with close competitors Asda, Sainsbury or Morrison. SECTION III: PRICING AND NON-PRICING STRATEGIES OF THE CO- OPERATIVE GROUP Being the player of UK retail industry with approximately 6.5% of the market share as oligopoly player, the assessment of Co-Operatives Group’s business strategy will be conducted in the underlying section of the report. To mention, the assessment will be based on exploring the strategies with respect to price and non price factors as identified as competition driving factors of oligopoly. The business structure of the Co-Operative Group is mainly governed by the interest of consumers at its heart. Len Wardle, chairman at the Co-Operative Group, hold view that economic model of cooperation is the real solution to the economic crises. Further, the chairman states that the UK’s market is growingly calling for the economic model that offers greater deal of cooperation and trust in all aspects of customer and consumer lives; irrespective of the model is cornered as capitalism as or country driven socialism (The Co-operative, 2011). Therefore, the business is greatly driven by its goal. For instance, analyst view co-operatives to retain a commendable position among its competitors mainly for its core values and ethics oriented business mode. The analyst further states by endorsing the same through marketing advertising Co- opt can increase its market share incrementally (Lawson, 2012). With respect to price wars strategies, the co-opt group does not compete on the prices strategies. It is evident from the fact that the business maintains the perception of being an expensive store in contrast to the big four stores in core market of the Co-Opt (Lawson, 2012). Further, there is also a concern pertaining that business cannot afford to enter into a price war alike the capacity of the market retailer Tesco. However, at the same time with strictly following the ethical and value based model Co-opt takes advantage of entire price wars at various instances. Co-opt main price wars have been witnessed on Christmas to take advantage of growing consumer buying momentum such as sales Co-opt food stores (over the three-week Christmas period) rose by 2.2% at its food stores mainly generated momentum from sales of Champagne and seasonal produce (The Telegraph, 2012). Further, it has also reduced the price of its own premium product, Truly Irresistible, by half on Christmas with further other products’ prices cut to half or to one third to fetch the event boomed sales (Rosen, 2012). On the front of non- pricing strategies Co-Opt retail derives it actual advantage. For instance, overall cooperative is being accepted as a retailer that benefits as well consumers with highly ethical as well as value driven model being core of its business. Though business has undergone financial crises; however, at the same time has managed to gain the Renaissance of its business with innovations and market driven changes in the business yet maintaining its core values. The business does not have huge super stores as leading store but at the same time has a store in every post code location of Britain making it extensively reachable. Hence sound performance, as noted by Clive Black, analyst at Shore Capital, of the firm with not even ranging series of value – products or premium brand. In addition, the further stress is maintained in product development such as introducing self-checkout units in its stores mainly for the cash shopper hence reducing the queue time and encouraging a greater number of shoppers (Briggs, 2012b). Further, Co-operative has also announced to launch a dine-in meal only for £10.00. The meal would be offering a great deal for shoppers, mainly couples and would save up to £3.83 while driving sales for its own products for meal constituting main and a side dish along with drink (Briggs, 2012b). The strategy that delivered success to co-op hence has been generated under single word of unification. Business has managed to create a single brand of co-opt from many large and variety of businesses. Continuing with improvements in business model co-op’s future business strategy is to focus more on convenience being offered to the customers. In addition, the nexus to the future offering is based on driving consumer mind set to divert shopping to local stores than going off to big stores along with tempting to increase the shopping frequency. This base line strategy, if, combined with the marketing and communication of its ethical model is expected to combat the challenges posed by other giants. SECTION IV- THE COMPETITIVE POSITION OF THE CO- OPERATIVE GROUP IN LOCAL MARKET OF UK The competitive position of the co-op can be well gauged from the fact that business based on the factor of mutuality managed to out-perform the UK economy. The co-operative contributes £35.6 billion to the UK economy and with the growth pace of 1.5% almost double to that of UK’s economy. Further, with the renaissance of Co-operative introducing innovations and improvement doubled its share in UK market (Briggs, 2012a). With considerably low market share, Co-operative has been giving competition to large market leaders. Further, the competitive position reveals that Tesco has been able to generate revenues of £60 billion with operating profit of £3.9 billion and net profit of £2.6 billion. Tesco has shown improvements in the revenues of the firm as the revenues have improved by 6.23% in the year 2011 from 2010. This increase in revenue has also resulted in increasing the operating profit which has increased to 29% in the same time period and net profit by 14%. The other competitor is Sainsburys which has revenue of more than £21.1 billion in the year 2011 which has increased from £19.96 billion in the year 2010. Thus the revenues in the year 2011 have increased by 5.7%. The operating profit of Sainsbury was £.85 billion and net profit £.64 billion in the year 2011, therefore the operating profits have increased by 19.86%. The net profit of this retailer has also increased by 9% during this time period because it has increased from £640 million to £585 million. Morrison, another UK retailer, has not been able to increase its sales revenue in the year 2012 as its revenues have declined from £904 billion to £907 billion thus a decline of .33% in the overall revenue of the company. However despite of the decline in revenues, the operating profit has increased by 22.5% and net profit has increased by almost 7%. The Co-operative group has also reported a decline in the sales as the revenues have declined from 12.38 billion to 12.31 billion thus showing a decline of 0.5%. Moreover, the operating profits have also declined by 19.3% from 465 million to 375 million. In addition to this, the net profit margin has also declined by 1.4% as they have reduced from 211 million to 208 million. The following table shows the summary of the financials of the most important retailers of UK: REVENUES (IN THOUSANDS) 2011 2010 Change TESCO 60,455,000 56,910,000   6.23% SAINSBURY 21,102,000 19,964,000 5.70% MORRISON 16,479,000 15,410,000 6.94% COOPERATIVE 12,318,000 12,384,000 -0.53%       OPERATING PROFITS     TESCO 3,917,000 3,032,000   29.19% SAINSBURY 851,000 710,000 19.86% MORRISON 904,000 907,000 -0.33% COOPERATIVE 375,000 465,000 -19.35%       NET INCOME %     TESCO 2,671,000 2,327,000 14.78% SAINSBURY 640,000 585,000 9.40% MORRISON 658,000 537,000 22.53% COOPERATIVE 208,000 211,000 -1.42% CONCLUSION Co-operative has an important place in the overall retail industry of UK even though the market share of the retailer is low and is not among the top four retailers. But still, the group has been growing over the last few years and as the overall economy is recovering from recession, the retail industry along with the Co-operative group could further enhance their financial statements. References Briggs, F. (2012a). ‘Co-operative to launch permanent Dine in Meal Deal offer for £10 in 2013’. Retail Times, Available from http://retailtimes.co.uk/co-operative-to-launch-permanent-dine-in-meal-deal-offer-for-10-in-2013/# [Accessed 11 March, 2013] Briggs, F. (2012b). ‘Co-operative Food cuts prices on Truly Irresistible products for Christmas’. Retail Times, Available from http://retailtimes.co.uk/co-operative-food-cuts-prices-on-truly-irresistible-products-for-christmas/# [Accessed 11 March, 2013] Economics Online. (n.d.). Oligopoly. Available from http://www.economicsonline.co.uk/Business_economics/Oligopoly.html [Accessed 11 March, 2013] Flood, A. (2012). ‘E-book price war sees discounts reach 97%’. Guardian, Available from http://www.guardian.co.uk/books/2012/sep/18/ebook-price-war-discounts [Accessed 11 March, 2013] Grocery News. (2013). UK Supermarkets. Available from http://grocerynews.org/2012-06-16-08-27-26/supermarkets-market-share/grocery-stores [Accessed 11 March, 2013] Lawson, A. (2012). ‘Analysis: Co-op’s battle continues as new era dawns’. Retail week, Available from http://www.retail-week.com/analysis-co-ops-battle-continues-as-new-era-dawns/5039610.article [Accessed 11 March, 2013] Rosen, G. (2012). ‘Co-ops are doing Britain proud, but is it mutual?’. Guardian, Available from http://www.guardian.co.uk/commentisfree/2012/aug/08/co-op-mutual-building-societies [Accessed 11 March, 2013] The Co-operative. (2011). Annual report. Available from http://www.co-operative.coop/Corporate/PDFs/Annual-Report/Annual_Report_2011.pdf [Accessed 11 March, 2013] The Co-operative. (2013a). Our History. Available from http://www.co-operative.coop/corporate/aboutus/ourhistory/#1895 [Accessed 11 March, 2013] The Co-operative. (2013b). About the Co-operative Group. Available from http://www.co-operative.coop/corporate/aboutus/ [Accessed 11 March, 2013] The Telegraph. (2012). Champagne fuels Co-op Christmas sales. http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/9803252/Champagne-fuels-Co-op-Christmas-sales.html UKCES. (2012). Working Futures 2010-2020. http://www.ukces.org.uk/assets/ukces/docs/publications/evidence-report-41-working-futures-2010-2020.pdf Read More