The UK supermarket industry forms the largest part of the UK retail industry. The retailing in Britain employs over 3 million people nowadays, which equates to 11% of the total UK workforce. Its sales in 2007 were approximately £265 billion and near 8% of the British GDP were generated by this sector (Data monitor, 2008). As a major part, the supermarket is a form of grocery store, offering a wide variety of food, drinks, cleaning and other household goods. The supermarkets sell an ever increasing range of non-food products that puts them in competition with a wider scope of retailers than traditional grocery stores or specialist retailers. It also has a larger size, approximate 1,000 to 2,000 sq meters. Although the industry is involved in selling of a whole variety of different products it mainly sells food, the food sales were over £100bn in 2007 (Data monitor, 2008).
If you need assistance with writing your essay, our professional essay writing service is here to help!Essay Writing Service
The UK supermarket industry is one of the most established industries in UK; it produces great sales and large profit for a great number of years. Although all main supermarket members enjoyed the growth, larger ones managed to grow much faster and outperform small stores. The UK supermarket industry today was somewhat different from ten years ago. A notable change is the acquisition of Safeway by Morrison Supermarkets. As it can see from the following pie chart, the market is dominated by four major firms, Tesco, Asda, Sainsbury’s and Morrison. These giants occupied 67.30% market share in the year of 1998 and rose to 76% in 2009. Tesco increased greatly and is controlling nearly one third of the UK grocery market. Figure 2.2 shows the supermarkets’ turnover in 2008, which indicates the market size.
As it mentioned before, there are only few dominant firms within this sector, thus supermarket industry is theoretically less competitive. Tesco, as the UK’s largest supermarket, accounts for “approximately one pound in every eight spent in the UK”, this is a big amount of the UK economy. The rapid development of Tesco makes smaller competitors stressful. To restrict the monopoly power Tesco holds and guarantee a fair competition environment, government intervention is quite necessary, like improving the bargaining power of suppliers and buyers, cultivating new entrants, encouraging competitive rivalry. Under the monitor of government, many Tesco’s potential store purchases have been stopped through the Office of Fair Trading (OFT). Tesco was even forced to sell a major store to a rival to aid competitiveness.
Benefits from the leading supermarkets’ large size and great demand of a wide range of products, their buying power are huge; comparatively the suppliers are in a weaker position. Due to the relatively large number of suppliers compared with the low concentration of retailers, there are a lot of available choices for the supermarkets, if one supplier can not offer products at that price, the others will do. Therefore, the supermarket is usually the price maker. Many suppliers argued that, relied on the lion’s share of market, Tesco has driven the product price down (Friends of the Earth, 2005). To help the supplier companies and reduce their unfair trades with the main supermarkets, a new code of practice has come into force in Feb 2010 (BBC News, 2010). This code suggests it is illegal for supermarkets to alter supply terms retrospectively or asking suppliers to fund promotions such as offering promotional products.
Environment is a key issue government concerned with in this modern society. The study by the Local Government Association (LGA) shows that supermarkets use excessive food packaging, although the weight of supermarket food packaging had gone down, almost 40% of it still can not be easily recycled. It costs £48 landfill tax for every tone of rubbish throw away. As dealing with these over packaging is expensive for taxpayers and damaging for the environment, the LGA argues that supermarkets should pay for the cost of dealing with it, and believes that this action can make recycling easier and ease the burden of landfill tax on local government  .
The Government has just announced the national minimum wage rate for 2010/2011, which will be carried out from 1 October 2010. The national minimum wage adult rate will rise from its current level of £5.80 per hour to £5.93 per hour  . According to the 2010 report of Low Pay Commission (LPC), this increase is “in line with the forecast increase in average earnings”. As a low-wage labor sector, the increased minimum wage can improve the living standard and loyalty of supermarkets’ workers, while it also increases the overhead costs of supermarkets. On the other hand, the increased minimum wage can narrow the distribution of wages and earnings among low-paid and higher-paid workers and reduce the income gap among low-income and higher-income families, which make positive effects on the customer’s purchasing power.
3.2 Economic Factors
In this global world, businesses are not only affected by the economic climate within the country they based but also the changes throughout the world, the global credit crunch originating in the USA from 2007 contributed towards the financial crisis in the UK. The economic factor can influence all walks of life. The financial issues like tax, interest rate, exchange rate, inflation and fiscal policy are always set according to the economic environment. The condition of the economy indicates the behavior of consumers, suppliers and other copartners or competitors within the sector. An effective analysis of the potential impacts of changing economic situation can help the players within supermarket industry response rapidly and efficiently to the action of their competitors and customers.
The UK economy has entered into recession from 2008 and no one can be sure when an upturn will come or how deep the recession will be. An economy recession is always undergoing with high unemployment, low spending power and low stockholder and customer confidence. The influences of the gloomy economic climate can be discussed from the following typical points.
The whole retail industry suffered negative impacts from recession. It is illustrated in Figure 3.2.1 that the retail sector enjoyed years of strong growth in the long-running economic boom, while it dropped significantly in the year of 2008. Even worse is that, according to the news on Timesonline, the monthly sale of household goods between Dec 2009 and Jan 2010 fell at the fastest pace since 1988, dropping 13.4%, fuel sales fell by 11.1% on the month, and food sales declined by 2.4%.
Figure 3.2.1: the UK Retail Sales Changes (Source: Haver Analytics)
From these data above, it can be found that customers are cutting purchases and customer confidence is affected by their passive predict about the situation. As customers are feel nervous about their own current financial condition, they will spend less. Thus supermarkets are facing a crisis, the most obvious way to hold customers may be cutting goods prices.
3.2.2 Disposable Income Level
Consumer spending has been growing ahead of family’s disposable incomes for some years. Despite inflation, increased tax bills and declined wages, the average household disposable income level went down by nearly 30% during the past two years by more than £150 a year. Families’ average money left to spend on non-essential items declined from £146 a week in 2008 to £143 in 2009. While food inflation is about 9% and the average annual shopping bill of every family is predicted to rise by almost £1000, combined with rising energy costs, it’s no wonder consumers are tightening their belts. The most common downturn-combating measure is to look for more bargains, many Britons agree that they are now more concerned whether they are getting value-for-money from their grocery purchases, a third of shoppers have switched from their usual grocery supermarkets to cheaper alternatives like open markets, 36% of UK consumers turned to down market to purchase a significant portion of their food, and this shift is occurring at different levels in the grocery sector  . A typical result is that Aldi has seen a 20% rise and Iceland 15%. Meanwhile M&S has seen a 3.2% decline  .
An ageing population suggests some changes and a long-term downward trend for supermarket food retailing. At first, the demands of products and services for different age groups are clearly different. Products aims to ageing people like healthcare goods would become more popular. Furthermore, the low birth rate results in decreased demand and greater competition as the amount of consumers fall. The older people tend to consume less foods or drinks that may consistently reduce the sales of supermarkets. Finally, the senior citizen might be more enthusiastic for home delivery when they go shopping, while deliveries for small purchases are inefficient and expensive for supermarkets. Meanwhile, the access to online shopping can bring older consumers convenience, while it might be some difficult for them to learn how to get the services on internet.
3.3.2 Lifestyles and Work Styles
People in this modern society prefer a more healthy and convenient lifestyle. From the aspect of health, obesity problem which is directly linked to bad food choices in the form of highly refined carbohydrates and sugars has got attention by people, thus more and more people choose to buy organic or green food in supermarkets. With the increasing living standard, people ask for convenience in shopping, hence, supermarkets not only offer a convenient and comfortable shopping environment in stores, but also provide services like free delivery or online shopping to improve customer satisfaction.
Car was a luxury product in the beginning of the 20th century, and there was only 8,000 in Britain. While the number of car population rose to 21 million by the end of the century  . In 2009, car ownership went up by 30% to 29.6 million (BBC News, 2009). The increased car ownership makes it possible to shop out of town centers, thus supermarkets can reduce operation costs and offer larger shopping areas by locating outside of downtown.
Online shopping is a typical developing trend in supermarket e-business. As it is estimated by Mintel (2009), the online grocery market will grow by 57% to £6.9 billion during 2009 to 2014. Although it only holds small part of the total grocery sales currently, at just above 3%, it is increasing gradually (Figure 3.4.1). From the consumer side, young families are the key volume users of online food shopping in the short term. With the rising broadband penetration and higher connection speeds, and the steady expansion of the online grocers’ geographical coverage, more people will do online shopping. Online shopping brings convenience to customers and profits to supermarkets. To maintain a competitive position in this new marketplace, supermarkets take a series actions to improve their online services like rising website fluency.
Besides that some innovations implemented by supermarkets help they operate much more efficiently and smoothly. A smart tagging which is seen as an improvement on old-fashioned barcodes was tried out by Tesco. Compared with traditional barcodes, such tags can be read from a distance, thus they can speed up the process of checking goods. They are wirelessly connected to readers placed around the store on shelves and at the check-out to allow staffs and customers to keep track of the goods in the store and tell staffs which items are in stock, where they can be found and when they go out of date. This tag could also be attached to distribution centres and warehouses to help supermarkets keep track of the whole supply chain in a particular area.
In this section, Porter’s five forces model will be employed to evaluate the competitive nature of supermarket industry. Porter (1980) argues the objective of a company’s competitive strategies is to determine a precise position in the industry where the company can best defend itself against the competitive forces or impact them in its favor. Combined with the identification of the strategies of the four leading supermarket competitors, the effect of competitive arena on the players will be highlighted.
A starting point to analyzing the industry is to look at its competitive rivalry. Too many existing companies in an industry will increase the intensity of competition between them. The supermarket industry is a typical oligopoly market, as it is occupied by four main companies, although there are many much smaller companies in the market. These four giants, Tesco, Asda, Sainsbury’s and Morrison are chosen as the competitors to be discussed. Their competition mainly focuses on price, advertising, introduction of products and services. They all have a different competitive advantage over their competitors. To be more specific, Tesco has the most broad product range, Asda is more focused on hypermarkets and out-of-town stores, Sainsbury’s target at cost conscious customers who place a high value on good quality food and Morrison focuses on food products. The intensity of rivalry is appraised from many different sides, three points is looked at below.
Our academic experts are ready and waiting to assist with any writing project you may have. From simple essay plans, through to full dissertations, you can guarantee we have a service perfectly matched to your needs.View our services
The differentiation of products and services of these four players is small, they carry similar products, as the brand products, such as Mars, Heinz, Birds Eye and Unilever, supply to all the supermarkets. The only difference of supermarket’s products is their own label goods, each supermarket introduce its own products, like Sainsbury’s basics range, Tesco’s value to finest range. However, many of these own label products are produced by the same manufacturer and just simply labeled differently for the different stores, so there is no difference in fact.
Switching costs is one-time costs the customer faced to switch from one supermarket to another, it links customers to supermarkets, including time or costs spend in trying a new supermarket. As the products available for sale in the different supermarkets have similar quality and price, one factor need customers to consider is the time or convenience for them to try a new retailer. In general, the customer switching costs in this industry is low.
The competition for supermarkets can be caused by feeling of pressure. The low product differentiation and low switching costs intensify the competition relationship between “the big four”. This competitive pressure results in pressure on prices, margins, and hence, on profitability for every single supermarket, as competitions on price usually results in the declined profit within the whole industry, as price reduction can be followed by other competitors rapidly and easily, the income of all players goes down.
First, as a feature of an oligopolistic market, supermarkets compete on price to become a price maker and attract a larger market share. In a previous price war, Tesco cut a range of product prices, the discount worth about 3% to 25% of each product; this action help Tesco increase its market share by 12% in eight weeks. Price wars are always taken place among the UK supermarkets, as one supermarket announces a product price cutting, the others follow. For instance, as Asda’s ‘roll back’ scheme cut its products’ prices by around £0.5bn, Tesco has also announced price cuts worth £1.2bn  . However, the CC find that the gap in supply prices paid between largest and smallest retail chains averages around 11% to 13%, that means a higher stock costs for smaller supermarkets compared with the giants. And large supermarkets have lower overhead costs. That means there is always no price competitive advantage for small supermarkets.
Besides price, each supermarket has its own advertising slogan to create a sense of loyalty from its existing customers and to attract new ones. Tesco is the advertising investment by Tesco, Asda spent £34.7m on advertising, Sainsbury rose advertising spend to £32.8m, and Morrison’s advertising spend increased to £25.5m. What’s more, many of the supermarkets have their own loyalty card like Clubcard of Tesco and Nectar card of Sainsbury to reward their customers, and send out mailings and vouchers to loyalty card holders to build relationship with customers and encourage them to do purchase in their stores. Tesco’s famous loyalty card remains the most successful customer retention strategy that significantly increases the profitability of Tesco’s business. Other non-price strategies are used by supermarkets to increase product differentiation and customer loyalty. For example, Morrison operates a scheme that customers can collect points in its petrol station for money off when they go shopping in stores. Asda offer customers help to carry the bags to their cars.
Buyer power in supermarket sector can act to force prices down, ask for higher quality products and services and play competitors against each other. The customer bargaining power to supermarkets seems to be low. As if all the supermarkets charge for same high prices on certain products, the only thing that the customers can do is to accept it. However, in fact, the bargaining power of buyers in this market is becoming more and stronger for the reasons explained below.
In the first place, the strong buyer power is due to the standardized and undifferentiated supermarket products and increased substitutes. If a customer is sensitive to price, he or she may choose to shop in a cheaper supermarket or simply turn to other cheaper retail sector like open markets or online stores. As to price-sensitive customers, if they find fruits in Sainsbury are too expensive, they will move to Tesco. Moreover, there is a low switching costs for consumers, if they do not satisfied with one supermarket, they can easily switch to another one.
Customers’ needs and wants are taken more concerned by supermarkets nowadays as the more and more intensive competition environment. In addition, customers are more sophisticated in this day and age, the developed technology not only improve the competitiveness of supermarkets, but also customers’ access to information from which customers can find more related information of different supermarkets and commodities, compare them and finally make a wiser choose. At the same time, as the economy goes further towards recession, to increase profits and sales, the consumers’ opinions are likely to be given more weight by supermarkets; it improves their buyer power considerably.
As it mentioned in section 3, the bargaining power of suppliers is low in supermarket sector. Moreover, the purchasing power of this industry is concentrated in the hands of a relatively small number of retail buyers, these large supermarkets, like Tesco, always have an overwhelming advantage than the small shopkeepers, because of their large demand, they can dictate the price they pay the suppliers in a large degree. If the suppliers do not reduce the price, they may loose a big deal and be left with a much smaller market for their products.
The suppliers for supermarkets can be roughly classified into two kinds: brand product suppliers and own label product suppliers. The brand product suppliers have a relatively stranger bargaining power compared with own label product suppliers.
From the aspect of brand product suppliers, their bargaining power is enhanced by the demand of customers, especially for the suppliers offer successful brand products. They are the only supplier. There are may other substitutes in the market for their products, while customers have formed loyalty to their brands, such as Mars chocolate bars, Colgate toothpaste and Olay beauty products. Because of this demand and loyalty, to maintain a complete product range, supermarkets may make concession when they cooperate with these suppliers, as if the supermarkets don’t pay the price, they don’t get the goods to sell, that could not only harm the interests of suppliers but also themselves’. And they are willing to pay more in some extent, as the popularity and large demand of these products, these products can be sold quickly and significantly improve the supermarket sales.
The bargaining power of brand product suppliers benefits from the success of their brands. While the suppliers who supply similar products with others like farmers and growers have weak bargaining power, because there is low switching costs for supermarkets to turn to another supplier. The fear of losing business opportunities weakens the bargaining power of suppliers. With the development of globalization, suppliers are also threatened by the competitors from abroad who can offer retailers cheaper deals. Last but not least, the forces of competitive rivalry discussed above reduced the profit margins for supermarket chains, the price wars between supermarkets pull down the price supermarkets can afford to suppliers.
So far, the remote and operating environment of the UK supermarket sector has been discussed. To sum up, a supermarket’s success is influenced by factors operating in its internal and external environment. The remote environment is external, which can not be controlled by the competitor directly. From the aspect of the external environment, this industry is enjoying the benefits bought by the changed socio-cultural elements and developed technology, while it also facing challenges from political and economic factors. As to the operating environment, it is internal and can be controlled, low customer and supplier bargaining power and low threat of entry and substitutes are positive for the existing competitors. As a oligopoly market, the competition among the four leading companies might be very intensive, while there is limited threat from other smaller competitors.
In my opinion, with the long time development, the strength of this sector is powerful. Although the remote and operating environment might be influenced by other factors, the future condition of the supermarkets should be optimistic simply because of the large demand of customers, and a successful supermarket will not only understand existing factors but also forecast change, the implement of effective strategies can help them defend their market.
Based on the findings above, the strengths, weaknesses, opportunities and threats for each competitor within supermarket industry can be identified accurately, and the strategies employed by each company can be decided accordingly. In the end, this report attempts to give some suggestions for the new entrants. The first thing need to be considered by new entrants is that if they have made sufficient preparations to entry, these preparations here refer to both financial and psychological sides. That is because, on one hand, the initial investment is huge to operate a supermarket; on the other hand, it takes time for new entrants to build their own brands and customer loyalty, thus the new entrants need to be patient. Another advice is that the new entrants should complete in the market rely on non-price competition strategies like offer unique products or services, rather than carrying out price war with the existing giants, as they definitely have no advantage at this point compared with the leading supermarkets.
There are still some limitations of this report. As I have no working experience in the UK supermarket sector, the analysis on its environment are mainly based on the information released to public, thus the analysis might not consider complete factors. What’s more, the evaluation on the importance of each factor or issue might be subjective.
Cite This Work
To export a reference to this article please select a referencing stye below:
Related ServicesView all
DMCA / Removal Request
If you are the original writer of this essay and no longer wish to have your work published on UKEssays.com then please: