Liesel Grassman PE 2008-0020Norman T. Kriel PE 2007-0155

John- Louis van Rensburg PE 2008-0023Group 1

15 April 2010

The UK supermarket industry is a very competitive and profitable industry. It is made up of four main players with significant share of the market, and then various smaller companies who focus on smaller niches in the market such as the bottom of the market discounters and the top of the line speciality stores.

The ‘Big Four’ consist of Tesco, ASDA, Sainbury’s and Morrisons.

Are British supermarkets more profitable than their European and US counterparts?

The major British supermarkets are confident and successful businesses which have combined an enviable growth record with margins which are three times as high as those of their mainland European counterparts. However, they are in danger of being marginalized within Europe by their reluctance to respond to the creation of the Single European Market, and the increasingly international nature of their industry.

British companies have a lead in applying IT to logistics. (centralized distribution and electronic point of sale (EPoS), product mix enhancements )

Compared to a similarly sized mainland European company, British retailers have twice to three times as much money available to spend on taking over a competitor.

Labour costs are lower in the UK, because in Britain the proportion of part-time labour in supermarkets is higher than elsewhere, and higher level of own-label penetration in British supermarkets means that the average cost of goods sold is lower than in the rest of Europe, and the gross margin higher.

Price plays a much more important role in both the USA and in Continental Europe than in Britain.

ROCE for six French companies were calculated at19 percent, and for six British companies at 21 per cent.

Average Operating margin for six French supermarket groups was 2 per cent. For six British groups, the average was over 6 per cent

In conclusion based on the above analysis and information on the industry and its competitors that British supermarkets were in fact more profitable during the years in question namely 1988-1995. But it must be noted that recent studies have presented that this trend has indeed changed over the following years and that it is not currently as strong as it used to be as recent studies have identified that British supermarkets have the lowest ROCE rate in comparison to France, Belgium, and the United States as at 1997.

Use the industry analysis framework to explain the profitability of the main supermarket chains in the UK.

Industry Analysis - The Five Forces model

Power of

Suppliers

CompetitiveRivalry

Power of

Buyers

Threat of

Entry

Threat of

Substitutes

Porter, 1980

1. Market leader Tesco, occupies the largest market share and targets the middle market offering value to consumers, providing both economy and up-scale products at very competitive prices.

2. Market challenger ASDA is slightly down-market of Tesco competing closely in price and focuses on delivering low prices to customers.

3. Morrisons competes at much the same level as ASDA.

4. Sainsbury’s, also a market challenger, is pitched slightly up-market of Tesco, targeting the premium end of the middle market, the consumers who appreciate good quality products for a slightly higher price.

5. Waitrose is a market nicher and the most up-market of the leading chains, catering to upper-middle class consumers who are prepared to pay premium prices for higher quality products and excellent service.

1. Bargaining power of buyers. 2. Bargaining power of suppliers. 3. Threat of new entrants. 4. Threat of substitutes. 5. Competitive Rivalry.

Bargaining power of buyers is low. The supermarket chains have a wide

variety of potential customers which weakens buyer power.

The switching costs are low There are few alternative sources of

supply There is a large concentration of buyers There is almost no chance of backward

integration.

Bargaining power of suppliers is low Due to the large size of the supermarket

chains their buying power is large Suppliers of the UK retailing industry are

farmers, food manufacturing companies, food processing companies, wholesalers.

Switching costs for suppliers are relatively high as they are doing business on such large scales

There are a large number of suppliers and substitute products available.

Low potential for forwardintergration.

Threat of new entrants is low The power of the ‘Big Four’ retailers suggests

that attempts to enter the industry are likely to be difficult.

Economies of scale, along with significant brand development, which takes years to establish also creates a barrier to entrants.

The lack of suitable sites for new stores Among other barriers to the entrant can be the

high capital cost of entering the industry, the possible retaliation by existing members

and experience in the industry

The threat of substitutes in the food retail industry can be high among the ‘Big Four’ as switching costs are relatively low and products can be similar.

However, most have their own private labels and also target slightly different markets, such as Sainsbury’s having more upmarket positioning and Tesco’s cost leadership. Waitrose offers unique and differentiated products, which are, in the eyes of the consumer, significantly superior. No other supermarket offers such premium quality products with great service and such a large range of organic products as Waitrose, so this makes them extremely difficult to substitute. (Euromonitor, 2008).

Indirect substitute such as eating out may threaten the profit potential of the industry by shifting consumers’ money from the food retailers to the caterers.

The overcapacity in grocery retailing suggests very fierce competitive rivalry among the members of the industry.

There are a few major competitors. UK retailing industry is believed to operate in a

very mature market. (limited or slow growth) as it is a mature market and these four

organizations are so well established with large investments in assets and market share that there are extremely high exit barriers as there is a lot at stake.

Undifferentiated product markets are more price competitive and that the organizations compete fiercely with one another in an attempt to differentiate themselves in any way possible.

Although the UK supermarket industry is both crowded and competitive, this analysis has proven that smaller niche marketer’s can be successful and profitable in targeting the upper-middle consumer by specializing in the sale of quality delicatessen and fresh foods. With such products holding a high profit margin it has proven to be a successful company in an attractive industry. Sainsbury’s also successfully uses a differentiation strategy to provide unique benefits to its customers, that are superior to its competitors products and services.

Datamonitor. (2008, Aug). Company Spotlight: J Sainsbury Plc. Retrieved from Business Source Premier database.

Datamonitor. (2008, July). Food Retail in the United Kingdom: Industry Profile. Retrieved from Business Source Premier database.

Euromonitor International. (2008, June 25). J Sainsbury Plc Retailing- United Kingdom Report. Retrieved from Global Marketing Database.

Euromonitor International. (2008, June 25). Supermarkets- United Kingdom Report. Retrieved from Global Marketing Database.

Euromonitor International. (2008, June 25). Waitrose Ltd Retailing- United Kingdom Report. Retrieved from Global Marketing Database.