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Supermarkets have a long history in Britain which can be traced back to the 19th century. During the past two hundred years, British supermarkets experienced a series of opportunities and challenges and made success eventually; their growth can partially be explained by their increasing sophisticate operation in marketing, their visually impressive display of products, also the development of national brands and direct advertising to consumers. Studying this mature and successful industry is possible to form a clear market profile and acquire useful information and practical suggestions for relative industries or the new entrants of supermarket industry. It could also help the investors to identify the different consumer classes served by different supermarkets in UK.
This report is organized as follows. First, it takes an overview of UK supermarket industry. The following tries to consider the UK supermarket industry based on two analysis tools, PEST and Porter’s Five Forces. With the assistance of these two tools, the key issues within this industry and the competitive arena it operates in are evaluated. The third section identifies the remote environment and market characteristics. In the fourth part, the generic strategies of Tesco, Asda, Sainsbury’s and Morrison are compared to one another and differentiation within the industry is discussed. Finally, the conclusion section attempts to make a summary of the strength of the industry in nowadays and predict for its future success. In brief, this report tries to navigate through the supermarket landscape in UK, provides readers with detailed analysis of factors that are propelling the industry, plus the opportunities and challenges in the market.
2 Industry Overviews
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).
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.
Figure 2.1: UK Supermarket Market Share (Source: TNS Worldpanel)
J Sainsbury (UK)
Asda Group Ltd
Wm Morrison Group
Co-operative Group (a)
Marks & Spencer (food)
Spar UK Ltd
Iceland Foods Ltd
Costcutter Supermarkets Group Ltd
Aldi Stores Ltd (UK)
Netto Foodstores Ltd
Figure 2.2: the UK Sales of Leading Players, 2008/09 (Source: Mintel)
3 Remote Environment Analysis
Finlay (2000) suggests that the remote environment has no significant influence from an individual business within it, while it can make a major effect on the operating environment of the business. Therefore, to analyze the UK supermarket industry, the remote environment of this industry should be studied firstly. The following part of this section employs PEST analysis and discusses the external environment of this industry from its political, economic, socio-cultural and technological factors respectively.
3.1 Political Factors
Political factors can influence companies in many ways, they can bring companies advantages and opportunities, at the same time, place obligations and duties. Within supermarket industry, political factors are usually employed to make restrictions and place duties on the major firms from different sides, among which three aspects should be noticed.
3.1.1 Fair Competition
The Competition Commission (CC) examines the customers’ choices in particular areas and considers how competition works between retailers of different sizes. According to the chairman of CC, customers benefit from the vigorous competition within retailers and have a good choice in most British areas, while there are also some local groceries markets need more competition and benefit customers locally and generally. Therefore, the CC warned action needed to be taken in a number of local markets (the Independent, 2007).
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.
3.1.2 Standards on Products
In the aspect of product standard, the regulations on food safety in UK are extremely strict. A Sainsbury’s chain store in Cambridge was fined £4,480 for selling out of date food in 2002  . The Food Safety Act 1990 is an act of parliament produced by the UK Parliament, which requires that food must comply with food safety requirements, must be “of the nature, substance and quality demanded”, and must be described or labeled correctly.
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  .
Facing this situation, supermarkets should consider changing their product strategies to offer better packaging design and more environment friendly products. At the same time, less packaging could cut costs for both supermarkets and suppliers and bring lower prices to customers.
3.1.3 Minimum Wages
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  .
The dropped average family’s disposable income level encouraged supermarkets to find solutions to defend their markets. Some value supermarkets have been trying to attract more customers away from the middle and high-end grocery market segments and keep those who have already moved to them by price promotions. At the same time, high-end grocery chains such as Waitrose and Sainsbury’s are introducing budget ranges to retain their customers, own-label products have also gained more customers.
3.2.3 Unemployment Rate
Under the recession, the number of people out of job has increased dramatically from 5.5% in 2006 to 6% in 2008 (Figure 3.2.3). While the latest news shows an even worse situation that the unemployment figures in the first quarter of 2010 have risen to the highest level for 15 years to 2.51 million, and a third of these unemployment people are now long-term unemployed. Nearly 18% of young people are unemployed  .
Figure 3.2.3: the UK Unemployment Rate 
The gloomy unemployment rate suggests a slow pace of economic recovery, which is not good news for supermarket industry. As the workless people would have financial problem and insufficient money, the buying power of them descend. The bad employment status also makes an explanation on the declined disposable income level these years. As a consequence, people will have a larger demand of value products or bargains in supermarkets.
3.3 Socio-Cultural Factors
Socio-Cultural elements are concerned with people’s needs, wants, attitudes, interests and opinions in the society. These forces shape people’s characteristics, affect the way people behave and ultimately what they purchase. Supermarkets must be able to adjust to environment changes and offer products and services which can exactly satisfy customers’ needs and benefit people’s lifestyle; otherwise, they may lose their competitive advantages and customer loyalty. Demographics, lifestyles and work styles are three socio-cultural factors which are related closely to supermarket industry.
Demographics indicate the features of human population, which determines many long-term changes in society (Finlay, 2000). In the UK, some imbalance of population age groups already exist, for instance there are more retired people than children, and this phenomenon will be more obvious. It is forecasted by (Mintel, 2009) that British population would peak within the next 20 years as the birth rate is still lower than the replacement level. The over-64s age group is projected to experience the fastest growth as it is showed in Figure 3.3.1.
Figure 3.3.1: the UK Forecast Population Changes between 2009 and 2014 (Source: Mintel)
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.
People’s traditional leisure and shopping time is changed by the work style nowadays. Compared with the traditional 9 to 5 working time, lots of other work formats have arose. People who work late or need to do their shopping later will go to the supermarkets which is still open at that time. That is an opportunity to supermarkets to increase their sales. Thus, many supermarkets have extended their opening hours, for example Asda open until 10 pm, Tesco open 24 hours 7 days. This 24-hour retailing of groceries by large supermarket groups can be seen as one of the consequences of the emergence of a 24-hour society (Moore-Ede, 1993; Presser, 2003).
3.4 Technological Factors
Technology development brings new products, services and processes and impacts on consumer habits and expectations, any retailers that ignore this fact may face extinction. The benefits of the developed technology on supermarket industry can be discussed from e-business and innovation aspects in this part.
The UK’s leading supermarkets have successfully employed e-business revolution to improve their services to customers and their operation procedures. The application of supply-chain management makes the supermarket inventory management more efficient and cost-saving.
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.
Figure 3.4.1: Share of online in total grocery sales (Source: Mintel)
With the development of technology, many new products have been launched into the market make a wider range of products in supermarket. Figure 3.4.2 present the number of new grocery product launched in the UK market ever year from 2001 to 2005. Nearly 8,000 brand and 2800 own label goods launched in 2005.
Figure 3.4.2: Number of New Grocery Product Launches Annually (Source: Mintel Global New Product Database)
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.
The self-checkout machine is also an innovation in supermarket industry, which offers a choice between automated and staffed checkouts to customers. With the use of self-checkout machines, customers’ checkout time and supermarket staffing requirements can be reduced. The staffs in supermarket can work more efficiently, as stores are often able to run two to six self-checkout machines where one cashier is needed. Tesco launched first self-service only store in Northampton in 2009, which has five self-service tills supervised by just one staff. It suggests a revolution trend on the supermarket checkout.
4 Operating Environment Analysis
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.
4.1 Intensity of Rivalry
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.
4.1.1 Product Differentiation and Switching Costs
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.
4.1.2 Competitors Strategies
Facing the low product differentiation and low switching costs in the industry, there are two main types of firm behavior in the market which can be identified as price competition and non-price competition.
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.
Overall, the supermarket industry can be seen as a mature industry which has experienced a very significant growth in the size and increased retailer concentration. Although the super power of Tesco is often discussed by many institutions or experts, under the intervention of government, the competition intensity of this industry is moderate in general.
4.2 Bargaining Power of Buyers
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.
Above all, customers can exert obvious influence and control over this industry in certain circumstances.
4.3 Bargaining Power of Suppliers
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 t
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