Economic Performance of J Sansbury Plc - Essay Example

?Economics Report 3 The aim of this essay is to explain and analyze the annual report of J. Sansbury plc with the application of various theories. Sainsbury was instigated in 1869 by John James Sainsbury and his spouse Mary Ann Sainsbury. The company operates through a network of over 1,106 supermarkets and convenient stores along with an employee base of 157,000 (J Sainsbury plc, 2013). Company annual report, various peer-reviewed journals and textbook along with news articles and industry reports have been considered as the main data sources in this research. The research findings obtained through the analysis of data findings from these sources further revealed that Sainsbury has been reputed as a market leader in the oligopolistic market structure of the UK retail industry. The company currently is also observed to be focused on product differentiation to obtain competitive advantages through the demand shift trends reflected in the recent market changes. Table of Contents Abstract 2 Table of Contents 3 1.0. Introduction 4 1.1. Report Brief 4 1.2. Company Background 4 1.3. Research Aim 4 1.4. Method of Data Collection 5 2.0. Literature Review 5 2.1. Demand Theory 5 2.1.1. Demand Curve 5 2.1.2. Price and Demand Elasticity 6 2.2. Market Structure Theory 6 2.2.1. Product Differentiation Theory 7 2.2.2. Sales Revenue Maximization Theory 7 2.3. Long Run Theory 8 3.0. Case Study 8 3.1. Demand Curve Shift 8 3.1.1. Sainsbury Investment 9 3.2. Market Structure 9 3.2.1. Product Differentiation Strategy 10 3.2.2. Product Shift and Sales Maximization 10 3.3. Unconventional Long Run Company 11 4.0. Conclusion and recommendation 11 4.1. Answer to Aim 11 4.2. Overall Conclusion 11 4.3. Recommendations 12 References 13 1.0. Introduction 1.1. Report Brief This report aims at examining the current performance deciphered by the UK based retail giant, J. Sainsbury plc (Sainsbury). Accordingly, to accomplish the defined objective, various economic theories have been applied and eventually, make suggestions for the better performance of the company in future. 1.2. Company Background The retailing company was founded in 1869 by John James Sainsbury and his spouse Mary Ann Sainsbury. Since then the company has been growing at a sustainable pace. Currently, the company operates over 1,106 supermarkets and convenient stores and has an employee base of 157,000. Operating in the retailing industry the company has it’s headquarter in London (J Sainsbury plc, 2013). 1.3. Research Aim As mentioned above, this study aims at researching the current developments in Sainsbury’s strategic behaviour along with that observed in its industrial trends, with the application of relevant theories. Based on the inferences drawn from the assessment of Sainsbury’s current developments, as presented in its annual report for the year 2013, the essay also aims to suggest few rational recommendations to the company. 1.4. Method of Data Collection The primary source used in this research is the 2013 annual report of Sainsbury. Besides this source, information from the company website are also used in this essay, as per as the requirement. Additionally, inferences have been drawn from relevant peer-reviewed journals and academic sources so as to accomplish the research aim. 2.0. Literature Review 2.1. Demand Theory According to the demand theory, explained in Reynolds (2011), customers’ willingness to buy the commodities served by a particular industry or by a company along with their purchasing capacity, determines the market demand. The theory bases its assumptions on the study of various determinant factors that influence consumer willingness and their purchasing power as well. These determinant factors include, the price of the products (Px), price of the other goods or substitute goods (P0), income of the consumer (I), advertisement and the structure of population (N) among others. Thus, the demand function is depicted as D = f (Px, P0, I, N). The theory further assumes that consumer demand for a particular commodity varies if the income of the buyers changes (referring to income effect on demand) or if the substitutes available in the market are able to attract a larger volume of consumers, thus minimising the total number of customers in the market and affecting the demand curve thereafter (referring to substitution effect) (Ebmer, 2013; Reynolds, 2011). 2.1.1. Demand Curve Demand function is depicted through a downward sloppy curve. Based on the assumptions of the demand theory, as stated by Ebmer (2013), the demand curve is helpful in assessing the relationship of the commodity price and the quantity demanded in the market, signifying the ‘law of demand’. According to the ‘law of demand, a change, in either price or quantity of the commodity, is likely to result in contraction of the demand curve. For instance, when the price of a commodity increases, with the other determinant factors remaining unchanged, the demand of the commodity is likely to reduce and vice-versa (Ebmer, 2013). 2.1.2. Price and Demand Elasticity As per the microeconomics theory, price and demand elasticity theory also causes a major impact on the pricing strategies taken by large companies. Explaining the concept theoretically, a percentage change in price of commodities may cause the demand curve shift either towards a positive direction of towards a negative direction. Notably, when a percentage change in the commodity price (Px) causes more than a unit change in its market demand (Qx), the product is affirmed to be price-elastic (i.e. Pe = Px ? Qx) and vice versa (Andrews & Benzing, 2010). Focusing on the example of food industry, Andrews & Benzing (2010) revealed that understanding price-elasticity for particular commodity helps in formulating more accurate and effective marketing strategies and therefore, contributes to greater organisational sustainability. 2.2. Market Structure Theory Market structure theory is another theoretical explanation to the determinants of organisational efficiency in dealing with industrial fluctuations and ensuring long-run sustainability of organisations (Sutton, 2006). Based on the determinants of the number of market competitors, substitution effect on the commodity and volume of customers majorly, market structure of a particular industry is classified into three types; (a) a perfectly competitive market structure is characterised by a large number of well-informed consumers and producers of homogenous products allowing high competition; (b) a monopolistic competition allows one market leader for a large volume of customers; (c) in a oligopolistic market structure, there are a few sellers in the industry that restricts one market player from exercising control on the market demand, but allows collective pricing on close-substitute products, where the functions of one market competitor influences the other market player to a large extent (Leonard N. Stern School of Business, 2013). As argued in Eaton & Ware (1987), market structure causes an inevitable influence on the competition between firms and thereafter intends to shape the other macroeconomic determinants. In other words, market structure plays a noteworthy role in defining the long-run sustainability of a company. 2.2.1. Product Differentiation Theory According to the product differentiation theory, a product is differentiated on the basis of its value to the customers in terms of its external benefits, environmental friendly nature and attractive packaging among others (Anderson & et. al., 2013). As argued by Ok (2011) and Anderson (2005), companies are likely to avail competitive privileges if they practice effective product differentiation strategies, which will reward them with lesser degree of substitution effect threat and subsequently, ensure a higher margin of competency in attracting larger volume of customers. 2.2.2. Sales Revenue Maximization Theory As explained by Ghai & Gupta (2002), sales revenue maximization allows a firm to find every possible way to increase its production and accordingly increase its sales turnover. The theory assumes that the only key to attain equilibrium, signifying the position where cost of production equals the revenue earned by the company, is to make maximum utilisation of resources. Thus, the firm opting for sales maximization needs to make productive use of its resources, engaging different policies, reducing employees, lowering the price to create a barrier for new entrants and among others (Ghai & Gupta, 2002). 2.3. Long Run Theory With reference to the study in Felipe & Adams (2005) and Bentacourt (1986), it can be inferred that long-run sustainability is quite essential for a firm to be profitable in its operations and obtain competitive advantages to suffice the interests of its stakeholders. According to the long run theory if the price does not cover the total average cost, calculated as the sum of the labour cost, the administration cost and the cost of involved raw materials, the firm is likely to face losses in the long-run. In the long run, a firm can either increase or reduce the production capacity or can enter or exit from the market based on the level of profits, whereby a normal level of profit is required to maintain the sustainability of the firm (Reynolds, 2011). 3.0. Case Study 3.1. Demand Curve Shift As per the joint report published by SAS & Verdict (2013), the UK retail industry is quite likely to grow in terms of consumer purchase capacity after the negative growth observed in the 2008 recessionary period. Where on one hand, it refers to better profitability margin for companies like Sainsbury; on the other hand, it also signifies an increased competition ahead for the company. It is also noteworthy in this context that competition between the existing players will tighten owing to the raised barriers to restrict new entrants, thereby building an oligopolistic market structure where product differentiation will be mandatory. Additionally, as the retail products are observed to be highly influenced due to their substitution effects and moderate elasticity of demand, it can also have a severe impact on the competitive challenges faced by Sainsbury (SAS & Verdict, 2013). Fig. 1: Market Demand Shifts in UK Retail Industry Source: (SAS & Verdict, 2013) 3.1.1. Sainsbury Investment Keeping in account the possible changes in the industrial context, Sainsbury intends to differentiate its commodities by attracting a larger volume of online consumers. With this aim, the company has planned to invest in its “dark store”, the name for its online market venture (Davey, 2013). Accordingly, the company has recently been investing in research and market strategy reformation as well, so as to adapt the industry changes with greater efficiency (J Sainsbury plc, 2013). 3.2. Market Structure Sainsbury’s market share grew continuously after its establishment. The company made a huge profit of ?22.294 billion in the year 2012, which further added to its market leadership positioning. Subsequently, Sainsbury was recorded as the third largest grocer on 2013, acquiring a market share of 16.9% in the global marketplace (Jefford, 2013). Fig. 2: Sainsbury’s Market Share Source: (Jefford, 2013) As can be observed from the diagram above, the retail industry in the UK is oligopolistic in nature, where the entry barriers are high permitting only a few leaders to take control over consumer demand trends. Notable, as Sainsbury has already acquired a position of a market leader, it has to face minimum challenges due to the market structuring. 3.2.1. Product Differentiation Strategy In its recent performances, Sainsbury has been suffering from the problem of product differentiation. Correspondingly, to differentiate its products, Sainsbury has been focused on using Information Technology (IT) to lure a greater volume of customers more efficiently (Cengagebrain.com, n.d). 3.2.2. Product Shift and Sales Maximization Besides being involved in the sales race through internet, Sainsbury focuses on cheapest and most effective supply chain mechanism so as to offer its customers with price advantages, thus increasing its market demand as per the demand theory. To be noted, Sainsbury continues to increase its online growth plans along with expanding its traditional stores network adding 14 new supermarkets and 87 convenient stores in the first quarters of 2013. Sainsbury has also been rendering immense focus on redefining its brand re-launching 6,500 product lines in the current fiscal year of 2013 (J Sainsbury plc, 2013). 3.3. Unconventional Long Run Company To improve the operational excellence in the long run, Sainsbury has been focused on implementing five unconventional strategies, which emphasise store capacity expansion and creation of property value, compelling general merchandise and clothing, developing new business lines and offering complementary business and services to its variety of customers. These values have evidently set Sainsbury apart from other retailers adding to its long-run sustainable growth prospects (J Sainsbury plc, 2013.). 4.0. Conclusion and recommendation 4.1. Answer to Aim The aim of this research was to apply various relevant theories in understanding the market structure in linkage with the operational efficiency and strategic behaviour of retail giant Sainsbury in the UK. As can be evidently observed form the above discussion, the law of demand was quite noteworthy to impose a considerable effect on the market operations of Sainsbury, apart from the influences caused by price-demand elasticity, market structure and long-run sustainability theories. 4.2. Overall Conclusion Based on the overall discussion in this research, it can be inferred that Sainsbury’s market strategies have been quite effective in reflecting a strong linkage with industrial and market demand changes. This in turn indicates that the company has been quite efficient in responding to the market alterations viewed in the recent phenomenon of the UK retail market, which further enhances its sustainable growth prospects in the long-run. 4.3. Recommendations As identified in the research, Sainsbury is currently recognised as a market leader, the third largest player in the UK retail grocery industry, to be precise. However, it is advisable that the company continues monitoring its market alignment strategies so as to obtain greater benefits from the market structure and demand shifts observed in the industry. The company must also deliver greater focus on differentiating its products, which can be accomplished by considering the environmental sustainability of its offered commodities. References Anderson, S. P. & et. al., 2013. Discrete Choice Theory of Product Differentiation. Economics and Finance. [Online] Available at: http://mitpress.mit.edu/books/discrete-choice-theory-product-differentiation [Accessed Nov 19, 2013]. Anderson, S. P., 2005. Product Differentiation. New Palgrave Dictionary Contribution. Andrews, T. & Benzing, C., 2010. Simplifying the Price Elasticity of Demand. Journal for Economic Educators, Vol. 10, No. 1, pp 1-13. Betancourt, R. R., 1986. A generalization of Modern production Theory. Applied Economics, Vol. 18, pp. 915-928. Cengagebrain.com, No Date. J. 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