Current Attractiveness Of The Uk Supermarkets Management Essay

The information is drawn primarily from the DEFRA (2006) Economic Note on UK Grocery Retailing investigation on the sector. This is supplemented with insights drawn from text-books, websites, premium subscription journals, online databases, and other such high quality sources of information.

Findings:

This report explores the macro factors that influence the UK grocery retailing sector using a PESTLE approach, conducts an industry analysis using Porter’s ‘Five Forces’ framework, and examines the strategy of Tesco from a resource-based perspective. It finds a range of macro factors exert an influence on the external environment of firms in the UK grocery retailing sector; that the UK grocery sector displays a varied level of attractiveness depending on the size of organisation and also the timing of entry; and finally that Tesco’s superior performance in the context of the UK grocery retailing sector can be explained with reference to its resources, capabilities, and culture.

Conclusions:

This report demonstrates how there are three levels to strategy within the UK grocery retailing sector – the macro level; the industry level; and the firm level. It concludes that an understanding of each of these levels is crucial to appreciating the workings of strategy within the UK grocery retailing sector

Recommendations:

This report recommends that organisations within the UK grocery retailing sector ensure that their interests are aligned at the macro, industry and firm levels, in order to ensure that the strategies they adopt are appropriate for their specific contexts.

Introduction

Before conducting such an analysis, however, it is useful to define what is meant by ‘strategy’, and explore briefly why it matters. In his work Understanding Strategic Management Anthony Henry (2008) provides an overview of forty years of vehement debate on the issue. He maintains that, ‘there is agreement that the role of strategy is to achieve competitive advantage for an organisation’. He continues: ‘Competitive advantage may usefully be thought of as that which allows an organisation to meet consumers’ needs better than its rivals . . . [and] its source may derive from a number of factors including its products or services, its culture, its technological know-how, and its processes’ (Henry, 2008, p. 4). It is important because a strategy which can enable a sustainable competitive advantage will allow an organisation to generate super-normal profits, and will have a distinct impact on overall organisational performance: strategies add value (Kay, 1995). With this established, this report will now investigate the macro factors that have influence the UK grocery retailing industry.

Macro Analysis

There are a number of key macro factors – that is, important external drivers of change – that have influenced the UK grocery market since the early 1960s. To conceptualise such phenomena, this report will utilise a PESTLE analysis. The PESTLE framework categorises environmental influences into six main types – political, economic, social, technological, legal and ecological – thus enabling a comprehensive examination of the external influences on a given market area (Johnson, Scholes, & Whittington, 2008, p. 55).

For the UK grocery retailing sector [GRS], the primary political influences is, and has been since the 1960s, the liberal government planning and competition policy, particularly during the Thatcher era of the 1980s (DEFRA, 2006, p. 10). This facilitated the growth and location of many contemporary grocery retailing outlets. Moreover, there are another two key political influences which can be expected to exert an enormous influence on the GRS in the near future: rising food prices – with prices rising by 18 per cent between 2009 and 2010 (Kazmin, 2010) – and the increased use of genetically modified [GM] crops – with GM crops having increased by 7 per cent in 2009 (Cookson, 2010). These are areas in which governments will need to actively legislate in the near future, with consequences for the UK GRS.

In terms of economic influences, the most important factor for the GRS is the UK’s economic growth. For the past decade at least, consumer spending was more or less in line with a growing Gross Domestic Product [GDP] (Magnus, 2010). This has enabled organisations in the GRS to diversify, for instance, into providing premium products (DEFRA, 2006, p. 11). However, the current troubled global economic environment may well affect how companies in the GRS do business in the future.

Within the GRS, changing social trends have exerted a significant influence since the 1960s. These include: busy consumer lifestyles, with rising incomes; an increase in household numbers and women working; wider car ownership and the falling cost of car travel; and the wider ownership of fridge freezers (DEFRA, 2006, p. 5).

Regarding technological factors, the advent of the microchip and the Internet have enabled the GRS to reinvent its process structure, implementing improvements such as stock control, checkout scanning, and consumer loyalty schemes in order to reduce costs and attract customers (DEFRA, 2006, p. 6).

In terms of legal factors, competition and planning law have exerted an important influence on the GRS. In France, Italy and Germany, for instance, planning law was strict from an early post-World War Two stage, whereas between the 1960s and 1990s it was relatively liberal in the UK, facilitating the rapid growth in out-of-town supermarkets (DEFRA, 2006, p. 21). However, the law in this area has now changed; and there are now tight planning restrictions to limit new store building (DEFRA, 2006, p. 11).

Finally, ecological influences for the GRS must be considered. In this category, there are three key issues: the use of Heavy Goods Vehicles [HGVs], the increase in food imports, and the morphing degree of car usage (DEFRA, 2006, pp. 20-21). These areas are particularly important for the ‘sustainability’ of current GRS business-models, and therefore must be at the forefront of such organisations’ concerns.

Figure 1 PESTLE Diagram for the UK Grocery Retailing Sector

Industry Analysis

This report uses a modified version of Michael Porter’s ‘Five Forces’ model to analyse the current attractiveness of the UK supermarket and superstore segment (Johnson, Scholes, & Whittington, 2008, p. 59). To do this, it will examine the strategic situation by considering the power of suppliers, the power of buyers, the power of complementary products and services, the threat of substitution, the threat of new entrants, and finally the degree of competitive rivalry between the industry’s firms.

Figure 2 the modified ‘Five Forces’

Buyer (or Customer) Power

Buyer power ‘is the extent to which an industry’s customers have power to dictate prices, quality standards and other terms and conditions to the firms that are supplying them’ (Haberberg & Rieple, 2008, p. 120). It is determined by issues such as: the size and number of buyers; the cost of changing; the importance of product or service quality; and the frequency and volume of purchases.

In the case of supermarkets and superstores, buyer power is relatively weak: the segment is attractive in this respect. Buyers are not well organised, and cannot easily switch to shopping at an alternative retailer, as this would impose disproportionate costs on the customer due to the savings available at certain stores, and also due to issues of accessibility.

Supplier Power

Supplier power ‘is the degree to which the suppliers to an industry have the power to dictate prices, quality standards, delivery lead times and other terms and conditions to the firms that they are supplying’ (Haberberg & Rieple, 2008, p. 119).

In terms of supermarkets and superstores, supplier power is not particularly strong. Big supermarkets are able to “obtain better terms from suppliers to such an extent that suppliers are forced to charge higher prices to their other customers” (DEFRA, 2006, p. 18).

Complementor Power

Closely linked to the issue of supplier power, is the issue of the power which complementary products and services exert over a company. This was first noted by Brandenburger and Nalebuff (1996; cited in Haberberg & Rieple, 2008, p. 152), who observed that the existence of complementors can increase profits for both firms and suppliers.

Certain supermarkets and superstores have turned suppliers into partners, and potential rent-extractors into collaborators. For instance, Tesco’s relationship with Coca-cola – the drink is wheeled into the shop floor rather than stacked, saving Tesco money on employing shelve-stackers, and Coca-Cola money on delivery costs (IMD, 2008, p. 5).

The Threat of Substitution

The strategic position of a company is strongly influenced by the availability of substitute products or services – that is, goods or services which customers may choose to spend their money on instead (Haberberg & Rieple, 2008, p. 121).

As the supermarket and superstore segment primarily operates in the food-retail market, the threat of substitution is consequently very low – it is impossible for a potential customer not to eat food. This increases the companies’ ability to make high profits, because substitution allows customers to change their habits according to social-cultural or technological changes, and this is not generally a threat in the food retail market.

The Threat of New Entrants

The threat of new entrants is determined by barriers to entry. Barriers to entry are ‘any advantage that firms already operating in an industry hold over other firms that might potentially decide to enter it’ (Haberberg & Rieple, 2008, p. 121).

The most significant barrier to entry to the supermarket and superstore segment is size. For instance, Tesco is a giant corporation, and dominates 30 per cent of the industry market share (DEFRA, 2006, p. 16). For a potential competitor to make a difference, they must invest with huge capital outlays, such as Aldi’s investment of £500 million to increase its UK presence (IMD, 2008, p. 8). Moreover, Tesco’s policy of land-locking which it engaged in the 1980s raised real barriers to entry to potential competitors, and significantly lowered the threat of new entrants – who could no longer find suitable places to build competing superstores or supermarkets (IMD, 2008, p. 2). As a result of these issues, for new-comers to the market space, the superstore and supermarket segment is particularly unattractive.

Competitive Rivalry between the Industry’s Firms

Competitive rivalry is strongly influenced by the factors outlined above – the stronger the power of buyer, suppliers, and complementors, and the stronger the threats of substitution and entry, the more intense competitive rivalry will be.

As a result of the issues outlined above within the superstore and supermarket competitive rivalry has been traditionally relatively limited. With the largest five firms controlling almost 80 per cent of the market, the companies have been relatively content to realise the unusually large profits they can generate (Haberberg & Rieple, 2008, p. 125). Nevertheless, it has been concluded that ‘the industry is currently broadly competitive and that, overall, excessive prices are not being charged, nor excessive profits earned’ – with supermarket profit margins ranging typically between 2 and 6 percent, lagging behind other major UK retailers (DEFRA, 2006, p. 14).

Overall Attractiveness of the Segment

For companies such as Tesco or Sainsbury’s, the supermarket and superstore sector is an attractive market space in which to compete as the five forces are in their favour. However, for organisations such as Aldi, who are new-comers to the market space, the barriers to entry are significant – and can make the segment much less appealing. Moreover, for smaller supermarkets and convenience stores, the supplier power is a particular area of concern, as prices could be adversely affected due to the influence of larger corporate entities. Thus the overall attractiveness of the segment varies according to size and scale, as well as timing of entry into the market space.

Firm Analysis – Tesco

It has been pointed out that: ‘Tesco, Sainsbury’s and Asda all compete in the same environment, yet Tesco is a superior performer’ (Johnson, Scholes, & Whittington, 2008, p. 94). To explore this, it is necessary to adopt a resource-based (or capabilities) view of strategy. The central tenet of this concept is that the competitive advantage and superior performance of an organisation is explained by the distinctiveness of its capabilities (Johnson, Scholes, & Whittington, 2008, p. 94).

It is useful to first consider Tesco’s motivations for growth. Growth is the logical conclusion of the factors highlighted in the above exploration of macro factors and the industry analysis – which have made clear the potential benefits of economies of scale: i.e. there is a fall in average costs as a business grows, arising from technical, financial, purchasing, managerial and marketing economies associated with being large (DEFRA, 2006, p. 24). Thus, in the GRS, size and scale can provide significant advantages over rivals – and this is a capability which other firms cannot readily replicate.

So how have Tesco pursued growth – what internal resources and competencies have they cultivated and nourished? One of Tesco’s key competencies is its ability to source goods for cheaper than its rivals. Using its size – in 2005 it employed 250,000 people across 1,800 stores – and by adopting a bullish attitudes towards suppliers, by 2004 it was estimated that Tesco could procure supplies for proportionally 1.5 per cent less than its rival Sainsbury’s, and had an even bigger margin over ASDA and Morrisons (IMD, 2008, p. 5).

Another important internal resource is Tesco’s Clubcard system. This is a loyalty card scheme, which provides discounts to consumers, and enables targeting of product ranges to individual preferences as revealed by loyalty card purchase data. Tesco has been particularly successful in this area in recent years, enhancing its advantage over similarly structured rivals such as Sainsbury’s, and also extending their competitive advantage over smaller retailers who cannot replicate such an approach (DEFRA, 2006, p. 13).

It is also worth noting that Tesco’s corporate culture is also a key factor in its strategy. Tesco put a lot of emphasis on supporting its employees. Indeed, according to Tesco Chief Executive Officer (CEO) Sir Terry Leahy, ‘Good people are behind the success of any organisation and this is certainly the case at Tesco. We look after our people . . . by investing in training and benefits and by providing a safe, interesting and warm environment in which they can work’ (Financial Times, 2006). To ensure everyone adopts the same standards of behaviour, Tesco has implemented a ‘Steering Wheel’ approach. This contains a set of objectives, and consequently targets are set against these objectives. These objectives are formulated so as to represent ‘demanding but achievable targets’ for its staff. Indeed, the measurement of success is determined by these objectives, with, for instance, bonuses based according to the level of achievement on the ‘Steering Wheel’ (Storey, 2007, p. 74).

The success of Tesco’s approach can barely be over-stated. Tesco has over 1,500 stores in the United Kingdom. It has 260,000 employees in the country, making it the biggest private sector employer in Britain. Of every three pounds spent on groceries in the UK, Tesco receives one pound (The Telegraph, 2007). Tesco sold £30 billion of goods in Britain in 2004; and has experienced rapid growth since then. In the UK, people buy houses with Tesco’s money, breakfast on Tesco’s cereals, commute in cars insured by Tesco and filled by their petrol, and communicate using telephones bought from Tesco using services provided by the company: in short, it pervades the daily existence of the people of Britain (Jowit, 2004).

Ultimately, according to Leahy, the Tesco ‘formula’ for success is simple: ‘Tesco is about making the shopping experience better for customers and we’ve built our success and our growth by listening to them’. (Johnson, Scholes, & Whittington, 2008, p. 389). In the macro environment and strategic landscape outlined above, Tesco’s resources, capabilities, and culture which have been developed in line the Tesco ‘formula’ for success are ultimately what explain Tesco’s superior performance in the UK grocery retail sector.

Figure 3 Tesco’s strategic directions and methods

Conclusion

This report demonstrates how there are three levels to strategy within the UK grocery retailing sector. First, there is the macro level – which includes the external political, economic, social, technological, legal and ecological influences. Second there is the industry level – which encompasses the impact of the buyers/customers, the suppliers and partners, the intermediaries such as ‘buyer groups’, and the competition between organisations. Third and finally, there is the firm level – which encompasses the resources, capabilities and cultures of organisations, and the performance such organisations derive from their particular choices in these areas. An understanding of each of these levels is crucial to appreciating the workings of strategy within the UK grocery retailing sector. It is recommended, therefore, that organisations in the UK grocery retailing sector ensure that their interests are aligned at all three levels; and it is suggested that there is much that could be learned from Tesco’s approach to strategy.

Order Now