The UK Supermarket Sector is an Oligopoly - Essay Example

? It has been said that the UK supermarket sector is an oligopoly BY YOU YOUR SCHOOL INFO HERE HERE Table of contents Introduction......................................................................................................... The market structure............................................................................................ The importance of consumer influence................................................................ Competition commission recognition................................................................... Conclusion............................................................................................................ References It has been said that the UK supermarket sector is an oligopoly Introduction The UK supermarket sector is most definitely properly defined as an oligopoly based on the market structure that guides its business principles, the relevance of the consumer in building business strategy, the level of interdependence between competing supermarket companies, and the sector’s influence in pricing and supply within its market. An oligopoly is defined as “a market dominated by a small number of participants who are able to collectively exert control over supply and market prices” (investorwords.com, 2011, p.1). It is the interdependency between the few firms, such as Morrison’s and Aldi, that makes this market sector an oligopoly in relation to marketing efforts and pricing structures that drive strategic intentions. This paper describes the market characteristics of the supermarket sector in the UK that label these businesses as part of an oligopoly. The market structure All of the major supermarket competitors in the UK maintain a high degree of market share in the foods industry and are affected little by smaller competitors in terms of profitability. An oligopoly is able to affect the market by maintaining this high market share and control by being able to influence pricing negotiations with suppliers who rely on their continued successes in order to, themselves, remain profitable. This is what characterizes an oligopoly when a market is dominated by only a handful of large-scale competitors. In this structure, firms can have either differentiated or non-differentiated products offered to consumers where advertising and marketing objectives characterize one of the most important features related to business strategy and competitive behaviours (Boyes & Melvin, 2005). Why is this? Supermarkets rely on consumer attitudes and behaviours to ensure they remain profitable which are always subject to fluctuating demand schedules and eating habits. Also based on price, consumers will choose one competitor over another in this market structure which drives the necessity for more innovation in marketing and the routine environmental and competitive analyses required to remain successful and profitable. Under macroeconomic theory, an oligopoly is considered to be the most realistic market structure since there are a diverse range of externalities and internal business behaviours that impact whether the firms gain higher volumes of market share in a local or international region (Boyes & Melvin). These supermarkets in their oligopoly maintain a downward-sloping demand curve where the shape of the curve is directly related to consumer behaviour patterns and the behaviours of competition in relation to strategy, marketing and advertising. This is why the supermarket sector in the UK is considered the most realistic of market structures as the importance of competitive behaviours and marketing are in-line with contemporary business practices with most non-supermarket organisations. Because of their dominance in this market sector, suppliers are made weak when considering consumer-based commodity products (quickmba.com, 2011) as they rely directly on the purchasing power of the supermarkets to maintain their production levels, adequate staffing and overall operational strategies related to the intent of building higher profitability. This gives the few large-scale supermarket competitors much more control over the supply chain and can dictate certain pricing structures if the supplier wishes to continue their supply relationships. Unlike other market structures in which suppliers maintain control, the UK supermarket sector is the most authoritative regarding distribution and per-unit pricing in negotiations. This is an important characteristic of the oligopoly market structure to be able to exert this control to ensure supplier devotion to meeting the needs of the supermarkets. The importance of consumer influence The most relevant driving force in this market is the consumers and their attitudes related to competitive exploration and pricing comparisons, along with the brand reputation they perceive to be attached to each supermarket competitor. For example, Aldi recognizes that pricing is a considerable factor for its many customer segments and has developed a frequent purchasing discount card as a marketing tactic to gain more loyalty and customer patronage (Foley, 2009). This builds more word-of-mouth advertising and also ensures higher profitability in an effort to gain more market share in the supermarket sector. This can be advertised using multi-media formats such as the Internet or newspapers as well, thus driving new competitive tactics that are constantly updated based on how the few competitors respond to this discounting effort. Consumers are more apt to choose products, especially when they are not differentiated directly by the supermarket and many competitors carry the same supply, based on pricing alone. As one example, many of these competitors carry the same frozen foods products that are only differentiated by the manufacturer’s advertising philosophies and not necessarily distinguishable from other frozen food products by the retailer itself. In some ways, the supermarkets, themselves, are reliant on the innovations of manufacturers in frozen food to assist in helping customers identify the differences between the products, perhaps on quality, price or taste. In this situation where products are not differentiated directly by the supermarket, there are less options available to compete other than through pricing which can impact demand significantly in multiple market segments that are driven to purchase based on price alone. One method of advertising that makes this sector labelled an oligopoly is the creative methodology by which the markets try to gain customer loyalty toward the specific supermarket brand. As one example, Baker (2009) identifies that UK household food waste reached six billion dollars in 2008. To capitalize on environmentally-based initiatives as a competitive tactic, Morrison’s developed an advertising programme that promoted the value of frozen foods not based on preparation and quality, but to ensure that there is much less waste and therefore providing more value for their money (Baker). In the oligopolistic structure, this would be effective advertising if coordinated effectively with integrated marketing strategies to reach consumers and would continue until the competitors respond with similar tactics related to environmentalism and consumer household waste. Customers are always looking for value-added products to enhance lifestyle. Restaurant patronage has gone down in the UK in recent years due to drops in economic stability in the region and less consumer disposable income (Casatelli, 2008). Because of this, consumers are cooking at home more often and look toward convenience products as a means of ensuring quality meals without harming their shrinking budget capabilities. Internally, the supermarkets maintain the ability to capitalize on this trend by spotlighting discounted frozen food specials or other pre-prepared meals to gain more consumer interest. This is generally done through in-store advertising or common circulars that are often delivered to consumer households in their weekly mailboxes. This creates a domino effect in which higher profitability is either achieved or the marketing effort meets with little success in boosting consumer loyalty toward a particular supermarket brand name. However, it is the methodology by which the competing companies try to outperform one another through advertising and discounting in an effort to gain more market share based solely, in this case, on the economic environment and changing consumer lifestyles. Environmental analyses should then be conducted periodically to observe other consumer-related buying trends and then develop an appropriate marketing strategy to fit these fluctuating needs. Competition in this market structure almost always responds with their own competitive strategies in an effort to outperform other supermarkets using innovative marketing tactics. Tesco, a major player in this market, recognised that consumers were demanding much more convenience as it is directly related to their buying habits and in-store experience. They were the first to offer online delivery services so that consumers could place their entire shopping order using the Internet and have it packaged and ready when they arrive at the store to save time and build more convenience in the shopping experience (Smith, 2009). Of course, other supermarkets in this market sector witnessed Tesco’s ability to gain more market share through this effort and launched their own online services to outperform Tesco. This leaves all of the competitors to come up with new convenience options that further enhance their online components and make themselves stand out even further over competing delivery services. This online competitive delivery activity has also had drawbacks, which again shows the interdependence between the retailers in this market structure. It created a new popularity of price-comparison sites from independent companies to help customers find the most financial value when looking for grocery-related products (Smith). This again changes the competitive landscape whereby the supermarkets become somewhat victimized by third-party influence that erodes their competitive edge. Therefore, in this situation, the supermarkets must collaborate in some fashion to attempt to erode the effectiveness of such sites that can erode profitability by establishing methodology to break down the quality and reputation of these sites to gain more control over consumer buying behaviours. This is characteristic of the oligopoly market structure where sometimes such collaborations are necessary to remove third party intervention in their competitive and marketing strategies. Ramsay (2009) identifies that one major competitor, Asda, in an effort to build more consumer loyalty has begun a programme referred to as the Pulse of the Nation shopper panel in which a group of recruited consumers are invited to give their opinion of product design and the brand promises offered by Asda. This is yet another effort in this market structure to make the supermarket brand, rather than its supplied product brands, stand out among competition for ethical behaviours and its devotion to customer service through interactive opinion polling. Because pricing and discounting is so often used in this market sector, it leaves companies like Asda with a need for reaching consumer segments in a way that is more effective and directly related to their lifestyles. Aldi introduced what is referred to as surprise buys, specials that change every week to include non-grocery items offered within the store such as electrical items, discounted hardware, children’s toys and sporting equipment (Dixon, 2007). Aldi recognised that its largest competitors were not offering non-grocery products in this fashion and took advantage of altering their supply chain to give customers more incentive to visit Aldi over competition. So long as environmental analyses do not indicate that other stores are adopting this same model of product offerings, Aldi maintains a competitive edge and is able to remain unique from competition. Some competitors turned toward public relations outlets to enhance their brand image, thereby using third party agencies to improve their brand value and market prowess. “PR has become a respected source of good thinking and provides maximum value for minimum budget” (Goodkind, 2010, p.11). This is yet another competitive tactic that is important in sustaining higher market share and is unique from other supermarkets that rely only on their internal marketing and sales expertise to gain more consumer patronage. Public relations can include press releases highlighting internal accomplishments, discounting, or their focus on corporate social responsibility. In this oligopoly market structure, the efforts to gain more consumer-based profitability often require ingenuity and activities that look beyond the price tag to gain more loyalty for the brand and build brand preference within their desired market segments. However, Morrison’s took advantage of the opportunity to outperform the corporate social responsibility publicity of its competition by creating a support for British farming initiative that included supply from local farmers in the produce aisle and using similar publicity to gain consumer attention (Bayley, 2010). This erodes the long-term effectiveness of Morrison’s competition and gives them a competitive edge, which again drives competition to change their tactics in an effort to stand out in the marketplace. Analysis of profit margins and the volume of specific product categories sold also drive the activities of this market environment. Rigby (2009) identifies that there has been growth in cleaning products offered at these supermarkets such as stainless steel cleaners, soaps and multi-purpose cleaning products. At the same time, research indicated that consumers have become more frugal and demand more value for their non-grocery purchases (Rigby). Therefore, eco-friendly products have been procured through contracted supply agreements with multiple vendors in an effort to capitalize on this changing buying trend. Also related to the environment are changes within the companies in this market sector to reduce their carbon footprint. One competitor developed a new HVAC system in their supermarket cooling units that reduces electricity consumption and less water consumption using chemical dehumidification (Capozzoli, Mazzei, Minichiello & Palma, 2006). Though this might be considered mostly a strategic cost-saving methodology, when it is advertised is shows the corporate social responsibility of the company to gain more trust from customers that make purchasing decisions based on this ethical behaviour related to the environment. This market sector is also driven by changes in the external environment that are largely out of their control as related to higher priced commodities such as eggs, milk and cheese (Scott, 2009). This is driving growth in private label sales that are attached to the individual supermarket name in order to provide struggling consumers, or those simply seeking value, with more options and diversity in product offerings. Private label sales grew nine percent in 2008 and represented 17.5 percent of total supermarket sales (Scott). This is accomplished by establishing partnerships with local and foreign producers with a contracted agreement for private label branding. Other competitors have followed suit in an effort to outperform. All of the examples provided of the competitive behaviours of this firm further reinforce why this market structure is considered an oligopoly. The interdependence on one another in the face of external threats and the ongoing competitive analyses conducted by the supermarkets to change their advertising and other long-term strategies indicate why this market is able to affect supply and demand using creative tactics and clever marketing strategies. It is different from monopolistic structures and perfect competition in virtually every detail based on the volume of competitors and the fact that there is not just one large supplier of consumer products that dominates the market. Competition Commission recognition Morrison’s recognizes the importance of the Competition Commission for assisting in gaining strategic statistical information regarding the market structure and helping to identify competitor behaviours to avoid conducting extensive and oftentimes costly research on consumer behaviour and the industry in general. This supermarket actually devoted a single senior-level representative to coordinate with the Competition Commission regarding pay structures for executives and generic strategy development (Morrison’s Annual Report, 2007). The Competition Commission is most likely to examine this structure since there are so few large-scale competitors and wants to avoid the creation of a monopolistic environment that can impact the long-term profit success of suppliers that would have no options by which to secure control over pricing negotiations. Further, if one competitor maintains significant, near-monopolistic growth in one supply sector, the long-term impact to the economy can be detrimental with lost jobs or the extension of higher prices to consumers because of the single market’s stranglehold on the sector. Conclusion All of the factors identified reinforce why the UK supermarket sector is an oligopoly as it fits all of the defined characteristics of this structure. This is true in relation to generic business strategy, the reliance on consumer patronage and attitude, marketing successes and the overall interdependence between competition. Intedependence between the different firms is recognised as being forward drivers in business strategy related to customer values along with the competitive behaviours used by each firm related to image, brand preference and corporate social responsibility. Unlike other market structures, the supermarket sector is unique in its ability to control supply chain pricing and negotiate new distribution strategies through its market presence. References Annual Report. (2007). [internet] Morrison’s annual report and financial statements. [accessed 3.3.2011 at http://www.morrisons.com] Baker, R. (2009). Brand sector report: love in a cold climate, In-Store, London. January, p.29. Bayley, N. (2010). Power to the people, Marketing, London. October 13, p.15. Boyes, W. & Melvin, M. (2005). Economics. 6th ed. Houghton Mifflin Company Capozzoli, A., Mazzei, P., Minichiello, F. & Palma, D. (2006). Hybrid HVAC systems with chemical dehumidification for supermarket applications, Applied Thermal Engineering. 26(8/9), pp.795-805. Casatelli, L.M. (2008). Adding value, Frozen Food Age. 57(3), pp.18-21. Dixon, P. (2007). [internet] Strategic management, University of Tasmania. [accessed 9.3.2011 at http://www.utas.edu.au/mgmt/Documents/SS_06_07/BMA302_Unit_Outline.pdf] Foley, N. (2009). Loyalty cards bear royal rewards, Retail World. 62(15), p.21. Goodkind, G. (2010). PR creates good buzz, Marketing, London. October 13, p.11. Investorwords.com. (2011). [internet] Definition of oligopoly. [accessed 8.3.2011 at http://www.investorwords.com/3404/oligopoly.html] Quickmba.com. (2011). [internet] Porter’s Five Forces – a model for industry analysis. [accessed 10.3.2011 at http://www.quickmba.com/strategy/porter.shtml] Ramsay, F. (2009). [internet] Asda explains its bold attempt to involve consumers in decision-making. [accessed 9.3.2011 at http://www.marketingmagazine.co.uk/news/943449/Asda-explains-its-bold-attempt-involve-customers-decision-making/#comment] Rigby, E. (2009). Thrifty Britain rethinks its shopping habits, Financial Times. Mar 9, p.22. Scott, S. (2009). Eating at home pays off, Beverage Industry. 100(6), pp.54-56. Smith, N. (2009). Vertical foods focus retail: delivering the goods, New Media Age, London. May 28, p.17. Appendix A: Demand curve for oligopoly market structures Profit maximisation is the main goal in this structure. Price reductions would lead to market share gains under this map, but unrealistic when there is steady competition from high market share-holding firms. Marginal cost (MC) is subject to fluctuations without necessarily impacting pricing structures. Source: http://www.economicshelp.org/microessays/markets/oligopoly.html Read More