The Various Trends in the Retail Industry - Research Paper Example

Introduction The current economic environment indicates that the world economies are not performing well and as such there is a general decline in the economic activity across the globe. The reduction in the demand is not only for the high value items but there is a gradual reduction in the consumer demand for some retail items also. Large UK chains such as M&S, ASDA etc have reported losses because of the low demand and difficult economic conditions. Various economic indicators therefore reflect that the economic situation in UK specially may not be favorable at least for coming one or two years as there are strong forecasts of negative growth. Such negative economic growth therefore indicates that the business prospects may be relatively not bright at least in near future. Retail sales in UK were more than 200 Billion pounds in 2007 however, with the increasing pressures from economic downturn; the trends have started to behave negatively. The same trends persisted during 2008 and 2009 and for year 2010 the trends may become relatively more stable. The situation therefore clearly reflects that the industry may be passing through a difficult phase whereas smaller players may face strong pressures to maintain their ground in the market place. This research paper will therefore explore and understand the various trends in the retail industry, provide analysis of the competition, profitability as well as market development while clearly identifying the potential for the new players in the market. UK Retail Industry- An overview As discussed above that the industry is experiencing a dramatic change in its fortune as the existing economic crises are becoming more and more difficult for the firms to sustain themselves into the competitive business environment. It is also critical to note that there are different and complicated patterns that are emerging out of the industry. The price deflating impacts are one of the serious repercussions for the firms in retail industry. Due to general decline in the aggregate demand as well as the increasing outsourcing, price deflating is becoming relatively unbearable for the smaller players. The decline in the price and cost pull inflation therefore making the products more costly and profits are further being squeezed.(PWC,2009). The emergence of large superstores in UK’s retail market was one of the turning points in the industry as large superstores become more convenient for the customers to buy large variety of products at relatively low cost. Apart from that, customers were offered variety at one place that made transaction costs lot lesser and switching cost from small retailers to big retailers become low. However, retail sector is also largely cyclical in nature as the selling activity picks up during certain specific periods such as Christmas and other religious occasions wherein customers tend to consume more than what is being experienced generally during off season. On more general term, the retail prices are on the continuous decline over the period of last ten years and the basis of competition have now turned out to be the pricing. The general decline in the profitability of the firms is also associated with the fact that customers are getting better deals thus their role has become more dominant in the overall process. This also critical in the wake of the fact that general decrease in pricing have been in specific segments such as toys, women overwears as well as photographic and sports goods.1 This face can be important for any firm willing to make entry into the retail segment and especially in baby toys and other related items. Secondly, the time available to recoup the money as well as to make profit is really short due to the speed with which the prices generally fall into the market. This makes retailers of electronics items such as plasma TVs etc more risky because the prices of such items reduced drastically during last few year. Political Environment We will be headquartered in UK and as such the overall political environment is conducive to the businesses. UK is one of the largest democracies of the world with strong ideology of supporting the free trade and liberalization. The recent efforts of the UK government to inject funds into the failing institutions is a proof of how State is corroborating with the economy as well as the institutions to engage into free trade. What is also significant to note that UK is probably the only country in the world whose political structure is designed in such a manner that it support the capitalism and various institutions to engage into any business practices? As such this political environment is therefore most conducive for the conducting business Economy of UK The current state of the world economy is not really favorable for the automobile industry as well as other businesses. The failure of many important and large organizations is a clear indication of how the industry can get affected by the adverse economic factors such as the current one. The overall decline in the consumer demand has been largely seen as a result of the current credit crunch which basically has shrunk the extension of consumer credit to buy things like cars. The year 2007 onwards has not been good for the economy of the world as well as the economy of the UK as UK is now largely perceived as going through strong recession with very slow recover. Though it is now estimated that the UK economy is recovering however, the overall pace of economic uplift is slow and as such there may still be serious challenges for the organizations to meet their profitability objectives. Such economic situation may not yield into better market conditions for our proposed business as customers may be reluctant to eat out or avail the services of an Indian Restaurant. It is however, estimated that the economic slowdown will start to pick in 2010 and as such there are good prospects for the business to grow in future. Overall the legal environment is stable as the UK is one of the most de-regulated economies of the world. This also means that the overall legal environment is relatively conducive for conducting the business whereas there is also an strong emphasis on the regulations pertaining to corporate governance etc which firms generally have to follow in order to ensure that the organizations follow well defined code of governance and do not engage into behaviors which may put the interest of the shareholders at stake. Demographics UK is considered as heaven for the immigrants and as such the immigrant population from South Asian countries is relatively large. UK is a country with rough 60 Million population and Immigrants form one of the largest chunks of the overall population of the country. What is however, significant to note that UK’s population is comprised mostly of the White British with new flow from the EU region? United Kingdom as a region is comprised of four large regions including England, Scotland, Wales and Ireland whereas most of the population is concentrated into the England and its urban areas. The overall age structure of UK’s population is however, not evenly distributed as majority of its population is ageing. Ageing population therefore also means that there may be more focus on the purchase of low cost retail items as consumers generally prefer to save in order to pass their post retirement life in relatively more ease. Market, trends & Profitability Analysis Latest Trends The trends after Charismas are not considered as gloomy however the trends are not bad in UK retail industry. Forecasts are that the prices may start to increase in the first quarter of 2010. However, the recent snow fall in the current month indicate that there will be gradual fall in the consumer activity as the businesses are forecasting another sharp decline in the purchasing activity. Apart from that the recent trends also indicate that the sectors such as baby care are mostly dominated by the organic food segment as organic food segment is the largest in the industry. Further, the baby care segment of the sector also includes the market for the reusable nappies. However, the baby food market for organic products is again dominated by the fact that most of the producers are outsourcing the products from developing countries thus the reliance on external world is still one of the most important aspects of the retail market in UK. The recent surge in the increase in the market for the organic baby foods is also because of the fact that the parents are increasingly becoming more worried about the health of their children because the chemical contents in the normal food are considered as harmful for the overall health of individuals.(Reportlinker.com,2007). Similarly, the trends in the electronics market indicate that the consumer activity is more robust in segments such as digital cameras, cell phones, MP3 players as well as high definition television sets. This therefore further indicate that the consumers specially young consumers are actively involved in the buying and selling activity of electronic items such as Ipods and mobile phones. It is also critical to note that in order to effectively analyze the trends it is critical to note that trends especially during last two years are markedly different from the trends that were observed prior to 2007. The lack of consumer credit made it difficult for the consumers to buy the high priced goods thus the retailers as well as manufactures are both facing difficulties in achieving their sales targets. Such behavior from the shoppers can also be a result of the financial crisis as well as the increasing unemployment levels as many, based on their fear, are basically questioning their own buying patterns and re-adjusting patterns that indulge them into high spending sprees. It is also critical to note that the retail sector in UK is one of the most innovative sectors as existing firms have engaged themselves into the innovation due to changes in the information technology. Many large retail firms now employ brick and mortar model wherein customers are served through their physical stores as well as the online stores.( Hristov & Reynolds, 2007) This line of innovation therefore has provided the retailers an upper hand in accessing the market in more innovative manner. What is also critical to understand that major driver behind this innovation in the sector is customer who is driving changes not only in cost structure of the firms but also the overall offerings made. Customers however, also respond to the innovative techniques of the firms as firms like Tesco have been successful in retaining their customers through the schemes such as club card which basically locked in the customers for them. Competition and Profitability As discussed above that there is a gradual emphasis on the cost reduction as consumers prefer to buy goods at lower prices every day. This fact therefore makes this industry to be based on the low margins as well as high turnover industry. Sector as such is dominated by the large firms such as Asda, Tesco, Morrison, Sainsbury etc with other small players geographically located across the country. Tesco has a market share of more than 30% whereas its average sales growth every year has been more than 4% indicating the strong presence of the firm in the market. Tesco specially capitalized on its club card scheme through which it was able to redeem the points accumulated by its customers. Thus the performance of the Tesco is considered as relatively better even in the current times when other firms are not relatively performing well.(Finch,2009) This industry is dominated by the low entry barriers however the larger firms still hold the key due to their developed organizational structure, better management practices as well as their strategic alliances with the international firms. Such alliances allow firms like Tesco and Asda to achieve cost advantage by lowering their cost of purchase. Further, the supply chain management is another critical factor that serves as the important link between cost and profitability of the firms. This is because of the fact that the large firms procure goods from the developing countries at low cost in order to maintain their hold over the market which in turn provides them room for maintaining their profitability. Thus to be successful in this industry, it is critical that the firm must be able to forge strong links with its suppliers in order to ensure that the it continue to receive the goods at lower costs. The diversity of suppliers is another important issue which need to be explored because existing firms have been able to diversify their portfolio of suppliers so as to achieve better mix of suppliers. Potential Opportunities The existing situation of the market may not indicate that there may be important challenges to be faced in the market. However, the current situation is considered as temporary as there are encouraging signs for recovery in the current year. What is also significant to understand that there are subtle changes that are being experienced in the market because overall consumer preferences and likings are changing with the passage of time? For example, there is a growing emphasis on the organic food for the babies as parents are becoming more and more concerned about the health of their children. Thus one critical opportunity that can be explored is the organic food market for the babies as there is enough room available and bigger players are not much into this business. Making investment into this segment of the industry therefore will offer a good opportunity for the firm to make an entry into the market. Justification UK is one the largest economies in the world with strong customer base as well as access to the international market. The environment is conducive both at the political as well as social level as government is more supportive of the free trade. Such environment is therefore considered as ideal for starting a new business which can offer less volatility and more chances of earning profits. Further the current economic conditions is said to be temporary in nature as large scale injection of money from the government have stabilized the economy and there is a gradual increase in the confidence of the consumers. This gradual increase in the confidence of the consumers therefore also means that the consumer activity will start to pick up in coming times and there will be renewed effort by the firms to serve the market with better strategies. Though such kind of environment may be relatively more volatile but it offers great opportunity to enter into a market where there is relatively more space because smaller firms have almost gone out of the business. Further the organic food market for the babies is considered as lucrative as consumers now give more preference to engage into healthy eating habits not only for themselves but for their kids too. Opening a retail chain that focus on offering organic food therefore may prove a more lucrative opportunity to make a successful entry into UK market. References 1. Finch, M (2009) Tesco increases market share The Guardian, Available: http://www.guardian.co.uk/business/2009/nov/10/tesco-waitrose-win-market-share Last accessed 20th January, 2010 2. Hristov, L & Reynolds, J (2007) Innovation in the UK Retail Sector The Oxford University, Available: http://www.nesta.org.uk/library/documents/inno-in-services-retail-report.pdf Last accessed 20th January, 2010 3. UK Organic Baby & Toddler Care (2007) ReportLinker, Available: http://www.reportlinker.com/p057081/UK-Organic-Baby-and-Toddler-Care.html Last accessed: 20th January, 2010 4. Who really profits in a world of falling prices? (2009) PriceWaterhouseCoopers, Available: http://www.pwc.co.uk/pdf/who_really_profits.pdf Last accessed: 19th January, 2010 Read More