Sainsbury and Its Future Corporate Strategies - Case Study Example

Expanding into a foreign market Table of Contents Introduction 1 Introduction to Sainsbury and its future corporate strategies 2 Sainsbury’s approach toward Corporate Social Responsibility (CSR) 5 Location of Sainsbury in retail industry 8 Identification of the foreign market 11 Identification of a foreign market servicing strategy 15 Justification for selecting India as a potential market 18 Conclusion 19 Reference 20 Introduction The financial meltdown of 2008-09 has changed the world economy lot. Major global powers like US, UK, Japan and many others suffered a lot with drastic fall in financial markets, constantly increasing number of unemployment, decline in consumers’ purchasing power and huge fall in demand. Though the market conditions have improved but experts feel that it will take much longer time to recover completely. On the other hand many third world nations emerged out as highly growing economies, so these have become the potential target markets for the MNEs which are planning to diversify their business. For preparing this report the UK based retail company, Sainsbury is selected which is planning to expand its business in international market. At first the company’s prevailing CSR strategies and its market position in UK retail industry has been analysed. Later on an in-depth analysis of all the potential markets is conducted and most suitable foreign market servicing strategy has been selected. Also a proper justification is provided to explain the reasons behind selecting the particular strategy. Introduction to Sainsbury and its future corporate strategies Sainsbury’s supermarket Ltd is the part of J Sainsbury plc and it is the third largest retail chain supermarket in UK. It covers almost 16.3 percent share in the UK’s super market sector. The parent group has diversified the business by entering in property and banking business. It was founded by John James Sainsbury and his wife Mary Ann. The company was founded in the year 1869 in London and attained a rapid growth from the early stage of development. By the end of 1922 it had established itself as the largest grocery retain in US. With passage of time Sainsbury lost its leadership in the grocery retain business and its rival Tesco took over its position in 1995. With emergence of Asda in UK market by 2003, Sainsbury has to compromise with the third position in the UK retail market. Sainsbury is listed in London Stock Exchange and it is incorporated in FTSE 100 Index. At present the company has existence in 502 super market and 290 convenience stores, so the total area under company’s retail stores are 16,703,000 square feet. As per the last years data, the market share of different retain companies in UK were as follows: Tesco 31.5% Asda 16.7% Sainsbury's 16.4% Morrisons 11.4% Waitrose 3.9% Somerfield 3.7% Iceland 1.8% (Source: BBC NEWS, 2008). In the last year company’s financial condition was adversely affected by economic recession that engulfed the whole world. The financial report published by the company indicates, its sales reduced to £m 18,911 as compared to the sale to 2008 which was £m 19,287. In the same way, profit for the year reduced by 2.7 percent. Effect of recession was visible on company’s Earnings per Share because it reduced from P. 19.1from P. 16.6 in 2008 (J Siansbury plc, 2009). Due to this recession the world economy experienced a change; as compared to the developed nations like US and UK, developing nations performed much better. Surprisingly China emerged as the fastest growing economy followed by India. All the BRIC nations performed quite well and they succeeded in overcoming the financial and economical recession much faster in contrast to the developed nations. Undertaking all these factors into consideration, the retail company is planning to take advantage by entering into these fast growing markets. At present the company is having good market share in UK retailed industry, but UK market is almost saturated. Sainsbury is already facing tough competition from Tesco and Asda so if the company have to expand their business in retail sector, they have to diversify and have to enter in new unexplored market. Again as a result recession the per capita income and the rate of consumption in UK have deteriorated, the company’s sale might not be back on the profitable track soon. On the other side per capita income is increasing faster in many third world countries. Due to injection of liquidity by the government in these nations demand for retail goods is growing quite fast. They have ample money to spend for quality products. Thus undertaking all these factors Sainsbury has planned to adopt diversification strategy. Sainsbury’s approach toward Corporate Social Responsibility (CSR) The company’s CSR values are as follow: Best food and health Sourcing with integrity Respect for the environment Making a positive difference to the community A great place to work Sainsbury has a well structured Corporate Social Responsibility (CSR); it has a CR committee established in 2007 which meets twice in a year. It also have a steering group founded in 2001 who meets on quarterly basis and take care of the above mentioned CSR values. Under this steering group there exist certain subgroups like Health Steering Group, Brand Governance Steering Group, Environment Steering Group, Community Steering Group, A Great Place To Work Steering Group. The company pay great importance toward the stakeholders and especially toward their customers. As per the data released by Sainsbury (2008), per week around 16 million customer visits their stores. Management distributes 15 million reusable bags which are made with 100 percent reusable material. To conserve energy, they encourage the customers to purchase energy saving electrical appliances and fair trade products. To attain the five CSR goals the company follow different strategies, like For achieving “best food and health” they use sunflower oil to reduce the fat content by 70 percent, they are targeting use to no artificial flavour, colour and strong preservative. 20 percent of the company’s alcohol products will contain information regarding maximum daily intake. It has also removed certain unhealthy substances from cooked foods. The company is promoting healthy eating among the customers as well as to the employees (Sainsbury, 2008). “Sourcing with integrity” is achieved by distributing IT equipments to the farmers so the supply chain management can be controlled by fully computerised manger. They are trying to pay more emphasis on UK based raw materials. The company is putting more focus on fair trade practices. 75 percent of the wooden products sold by the company are certified by Forest Stewardship Council. They talk with the suppliers on a regular basis to discussing the strategic changes introduced by the management. Such policies are practised to have ethical and sustainable sourcing (Sainsbury, 2008). To maintain “respect for the environment”, the company is trying hard to reduce the carbon oxide emission by 25 percent in 2012 as compared to 2004-05. This can be achieved by efficient use to energy and more efficient equipments and technology. There is a plan to reduce use of electricity by 12 percent in 2010, 50 percent reduction in vehicle movement in construction sites and 30 percent of the material should be recycled. The use of water is to be reduced by 50 percent against the volume in 2007-08 through recycling and using more efficient technology (Sainsbury, 2008). To make a “positive difference in the community” the company is aiming in registering 5000 scouts and Girl guiding groups in UK to make the kids more active. Sainsbury has donated £3 million to MEND for development of the UK’s largest prevention and treatment programme for obese and overweight children (Sainsbury, 2008). “A great place to work” concept is of equal importance for the management as they believe employees are vital asset for the company. The company makes considerable amount of investment for development of the employees per year for enhancing their skill. In the year 2007, Wellbeing Charter commitments was launched for providing adequate health surveillance processes, to keep the environment smoke free, to monitor the cause for stress and risks within organisation workplace. Such programmes make the employees more aware regarding health related facts. At present 24 per cent of the Duty Managers along with 16 percent of the Store Managers are females (Sainsbury, 2008). Location of Sainsbury in retail industry The company, Sainsbury has retained 3rd position in the UK’s retailed market but the UK market has got adversely affected by financial meltdown. To analyse the threat and opportunities for Sainsbury in UK retail industry, Porter’s Five Forces Analysis was conducted. (Source: Agility Business Concepts, n.d.) Threat of New Entrails: at present the UK’s retail sale is renouncing after hitting the lower levels, as the retail industry was almost at the verge of bankruptcy. The industry suffered with high job cuts in all the major companies. The export was attractive due to fall in the Sterling against Dollar (Walayat, 2009). In this Christmas season the retail sales grew quite well, it was marginally higher as compared to the last year’s sale. But this does not indicate for conditions to be better in the coming days (Wood & Finch, 2009). At present the threat from new entrants is not so high because of the prevailing barriers. Sales being low, a new entrant will find it tough to achieve breakeven sales. The competition is already high in this field and profit margin has gone quite down, so the new entrants are not taking the risk to enter in UK retail market. Another reason for lower threat from new entrants is saturated for the UK retail market. Bargaining power of suppliers: in UK, the retail industries try to maintain good terms with their suppliers and they offer them several measures to upgrade their position. All the major retail giants in UK are focusing to use more of UK based raw material, hence the demand is quite high and the suppliers enjoy high bargaining power. The government interference also acts in favour of the suppliers as government prefers more use of the domestic products. Bargaining power of Buyers: at present the UK market has many supermarkets and convenience stores offering enough choice to the customers. To attract the customers they provide high discounts at different point of time along with many other facilities. So the customers have high a bargaining power. The cost of switching from one retailer to other is quite low therefore the customer loyalty is also weak. Threat of substitute product: almost all the retail shops and supermarkets offers same products and services, hence the threat of substitute product is quite high. Customers find very less difference among the quality and the prices of the products offered in all supermarkets and convenience stores. While selecting the retail shops many other factors affect customers’ choice like the proximity, atmosphere within the store, the friendly nature of employees and so on. Threat from existing industry competitors: the UK retail industry is flooded with many big players who are enjoying major market share. These retailers have collaboration with different international firms, so they enjoy economy of scales and can manage good profit margin, even keeping the prices low. So the threat from existing industrial rivals is high enough which reduces the possibility of further expansion or penetration in existing market. Undertaking this analysis it can be concluded that the UK industry offers very little opportunity to Sainsbury for further expansion and attaining the position of market leader. Identification of the foreign market It is clear that the opportunities of further expansion is quite low in UK market as it is almost saturated where as the economical and financial state of other developed nations are yet at recovery path. On the other hand many developing nations and third world countries have emerged as the drivers of world economy. This shift in power from developed nations toward developing countries has opened new opportunities for many companies to expand their business by capturing these unexplored markets. Considering the GDP growth rate, the growth rate in the living standards, the hike in purchasing power and wage rates, increment in per capita income and the population growth rate it seems the BRIC countries offers a high potential market for retail companies. Comparison of these countries through PEST analysis has been provided below: Environmental Factors Brazil India China Russia Political: Government type federal republic federal republic Communist state Federation Legal System Based on Roman codes & not accepted compulsory ICJ jurisdiction. Based on English common law & accepts compulsory ICJ jurisdiction. Based on civil law system & yet not accepted compulsory ICJ jurisdiction. Based on civil law system & has not accepted compulsory ICJ jurisdiction. Openness for international company Lenient regulation Lenient regulation Stringent regulations Stringent regulation Economical: GDP (PPP) in 2008 $1.998 trillion $3.304 trillion $7.992 trillion $2.271 trillion GDP per capita (PPP) in 2008 $10,200 $2,900 $6,000 $16,100 Labour force as on 2008 93.65 million 523.5 million 807.3 million 75.7 million Unemployment rate as on 2008 7.9% 9.1% 4% 6.4% Population below poverty line 31% (2005 25% (2007) 8% 15.8% (November 2007) Investment (gross fixed) 19% of GDP (2008) 39% of GDP (2008) 40.5% of GDP (2008) 22.1% of GDP (2008) Reserves of foreign exchange and gold (2008) $193.8 billion $254 billion $1.955 trillion $427.1 billion Social: Population (July 2009) 198,739,269 1,166,079,217 1,338,612,968 140,041,247 Age structure 0-14 years: 15-64 years: 65 years and over: 26.7% 66.8% 6.4% 31.1% 63.6% 5.3% 19.8% 72.1% 8.1% 14.8% 71.5% 13.7% Population growth rate 1.199% 1.548% 0.655% -0.467% urban population (2008) 86% of total population 29% of total population 43% of total population 73% of total population Rate of urbanization (2005-10 est.) 1.8% pm 2.4% 2.7% -0.5% Literacy (2000-2001) 88.6% 61% 90.9% 99.4% Social issues Dispute with Argentina & Uruguay. 2nd largest consumer of cocaine Dispute with Pakistan & China. High involvement in Trafficking of persons, world's largest producer of licit opium and distributes it in international drug market. Dispute with India, Japan & other neighbours. High involvement in Trafficking of persons. Major part in transhipment of heroin, Dispute with China, Japan & few EU nations. High involvement in Trafficking of persons. Technological: Nature of technology advancement The technological sector is not so well developed The advanced technology is entering in the market Technology wise the country quite advanced Highly advanced in the technology sector (Source: Central Intelligence Agency, 2009) After conducting PEST analysis for all the selected market, it seems India and China have a comparatively higher potential market. The high rate of urbanisation will be instrumental in creating a high demand for grocery goods of international standards. But again the rules and regulation are more stringent in China due to extreme high interference from the government. Thus at present India is a highly attractive potential market with high rate of GDP growth, stable financial market condition, changed legal regulation to attract foreign direct investment and huge unexplored sub-urban areas. Identification of a foreign market servicing strategy After undertaking the results of PEST and finalising India as the destination for diversifying the retail business, the foreign market service has to be selected. At first the management of Sainsbury have to determine certain vital facts regarding present market condition in India, few of them are being discussed below: Accessibility of markets: In India the cities are much more advanced as compared to the villages, but due to high rate of urbanisation, many suburbs are emerging as potential markets. So for penetrating the Indian retail market both metropolitan cities as well as the interior suburbs have to be focused. Domestic competitors: The competition is high among the domestic retail players like Aditya Birla Retail Limited, Bharati Group, Pantaloon Retail (India) Ltd. RPG Retail Sankalp Retail Value Stores Pvt. Ltd. and Vishal Retail Ltd. Most of these local players are trying to expand their market share by making collaboration with international retail companies. Customer structure: population in the age group of 14 to 50 and belonging to the middle class income group are most attractive as these are the one who makes maximum expenditure for grocery and other retail goods. So the suburbs and developing second tier cities are more suitable. Considering all these facts Sainsbury will finalise the strategy to enter in Indian retail industry. As per the India government, a company who is willing to make foreign direct investment should make collaboration with a local Indian company. So Sainsbury have to find out a local retail partner for entering in the market. They can also make partnership will those companies who have not yet entered in the retail sector but have a plan to do so. This however, might be a more risky move for Sainsbury as none of the company will be having practical experience of the Indian retail market. The success of the company in the new market depends on efficiency of its marketing plan. The whole plan should be based on in-depth market research conducted in all the target markets. The company should target on metro cities, second tier cities and suburbs. Studying the purchasing patter of local customers, at first all those products should be introduced which have high demand and customers are familiar with them, later on the product basket should be expanded considering the response from customers. Different supermarkets and shops which are located in different places should be handled as a separate entity where each one can plan their future strategy for expansion and plans for attracting and retaining customers. Justification for selecting India as a potential market After the worldwide financial meltdown, India has emerged as second fastest growing economy and a future market with huge potential. Indian retail industry is one of the most attractive sector for all the MNEs because it is the fifth largest retail industry of the world. As per AT Kearney's eighth annual Global Retail Development Index (GRDI) in 2009, this industry in one of the most lucrative market that have a high possibility to grow (Indian Brand Equity Foundation, 2009). Indian retail industry is the largest industry and fastest growing industry in India which provides 8 percent of employment and contributes 10 percent to the GDP. It is expected to grow as fast as 25 percent per annum. At present it amounts to US$ 7.5 billion which will reach to US$ 21.5 billion by the end of 2010 (Maps of India, n.d.). The data also reveals that by 2010, 200 new shopping centres will come into existence. Food sector is the most dominating component of retail industry with a growth rate of 9 percent. At present 60 percent of the Indian consumer grocery basket contain non-branded food items (Maps of India, n.d.). As per the Sainsbury’s CSR strategy they prefer to serve best food to their customers whereas the Indian customers are getting more conscious toward health and the quality of food they are consuming. So in future demand for branded food products will increase. The company prefers to maintain a healthy environmental policy and on the same side the Indian government is making the environment related laws more stringent. Hence the company will succeed in adjusting the legal requirement and environmental standards. The company’s policy to develop the society and to provide a best place to work will enhance company’s image and thereby the market value. As Sainsbury will make collaboration with an Indian local company, it will have the opportunity to utilise market knowledge, knowledge regarding customers and also the existing supply chain and distribution channels. All these factors clearly indicated that India is one the best choice for Sainsbury as future potential market. Conclusion Like many other international companies, Sainsbury is planning to diversify its business by exploring the emerging unexplored market. Among these markets India is the one which offers a huge potential due to its unique geographical, demographical, economical, legal and social structure. At present the Indian retail industry is at growth phase with bright future and low penetration rate. All these features make India a lucrative business proposition to the retail majors all over the globe. Reference Agility Business Concepts. No date. Porter's Five Forces Model. [Online]. 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