Strategic Analysis: Iceland Supermarket UK - Case Study Example

Strategic Analysis: Iceland Supermarket UK BY YOU YOUR SCHOOL INFO HERE HERE TABLE OF CONTENTS Introduction................................................................................................................... 2. Strategic Review............................................................................................................ 2.1 Porter’s Value Chain Analysis......................................................................... 2.2 SWOT Analysis................................................................................................ 2.3 PEST Analysis.................................................................................................. 3. Five Forces Analysis....................................................................................................... 4. Business and Corporate Level Strategies....................................................................... 5. Conclusions and Strategic Options................................................................................. References EXECUTIVE SUMMARY Iceland strives, as a discount supermarket chain, to be a low cost leader in a very competitive industry in the UK. An everyday low price strategy allows Iceland to avoid the recurring price promotions that often undercut competitive prowess of major competition such as Tesco and Sainsbury. However, the company has not sufficiently created contingency plans or developed marketing tactics that will assist in differentiating the business other than price which could lead to long-run stagnation of the company and its associated brand. Iceland further maintains many negative socially-driven attitudes about the private label brands offered at the firm which causes significant risk to expansion and revenue growth in the UK. It has been suggested based on external and internal conditions that Iceland should develop better functional strategies, diversify the business to include new products and services, and conduct ongoing external market research (both qualitative and quantitative) to ensure that business is positioned properly to evolve with changing marketing conditions. Based on a variety of analytical tools conducted in this study, Iceland will be better prepared to achieve higher market share if the company develops more contingency plans and continues to monitor changing market conditions. 1. INTRODUCTION Founded in 1970, Iceland Foods Ltd. has become a potent competitor in the UK supermarket industry and is, today, a private company not trading on the UK capital markets. Iceland competes against the Big 4 supermarket chains such as Tesco, Morrison’s, ASDA and Sainsbury’s, who maintain the most significant market share in the industry. Iceland currently holds only two percent of market share in the industry (The Journal 2012), however the company focuses primarily on frozen food products as its primary product line and is not nearly as diversified as main competition. The most significant growth for Iceland occurred in 1989 when the business acquired its struggling competitor, Bejam, which at the time was three times larger than Iceland’s business model in the late 1980s. This acquisition expanded the company and provided new opportunities for bargaining power in the supply chain and expanded distribution capacity. By 2011, the company boasted 796 different stores throughout the UK (The Guardian 2011) and sustains 40 stores in Ireland. In an effort to maintain presence on High Street, Iceland acquired 51 different Woolworth’s stores in 2009 that had, at the time, gone into administration (BBC News 2009). Iceland is considered a discount supermarket retailer, offering a variety of private label brands that appeal to the very price-conscious consumer segments. This is the company’s competitive advantage as there is considerable year-on-year growth in private label food brand sales. Whilst competitors attempt to promote their organisations according to product diversity, price promotions on name brand food products, Iceland is a value leader that maintains considerable appeal to consumers that are price-sensitive in the country. An Everyday Low Pricing business model is what makes Iceland stand apart from non-discount supermarket competitors. Iceland’s mission is “to be an expert in frozen food products, delivering great ideas for busy, value conscious mums” (deliveryfe.net 2013, p.1). This also serves as the company’s value proposition. Hence, the company’s overall strategic position is that of a value leader, capable of providing a vast array of frozen, private label products that have appeal to consumer segments through value pricing structures without reliance on recurring price promotions on select products, a common competitive tool, in order to retain loyal customers, something common with companies such as Tesco and Sainsbury’s. 2. STRATEGIC REVIEW 2.1 Porter’s Value Chain Analysis Marketing & sales and human resource management are the most significant influences of success for Iceland Foods. Figure 1: Value Chain Model Iceland adopted the strategic initiatives of major competitors through the establishment of a loyalty program that provides consumers with extra discounts and points on purchases to serve as an incentive for consumption and to provide the firm with the ability to retain existing customer segments. There is a phenomenon in the consumer social environment that is explained by social comparison theory which states that consumers’ individual well-being is improved when they make downward social comparisons. It is a legitimate psychological trend, stating that consumers want to perceive they are better than others (Suls, Martin and Wheeler 2002; Taylor and Brown 1988). Since pricing promotions are not viable strategies to retain customers, under an everyday value pricing model, the implementation of a loyalty program exploits basic tenets of human behaviour as a means of building brand equity. Customers’ overall positive impressions about a company and its pricing equity are highly dependent on perceptions of price discrimination; offering discounts to some and not to others (Darke and Dahl 2003). Customers who actively participate in loyalty programs maintain a higher sense of ownership within the firm and develop a sense of belonging toward the company (Hart, et al. 1999). Iceland maintains a very adept marketing division as a support service that fully understands what drives positive psycho-social reactions to the company and its products and then implements strategies that appeal to these inherent consumer characteristics. Through strategies that have potent impact on consumer behaviour attributes, sales and marketing ensures that customer retention is achieved at higher ratios and assists in building important relationships with loyal customers. Grande (2007) identified results of a research study that indicated one-third of consumers would be willing to pay premium prices if a business maintained a positive ethical stance. This is a phenomenon known as ethical consumption which is a growing trend in capturing the attention of the contemporary customer segment. Consumers are actively starting to discipline companies that do not have significant ethical standards and rewarding other businesses that do maintain very high ethical standards through increased expenditures and patronage (Globe Scan 2009). Iceland recognises this fact and devotes considerable labour in HR and expenditures toward improving relationships and motivations with internal employees. Iceland was voted the number one best place to work in the UK for its commitment and dedication toward soft HR approaches that develop, coach and inspire employees to become valuable team members (Iceland 2013). According to human resources literature, this is crucial for ensuring employee loyalty and motivation (Armstrong 2007). For instance, in 2007, the business took 900 of its managers to Disneyland in Paris to attend a conference where they enjoyed company-paid entertainment and amusement park attractions (Iceland 2013). 2.2 SWOT Analysis Strengths Substantial emphasis on corporate philanthropy and charitable giving Excellent emphasis on providing employees with work-life balance programs and HR development. Private ownership allows the business to determine its own strategies without adhering to shareholder demands Weaknesses Poor control systems internally for employee monitoring Weak corporate branding practices Little emphasis on public relations practices to gain more national visibility and trust in consumer segments. Opportunities Utilisation of social media to better engage customer in real-time and update corporate improvements Development of strategic alliances throughout the supply chain. Diversification strategy development Threats Growing trend in competitive discounting and private label brand development Decreasing consumer disposable incomes due to UK monetary policy changes and inflationary rates. The first, most important benefit to the Iceland strategic position is emphasis on human resources support. In a recent survey, a whopping 94 percent of employees stated they believed their training was superior and fully equipped them for job role responsibilities (Iceland 2013). This reduces the costs and laboriousness of turnover and re-training that is common with other supermarket competitors. The company further provided 22,000 different employees with a share of a £14.6 million pay award which led to an average pay increase between 6.3 percent and 45.5 percent for top performing employees (Iceland 2013). The aforementioned HR strategies designed to foster team-work and dedication is absolutely unparalleled in the supermarket industry which provides the company with substantial human capital advantages over competing forces in the industry. Employees are the most influential stakeholder in the business who can either enhance productivity and cost controls or pose risks through undedicated behaviours related to lack of job satisfaction. Hence, such a strong emphasis on supplementary HR-supported incentive schemes continue to provide support for a rather successful business model. Second, utilisation of social media as a means of engaging customers and building relationships is not currently part of the Iceland business model. Goodson (2011) iterates the importance of being interactive with customers and maintaining a transparent market position in order to build trust in the organisation. There is a growing trend for consumers to engage with companies utilising smartphone technologies, using such sites as Facebook and Twitter, which is revolutionising customer relationship management practices and effectiveness. Today, there are 6.8 billion consumers with mobile phones across the world (MobiThinking 2013). Not only can Iceland build important, real-time psycho-social connections with existing customers in the UK and Ireland, but expand brand presence around the world (proactively) in the event of future market expansion into foreign countries. Third, decreasing consumer disposable incomes as a result of new UK monetary policy and lingering impacts of the 2008-2010 recession is a threat to the business. The price of food and drink as a result of austerity package measures increased 2.8 percent in 2012 and an additional 1.8 percent in 2013; totalling 5.6 percent in just one year (Hawkes 2013; Allen 2012). Concurrently, consumer disposable incomes are impacted by non-stabilising or reducing unemployment rates and other inflationary costs in a variety of consumer product sectors. The key problem is that, internally, there is little emphasis on contingency branding strategies as the company is wholly reliant on its everyday low cost strategy which has not improved the market share position of Iceland against major competitors. Contingency theory states that when market conditions change, the organisation’s structure and practices must also adapt to keep the business relevant (Buchanan and Huczynski 2010). Research did not uncover any instances of marketing contingency plans that could address the value-conscious consumer in a method other than pricing to build brand preference for this supermarket chain. Thompson, Strickland and Gamble (1992) argue that the most imperative risk to strategic positioning is for a business to place all of its proverbial eggs into a single basket. Iceland shows no evidence of adopting contingency strategies to combat changing economic market conditions. 2.3 PEST Analysis Political – The UK imposes many different tariffs on international procurement of food products which impacts corporate profitability along the supply chain. However, in order to maintain the company’s low cost leadership strategy, the business requires procurement of frozen products from industries outside of the UK where labour rates are lower and the currency exchange rates much more advantageous against the British Pound Sterling. Economic – It is becoming more and more difficult within the UK for companies in an excellent liquidity position to gain credit and appropriate capital loans. This is a result of UK government intervention that occurred as a result of the 2008-2010 recession where the government injected upwards of £37 billion into the national economy and banking system to stabilise the national economy (Simpson 2009). Furthermore, at the end of 2013, the Bank of England warned that banks would require an additional £25 billion in capital in order to maintain banking operations successfully (Worldwide Invest 2013). This has considerable risks for expansion at a company that, on the heels of sales exceeding two billion dollars only maintains an operating profit of approximately £190 million in 2013 (Iceland 2013). Banks that are constraining their credit restrictions limits capital procurement possibilities, especially for a private company without common stock as a capital-building opportunity. Social – Unfortunately, Iceland maintains a very negative social connotation in many consumer segments in the UK market due to its low cost pricing structures and business model (Moir 2013). Said one reporter from The Guardian to founder Malcolm Walker, “You got rich selling shit to poor people on benefits, what do you say about that?” (Moir 2013, p.2). Many consumer segments in UK society look toward name brand products as being a social justification for class status under the phenomenon of conspicuous consumption. Those who maintain these ideologies about the relevance of name brand products pose risks to expansion for Iceland with its majority of private label product offerings. This is a primary driver of potential change within the Iceland business model. Technological – Research did not indicate any threats related to technology in a national environment where ample access to business resource planning software, loyalty program software, and other advanced technologies relevant to this market is widely available. 3. FIVE FORCES ANALYSIS Threat of Substitutes – In the supermarket industry, consumers have ample substitutes available at differing prices among competition. For instance, private label potato chips available at Iceland can be substituted by much lower cost potatoes that are processed and cooked by the consumer in their home environment. The vastness of substitutes represents enormous risks to both Iceland and other competitors in this particular industry. Furthermore, growth in vending services in the UK represents ongoing threats of substitutes which should be causing the company to pay more attention to changing market conditions and consumer trends. In 2009, vending product sales accounted for 1.9 percent of average consumer household spending on food (Research and Markets 2010). In the UK, more than seven billion transactions occur annually in the vending industry, a substitute for supermarket products. Competitive Rivalry – This near-oligopolistic industry is driven by competitive strategies and ongoing replication of existing competitor strategies to avoid one competitor achieving advantages. Tesco is adept in diversifying the company’s business model and providing new services and products that are non-food related to offset any potential losses in the supermarket sector. Sainsbury is quite adept in promotional literacy which gives the company strong brand visibility and preference, especially for the ethical consumer. Adaptable emphasis in promotional strategy by competition and ongoing diversification could radically impact Iceland’s rather stagnated low-cost leadership strategy. Buyer Power – Fortunately, consumers have much buying power in the industry that impacts competition with higher prices and many name brand product offerings. The switching costs for defection to competition is very low for consumers and they will often seek out the lowest priced competition. This is advantageous for Iceland with its everyday low price business strategy. Whilst other competitors are struggling with unique price promotions and other incentives through marketing to gain consumer loyalty, Iceland continues, without adjustment to its strategies, to appeal to many different price sensitive markets. 4. BUSINESS AND CORPORATE LEVEL STRATEGIES Becoming a low-cost leader is the business level strategy that best defines Iceland’s strategic intentions. As previously mentioned, the functional strategy of diversified marketing strategies is insufficient within Iceland (as illustrated by Ansoff’s Growth Matrix), something requiring development in the company. To avoid long-term stagnation of the brand, Iceland should be developing more corporate level contingencies associated with its low cost leadership objectives. An effective corporate level strategy for Iceland is diversification. One of the main problems is that the low cost leadership strategy is simply not giving this organisation the growth potential it requires. By adopting diversification strategies, Iceland will avoid the risks of placing all proverbial eggs in a singular basket and be equipped to respond to changing market conditions. In today’s markets, competitors are able to quickly replicate existing strategies of another competitor. Major competitors for Iceland such as Tesco and Morrison’s have the resources for price discounting and using private label brands to gain consumer attention. Diversification, therefore, is a viable strategy for gaining market share. Since Iceland only holds two percent market share against competition (The Journal 2012), diversification could broaden its ability to gain the attention and interest of many other market segments, not just the price-sensitive buyer that currently sustains the firm’s profitability. 5. CONCLUSIONS AND STRATEGIC OPTIONS The most primary strategic option for Iceland that would bring the business more revenue growth and expansion opportunities is diversification. Though the business achieved record sales in 2013, the company still only holds two percent of market share in the supermarket industry. In previous years, the company maintained a stake in household appliance sales, but did not effectively market this opportunity efficiently that led to disappointing return on investment. Iceland maintains opportunities to expand into different sectors, ranging from real estate to consumer product sales that could maintain the same market positioning related to quality and low pricing. It would give Iceland fewer risks related to remaining dedicated to only a singular competency and also expand the company’s brand visibility with many different and potentially profitable, disparate market demographics. Iceland, as a secondary priority, should be developing new functional strategies such as diversifying marketing and promotion. There is a growing trend in businesses to avoid segmenting and targeting using demographic factors or behavioural factors and, instead, utilising psychographic (lifestyle) marketing to gain important emotional connections to the brand or company. Iceland should be developing more advertising that uses celebrities or other aspirational public figures to appeal to consumers and create a sense of excitement or sophistication for the company. In an environment where many social attitudes believe that Iceland is inferior as a discounter supermarket organisation, changing these attitudes through creative promotion would reposition Iceland successfully as an engaging and cultivated retailer with more social appeal. Finally, based on all research findings, Iceland should be conducting more market research, both qualitative and quantitative, to stay on top of changing market conditions and developing contingency plans that would better serve fluctuating consumer preferences and demands. Ethical consumption, as one example, is changing consumer buying behaviours and this trend, like many others such as organic consumption, are fashionable only for a period of time. There is no evidence that Iceland recognises the importance and critical influence of social developments that radically and sometimes unexpectedly alter consumer behaviours. By utilising online surveys, questionnaires and other research instruments aimed at disparate market characteristics, the business can have valuable data that will allow the company to adopt new strategies to better build a positive brand personality or diversify product availability to fit market trends. This is especially important in a competitive environment where large competitors are using discounting and developing private label brands as a means of ensuring stable revenue growth in an economic environment where many consumer segments of varying demographic statuses are being impacted by monetary policy and unprecedented rising inflation rates. Finally, diversification as a recommended strategy at the corporate level will ensure that the company is better insulated against competitive threats. The company should follow the Tesco and Sainsbury’s models in which non-food services have been developed to supplement its profit objectives and market position. The company can begin conducting research and managerial recruitment activities to launch low-cost tax services, real estate services, or any other viable business unit that is aligned with Iceland’s reputation for maintaining low-cost services and products that have given the business a strong brand identity with price-sensitive consumers. Diversification goes hand-in-hand with establishing better business level strategies. The company does not maintain adequate presence throughout the whole of the UK and the company can expand its value-orientation to many in Wales and the UK to gain more price-conscious consumer segments. Though representative of short-term, high cost expenditures, Iceland can build new supermarket facilities in regions where consumers would strongly support value-based promotions and private label brand discounts. 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