How Supermarkets in the UK Have Coped with the Recession - Case Study Example

How supermarkets in the UK have coped with the recession Introduction The failure of the markets to develop mechanisms that can protect investorsfrom severe losses has been considered as the most important reason for current recession. The recession initially appeared in the USA market; however, soon, it was expanded worldwide. The relationship between the British market and the USA market is quite close; as a result, the rapid development of the recession in Britain was unavoidable. Current paper focuses on the examination of the policies developed by the supermarkets that operate in the British market in order to face the recession. Through the review of the literature published on the specific issue it has been proved that supermarkets in Britain has managed to control the effects of the recession on their performance; the introduction of appropriate marketing tools has been proved to be the most common strategic tool used by the British supermarkets from 2008 onwards; the level of effectiveness of these firms’ strategic policies during the recession is examined and evaluated; the common consequences of the recession the organizational performance are also discussed as they can help to the understanding of the strategies used by the British supermarkets in order to face the current financial crisis. 2. Supermarkets and recession – the case of UK The financial crisis that started in 2008 has adversely affected the operation of firms in all industrial sectors; supermarkets in Britain had been also affected by the recession; however, this influence had different aspects; there were supermarkets that used the recession as a chance to increase their competitiveness in their market – like in the case of Tesco; however, most of the supermarkets in UK have suffered losses because of the crisis. The examination and the analysis of the effects of the recession on the performance of British supermarkets requires the prior examination of the characteristics and the effects of the recession – especially as a phenomenon developed within the context of the international market. 2.1 Recession – characteristics, factors related with the development of recession Recession is a term used in order to describe the decrease in the performance of firms operating in a particular market – or the global market; the main characteristic of recession is that the limitation is organizational profitability in the specific period is high and usually a long – term. The behaviour of firms during the recession is not standard; other firms are likely to introduce radical changes in order to face the recession; the most common results of these changes is the decrease of the number of employees and the reduction of the firm’s branches; in other cases, recession is viewed as an occasion to restructure the firm’s operations and compete the rivals; the specific issue is highlighted in the study of Srinivasan et al (2005) where it is noted that ‘some firms view recessions as opportunities to strengthen their businesses, invest aggressively and establish their advantage over their weaker competitors’(Srinivasan et al., 2005, p.109). The level at which the recession can adversely affect the international and the local market can be identified through the example presented in the study of Pearce et al. (2006); the above researcher noted that ‘an average of more than 500,000 businesses failed in the United States during each of the 10 recessions that have occurred since the end of World War II’ (Pearce et al., 2006, 201). 3. Are the causes of recession related? Which are the potential points of connection? The study of the practices of major financial institutions before the crisis leads to the assumption that the recession has been unavoidable; Kenc et al. (201) relate the recession with the subprime crisis; Rotheli (2010) note that a series of factors led to the appearance and the development of recession; these factors could be summarized as follows: ‘Shortcomings on the side of monetary policy, rating agencies, and bank regulation’ (Rotheli, 2010, p.119); moreover, it is made clear that ‘the credit cycle is the mechanism that links the present financial crisis with earlier crisis’ (Rotheli, 2010, p.119); in other words, the current financial crisis should be regarded as the continuation of previous financial crises; those crises were faced successfully but their reasons were not identified; for this reason, the same mistakes in the management of funds were repeated and the financial crisis appeared again. 4. How the recession affected supermarkets in UK? The effects of the recession on the supermarkets in UK have been similar with those identified in firms in different industrial sectors; for this reason, the studies that examined the effects of recession on British market avoided to refer specifically to the supermarket sector; rather, they made clear that recession affected all British firms and this affection has many forms as explained below. One major effect of the recession on British firms – including supermarkets – is the limitation of opposition against the employers/ state in cases where violations of employee rights have taken place. In the past – referring especially to the 1970s – workers in Britain used the occupation as a tool in order to make the employers and the government to respect their rights in work; in current recession occupation was not particularly used by workers as a tool to protect their rights; the specific fact is highlighted in the study of Gall (2010) where it is noted that ‘the global recession of late 2007 onwards in Britain has witnessed very few examples of workers deploying this tactic, i.e. the occupation, when compared with the recessions of the early 1980s and early 1990s’ (Gall, 2010, p.107). It seems that the willingness of workers to claim their rights in work has been weakened; this is an important characteristic of current recession; The recession has caused turbulences in all sectors of the British market; in the supermarket sector the effects of the recession have taken related with the limitation of buyers’ spending on goods; however, as the supermarkets involve in the selling of products that are vital for living, the limitation of these firm’s profitability has not reached the levels that were observed in other British industries. Another reason for this outcome could be the fact that shareholders in major British supermarkets avoided to differentiate their investment plans on the sector’s firms. In accordance with Kang et al. (2010) ‘the controlling shareholders incentives to expropriate other investors are high during an economic shock’ (Kang et al., 2010, p.333)’; in other words, if the pressures of these firms’ controlling shareholders were strong because of the crisis then severe failures would be identified in the specific sector. It seems that the influence of recession on the investment practices of shareholders in British supermarkets has been limited. 5. Did supermarkets in UK take specific measures for the limitation of the crisis? Presentation and critical analysis of these measures The measures suggested for the limitation of the effects of the recession can be differentiated; an indicative measure of such type is the price stability, which has been characterized as a common but ineffective measure for control the effects of the recession. In accordance with Hamister et al. (2008, p.441) ‘with an auto-regressive (AR1) demand process, the use of constant, instead of dynamic pricing may result in lower profitability and higher-demand volatility’; in other words, the use of inappropriate policies for the control of the effects of the recession can lead to the deterioration of the financial crisis. The review of the strategic choices of supermarkets in UK during the recession has proved that all these firms tried to alternate their operational practices in order to reduce the effects of recession on their performance. In some cases, the effectiveness of these measures has been doubted; however, it has to be noted that not all supermarkets had the power to proceed to a radical update of their operational practices; those supermarkets that are among the leaders of the specific sector, like Tesco and Sainsbury’s faced less challenges when applying such strategies; supermarkets with low profitability – compared to the sector’s leading firms – did not have the power to proceed to radical changes in their operations; in this context, their offers to the public have been less compared to the supermarkets that have a significant base of customers and can compete their rivals more effectively. On the other hand, the perceptions of managers and customers on the appropriateness of a firm’s strategic choices can have similarities; this issue is highlighted in the study of Hansen (2003) where it is made clear that ‘food store managers’ and consumers’ evaluation of the importance of various store choice factors are quite similar’ (Hansen, 2003, p.35); the above view is based on the findings of an empirical research developed by Hansen (2003); the particular view can lead to the assumption that the measures introduced by supermarkets in Britain against the recession are likely to be accepted by the customers – their views are likely to be within the same framework with the views of the food store managers. The measures taken by the supermarkets of UK regarding the limitation of the effects of recession focused on the achievement of the following two targets: a) the limitation of operational costs and b) the stabilization of profits – since the competition in the sector is already high the increase of profitability of supermarkets across Britain would be an unrealistic target; even the stabilization of profits under current market conditions could be a challenge. In the context of the above two targets, supermarkets in Britain introduced a series of practices – common in most of them, i.e. increase of offers on products, reduction of prices in certain products – especially those that are likely to be avoided in periods of crisis, promotion of products of own-label – these products offer the advantage of the low price compared to the products that have the label of a know brand. Another strategic measure quite important for the support of the supermarkets during the crisis has been the introduction of services that are not included in the supermarket sector - referring to the services that are normally provided by financial institutions, for example insurance, credit cards and so on, but also the services provided in the context of the telecommunications industry. At the next level, the scheme of the ‘supermarkets’ card’ has been promoted – the owners of these cards have a series of benefits, as lower prices and offers on specific products, also reduction to the amount paid on the supermarkets’ products – through the scheme of the return of money provided through the supermarkets’ cards. Despite the effectiveness of the above measures, additional actions have taken by managers in supermarkets in order to further decrease their firms’ operational costs. In accordance with ‘evidence obtained by the Competitions Commission, hidden but potentially severe financial pressures are being imposed on UK supermarket suppliers’ (Towill, 2005, p.426)’; suppliers in British supermarkets have been affected by the crisis even if the profitability of the British supermarkets has been kept at satisfactory levels; the reason for that is that supermarkets in UK have introduced measures for both facing the crisis and prohibiting its further development across the organization. The search for suppliers that can offer lower prices has been a policy that attracted the interest of managers in all supermarkets across Britain. The policies used by managers in British supermarkets are reflected in the study of Morgan et al. (2007); in the above study, it is revealed that ‘the potential for supplier opportunism means that supermarket retailers are either skeptical or have failed to make such category management relationships with key suppliers work’ (Morgan et al., 2007, p.512). In accordance with the above, supermarkets in Britain have introduced a series of strategies in order to face the crisis; it seems that those strategies have been rather satisfactory – compared to the firms that operate in other sectors; however, additional measures would be possibly required in order for these firms to stabilize their position towards their competitors. 6. Conclusion The strategic initiatives of British supermarkets can be evaluated by referring to the similar practices of supermarkets in Spain; a research developed by Rubio (2009) across the supermarkets in Spain in regard to their strategic responses to the increased competition; it was revealed that ‘the competitive situation that best characterizes this sector is that of the modified efficient structure’ (Rubio, 2009, p.61). Before the crisis, the performance of supermarkets in Britain had been significant (see Figure 1, Appendix); on the other hand, people in Britain tend to spend on buying products in supermarkets (see Figure 2, Appendix). The strategic policies developed by the managers in UK supermarkets have performed well – as indicated in the graphs, which show the changes in share prices of the 3 major competitors in the British supermarket sector. Bibliography Armstrong, G., Harker, M., Kotler, P., 2009. Marketing: An Introduction. 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International Journal of Research in Marketing, Volume 22, Issue 2, pp. 109-125 Towill, D., 2005. A Perspective on UK Supermarket Pressures on the Supply Chain European Management Journal, Volume 23, Issue 4, August 2005, pp.426-438 Appendix Figure 1 – Performance of the grocery sector in Britain (source: http://www.igd.com/index.asp?id=1&fid=1&sid=7&tid=26&cid=94) Figure 2 – Expenditure on Transport and Food in Britain – before the recession (source: BBC News, 19 June 2009, available at http://news.bbc.co.uk/2/hi/uk_news/magazine/8105812.stm) Figure 3.1 TESCO – share price the last 3 months (source: http://www.lse.co.uk/SharePrice.asp?shareprice=TSCO) Figure 3.2 Sainsbury – Share price the last 3 months (source: http://www.lse.co.uk/SharePrice.asp?shareprice=SBRY&share=SAINSBURY(J)) Figure 3.3 Morrison – Share price the last 3 months (source: Read More