Supermarket Industry in the UK - Case Study Example

Supermarket Industry in UK College: Introduction The supermarket industry in the United Kingdom is among the largest industries in the country. It is believed to be providing employment to more than three million people both directly and indirectly. The industry is said to be an oligopoly market that is made up of a few large firms that are highly competitive. More than 75% of the market stake in the industry is dominated by the major four firms namely Sainsbury, Tesco, Morrisons, and Asda (Traill, 2014, p.104). This research paper is going to analyze the supermarket industry critically by focusing on its external environment that is affecting the industry. Just like any other industry, supermarkets are subjected to two types of environment namely the internal and the external environment. External environment comprises of all the macro environment factors that exist past the limit of the business, but influences the performance of the business organization (Giovanardi, 2012, p.52). In this case, business organizations are required to adapt to the changes that are posed by its external environment since they have very little or no control over its external environment factors. The other type of business environment is internal setting, which comprises of the factors that business organizations can control. Supermarkets in UK are posed to external environment factors that significantly affect their performance. These external environment factors are defined by the acronym PESTEL (Political, Economic, Social, Technological, Environmental, and Legal Factors). This external environment can further be split up into two; direct interactive and indirect interactive (Giovanardi, 2012, p.52). Direct interactive are the external environment factors that have an instantaneous and firsthand effect on the supermarket industry, while indirect interactive are the external environment factors that have a distant and secondary impact on the industry. PESTEL analysis Political Changing of employment laws as well as tax changes that were introduced by HM Treasury are among the main political issues facing the supermarket industry in UK. Most of these changes were made in the year 2012 whereby Chancellor George Osborne announced a tax cut for corporations to 24% and promised a further annual decrease of 1% per year up to April 2014, meaning that the current tax for the corporates is 24%. According Chancellor Osborne “The extra 1p cut in corporation tax will help firms increase investment” (Traill, 2014, p.103). This element has saved many corporations in the industry millions of sterling pounds as he was quoted say “And a significant lifting of planning constraints will delight much of the corporate sector” (Traill, 2014, p.103). In 2012, it was also announced that the national minimum wage for the following years would be below inflation translating for a reduction on the cost of hiring low-level operation employees like check out assistants. Economic factors High levels of inflation because of the European economic crisis as well as the high rate of unemployment are the major economic issues affecting the supermarket industry. CPI has been on a drastic average rise of about 3.5% in the past two years, a factor that is being attributed to the rise in clothing and food costs. This has been a major blow in the supermarket industry since food and clothing are the fundamental products that supermarkets highly rely on. The hike in inflation has led to a dramatic decline in growth with some of the major players recording huge profit decreases. The high rate of unemployment in UK that is currently at 8.3% is also another key economic environment that has affected the industry in an immense way. High levels of unemployment have led to reduction in consumption due to low purchasing power of the public. This has ended up limiting the overall growth of the supermarket industry (Burch and Lawrence, 2007, p.84). Social Change in customers’ tastes as more and more people turn to healthier lifestyles is the major issue that is facing the supermarket industry in UK. Some of the player firms have not been able to adapt appropriately, a factor that has declined their profits. However, others have being slowly adapting to the change with others engaging in thorough research in order to establish the new trend of foods (Plunkett and Plunkett, 2009, p.89). Technological Technological change has led to various changes in the supermarket industry with competition being one of the element that has been significantly been affected. Most of the firms have embarked on internet marketing and social media in order to give them an upper hand. The internet has also increased the spending habits of customers, a factor that has relatively improved the turnovers of most of the firms. Customers can easily compare the major competitors in the industry in terms of products offered and prices. Introduction of self-service checkpoints in various supermarkets is also another technological trend that has gained a lot of popularity. The strategy is significantly reducing the cost of long term staffing (Henry, 2011, p.93). Environmental Sustainability is the main element that most firms are focusing on in this industry. This has led to introduction of various products as well as opening of branches that are zero-carbon, with other retailers having long-term goals of making all their operations carbon-free in the future. Sustainability is also being achieved in other ways such as redesigning their stores to make them more energy efficient and convenient to the customers (Cunningham and Harney, 2012, p.106). Legal Competition law is one of the major legal issues that are affecting the supermarket industry in UK (Carysforth, Neild and Edexcel Foundation, 2011, p.73). Some of the major firms have already experienced negative implications because of this law. The new law requires supermarkets to sell their products in a responsible manner with those not following it to the latter being heavily fined. Five forces analysis Competitive Rivalry The major four supermarkets have engaged in stiff competition with each organization applying a different strategy that the management finds most effective. Some of the firms focus on providing quality products with others focusing on elements like providing value to their customers. Some of the firms are also applying a hybrid of the two strategies (Great Britain, 2009, p.23). Power of buyers In the supermarket industry in UK, customers have very little power with regards to the overall organizations strategies. The only little power that the customers may have is if only they can act as one (get united) which in this case is an ideal situation. Many firms have adapted to this element by ensuring that they closely monitor the changing needs of their customers and respond to them appropriately (Great Britain, 2009, p.23). Power of suppliers Researches have shown that most suppliers tend to be weak with regard to working with major supermarkets in the country. This has forced some of the supermarkets to force the suppliers in cutting the cost of store space. Most of the firms in the industry work with various suppliers a factor that has led to shortage of floor space, as every supplier wants a display. In most cases, suppliers do not have any power in directly determining the selling prices of the products they supply. New entrants The supermarket industry is an oligopoly type of market structure where by the big four firms holds in excess of 75% of the total market share Cambridge. (McIvor, 2008, p.38). This has made it difficult for the new entrants to survive in the market with some other new entrants introducing unique strategies like increasing the role of cooperativeness primarily to try and secure a pie of the market; a strategy that increases poses a serious threat to the existing key firms. Substitutes Online retailing and discount stores are the key substitutes of the supermarket firms. The stores particularly discount stores have gained popularity especially because of the current financial situation that many consumers are facing (Parr and Hughes, 2013, p.73). This has made some of the firms to respond to this type of threat by embarking on online stores though physical stores remain dominant. Threats/Opportunities A concise analysis of the external environment of the supermarket industry in UK shows that that there exist numerous threats as well as opportunities. One of the major threats that are clear in this industry is the element of stiff competition. As mentioned in the introduction, UK supermarket industry comprises of a few major retailers who hold about 75% of the total market share. Each of the four major companies aims at introducing strategies that would enable it survive in the competitive environment or increase its market share. The entrance of new retailers is also intensifying the level of competition in the industry (Michman and Mazze, 2008, p.52). Over the past few years, there has being mushrooming of other retail stores in the country that have continued to threaten the market share of the dominant firms hence calling for application of effective strategies in order for a firm to survive. This has led to stiff competition amongst the firms, which is characterized by application of various methods of promotion like advertising, offering discounts and creating good customer relations among other strategies. However, the industry has some opportunities with the major opportunity the growing population. Increase in population translates to an increase in demand for retail products particularly foodstuffs (Humphery, 2011, p.65). Other opportunities exist in the legal aspect whereby the UK government is creating favorable business environment by cutting corporates tax as explained in the paper. Key drivers of change According to the analysis done by this research paper, it is clear that the key drivers of change will be technologically and economically based. Economic based drivers will be effective if applied within a short-run to medium term, while on the other hand technological based drivers will be effective if applied for the long run. In conclusion, some of the key economic issues facing the supermarket industry in UK include the high level of inflation, which has led to reduction of the purchasing power of the citizens a factor that has significantly affected the overall performance of the industry. The technological issues that are affecting the supermarket industry include the use of self-service tills, a factor that is significantly reducing the staffing cost. The industry is also impacted by other macro-economic factors with some of the changes being friendly to the industry while others have become major threats. The analysis has also revealed that high levels of competition among the major firms and competition from the new entrants like online retailers and discount stores is the major threat facing the current firms. Therefore, this calls for adoption of appropriate strategies by the management of each firm in order to remain competitive. 1. Bibliography Burch, D., & Lawrence, G. 2007. 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