Business and Sustainability - Essay Example

Running Head: Business and Sustainability Business and Sustainability of the of the Business and Sustainability Introduction Since Wal-Marts acquisition οf Asda, the company has steadily increased its market share to become the second largest retail chain operating company in the UK with a 12% market share. The company runs more than 269 Asda stores (including superstores and super centers), 47 Asda small stores, seven Asda Living stores, two discount stores (Asda Essentials) and 12 apparel stores (George) in the UK. It has successfully implemented Wal-Marts low pricing strategy which is yielding positive results. Furthermore, Wal-Mart’s robust financial performance (revenues reaching $348,650 million during the fiscal year 2007, an increase οf 11.7% over 2006) would provide financial stability to the company. Also, Wal-Mart’s presence in 13 international markets including the UK, Canada, Japan, Mexico, Brazil and China, it also allows Asda to foray easily into new markets. (Barnes 2004) The Wal-Mart umbrella not only provides Asda with a strong brand image but also fuels the company’s top line growth. Asdas George apparel line started as a small unknown brand in 100 ASDA stores. It is now the second largest clothing retailer in the UK by volume selling in more than 250 stores in the UK. Furthermore, George now has a presence in five other countries including Canada, Mexico, Argentina, Japan and the US. George products are available for men, women, and children and include apparel, shoes, handbags and even eyeglass frames in select stores. (DesJardins 2006) The George brand, known for style and quality, continues to grow in popularity as a favorite fashion choice across the globe. Strong brand image οf George allows the group to extend the brand into other product lines. Asda is the second largest chain οf supermarkets in UK with a market share οf 16.8% as οf February 2007. Furthermore, the company outperformed the rest οf the retail sector for the first time in three years in terms οf growth rate. The overall growth rate οf the company was recorded at 9% for the fiscal 2007. Asda’s competitors on other hand recorded a low growth rate during the same period. (Thomas 2003) For instance, Sainsbury recorded a growth rate οf 7.8%, Tesco (7.2%), Morrisons (3.9%) and Somerfield (-3.8%). This was primarily due to attracting one million new customers through its checkouts and re-evaluation οf its customer offer and pricing strategy. Asda can leverage this growth to further enhance its revenues and profitability. (DesJardins 2006) Evaluation οf ASDAs non-financial reporting practices Asda has recalled many products in the last year. In August 2007, Asda recalled 115,000 Chinese-made childrens bottles in response to a customer complaint regarding the breaking οf caps οf the bottle. The yellow, pink and orange colored reusable bottles are aimed at children aged three upwards. The recalled bottles were initially priced at £1.25 each then reduced to 63p. Earlier in February 2007, Asda recalled its George kids snow boot as due to a problem with the toggle that tightened it. Additionally, Asda recalled all batches οf its own-brand 500g packs οf Simply Porridge due to possible cross contamination with nuts in November 2006. The affected packs contained nuts, which makes this product unsafe for individuals who are allergic to nuts. Product recalls such as these would adversely affect the corporate image and investor confidence. Online shopping has steadily grown in popularity in the UK. It has been estimated that by 2012 online sales will increase by 320%, to £60 billion per annum and would account approximately 20% οf all retail sales in the UK. Although the company provides online services, it has a significantly lesser market share than its peers. For instance, the company’s biggest competitor, Tesco has 66% οf the Ks online shopping market. The companys weak presence in this stream οf business denies it he opportunity to gain market share in this rapidly growing sector. (Fisher 2006) In July 2007, Asda introduced a new food nutrition labeling system which provides customers with detailed, easy-to-understand information. It uses the distinct colors green, amber and red to highlight tow, medium and high levels οf sugar, fat, salt, saturated fats and calories in each product. In addition, it also includes the precise amount οf each nutrient in grams per serving and the percentage οf the guideline daily amount (GDA) this represents. It is specifically designed to be read and easily understood in less than two seconds (the average length οf time that customers spend reading a label) and will enable customers to see at a glance how best to choose foods which will give them a healthy, balanced diet. (Fisher 2006) The new food labeling system demonstrates a clear, simple format when compared to rival supermarkets who have chosen to adopt either the easy-to-understand traffic light labeling system (Sainsbury) or the more complex GDA labeling system (Tesco and Morrisons). Over 95% οf respondents favored the system this labeling system over other rival versions, and 64% οf Tesco customers favored the new Asda nutrition label over Tesco’s own GDA version. (Gorman 2007) The new food labeling system would provide an opportunity to Asda to establish a competitive edge over its competitors. Evaluation οf the two chosen policies mentioned above In January 2007, Asda launched its latest dotcom business, Asda Electricals (accessed via asda.com). The site offers thousands οf new products ranging from top οf the range plasma and LCD TVs to energy efficient washing machines and fridge freezers. The online electrical market is currently worth £1,900 million and is forecasted to grow at a rate οf 30% each year. The launch οf Asda Electricals would strengthen the supermarket’s foothold in online services and would enable Asda to benefit from growing online electrical market. (Thomas 2003; Ritson 2005) Rising health awareness among consumers is leading to higher demand for low carbohydrate and low calorie foods worldwide. Consumers are increasingly becoming aware οf the risks associated with obesity and poor dietary habits. The organic food and beverages in the UK is estimated to grow at a CAGR οf 15% during 2005-2010 and expected to reach approximately £3 billion by 2010. The company has taken many initiatives in order to cater to the increasing health consciousness. (Jack 2007) Firstly, under the own Great Stuff Organics label the supermarket would sell 24 different dishes thus making Asda the first UK supermarket to sell own label organic ready meals for kids. Furthermore, the supermarket commits to the removal οf all artificial colors and flavors from every single one οf its own label food and soft drinks products by the end οf 2007. This would imply that none οf the supermarket’s 9,000 own label food and soft drinks products would contain any artificial colors or flavors, hydrogenated fat or flavor enhancers, such as monosodium glutamate (MSG). In addition, the supermarket is also replacing Aspartame in low calorie products with Sucralose, a sweetener made from sugar that tastes like sugar. Initiatives such as these would not only enable the supermarket to exploit the growing health consciousness but also enhance its corporate image. (Kolk 2000) Labor costs are rising in the UK. The UK government announced that the adult minimum wage rate would rise from £5.05 to £5.35 per hour in October 2006. The national minimum wage is expected to further rise to £5.52 an hour from October 2007 in the UK. The rate for those aged 18 to 21 years will be increased from £4.45 to £4.60 per hour and the rate for workers aged 16-17 years would increase from £3.30 to £3.40 per hour. The company employs about 154,000 full time employees. (Quilter 2006; Sweney 2004) An increase in labor costs would adversely impact the companys margins. Asda faces intense competition in retailing business from other supermarkets and discount stores. Asdas main competitors include Tesco and Sainsbury in addition to numerous small and local store operators. Competitive pressure in this sector is rising up further with LIDL, a low cost supermarket chain οf Germany, expanding its presence in the UK. Moreover, competition in UK retailing is also increasing due to consolidation. For instance, the acquisition οf the Safeway supermarket chain by Morrisons created the UKs fourth largest retailer, increasing the competition at the top. Intensifying competition in the retailing industry would affect the companys profitability. (Sweney 2004) Although the Bank οf England cut interest rates in August 2005, they still remain at high levels. Interest rates in the UK stood at a high οf 4.5% at the end οf January 2006. This was further raised to 5.25% in January 2007. High interest rates have discouraged credit card borrowing as consumers become more conservative in its use. Consumer credit in 2006 has been growing at its slowest pace since 1994. Additionally, as increased interest rates discourage borrowings for business expansions and purchases, they can dampen the company’s credit services by driving down demand. In such a scenario, Asda’s credit card business’ profitability could be adversely affected. (Quilter 2006 Conclusion Asda has announced a "trade war" between retailers this summer with chief executive Andy Bond reportedly saying: "Over the next year, we are going to expose businesses that prey on customers, forcing them to pay through the nose for goods and services, while they pocket massive margins". Pots and kettles have nothing on this breathtaking statement. (Quilter 2007) Any dairy farmer reading the above is excused for feeling sick to his stomach, considering the profiteering that has taken place at the expense οf dairy farmers, right across the retail sector on liquid milk and cheese, in particular mature cheddar. The recent cut in the retail milk price by Asda is another example οf Wal-Mart gearing up to resist increases in the milk price paid to farmers for as long as possible -- increases that are driven by real market forces. (Kolk 2000) Asda is rapidly heading for direct confrontation with farmer groups and consumer organizations. It is single-handedly leading the retail sector in the wrong direction. The world has changed rapidly in the last few months, and change continues apace. Is the general public pleased to see retail giants scouting the world for cheap food, squeezing the returns οf every farmer or grower wherever he or she may be, competing to be the very cheapest, while there are huge issues with packaging, waste, food miles and sustainability? I believe that more and more people are supportive οf Sainsburys fair-trade bananas and Tescos Localchoice milk, and Asdas cuts in both products will be seen as needless, petty, and a direct attack on others who are trying to move things forward in a positive way. At the NFU we have been disappointed with Asdas failure to take responsibility for their own milk supply, despite our strong backing three years ago when they embarked on dedicated supply, there is still no Asda milk price - unlike Tesco which has moved well ahead, both with its Localchoice and conventional pools. Sainsburys has also stolen the march on Asda, and if Morrisons finally gets its act together, it could find itself left further behind. Local food and regional foods are the future; world demand for dairy products is booming, and as supply in Europe and the UK continues to fall, more milk will be switched to commodities (especially milk powder), and someone will go short this autumn -- most probably the middle ground. Food is far too important to be taken for granted, far too valuable to be treated with such disdain. Consumers will value the food they buy if it costs more. It is not as if they cannot afford it; food has never been cheaper. Although I would not for a minute deny that there are many people who have tight budgets, milk price hardly registers even on their radar; they have told us so themselves, outside the stores. (Quilter 2006) It is time that this sort οf discounting, that ultimately affects the price for the primary producer, is replaced with a more forward-thinking strategy, adding value and giving the consumer a sustainable supply οf quality food, produced in the UK, locally and regionally, where farmer and retailer work together for the good οf everyone. (Jack 2007) Asda, more than any other UK supermarket, has cultivated the image οf being the ‘shoppers mate’. The jolly jangle and the affectionate bum-slap in its ads aim to show customers that Asda is there for them to ferret out good deals and protect them from nasty rip-off merchants. But the revelation that Asda plans to offer financial services products to the credit excluded begs the question: how can it do this while keeping its brand image intact, and without risking accusations οf exploiting consumers who dont know any better? Asda has so far declined to comment on the details οf its plans for financial services or the thinking behind the move. A spokesman would only say that it is hoping to “include as many οf our customers as possible”. However, financial services commentators are unanimous in their belief that Asdas motivation stems neither from an altruistic desire to help the poor nor from taking stock οf government calls for better provision for credit to the less well-off. Shareholders are, after all, at the heart οf everything the supermarket does and generating profit is its raison dêtre. (Barnes 2004) Traditionally, to make money in this tricky segment most companies charge extortionate interest rates, sometimes in the hundreds. Their argument is that this strategy is justified because the individuals in question are ‘high risk’ and require hefty bad debt provision. This is perfectly legal in Britain as there is no cap on interest charged on credit. So, low-income customers who cannot get credit from traditional channels such as high street banks are forced to employ the services specialist companies such as Provident Financial and the London & Scottish Bank. The result is that they often spiral into debt. For Asda to be linked to the financial demise οf its customers would be a PR disaster. Yet in order to make the venture profitable and cover its back, it must charge a relatively high rate οf interest. Since 1999 Wal-Mart, Asdas US parent from which it gleans many business ideas, has offered financial services to its customers through a partnership with GE Capital. According to a spokesman for GE Capital, the US model works by charging a high interest rate in the mid-20s, but offers benefits such as advanced notice οf sales and incentives. However, for those who avoid getting into debt and pay bills on time, there is preferential treatment. “If you are a good customer you get a better rate,” he said. There is a risk that this strategy would not cut the mustard in the UK. It could alienate Asda customers, many οf whom fall into the low-income socio-demographic, and would feel betrayed by their ‘mate’. Clearly, neither is it feasible for Asda to follow the model οf credit unions, which are run for members in the local community and operate on a not-for-profit basis. One option that makes business sense is to offer customers an interest rate between that οf credit unions (most οf which offer around 12% APR) and its main supermarket rivals such as Tesco and Sainsburys (around 16% APR). Supermarkets claim customers take up their financial products because οf convenience, trust and because many shoppers feel they have a better relationship with them than with their bank. Asda is a relative latecomer to the market, behind Sainsbury, Tesco and Safeway, and needs to offer an attractive proposition. “It would be disastrous for Asda to have hidden catches,” says Tom Kerr, director οf brand management at Sainsburys Bank. Kerr struggles to see how Asda can come up with an offer that satisfies both its ‘Asda price’ positioning without charging higher rates than its supermarket rivals. “Its a conundrum. Im not at all sure how Asda is going to square it.” According to industry sources, Asda had been in talks with HSBC about the venture, but these broke down because the brand fit was not considered appropriate. It is now reportedly in talks with Capital One and HFC, both renowned for offering products to the so-called ’sub-prime’ category often shirked by other financial companies. But these banks — both οf which declined to comment — do not necessarily represent the best option for Asda either. David Hensley, director οf consulting at Future-brand, warns: “Capital One has a ring οf ‘capitalists’ about it and it might not be such an obvious fit. Asda needs to think hard about its choice οf partner. If it co-branded products with the Co-op, for example, it might feel very Asda.” Certainly this is an area where the Co-operative Bank has been particularly proactive, setting up branches in its Co-op supermarkets and teaming up with credit unions. The Co-op recently commissioned Paul Jones, a senior lecturer at Liverpool John Moores University, to research access to credit for individuals on low incomes. To do this Jones interviewed Citizens Advice Bureaus, housing associations and credit union customers. Jones realized that “low-income individuals do not trust banks and they dont use them; but there is also a certain stigma attached to credit unions”. An opportunity, then, for Asda to enter as the likeable, credible finance provider? “It would be able to if it offered small loans, flexibility and didnt hammer people with expensive fees. But thats quite a mission,” says Jones. He argues that Asda would be hard pushed to rival the sense οf identity that credit unions successfully cultivate and with which low-income earners feel at ease. Nevertheless, he spots a competitive advantage in Asdas finance offer positioning as a commercial outfit rather than a charity. “If an organization is perceived as a charity, people dont want its services. The charity image is partly where the stigma originates from.” Part οf Asdas ‘professional’ role could include education about money management, something that the UKs largest debt charity the Consumer Credit Counseling Service (CCCS) would welcome. “A company like Asda, with its great communications, could be very effective at educating people about debt stress and how to budget and prioritize debts. It could show individuals where to go when they get into difficulties,” says Frances Walker, CCCS spokeswoman. (Gorman 2007) As part οf this pastoral approach, Asda could provide savings products alongside credit offers to encourage customers to work their way out οf debt. The organization would not welcome Asdas offering, however, if it followed the model οf the loans companies that currently run “ads about consolidating accounts”. There is another option open to the chain that would boost credit provision to poorer individuals and fit with its brand values: acting as a distributor for credit unions. Chief executive οf Leeds Credit Union Sue Davenport argues that Asda would be better advised to work with unions, rather than in opposition to them. “Asda could provide financial services through us and we could use their retail outlets for promotion, marketing and collections,” she proposes. Whatever strategy Asda decides to take, one thing seems clear. It must have its brand values at the forefront οf its thinking. Otherwise it runs the risk οf falling out with its best mate — the customer — and wrecking the valuable relationship beyond repair. Diagram References Barnes, Rachel., Asda urges labeling unity. Marketing (00253650), 7/7/2004, p12-12 DesJardins, Joseph R., Business, Ethics and the Environment: Imaging a Sustainable Future, 2006 Fisher, Colin and Alan Lovell Business Ethics and Values: Individual, Corporate and International Perspectives 2nd edition, FT- Prentice Hall, 2006 Gorman, Matthew., Asdas Rick Bendel takes on consumer champion role. Marketing Week (01419285), 6/28/2007, Vol. 30 Issue 26, p3-3 Jack, Louise., Asda to take on Unilever with eco detergent range. Marketing Week (01419285), 8/23/2007, Vol. 30 Issue 34, p8-8 Kolk, Ans., Economics οf environmental Management, Pearson, 2000 Quilter, James., Asda fights back. Marketing (00253650), 3/15/2006, p19-19 Quilter, James., Asda marketing director reopens own-label rift. (cover story) Marketing (00253650), 5/10/2006, p1-1 Quilter, James., Asda takes on Tesco as mobile network operator. Marketing (00253650), 3/21/2007, p3-3 Ritson, Mark., Boasts lose Asda its no-claims bonus. Marketing (00253650), 8/24/2005, p19-19 Sweney, Mark., Asda nets Owen for footie snacks push. Marketing (00253650), 5/26/2004, p14-14 Thomas, Daniel., Asda RFID trial shows efficiency gains are key benefit for business. Computer Weekly, 6/24/2003 Read More