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The impact of the recession on the reatailing industries of Britain

Introduction:

The recent global financial crisis reaches out from the table of parliament to common men, from café to boardroom, from here and there and everywhere. It was the most burning question in the last two years or so. This research work is done because of this global financial crisis to see the mark it has made in the retail industry of the United Kingdom with special mention to the two of the UK’s retailing leader Tesco and Asda.

It was assumed that the most current recession will obviously have immense devastating impact on the overall profitability of retail industry of United Kingdom. But this did not happen - more certain is the fact with Tesco and Asda- two U.K. based retail giant. Even though the overall business did not touched the desired growth level, the sales figure and profit volume did not affected like the way aviation industry, automobile and real estate sector. The main reason behind it is that the business of Tesco and Asda is mostly related with the daily necessary products like rice, sugar, milk, egg, clothes which is inseparable from everyday life.

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Conceptual framework:

Tesco is the biggest English retail giant of the lot along with an impeccable sales and profit volume. Jack Cohen founded it in 1919 in East London. According to February 2010 statistics, it is operating 4811 stores with a £3.41 billion operating cost. It is running 6 categories of business outlets named as Tesco Metro, Tesco Extra, Tesco Express, Tesco Superstores, One Stop, Tesco Home plus. Now a day, it has a market share of around 30% of the overall market share. It started retailing food and drinks and right now it has turned itself into one of the most diversified British firm with a very detailed product line.

As of 27 February 2010, at the end of its 2009/10 financial year, Tesco's UK store portfolio was as follows:

Format

Number

Total

area (m²)

Total

area (sq ft)

Mean

area (m²)

Mean

area (sq ft)

Percentage

of space

+/- Stores

2009/10

Tesco Extra

190

1,265,989

13,627,000

6,625

71,721

41.31%

▲ 13

Tesco Superstores

455

1,255,584

13,515,000

2,786

29,703

40.97%

▲ 7

Tesco Metro

181

192,867

2,076,000

1,081

11,470

6.29%

▲ 7

Tesco Express

1,130

236,345

2,544,000

205

2,251

7.71%

▲ 169

One Stop

513

62,430

62,710

126

1,316

2.02%

▲ 1

Tesco Homeplus

13

37,904

554,000

3,790

51,468

1.70%

▲ 3

Total

2,482

3,051,119

32,991,000

1,229

13,292

100%

▲ 200

Tesco has traditionally followed a blend of differentiation and cost reduction as its generic business model and by the way it has stuck somewhere in between. The resistance of Tesco from sustaining another recession is questionable since it serves its own branded costly items along with the lower priced items of the basic necessity category. Moreover the apathy towards outsourcing and grandiose investment in infrastructure to reduce long queue and theft means more expansion to achieve the spillover effect. Again the same size fits all strategy of Tesco means huge expenditure on mass advertising without creating any generic appeal.

Asda is the Wal-Mart’s British subsidiary, with a generic cost leadership business model. It is the second largest retailing giant operating in U.K. after Tesco with a market share of 17.5%.It is mainly involved in business of selling basic daily human needs like foods, clothing and general merchandise. Though it was founded in 1949(then known as Associated Dairies & Farm Stores Limited), the name Asda came in 1965. Since then it I successfully operating it’s business with the slogan “Britain’s lowest priced supermarket”. It’s operating income is now £638 million having 346 supermarkets and about 150,000 employees. Traditionally Asda had the reputation for being the lowest cost supermarket brand across the whole United Kingdom. The dependence on the locally produced brands and the outsourcing strategy has made Asda the ultimate cost leader of the industry enjoying the highest level of margin around the country. The basic problem with Asda’s business module is did not attract the middle- to higher range clients because of the ongoing 12 year long reputation of the industry cost leader. Moreover at times Asda has blamed for poor inventory management and service quality in comparison to the rivals like Tesco and Morrisons.

As of March 2009[update], Tesco has a 30.4% share of the UK grocery market while Asda's share is 17.5%, followed by Sainsbury's at 16.1%, and Morrisons at 11.8%.

Supermarket

Consumer

Spend (£000s)

Market Share

March 2009

+/- from

March 2009

Tesco

6,453,370

30.4%

▲ 4.3%

Asda

3,411,938

17.5%

▲ 8.5%

Sainsbury's

3,239,500

16.1%

▲ 5.7%

Morrisons

2,327,583

11.8%

▲ 7.2%

Whether the recent global financial crisis has some impact on the two retailing companies the management should analyze the situations very carefully. Management of the two firms should at this time look out for answering questions like why there is drop in the sale of consumer durable whereas the day to day consumable goods were not that much hit by the crisis. Is there any way to immunize the business from this sort even by introducing different types of business model that will be suitable for retail business? Whether there is any chance or technique to reduce the overall fixed cost of the firms in theses sort of situations? So the analysis should be a rigorous one in answering these questions and aid the management in analyzing the situations they have faced recently.

From the researcher point of view the research topic is of utmost important one as the impact of the crisis needs to be carefully sorted out. It can be easily seen that the defensive products are always hurt by a lesser extent as the consumers never reduce the purchase of the daily necessary items but the retail stores of today specially Tesco and Asda have other products which do not fall in the category of defensive products like consumer durables and telecom eservices and various types of financial services sot the impact the crisis on these business is inevitable. So there is always a dilemma as to whether the firm should go for diversification or be small and avoid crisis. This particular research is done to put a light on this issue mainly.

Different people have different thoughts regarding the actual reasoning of the recent financial crisis. Some observations are given below:

According to Steven A Holmes [" Fannie Mae Eases Credit To Aid Mortgage lending" The New York Times, September 30, 1999], Thomas Sowell ["The Housing Boom & Bust". (New York: Best Books, 2009). Page 66, 2nd paragraph] and Paul Krugman securitization of the long term bank loan, subprime lending and interruption of investment bankers were the root cause of the recession. As the housing bubble was spread everybody were so reluctant to search for creditworthy borrowers and did not emphasis on the loan to value ratio at the time of any mishaps.

According to Arthur Leibold ["Some Hope for the Future after a Failed National Policy for"], James R Barth.; Susanne Trimbath; Glenn Yago [The Savings and Loan Crisis: Lessons from a Regulatory Failure. Milken Institute. pp. 58–59] overall debt level in housing sector with almost 127% of yearly earnings of that sector was the reason for this recession.

An important understanding from this finding of the causes of recession tells us that the recession was created because of real estate industry and it takes its toll from everybody. But the defensive industry on the other hand was neither a responsible party nor the crisis hampered it greatly. As the retailing maestro the two firms Tesco and Asda find their operation to affect because of this debacle but at what extent will be unfolded through this research work.

In identifying the impact of the crisis on the retailing industry we should pay a close attention to the generic business strategy followed by the firms. There is a ongoing debate about whether firms belonging to the retailing industry should follow differentiation or cost leadership. This debate generated at least two types of thoughts they are presented below:

From the point of view of Philip Kotler and Kevin Lane Keller [Marketing Management (12 Ed.). New Jersey: Prentice Hall.] And Pepall Lynne, Daniel J. Richards, George Norman [Industrial Organization, Contemporary Theory and Practice. Natorp Boulevard, Mason, Ohio 45040: Thomson South-Western. pp. 133.] – The strategy the retailer should follow should be cost leadership and nothing else. This view is taken under consideration because retailers usually do not go for backwardation means they are not the producers rather they sale the products of the producers so any gain they make shoals based on the sales they have made for any particular product. That’s why retailers should focus on the bulk sales to accumulate larger profit through the use of cost leader ship.

Whereas from the view point of Rita Kean , LuAnn Gaskell , Larry Leistritz , Cynthia Jasper , Holly Bastow-Shoop , Laura Jolly , Brenda Sternquist ["What is Differentiation and How Does it Work?," Journal of Marketing Management and ] and William Harley Davidson.[ "Breakthrough". John Wiley and Sons, 2003] to make profit and be successful the retailers should try to achieve diversification in what they are selling and in turn opt for differentiation. According to them it is differentiation that would help the retailers in increasing their margins be at the top.

An interesting observation is that none of the observations make any sort of comment on the blend of the two generic strategies. Tesco follows a blend which does not fall in any category and Asda falls in the first group of view.

Another important point is that both the thoughts tell what should be the preferred generic business model that should be followed by the retailers but none have told what to be followed at the time of any sort of debacles.

Methods and Methodology:

1. Methodology:

Whether the financial health of the UK based mega retailer Tesco and Asda remain immunized at the time of the global financial crisis was the determining factor of the analysis. To analyze the problem as in depth as possible the need of an exploratory research was paramount. And the conclusion based on the work done will be very much insightful for the retailing industry of the UK as a whole. To find out the underpinning reasons research idea, questions and objectives were identified. And respondents were asked different questions to collect data to aid in doing this research.

The steps followed in performing the research work are the following:

Identifying the type and nature of the problem under consideration,

Indentifying the data sources from which the data to be collected to aid in decision making,

Data collection about the companies concerned and of comparables to make comparison and make inferences,

Data collected were both primary and secondary in nature.

Processing and analyzing the data gathered,

Interpreting the results and

Making concluding remarks and recommendations about Tesco and Asda.

2. Development of Research Ideas, Objectives :

In performing any type of research work there has to be a chronological flow of the work done. At first a research idea had to be established which centers the prime focus of the whole work. Then research question and objectives were established in line with the idea. The research need to be a meaningful one which would serve the researcher best to carry out the work efficiently and effectively.

The development of research questions from the research idea was a tough job. The questions need to be as precise as possible and at the same time they need to serve the purpose getting the idea in a more meaningful manner. The research questions followed an order to discover the fact that was warranted in this particular study.

After the development of the research questions there was a need to develop the research objectives. By keeping the research questions in mind the objectives were developed. The research objectives were kept as simple and understandable as possible and at the same time as meaningful as possible.

Research Idea:

Figuring out the impact of the global financial crisis on the UK’ retail industry with respect to Tesco and Asda.

Research objectives:

The following objectives are tried to achieve by me through carry out the research work:

The main objective of the research was to indentify the impact of the global financial crisis on the turnover and return of the two firms under consideration.

To identify the impact of the recession on other industries to make a clear comparison with them and make comment about the retail industry.

To identify the underpinning reason for which the household or daily consumables are less affect with respect to recession in comparison with other products such as construction and consumer durables.

To give an idea about some model that would make the retail industry further insured at the time of any black swan event.

To know more about the technique that retailers follow to reduce the fixed cost at the time of trough.

3. Research strategy and data collection method:

The gradual phases of the analysis are represented below and it is obviously evident that data collection was the toughest job in my research.

Choosing the Topic

Analysis and interpreting data

Review the related literature critically

Collecting Data for the research

Choosing the appropriate research approach

Writing the final project

Figure: Research process

Source: Saunders et al 2003, research Methods for Business Students, Prentice Hall

Now I will discuss how I have proceeded with my research with a little description at each phase.

Step-1: Determination of the data source and the proper development of the survey instrument:

There are two generic data sources- primary data and secondary data. Primary data is unpublished data series and it was my responsibility to collect the data. There was no field worker or investigator used in the data collection process. The primary data collected was the Tesco’s and Asda’s management’s response regarding the global financial crisis. Secondary data means data which has been collected by the other party and remains in the published form. For the research I have used internet, published journal, and annual report of Tesco and Asda for collecting secondary data. The secondary data used was reliable since it was fine-tuned by me for validity and suitability.

As previously mentioned both primary and secondary data was used for the research. All the stakeholders related with Tesco and Asda was the population. The data collection process followed the following format.

Focus groups;

Other

Qualitative techniques;

Recognizing the need to collect primary data

Determining the methods for collecting data

Describing the type of data to be collected

Quantitative Research;

Survey

Instrument

Needed;

Qualitative Research:

Observation:

Figure: Primary Data Collection Decision Framework

Source: Davis, D. (2000), pg 264-265, Business Research for Decision Making, 5th edition by Thompson

Step-2: Design of sample and collection of data:

Before moving on to the sample design it was very crucial to decide whether to go for sampling or census. There are several valid reasons for which census was not done rather the research was done based on sampling. The drawbacks of census survey are the following:

Very large size of the population which will need more time and money that I could afford.

In accessibility of the population due to travelling or any other reason.

The non sampling error in census is more than the sum of sampling and non sampling error arises from sampling.

So sampling was chosen over census to conduct the research.

Stratified random sampling was done to keep align with the heterogeneity among the respondents of Tesco and Asda. And further through the use of optimality measurement number of samples in different strata was allocated.Like in every research there may be responses which do not go with the need of the work but the data were collected from so many diverse groups to ensure data heterogeneity so the irrational responses did not pose a major threat to invalidate the research even though it was a limitation of the study on the researcher’s part.

4. Research Validity, Reliability:

There were both budgetary and time constraints the smaller size of sample but enough to reflect the characteristics of the population to make the research reliable. If the then provided methodology is followed by another researcher similar results will be there.

To make the research a valid one the research topic should provide the results that was desired initially and in this regard this research provided with stand the expectation and showed the impact of crisis on Tesco and Asda.

The idea of the research is so demanding that any other researcher can use it with little moderation in the given methodology. So it can be said that the research has generalisability.

Findings and interpretations:

From the point of view of profit recession did not have that much impact on both the firms. And while considering the business and financial risk both firms have managed their risks quite efficiently.

Through careful scrutiny of the Tesco it was found that newer outlet contributed to the profitability while some products such as insurance lost its way. And as a cost leader Asda recovered its losses from mobile sector.

Because of being only the seller of the retail items the whole industry and its participants are not that affected by the recession.

The expansion of new retail outlets helped both the firms in retaining their position.

The introduction of non traditional retail items will not aid in this sort of situation rather the size of the business played a vital role in obtaining economies of scale and economies of scope.

Conclusion and Recommendation:

This particular research shows that the retail industry of United Kingdom faced lesser difficulties with respect to others as governments now follows the Keynesian views of spending more and more specially in the time of recession. As the retail industry has the predominance of the household or defensive products the contraction of business was very minimal and furthermore the cost minimization efforts of management did not allow narrowing down the margin. The specific recommendations are the following:

The core product line should never be left alone as in this line the business are most efficient.

Cost effectiveness through the economies of scale and scope should get ample focus.

Follow strictly the generic business strategies of each and try to blend them as efficiently as possible.

At this moment try for bulk sales with low price which in turn will ensure high turnover and thus high profit.

Day to day used household products should get utmost importance as these products will help to boost sales.

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