Forces analyses of Sainsbury

J Sainsbury plc is a leading UK food retailer with interests in financial services. It consists of Sainsbury’s Supermarkets, Sainsbury’s Local, Bells Stores, Jacksons Stores and JB Beaumont, Sainsbury’s Online and Sainsbury’s Bank. The decision to diversify into convenience stores is discussed further within a Porters 5 forces analysis. Their objective is “to serve customers well and thereby provide shareholders with good, sustainable financial returns. They aim to ensure all colleagues have opportunities to develop their abilities and are rewarded for their contribution to the success of the business. The company’s policy is to work with all of our suppliers fairly, recognising the mutual benefit of satisfying customers’ needs; a concept which is considered in the Porter’s 5 forces analysis. They also aim to fulfill responsibilities to the communities and environments in which they operate” (Sainsbury’s, 2008) a point which is discussed within a PESTEL analysis.

Sainsbury’s serves 16 million customers each week in 455 supermarkets and 301 convenience stores across the country. The company employs 148,000 colleagues committed to delivering ‘Great Food at Fair Prices’. Yet more examples that can be included as a strengths in a SWOT analysis.

Sainsbury’s sells £6bn of British food every year, an obvious strength in a SWOT analysis. The company works closely with smaller-scale suppliers to expand local sourcing wherever possible, and has a network of over 3,500 local suppliers. In May 2006, Sainsbury’s launched Supply Something New, an innovative scheme to make it easier for small and medium-sized suppliers to gain access to Sainsbury’s and make locally produced food available to more customers (Annual Report 2007). This could be argued to be an important element in a PESTEL analysis.

PESTEL analysis

PESTEL analysis – Political Factors

• Increasing globalization, presents a challenge as well as an opportunity to Sainsbury’s. The challenge will be to compete against unknown forces and to source the best quality/financially viable products from world over. Sainsbury’s can enter the markets of emerging companies through joint ventures or partnerships to explore these new markets, although it does not have any plans on the horizon to do so.
• The ongoing investigation of price fixing amongst the big four retailers within the UK can have some negative impact to the industry in general and Sainsbury’s in particular, as it is at the forefront of this allegation(Rigby 2008). Although Sainsbury’s is very well established among consumers, these allegations can lead to a negative public image as the consumers might feel cheated.
• In the UK, the Government is to decrease the rate of corporation tax from 30% to 28%, which will save big companies like Sainsbury’s significant sums of money (HM Treasury 2008).

PESTEL analysis – Economic factors

• The rapidly increasing global food crisis has increased food prices all over the world, which will result in rising purchasing costs for Sainsbury’s (economist.com 2008 [online]). This will have an impact on the margins of the organisation and might lead to passing over the cost to consumers by increasing prices of most things in the supermarket. Furthermore, rising fuel costs will have implications right throughout the supply chain of Sainsbury’s leading to an overall situation of increasing prices.
• The credit crunch can have a two way impact on Sainsbury’s as it also runs a financial services company with HBOS (Annual Report 2007). The credit crunch might decrease the purchasing power of consumers and though they will still buy the essentials they may be more cautious. They may also spend less on luxury items, something that has a greater profit margin for Sainsbury’s. As far the Sainsbury bank is concerned, the credit crunch directly affects its ability to provide credit especially as it is not an established name in the financial services industry.
• Stiff competition within every segment of the retail sector has lead to retailers giving a lot of incentives to the consumers (Annual Report 2007). This will affect Sainsbury’s as the prices have to be driven down most of the time.

PESTEL analysis – Social factors

• Nowadays there seems to be more emphasis on fresh, easy style cooking. This serves an opportunity for Sainsbury’s to encourage new recipes and unfussy eating.
• There has been a huge emphasis by the government to promote healthy eating (eatwell.gov.uk 2008 [online]), primarily due to the increasing level of obesity within the UK (department of health 2008 [online]). This has lead to many consumers to shift towards healthier food. This presents an opportunity to Sainsbury’s to stock up with more healthy food or create healthier foods at a cheaper price than other manufacturers so as to benefit from this new trend.

PESTEL analysis – Technological

• The Internet phenomenon seems to be ever growing within western countries. It is predicted that by 2011 online retail sales in Europe will have reached Eur263bn, with British shoppers accounting for more than a third of all revenue. The Internet accounts for 8% of global advertising spend and is growing rapidly (The Economist, 2007). If used cleverly, Sainsbury’s can leverage the internet to its advantage. Competitors like Tesco use their own online delivery model successfully. However, specialist delivery companies like Ocado (working in partnership with Waitrose) provide an alternative for the outsourcing of non-core work.
• One of the downsides of supermarket shopping is the queuing system customers often find themselves in at the checkout. Self checkout machines, employed by Asda and Tesco, can help solve this problem, especially for customers who have to queue up for very few items. Furthermore, self checkout machines could help in Sainsbury’s opening stores for 24 hours which might help boost sales.
• Although not yet popular, RFID (Radio Frequency Identification Device) technology can be used for significant benefits to the supply chain of Sainsbury’s. If adopted, this technology will lead to less inventory for the supermarket firms leading to a leaner, more profitable organisation (directions magazine 2008 [online]).

PESTEL analysis – Environmental factors

• A lot of emphasis western companies has been on the role of big companies in reducing carbon footprint and increasing energy efficiency (Bream 2008). This is just not a backburner issue anymore and every firm will have to prove they are reducing their impact on the environment, meaning Sainsbury’s will have to invest more on green issues.
• Other important ethical issues, like sale of organic food and the ethical treatment of animals, clearly effect Sainsbury’s on various levels. The growing importance of such issues means that they will have to cater to those consumers as well as to consumers governed by price. This is a sensitive issue as they will have to balance their public stand on environment without losing consumers due to the increase in prices.

PESTEL analysis – Legal factors

• With ever stringent laws on food and drinks, Sainsbury’s will have to follow more and more packaging and labeling policies to deal with these, which will be an additional financial burden on the company.
• Due to its interests in financial services, there is ever more legal scrutiny in the operations of Sainsbury bank which means there is more responsibility regarding legal compliance and other risk measures.

Porter’s 5 forces analysis

Porter’s 5 forces analysis – Competitive rivalry

• The retail market is extremely competitive with a very crowded market. Now, more and more companies are trying to get into non food sectors (Rigby and Killgren 2008) further intensifying the competition.
• Sainsbury’s has a market share of 14.9% in 2007, steadily increasing since its restructuring programme that started in 2004 (Annual Report 2007). This is a positive trend but it lags well behind the runaway market leader Tesco, showing that there is considerable distance to cover.
• Tesco, Asda, and Morrison’s are the other three big supermarket chains in the UK retail sector. All of them have a different competitive advantage over their competitors. Sainsbury’s reach in the convenience stores makes it have a larger customer reach.
• Banks and building societies compete with Sainsbury bank but it is not a core business for Sainsbury’s.

Porter’s 5 forces analysis – Barriers for entry

• Barriers to entry are extremely high in the food retail market due to a number of factors. Firstly, organised retail is amongst the most sophisticated sectors within the UK and needs a lot of investment, along with significant brand development, which takes years to establish (Doyle 2002). Secondly, retail is also at an advanced stage within the UK and most of the western world, which means there is little scope for new entrants to establish themselves.
• Local knowledge is extremely crucial within the food retail sector, something that is difficult for foreign firms to replicate. This is corroborated by the presence of few global supermarkets within UK.

Porter’s 5 forces analysis – Threats of Substitutes

• The threat of substitutes in the food retail industry is a low one simply because consumers view it as a necessity, especially in the developed world and increasingly in the emerging markets.
• The retail market is always trying to converge and assimilate new innovations with respect to food products or alternative businesses, to make shopping an extremely pleasurable experience. This makes them extremely difficult to substitute
• The only major threat of substitute is an internal industry threat whereby one supermarket can lap up the business of other supermarkets.

Porter’s 5 forces analysis – Buyer power

• Buyer power is high in this industry simply due to the presence of so many competitors selling the same products. It is only differentiated in price and consumer loyalty and increasingly on green credentials. Moreover, the switching costs are low for consumers.
• As the economy goes further towards recession (O’Doherty 2008) consumers’ needs are likely to be given more weight, increasing their power considerably.

Porter’s 5 forces analysis – Supplier power

• Supplier power is usually more complicated as it is difficult to categorise it. It is safe to call it a mutually dependent relationship as suppliers are in itself huge companies, like P&G, Unilever, Cadbury etc. with huge brand appeal. It can be argued that if supermarkets do not sell their products consumers will shift loyalties, making suppliers very powerful. However, if the products of big companies do not reach supermarkets, their sales volumes will be affected hugely. The relationship might change depending on the situation of the big branded supplier, for example, when sales of Cadbury’s dairy milk increased through the successful Gorilla ad campaign (Wiggins and Urry 2007).
• Supplier power of smaller suppliers will not be considerable because of their sales volumes on dependence on these supermarkets.

SWOT analysis

SWOT – Strengths

• Sainsbury’s has had thirteen straight quarters of growth showing real turnaround in its business (Rigby and Braithwaite 2008). Even for 2007 it has shown an increase of 7% in turnover and a huge 450% increase in profit after tax (Annual Report 2007).
• It has an extremely experienced leadership team with Justin King, its Chief Executive receiving great praise for his work in Sainsbury’s (timesonline.co.uk 2008 [online]).
• Sainsbury’s seems to be very well placed on green and environmental issues due to its various recent initiatives, like buying fair-trade bananas (economist.com 2008 [online]). Furthermore its help in closing down gangmaster (Taylor 2008) has had a positive effect on the public in general. It has a positive consumer brand and it’s liked by both green activists and consumers.
• It is one supermarket chain that has a clear celebrity endorsing products, leading to increased sales. “With Jamie Oliver, it has been simple for Sainsbury’s to see uplifts in sales of specific ingredients that have been featured in ad campaigns. Apparently the supermarket had to order nine tons – the equivalent of two years’ supply – of nutmeg to meet demand when it appeared in one of Oliver’s hundred-plus ads” (Dickinson 2008).

SWOT – Weakness

• The takeover bid by the Qataris Private equity firm last year (Arnold and Politi 2008) can have some implications as people are gravitating towards British companies and the prospect of Sainsbury’s being governed by a foreign firm can lead to consumers switching loyalties.
• Unlike Tesco’s expansion plan (economist.com [online] 2008), Sainsbury’s is not present in markets other than the UK. This can lead to trouble especially if there is some problem within food retailing in the UK or if there needs to be a source of extra growth.

SWOT – Opportunities

• Sainsbury’s alternative business presents a great opportunity for future growth. Its investments in property (Killgren 2008b) and a goal of £40 million profit through its bank seem like a good strategy to pursue
• Online sales are a great opportunity as well, since online margins are higher and investments are not huge.

SWOT – Threats

• There needs to be continuous heavy investment in environmental and green issues without immediate benefits. The problem lies in maintaining a balance e.g. Bio-fuel is an important tool to curb global emissions and its use affects Sainsbury’s supply chain directly, so Sainsbury’s should support it. However, a spurt in bio-fuels has made corn dearer (independent.co.uk [online] 2008) affecting its prices within the UK and making Sainsbury’s consumers bear the brunt.
• Sainsbury’s operations are subject to a broad spectrum of regulatory requirements particularly in relation to planning, competition and environmental issues, employment, pensions and tax laws and in terms of regulations over the group’s products and services.

Conclusion

Through this piece it can be seen through the various analyses; Porters 5 Forces, PESTEL and SWOT, that Sainsbury’s is an iconic British food brand, well loved by its consumers. It had been suffering but since 2004 its image, and importantly profits, have improved tremendously. However, it is not insulated to many outside risks like recession and rising material costs as highlighted in the PESTEL analysis. Although it has shown steady growth it is important for Sainsbury’s to go the next level by challenging Tesco, a competitor identified in the Porters 5 forces analysis, either by thinking of international expansion or on price. This in conjunction with its increasing property portfolio and alternate businesses should help in continuing the strong growth path, as well as tiding over threats (SWOT) in its external environment.

References

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