UK Supermarkets - Key Global Drivers for Change, Plans for Plausible Scenarios - Report Example

UK Supermarkets Contents Environmental analysis 3 Key global drivers for change 6 Plans for plausible scenarios 9 Limitations of environmental analysis 11 11 References 12 Environmental analysis The supermarkets are major parts of the retail industry. The UK supermarket industry is the largest segment of the retail industry in the country. A supermarket is a type of grocery store that offers a wide variety of food items, cleaning, drinks and other household items. The supermarkets mainly focus on food items. Although the supermarket industry involves the sale of a number of varied items, the main revenue of the supermarket industry is generated by the sale of food items. The total sale of items from the supermarkets in the United Kingdom in 2013 was more than £174.5 billion. Most of the supermarkets in the United Kingdom operate in the middle segment which is a high potential segment of the country. This segment is best captured by providing high value at low prices which is inherent to the functioning of supermarkets. The supermarket industry in UK is oligopolistic in nature with four dominant supermarkets, Tesco Plc., ASDA which is owned by Wal-Mart, J. Sainsbury’s and Morrison Plc. and 11 small players including Waitrose, Somerfield, Lidl, Netto, Marks & Spenser and Aldi competing in the sector. The Porter’s five forces tool can be used to conduct appropriate competitive environmental analysis of UK super market industry. This tool will analyze five different business environmental forces that have strong impact on the whole industry and its constituent firms. (Source: Porter, 2008) Industry competition: The supermarket industry is one of the largest and most established industries in the United Kingdom. It is a largely concentrated market with the major market shares being held by the four big companies, Tesco Plc., Morrison Plc., ASDA and J. Sainsbury’s Plc. However, recently the smaller firms like Waitrose. Aldi and Lidl have also started operating at a more competitive level. The market is relatively less competitive because of the power being concentrated in the hands of the few large players. UK supermarkets market share percentage (Source: Economics Online, 2012). Bargaining power of buyers: The bargaining power of buyers in this segment is very high. The customers can influence price cuts and ask for better quality products and services (Moore and Robson, 2002). The high level of influence of the customers is the main driver of competition between the main supermarkets in UK. The relatively low brand switching costs and low differentiation in products make the bargaining power of customers high in this industry. The UK supermarket industry is an oligopolistic market in which the competition between the few players is mainly based on pricing. The price sensitivity of the customers is high and affects this industry in a major way. Bargaining power of suppliers: The bargaining power of branded product suppliers is high while that of own brand suppliers is low in this industry. This is because there are only few dominant supermarkets in UK while a number of small and big suppliers operate in the industry. Since the big super markets like ASDA, Tesco etc. have large demands, they can easily influence the prices quoted by the suppliers. The unbranded product suppliers are more often forced to be dictated by the supermarkets with respect to prices and supply terms. However, the branded product suppliers have some degree of control over the market high demand and strong brand of their products. Threat of new entrants: The threat of new entrants is low because the entry barriers are low in this industry. The industry is concentrated with more dominance from the big players both in terms of market share and geographical distribution. Also, the emergence of the digital space as a main marketing medium would create scope for more companies to enter this market. Threat of substitute products: The threat for substitute products is very low in this industry. The products of supermarkets are of wide variety and are available under one roof which is difficult to find in any other retail store format. Also, the competitive pricing acts as a main mitigating factor for the threat of substitutes. Key global drivers for change There are a number of global drivers that can influence the UK supermarkets industry in the next few years. The advancements in technology will act as main drivers in the global as well as the UK supermarkets industry. The technological innovations and advancements have led to the rise of a new era of electronic commerce. Though the supermarkets are comparatively new entrants into the electronic commerce space, yet it is expected that in the next few years, a large part of the sales of supermarkets would be generated through their electronic commerce business wings. The UK supermarket industry has always been dominated by the large players, However, the recent trends show that the small supermarkets operating in the country are experiencing higher growth in sales and are surging ahead to take up more market share. Companies like Waitrose, Lidl and Aldi have introduced highly competitive pricing and retail strategies which have squeezed the sale of the giant supermarkets to a high extent since the last quarter of 2012. The big supermarkets are fighting over the middle ground of the market, while the small supermarkets are competing effectively through better pricing and promotional strategies. The market share of Tesco, the biggest retailer in the United Kingdom fell from 30.1% in 2013 from 30.7% in 2012 and that of ASDA fell from 17.3% in 2012 to 17% in 2013. In contrast, the small supermarkets gained more market share. For example, Lidl expanded its market share from 3.1% to 3.6% in the same period. Also, the market share of Waitrose increased from 4.5% in 2012 to 4.8 in 2013 (Neville, 2013). This indicates that the landscape of the industry is fast changing with new entrants and small players breaking down the entry barriers and positioning themselves at a competitive level with the established supermarkets. The rise of private label sales is another key driver for change noted in the UK supermarket industry. The private label products are the in house products of the retailers and supermarkets. The recent few years saw an increase in the consumer preference towards using the private label products. For example, the sale of the Taste the Difference range of food products launched by Sainsbury’s increased by 10% from 2012 to 2013. Also, the private label of Tesco called Tesco Finest has experienced a boost in popularity and purchase in 2013. The private products by different supermarkets are being positioned as the direct competitors to other big brand products, especially in the food segment. Corporate social responsibilities of the supermarkets have assumed a more critical role in the recent years. The rising importances of stakeholder accountability and ethical considerations have created the need for extensive philanthropic activities to be taken up by the supermarkets. Apart from the core ethical business perspectives like the use of organic food items, the prevention of the use of animal tested products and use of green supply chain, companies like Tesco Plc., ASDA, J Sainsbury’s and Morrison Plc. are also focusing on extensive corporate social responsibility activities (Reardon, Timmer and Berdegue, 2004). Especially after the horsemeat scandal of Tesco, the supermarkets have become more conscious towards conducting their operations in a socially and ethically compliant manner. The increasing focus of the consumers towards use of ethically and environmentally sustainable products would act as a key driver in shaping the future of the supermarkets industry in the United Kingdom. Self-regulation and transparency creation would be other major requirements in this industry in the future. The consumer groups in the United Kingdom are demanding and influential groups. The consumers are likely to display more interest towards experience consumption and convenience consumption from the supermarkets in the future years. The experience consumption would be based more on enjoyment and experiential value rather than utility value. On the other hand, the convenience consumption would be based on the ease of access of the products and purchase of goods with lowest possible efforts (Gajanayake, Gajanayake and Surangi, 2011). Also, market segmentation would be a key factor affecting the industry. The UK supermarkets industry operates in different customer segments. Both small and big supermarkets are present in the country which caters to the needs of all levels of customers. However, the importance of marketing labels and branding is expected to rise in future. The social trends like more focus on self-identity and association of brand names with social image will lead to the increase in the sale of branded products. On the other hand, the low income groups of customers will tend to buy products based on utility and value for money and will focus on buying private labels and unbranded items. Space race is identified to be a major driver of change in the supermarkets industry in UK. With the giant supermarkets opening up a number of stores over thousands of square feet space in different cities of United Kingdom, there is likely to be more competition for space in the segment. The big supermarkets like Tesco and ASDA which operate on a multichannel format would focus on opening up giant supermarkets stores in large formats and over more floor space. Both the geographical locations and the floor area of the supermarkets would act as major factors in affecting the sales of individual multi-channel supermarkets. The increase in floor space would also ensure the ease of availability of different products under one roof. This would act as a competitive advantage for the supermarkets by helping them to increase the number of footfalls in the supermarket spaces (Petroski, 2005). Plans for plausible scenarios The UK supermarket industry is a heterogeneous industry in terms of scale, customer base and ownership. All these factors are critical in influencing the ability of the supermarkets to become successful in maintaining sustainable businesses. The market environment in the supermarkets industry is fast evolving and the industry is experiencing dynamic changes which should be implemented for continued success of the existing and new market players. The increasing pace of market concentration, rise in levels of market competition, more focus on sustainability and ethical practices, evolving consumer expectations and perceptions and rapid technological advancements are key factors that are likely to create the need for new strategies and plans for the supermarkets operating in United Kingdom. Therefore, the companies operating in this segment should focus on developing ethical business processes in every aspect of the company. The large players like ASDA, Morrison Plc., Tesco Plc. and J Sainsbury’s should continue applying the predictive pricing strategies to offset the competition from the new entrants and the small players (Blythman, 2005). Philanthropic activities should be taken up by the supermarkets in order to ensure a clean and ethical image of the supermarkets. Since, philanthropic activities would directly affect the message carried by the supermarkets; they are likely to increase the sales of the supermarkets as well. The insurance of sweatshop free production and sourcing environments would act as a critical factor in enhancing the ethical image of the supermarkets. The supermarkets should also avoid any kind of negative publicity because that would impact the success and sustainability of the company and would be difficult to recover from as was seen in the meat adulteration case of Tesco in 2013. Value should be created by the supermarkets through all aspects of the business including merchandising, pricing, service factors, store formats and layouts, supply chain management, technology and so on. Focusing on the electronic commerce and mobile commerce technologies would help to ensure competiveness of the supermarkets and also ensure that the visibility and accessibility of the supermarkets increase in the national as well as international levels. A high level of consolidations, vertical and horizontal integrations would also help the supermarkets to maintain their position in the continuously evolving global business environment. Consolidation, value creation, innovative strategies and cost controls would act as suitable measure to create competitive advantage and ensure sustainability. Limitations of environmental analysis The limitations of using the Porters five forces model as an environmental analysis tool is that the model is a traditional model which does not take into consideration sudden changes in the business environment like new regulations, political upheavals etc. which may lead to business contingencies. Also, the model is based on a number of assumptions like the buyers, suppliers and the companies in an industry do not interact and that the market uncertainty level is low which may act as a hindrance in the practical analysis of the industry. References Blythman, J. 2005. Shopped: The Shocking Power of British Supermarkets. Harper Perennial: London. Economics Online. 2012. Supermarkets: Increasing concentration. [Online]. Available at http://www.economicsonline.co.uk/Business_economics/Supermarkets.html. [Accessed on 11 August 2014]. Gajanayake, R., Gajanayake, S., Surangi, H. 2011. The impact of selected visual merchandising techniques on patronage intentions in supermarkets. Malaysia: International Conference on Business and Economic Research. Moore, G. & Robson, A. 2002. The UK Supermarket Industry: An Analysis of Corporate Social and Financial Performance. A European Review of Business Ethics. Vol. 74(1). Neville, S. 2013. Big four supermarkets squeezed by high-end and discount competitors. [Online]. Available at http://www.theguardian.com/business/2013/jul/16/big-four-supermarkets-squeezed-competitors. [Accessed on 11 August 2014]. Petroski, H. 2005.  Shopping by Design. American Scientist. Vol. 93 (6). Porter, M. E. 2008. Competitive Advantage. New York: Simon & Schuster. Reardon, T., Timmer, P. & Berdegue, J. 2004. The rapid rise of supermarkets in developing countries. Journal of Agricultural and Development Economics. Vol. 14(2). Read More