Pest Analysis Macro Environment Marketing EssayFor assignment help please contact
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The purpose of this report is to analyse the food retail industry in the
United Kingdom. The reasons of the industry selection can be
concentrated to the broad range of provided products and services, the
financial activity of the industry, the influence in the people's life and the
various external factors that affect the sector. The analysis will begin
with a presentation of the food retail industry and a highlight of its
significant features. Furthermore, to assess the remote environment of
the industry a PEST analysis will be conducted, analysing the political,
economical, social and technological factors that affect the industry.
Furthermore, a Porter's 5 forces analysis will be used to evaluate the
operating environment and the nature of competition. Moreover the
major competitors and their competition strategies will be identified.
Additionally, the effect of the remote and operating environment on the
players of the industry will be highlighted. Also, a critical analysis of the
industry's strength and its future will be presented. Finally, a critical
evaluation on the used business analysis techniques will be illustrated.
The UK food retail industry is an established sector of the UK economy.
During the last thirty years the food retail corporations expanded their
activities to serve various consumer needs. The products that are
provided to the public include food and its sub-products, but also alcohol,
tobacco, health and beauty products, clothing, electrical products,
homeware, fuel and financial services. However, according to the Mintel
report 2009, more than half of the total sales in 2008 were assigned to
food. Furthermore, concerning the size of the industry an increasing
trend of sales can be observed of about 4% per year from 2004 to 2008
and a total amount of 108.1 billion pounds in 2008 (National Statistics -
Mintel report 2009).
The food retail industry is mainly controlled by large supermarket chains
that possess the overwhelming majority of the industry's market share,
as it will be analysed further in the report. Concerning the size
diversification of the retail stores, the majority are large units like
hypermarkets, supermarkets and discounters with a percentage of 62%
of the total number of stores. Furthermore, small units as convenience
stores and gas stations represent the 21.2% and food and drink
specialists the 11.3%. The minority are drug stores, warehouses and cash
and carry stores (Datamonitor 2009).
3. PEST analysis Macro-environment
To analyse the macro-environment or otherwise known remote
environment of the food retail industry, a PEST analysis will be used to
specify how Political and legal, Economical, Social and Technological
issues affect the industry.
3.1 Political
There are many political and legal factors that affect the food retail
industry. Future political decisions concerning taxation or the retail
industry legislation will definitely have an impact in the industry
competitors' policies and strategies. The current legislation and
regulation concern competition, employment, environmental, food and
grocery safety, financial services and health issues.
Specifically, the UK food retailers are obliged to follow food hygiene
legislation set by the Food Standards Agency and the equivalent
European Union regulation such as the General Food Law Regulation. In
the UK the food safety act of 1990 was enacted to set the food safety
requirements for food intended for human consumption. The Food
Standards Agency was created in 2000 after the food standards act of
1999, which was enacted to further secure the public health related to
food safety (Office of Public Sector Information, 1999). The UK food
retailers are obliged to follow the above regulations in conjunction with
the General Food Regulations 2004 that set the rules about the
transportation, distribution, quality, hygiene, maintenance, advertising
and selling of food and its substances.
Especially for the food hygiene and maintenance the rules and
requirements of the Food Hygiene Regulations of 2006 and the
internationally recognised Hazard Analysis Critical Control Point
(HACCP) must be followed (Food Standards Agency, 2010). Therefore,
possible disobedience of the above regulations by the supermarkets will
cause legal problems and the enforcement of fines, harming their budget
and social image.
The competition in the UK is observed and controlled by two government
bodies, the Competition Commission and the Office of Fair Trading. The
two government bodies ensure that the companies in the UK comply with
the competition law and practices. Therefore, they observe and interface
the market to avoid monopoly, oligopoly and cartel phenomena. Their
role beyond the control of competition between the competitors within
the industry is to ensure the fair trade between the supermarkets and
their supplies. According to recent press publications the fair trade is
currently the most important issue (Haurant S., 2009). In 2001 the Office
of Fair Trading enacted the Supermarkets Code of Practice to regulate
and assure the trade between supermarkets and suppliers, who include
amongst others, farmers and breeders (Office of Fair Trading, 2001).
Additionally, the major supermarket chains had been often accused for
anticompetitive, unfair practices and failure to meet the necessary
requirements. For example, in April 2010 the Office of Fair Trading fined
nine retailers for anticompetitive practices at their tobacco pricing
between 2001 and 2003 (Mintel report, 2009). For this reason the
Competition Commission planned to change the existing Supermarkets
Code of Practice to a new Grocery Supply Code of Practice (Haurant S.,
2009). The new code of practice added intensive pressure to the Grocery
retailers because they were forced to comply with stricter regulation and
to cover the costs of the observation body. This new regulation led to
greater competition which toughed the operations of the supermarkets
but reduced slightly the prices to benefit the consumers.
Another important group of regulations are those concerning the
planning and environmental law. The grocery retail companies need to
comply with the planning law to be able to expand their activities in new
places. During the past years, the grocery retailers tended to expand
their stores in places away from town centres. The reason was primary
the reduced property prices and the ability to construct large
supermarket units, maximising their profits.
However this trend provoked a series of issues such as the increased
pollution from the consumers' transportation leading the government to
change the legislation, demanding the presence of town centre stores at
first. Therefore, the reaction of the supermarket chains was to increase
the number of mid-size and small stores who complied with legislation
and increased the supermarkets' points of presence (Tescopoly; Butler S.,
2006). Furthermore, the grocery retail corporations need to comply with
environmental law and regulations concerning goods transportation
pollution, aesthetics, proper disposal and recycling. For example the
supermarkets were forced by new legislation to charge their customers a
certain cost for each provided plastic bag (Brogan B., 2008).
There is a significant percentage of the workforce that is employed in the
food retail industry. Therefore, the food retail companies are obliged to
comply with the UK and EU employment legislation exactly as the rest of
the employers. Labour law such as the Employment Rights Act 1996 and
the Employment Act 2002 specify the workers' rights including wages,
working conditions, work hours and job security Also, during the past
thirty years, a series of anti-discrimination laws were enacted to
establish equality and diversity in the workforce (Businesspme.com,
2008; direct.gov.uk, 2010). Also, the food retail corporations are obliged
to comply with health and safety standards in the workplace in
operations like the use of machinery, electrical equipment, transportation
of goods, violence etc (Shropshire, 2010). These regulations are mainly
set by the Health and Safety at Work Act 1974 and the Workplace
regulations of 1992. Therefore, any political decision leading to more
complex employment legislation can increase the labour costs in the
industry and reduce the profitability. Additionally, non compliance with
the labour regulations can lead to long term litigations with former or
employees or the government.
During the last years the large supermarket chains expanded their
activities to provide financial services such as credit cards, loans and
deposits. Therefore the supermarkets are obliged to comply with the
legislation and regulations enacted by the Financial Services Authority
(Financial Services Authority, 2010). Therefore, a possible change in
financial services taxation or regulation will affect their profitability.
Furthermore, the supermarkets are obliged to pay the equivalent
corporate tax at the HM Revenue and Customs.
3.2 Economical
The economic factors, incidents and situations that affect the food retail
industry can be concentrated in the following categories: Consumer
spending and disposable income, inflation, taxation, interest rates,
unemployment, monetary issues, and the recent financial crisis.
The recent financial crisis has definitely brought many important changes
in the food retail sector as well as to the majority of the industries.
However, the effect of the financial crisis did not affect negatively the
consumer demand. On the contrary the consumer spending in the food
retail industry increased from 2007 to 2008 especially in the food
products and continues to increase at an approximately rate of 5%
(National Statistics; Mintel report, 2009).
The main implication for this trend was that because of the recession, the
consumers cut their eating out expenses and started to consume food at
home as it is much cheaper. Furthermore the sales of organic food,
specialised products such as television and sound systems and expensive
products declined (Mintel report, 2009).On the contrary, the sales of own
brand products and hard discounters chains increased indicating the
consumers' turn in low cost products.
The price competition and the importance of food increased the
consumer demand and expenditure; however it is doubtful if it will
continue to rise mainly because of the general economic uncertainty and
the higher upcoming personal income taxation.
In macroeconomic terms, the GDP after a massive decline in its change
rate started to increase after the mid 2009 to reach a positive 0.5% in
early 2010. Also, the inflation after a decline during the recession
increased in late 2009 which probably led to an increasing trend at
groceries prices (National Statistics, 2010). However, the Bank of
England continues to maintain the interest rates at a low level (0.5%), to
protect the fragile economy (BBC, 2010). This low interest rate will lead
to increased consumption because consumers will favour to spend than
to save their funds and the food retailers will be able to borrow funds at a
low costs to cover their liabilities. This fact will act as compensation to
the increased inflation and will probably maintain the prices.
Concerning the monetary issues, during the last three years the sterling
faced a significant decline of approximately (-26%) towards the euro and
approximately (-25%) towards the dollar which increased the cost of
imported goods in the UK (Yahoo Finance, 2010). Therefore, this
situation might force the UK food retailers to construct food
manufacturing plants in the United Kingdom and prefer UK suppliers.
Thus, the grocery retailers will be able to have a stable pricing policy and
larger price margins. From 2009 to 2010 the exchange rates fluctuated
causing uncertainty and maintaining the food prices high
One of the most important parts of the economic factors that affect the
food retail industry is taxation. This is divided to personal income tax for
the consumers and to corporation tax for the supermarkets. After May
2010 elections a coalition government between the Conservatives party
and the Liberal Democrats party formed and changes are expected in
taxation. Concerning income tax an increase in tax contributions is
expected in 2010/2011 which will lead to a decline in consumption
possibly affecting the more expensive goods and food retailers. On the
other hand the corporate tax will be probably reduced during 2010 to
boost economy and development. (Vincent, 2010) Therefore, the food
retail corporations will be able to afford larger margins to price
competition. The above facts will possibly lead the supermarkets to a
trend of decreasing prices in basic goods and making offers to maintain
consumer spending levels. For example there is a trend at supermarkets
to offer products in rounded prices (£1, £2) creating an offer impression
(Felsted A., 2010).
3.3 Social
The next sector of the PEST analysis is consisted by the social factors
that affect the industry such as the demographics, lifestyle, culture and
population trends.
It is well known that Europe's population is getting older and as years
are passing this phenomenon will be more intense. In the United
Kingdom (Mintel report, 2009) the average age and the percentage of
retired people are rising. This trend has many implications to the food
retail industry.
First of all, elder people tend to consume less than younger people. This
happens because their income which mainly comes from pensions is
lower.
Secondly, elder people tend to shop from the cheaper discounter
retailers. Therefore, the market share of the discounter chains will
increase against the rest of the competitors in the industry (Mintel
oxygen, 2009).
Also, the additional needs of this age group leads to an increasing trend
of online and distance shopping which increase the home grocery
deliveries. Thus, the operational costs of the supermarkets increase due
to increased expenses for vehicles and personnel. Another implication
coming from the ageing population will be the need for new product lines
designed for people with various chronic ailments which are common
amongst elder people.
An important issue that concerns the society is obesity. According to the
Health Survey for England, there is an increasing trend of obesity
especially in children (NHS, 2009). The health problems and their
consequences led the government and various organisations to promote a
healthier lifestyle in Britain. Therefore, the consumers' health awareness
increased and they turned their interest to healthier foods and to more
fruit and vegetables. Thus, it can be supposed that the food retail
corporations will continue to adapt to the consumers demand enhancing
their existing product lines with new healthier products such as organic
foods, low fat and low sugar products and healthy food campaigns. Also,
it will be possible to appear products for specific social groups such as
people suffering from diabetes, cardiovascular diseases and allergies.
Therefore, by targeting these consumer groups the food retail
corporations will increase their income and improve their corporate
social image.
Furthermore, the increasing trend of more women entering the
workforce, led to the need for ready meals at the supermarkets because
women had less time to prepare food after work (International Labour
Organisation, 2008). As this trend continues the supermarkets will
expand their ready meals variety and create new categories depending
into cost, calories and taste covering different needs.
Also, the presence of different people from different background and
culture in the UK changed the structure of the society. According to the
UK National Statistics approximately the 10% of the UK population is
non-British (UK National Statistics, 2001). Different cultures mean
different habits and different food preferences. Therefore, the food
retailers often provide goods from all over the world to serve those
needs.
3.4 Technological
The final element of the PEST analysis concerns the technological factors
that are related to the food retail industry. The technological
development affected and changed the industry in different categories
including consumers, environment, cost, distribution, and logistics.
During the last decade, the supermarkets in the United Kingdom took
advantage of the internet and they are offering online shopping to the
consumers. Through this innovative feature the supermarkets offer their
entire catalogue of products to the consumers and the ability to compare
prices, search for a product, pay and order for their groceries. Therefore,
the food retailers reduce their personnel costs while they are able to
advertise almost free and make consumers aware of their offers. Also it is
not unusual that many products cannot be found inside the stores and
are available only through e-commerce (Tesco annual report 2009). This
is another example of minimising operating costs while increasing sales.
Furthermore, the food retail corporations used the information
technology to organise their operations and maximise the organisation's
efficiency and profitability. Specifically, the management of each
organisation's functions is assigned to specialised software and
digitalisation of processes. Through the use of innovative technology the
cost and the paperwork is reduced and time is saved. Also, the logistics
department increases its efficiency because the supply chain is more
efficient controlled and the stock management provides a real and
immediate view (Sainsbury's annual report 2009).
The implementation of technology can be beneficial for both retailer and
consumer. The self-checkout machines reduce the labour costs of the
company because they usually require one person per five machines to
observe. Also, in that way the consumers save time and control their
groceries shopping. The introduction of point earning cards offers
discounts and rewards to the consumer while it provides valuable
information to the supermarket company about the preferences and
habits of each individual. The analysis of this information assists to the
company's advertising planning and strategy while it offers the ability of
targeted marketing (Moody, 1997).
The effective application of technology in the distribution and
transportation process through energy efficient vehicles protects the
environment as it reduces the vehicle's carbon emissions. Furthermore,
the food retail company improves its corporate social responsibility and
reduces the goods transportation cost.
Finally, the Universal Product Code or in other words bar-code was an
innovation that brought a revolution in the industry. Each product could
have its specific bar-code, simplifying the pricing and check-out while
saving time and establishing accuracy. Also, the use of wireless
technology and the attachment of electronic chips on the products can
prevent theft and measure the product availability on shelves. Therefore,
the inventory is the supply process becomes faster and the food retail
corporations avoid unexpected losses that due to their volume can have a
significant cost for the organisation (Food Marketing Institute, 2010).
4. Porter's five forces analysis - Operating Environment
To analyse the operating environment of the food retail industry and
evaluate its competitive nature, a Porter's Five Forces Analysis, created
by E.M Porter professor at Harvard University Business School, will be
used. According to Porter the five forces are: the industry competitors'
rivalry, the threat of new entrants, the bargaining power of suppliers, the
bargaining power of buyers and the threat of substitutes products or
services (Porter, 2004).
4.1 The industry competitors' rivalry.
The competition in the food retail industry is intense. The named big4
supermarkets which are: Tesco, Sainsbury's, Asda, Morrisons own the
73.3% market share, fact that makes the industry an oligopoly (Mintel
report 2009). Below are the identified the major competitors in the
industry and their competitive strategies.
4.1.1 Tesco
Tesco is the market leader with a market share of 31%, and a total
number of outlets 2,282, is traded in the London Stock Exchange and had
£41,520m sales and £2,381m profit in 2009. Beyond food products it sells
electrical equipment, health products, petrol, clothing, homeware,
telecommunications through a joint venture with O2, and financial
services through Tesco Bank (Datamonitor, 2009). Also, Tesco is
expanding to land telecommunications, construction and youth clothing
(Parker; Felsted; Poulter; Minton, 2010) Tesco's expansion plans target
to the development of the small "Tesco Express" who satisfy the legal
size requirement of Sunday trading act to operate on Sunday (DEFRA,
2006). The objectives of Tesco's strategy are concentrated in five areas:
"to be a successful international retailer, to grow the core UK business,
to be as strong in non-food as in food, to develop retailing services - such
as Tesco Personal Finance, Telecoms and tesco.com and to put
community at the heart of what we do" (Tesco Annual report 2009).
4.1.2 Sainsbury's
Sainsbury's is a supermarket chain in the United Kingdom with a market
share of 15.4%, and a total number of outlets 792, is traded in the
London Stock Exchange and had sales £18,911m and £466m profit in
2009. Sainsbury's sells food products, home and garden products,
electrical appliances, clothing, health products, sports and leisure
products, petrol and offers financial and insurance services. Also,
Sainsbury's is expanding to Electricity and Gas, broadband and digital
TV. Furthermore, Sainsbury's collaborates with convenience store chains
Bells Stores, Jackson's Stores, and JB Beaumont Stores in a strategic
alliance move to increase its market share in the convenience stores
battle.
Sainsbury's concentrate its corporate objectives in five areas: Great food
at fair prices, Expansion in non-food products and services, Reaching
more consumers through alternative distribution channels (online
shopping), growing supermarket space and active property management
of existing stores (Datamonitor, 2009; Rigby and Killgren, 2008;
Sainsbury's annual report, 2009).
4.1.3. Asda
Asda is a supermarket chain owned by Walmart a United States of
America supermarket corporation. Asda operates in the United Kingdom
with a market share of 15.1% and a total number of outlets 356 and had
sales £18,573m and £520m profit in 2009. Asda sells food products,
health and beauty products, household products and petrol. Also it offers
telecommunication services through its own mobile network "Asda
mobile" and clothing through the "George" stores. Asda's competitive
strategy is to differentiate from the competition emphasises in the fresh
food, including bakers and butchers in its stores. Also, Asda operates a
discount store "Asda Essentials" with own brand products competing
directly with the discounters Lidl and Aldi. In a generic view, Asda
targets in price competition boasting better prices and offers.
(Datamonitor 2009; Corporatewatch.org.uk, 2004)
4.1.4. Morrisons
Wm Morrison supermarkets or otherwise Morrisons is the fourth
supermarket chain in the United Kingdom. Morrisons have a market
share of 11.8% and a total number of outlets 420. Morrisons sells
groceries, household products, petrol and dry cleaning and photo
services. Morrisons operates through its own stores and its subsidiaries
with Safeway among others. Morrisons' target is to become the "Food
Specialist for Everyone" as it owns 13 manufacturing plants and a fresh
food factory. Morrisons concentrates its strategy around three brand
values: Fresh, Value and Service. This means that Morrisons targets to
offer fresh food in competitive prices in a premium consumer service.
Generally, Morrisons is an emerging power in the industry and tries to
gain competitive advantage by connecting the gap between value and
high quality products. (Datamonitor, 2009; Wm Morrison annual report,
2009)
Examining the nature of competition and the competitive rivalry it can be
observed that the market share of mid-size and local grocery retailers is
too small and the increasing appearance of big4 convenience stores and
the large fixed costs. This leads to the implication that the competition in
the industry is mainly concentrated among the major competitors.
The major competitors are operating in a mature market, which pushes
them to "fiercely compete for market share through price, range and
service" (DEFRA 2006).
In a mature market with a stable population like in the UK the
consumption cannot be increased significantly. Thus, the main objective
is to acquire a bigger percentage of the market share pie. Therefore, this
situation has driven the grocery retailers to compete in a price war to
maintain their customers and if possible to attract more to increase their
revenues (Felsted, 2010).
For this reason the grocery retailers aim to innovate and minimise the
cost to be able to allow larger price margins. Also, taking into account
the recent financial crisis and the recession it can be observed that the
consumers were cutting their expenses and turned to hard discounters'
chains such as Lidl and Aldi. (Mintel report, 2009) This situation
strengthens the price competition from sophisticated to basic products
such as milk, poultry and bread. Also, the major competitors adopted
aggressive advertising policy comparing often their prices with
competition (Leroux, 2009).
Furthermore, to increase their competitiveness supermarkets expand
their activities and increase their product range. For example they offer
in their stores non-food products like electrical equipment, homeware,
pharmacy, financial services etc. This action widened their competitive
arena, as they compete with a large portion of the retail sector such as
electrical equipment, clothing, DoItYourself, furniture and health and
beauty stores. The existence of petrol stations at the supermarkets
competes directly with the petroleum providers e.g. BP and SHELL. Also,
the supermarkets' expansion to financial services e.g. Tesco Bank, place
supermarkets to compete with retail banks. It can be suggested that the
supermarkets because of the mature food market aim to provide a total
"package" of products and services to their customers covering all their
consuming needs; thus increasing the food retail industry's sales and
profits.
4.2 The threat of new entrants.
The entrance of new competitors in the food retail industry faces several
difficulties. The creation of a new supermarket chain requires large
capital investment, funds for corporate planning, advertising and trading
capital. Furthermore, the majority of the industry's market share is
acquired by the established big4 chain supermarkets and the margins for
expansion are very limited. Also, the acquisitions are very difficult to
realise because of the high value of the existing chains. However possible
mergers or strategic alliances might take place. Other barriers to entry
in the industry are the large fixed costs and the developed supply chains.
Also, the existing dominants of the market benefit from the economies of
scale which gives them the ability to adopt an aggressive pricing
strategy. Therefore, it is very hard for the smaller retailers to compete
and survive in that environment.
According to the Competition Commission (2008) there are three
different factors that lift entry barriers to the industry: a) cost
advantages that large grocery retailers have b) the planning regime for
grocery retailing and c) the control of land of large grocery retailers.
The Competition Commission report divides the large grocery retailers
cost advantages in two categories: distribution costs and purchasing
costs.
The large grocery retailers gain benefits from reduced distributions costs
occurring by economies of scale and economies of density. The
economies of density benefit the supermarkets because they operate
satellite distribution centres that serve groups of stores. This process
reduces the distribution costs because the distribution centres supply
only the short and medium distance branches saving time distance and
transportation costs.
The economy of scale impact is that the supermarket chains use
technology to control the products availability, to maintain the sensitive
groceries such as meat and vegetables. Also, the supermarket maximise
the efficiency of the distribution from and to suppliers, supermarket
stores and consumers.
Therefore this acts as another barrier to entry because the large
supermarket chains have established channels of distribution and a cost
effective distribution network supported by their own distribution fleet
which covers the majority of the British territory (Competition
Commission, 2008).
The purchasing costs act as a barrier to entry to the food retail industry.
The large supermarket chains because of their high volume purchases
are able to deal better prices with their suppliers.
Therefore, they are able to offer their products at a lower price in
contrast with the smaller retailers who are obliged to purchase at a
higher price (Competition Commission, 2008). Also, the big4 chains have
already a competitive advantage because they possess knowledge and
information about the suppliers. The volume of their sales gives them the
ability to make large orders of supplies in lower prices.
Another barrier to entry in the industry is the current planning regime
for grocery retailing. The planning regulation sets limitations to the
ability of new and existing competitors to open new stores in the
positions they want. The reasons for this include environmental,
competition and town planning issues. Also, the continuous development
of supermarket outside towns led the UK government to demand the
town centre development since 1996 (Competition Commission, 2008).
Additionally the large supermarket chains already control the suitable
land and the best locations, which make the rest of the sites expensive
and difficult to find.
All the barriers to entry in the industry are beneficial to the oligopolistic
big4 supermarket chains and allow them to increase their profitability
through the reduced costs and by controlling the goods prices.
4.3 The bargaining power of suppliers.
According to the Datamonitor report (2009) the suppliers in the grocery
retail industry include: food manufacturers, food processors, farmers,
and agricultural co-operatives. The most powerful suppliers are the food
manufacturers and the food processors because their number is smaller
and in some cases they are irreplaceable. The bargaining power of the
suppliers is high when they supply the supermarkets with branded goods
that are highly demanded by the consumers. The supermarkets cannot
apply big pressure to secure low prices and the suppliers can negotiate
better prices. Therefore the supermarket chains make long term
contracts with certain suppliers while maintaining their deals with a
variety of suppliers to keep the switching costs low.
Furthermore, the presence of the supermarkets own brands weakens the
position of the suppliers and reduces their bargaining power. For
example the supermarket chain "Sainsbury's" includes in their product
line their own branded "Sainsbury's ham" and the "Danepak" ham and
the consumers prefer them because they are usually sold at lower prices
(Ali, 2009). The implication is that the supermarkets gain bargaining
power because they are able to change suppliers or to make big orders.
However when the food retailers choose to cooperate with only a few
suppliers they give bargaining power to suppliers. For example big food
manufacturer like "Nestle" have loyal consumers who give high value to
the brand. Therefore, the supermarkets are obliged to bargain with
different terms with the big suppliers and make concessions to their
profits (Hill, 2007).
During the last years the big4 competitors demanding for lower prices,
were often accused for price wars with the suppliers. Unfair competition
practices like late payments were often adopted which led the Office of
Fair Trading and the Competition Commission to conduct deep
investigations in the industry and to impose big fines to the supermarkets
(Peel et al, 2010).
Additionally, according to Financial Times publications in 2008, the
Office of Fair Trading discovered the adoption of cartel practices and
price sharing plans between the big4 supermarkets and big suppliers like
Unilever, Nestlé, Cadbury, Mars, Coca-Cola Enterprises and
GlaxoSmithKline (Peel and Rigby, 2008). Therefore, to ensure the health
competition in the food retail industry, the Grocery Supply Code of
Practice (GSCOP) introduced, to improve the supermarket chains
relationships with the suppliers and establish a fairer trade of goods
(Dickinson, 2010).
On the other side, during the spring of 2010 publications from the press
revealed the intention of small suppliers like farmers, to unite under one
syndicate to achieve better prices for their products. In that form they
will be able to gain bargaining power and add pressure to the oligopoly
of the supermarket chains (Kuchler, 2010; Lawrence, 2010). If this move
succeeds, the grocery retailers will be obliged to squeeze their profits,
buying the suppliers products in higher prices.
4.4 The bargaining power of buyers.
The buyers in the food retail industry are considered the consumers. The
objective of the consumer is to satisfy his need and minimise the cost
(Ratchford, 1982).
Therefore, if the quality and the features of the product are the same, the
consumer will prefer the product with the lower price. The consumers
buy products in small quantities which imply that the switching costs for
the buyers are low and pressure is applied to the supermarkets,
providing bargaining power to the buyers (Perner, 2008). Also, there are
lots of buyers and they have intelligent consumer consciousness.
The price sensitivity of the basic products is high due to their
homogeneity and the small differences that they have. However the
supermarkets obtain higher bargaining power when they provide high
quality products such as organic or specialised products. The price
sensitivity of luxury and high quality products is low because they are not
a lot of substitutes; their sales volume is low and the consumers pay high
prices to acquire them. Additionally, to increase their consumers' loyalty
they use promotions, special offers and loyalty cards (Trench, 2010).
Furthermore, the consumers have the necessary information because
they are able to compare prices through the online internet catalogues.
Another important factor that increases the bargaining power of buyers
is the large proportion of supermarkets to consumer in each town
(DEFRA, 2006). The presence of hypermarkets, supermarkets, express
and convenience stores from all the supermarket chains does not force
the consumers to prefer a specific chain due to geographical reasons.
Also the big4 supermarkets do not differ too much among each other
which give to the consumers the ability to choose. The implication is that
the supermarket chains to maintain their revenues and profits need to
retain their existing customers. Therefore, they are obliged to continue
their offers, loyalty programmes and low prices.
4.5 The threat of substitutes products and services.
It is not valid to say that the food retail industry has substitutes, a more
proper characterisation is that it has alternatives. Due to the range of
products and services that the grocery retail industry offers the
substitutes can include Banks, Restaurants, Petrol stations, Electrical
equipment stores, clothing stores, pharmacies and homeware stores.
Food and its sub products equals to approximately 50% of the total sales
in the industry (Mintel report, 2009). Food cannot be substituted;
everybody needs it to satisfy one of his basic needs for living. Also, in the
modern way of living, people have less time and do not prepare food at
their homes. Despite the recession there is still a big percentage of the
population that buys food from restaurants or takeaways (Kuhn, 2008).
However, the food consumption remains stable; the restaurants are only
a process stage from the food production to the food consumption. The
supermarkets often act as food wholesalers and sell food products to
businesses. Therefore, the threat from food substitutes is low.
Concerning the other products and services, the supermarkets have to
oppose and compete with specialised retailers in their sector such as the
BP in the petrol, Curry's in the electrical equipment, Primark in clothing,
IKEA in the furniture and Boots in the health and beauty. It can be
supposed that each one of these retailers has more knowledge and
information in the sector than the supermarkets. Also, the retailers gain
competitive advantage through the variety and quality of their product
range. Furthermore, through discounted large orders from big suppliers
they reduce the prices and make special offers. Thus, in conjunction with
the low switching costs the threat of substitutes in the above categories
increases.
Additionally, the threat from substitutes creates a complex situation for
the grocery retailers. On the one hand the supermarkets have
competitive advantage due to the variety of products that they offer in a
single place. On the other hand, the supermarkets cannot fully compete
with the specialised retailers because a supermarkets' expansion in more
specialised products will be risky, costly and dangerous for their
profitability.
5. Remote environment and competitive arena effect
Examining the remote environment impact on the players of the industry
and specifically the political/legal factors, a long term involvement is
revealed between the big4 supermarkets, the Competition Commission
and the Office of Fair Trading. The new regulation, planning law,
restrictions and fines that were imposed to the supermarket chains
increased their costs, reduced their profitability and changed their
expansion plans.
In the economic factors, an expected decrease in corporate tax will
increase the industry players' profitability. Also, the weakened sterling
acts pressure on the competitors due to the increased cost of imports,
fact that will probably make them turn to domestic suppliers.
Furthermore, social changes such as the ageing population, increased
obesity, diversity of the UK ethnic groups forces the food retailers to
adapt their product lines and strategies.
Also, the advancing technology changes the supermarket operations,
reducing the operating costs and increasing security and effectiveness
and allows offering more products online, therefore increasing
supermarkets' profitability.
Furthermore, examining the operating environment, the fierce
competition forces the major players in the industry to price and offers
wars. The food market is mature; therefore the supermarkets expand in a
variety of products and services, to increase their market share and
profits.
Also, there are strong barriers to entry in the industry due to cost
advantages, economies of scale and the control of land and the big4
supermarkets take advantage of the oligopoly and maximise their profits.
Generally, the bargaining power of suppliers is low, giving the ability to
the supermarkets to negotiate better prices and increase their profits.
The bargaining power of buyers is high due to the low switching costs
and the variety of options. Therefore, the major players in the industry
try to differentiate from the competition and increase their loyalty in
order to retain consumers.
Finally, the supermarkets are not significantly threatened by substitutes
in the food market but are weaker in the specialised non-food categories.
6. Conclusion
The food retailing industry in the United Kingdom is an established and
highly profitable industry (Datamonitor, 2009). Food is one of the basic
needs of humans; therefore its providers are irreplaceable in a society.
Additionally it has a significant impact in people's everyday life and is
still developing as it expands in almost all the retail industries. During
the last years the industry proved its strength by continuing to succeed
in the most severe financial crisis after the World War II. However, the
industry is characterised by oligopoly practices and the supervisory
bodies often set limitations in its actions. It is also tested by the socio-
cultural changes and the evolution of technology.
Also, the fierce competition might lead to harder price wars which can
increase the competitors' financial risk. Furthermore, due to
technological evolution it is possible that the vast majority of grocery
shopping will be online in the future, eliminating the physical presence
stores. Also, in a possible severe deterioration of the recession the
supermarkets' social responsibility will be tested as the country's main
food supplier. Therefore, in order to maintain the industry's strength, the
major players of the industry need to adapt fast and effectively in the
remote environment changes while maintaining healthy competition in
the operating environment and the competitive arena.
7. Appendix - Critical Evaluation of Techniques
The PEST analysis concentrates in the external factors that affect an
industry, captures the current trends and is useful to understand the
environment that operates and predict its future. Using the PEST
analysis tools the companies can plan their future corporate strategy and
assess a possible expansion in a new market or country. Additionally,
when in an industry analysis PEST is combined with Porter's five forces
the analysis of the macro-environment and micro-environment can reveal
the industry's profitability potential. According to the creator of the five
forces model, Michael Porter, the analysis of the competitive forces
reveal profitability but also provide with a template for the future
competitive strategies (Porter, 2008).
Porter's five forces identify the source, strength and nature of
competition. However, it cannot easily capture the unexpected changes
as it is based on the current competition. For example, a possible
financial crisis or significant technological discovery can completely
change the existing competition characteristics. On the contrary no one
is able to forecast the future and the past is the best predictor for the
future. Finally, it can be suggested that the combination of PEST and
Porter's five forces with accurate information can provide a realistic and
valuable analysis of an industry's remote and operating environment.