Supermarkets in UK Essay Example

Supermarkets in UK Paper The normal way to buy food has changed dramatically over the last half century, with the small independent shops such as butchers, greengrocers, fishmongers and bakers which dominated the High Street in the 1950s disappearing and being replaced by the ubiquitous supermarket. Today, 60% of British shoppers purchase most of their groceries in one weekly shop. The growth of the sector over the last fifty years has been remarkable. In 1950 the multiple supermarkets represented just 20% of the food retail market. By 1961 this had risen to 27%; by 1971 to 44%. As the trend continued, a generation has grown up relying on the convenience and choice of supermarket food. Of course some independent retailers went out of business, but the consumer is king and consumers felt that the price was worth paying. But the price tag got higher. Between 1997 and 2002 more than 13,000 specialist stores around the UK including newsagents, Post Offices, grocers, bakers, butchers closed, unable to cope with the competition from the multiples. A recent study by the Institute of Grocery Distribution revealed that 2,157 independent shops went out of business or became part of a larger company in 2004, compared with a previous annual average of around 300 a year. Traffic congestion rocketed as more large stores were constructed out of town. Tales abounded of the negative impacts of low supermarket prices on farmers and food processors, whether the UK or abroad. By 2005 a mere 8% of food was purchased from the independent sector. Tesco and other supermarkets claim that their growth is occurring purely in response to the desire of consumers. Market structure We will write a custom essay sample on Supermarkets in UK specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Supermarkets in UK specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Supermarkets in UK specifically for you FOR ONLY $16.38 $13.9/page Hire Writer The UK supermarket industry is led by the `big four (Times Online, 2009), Tesco, Asda, Sainsburys and Morrisons. Thus it can be defined as an oligopoly. In the 12 weeks to 29th November 2009 these four competitors accounted for 75.6% of UK consumer spending on groceries. The market average increase in sales over this period was 4.4%. Tesco hold an actual monopoly over the industry, with 30.7% market share. The industry is currently worth à ¯Ã‚ ¿Ã‚ ½146.3bn and is predicted to grow to à ¯Ã‚ ¿Ã‚ ½175.9bn by 2014 according to UK Grocery Retail Outlook 2009 Repositioning for Growth Market share The market in which Tesco operates is supermarkets. Although this is a highly competitive one Tesco holds a disproportionate amount of power. The figures below indicate that Tesco holds over a third of the market share, and even double the amount of Asdas market share, the second leading supermarket. Market share is the percentage or proportion of the total available market or market segment that is being serviced by a company (Wikipedia 2006). Bargaining Power of suppliers Supplier power is an important part of the Porters five forces model. Implications for Tesco are many. Supplier power is wielded by suppliers demanding that retailers pay a certain price for their goods. If retailers dont pay the price, they dont get the goods to sell. But large supermarkets, like Tesco, have an overwhelming advantage over the small shopkeeper-they can dictate the price they pay the supplier. If the supplier does not reduce the price, they will be left with a much smaller market for their produce. Bargaining power of buyers Buyer power also acts to force prices down. If beans are too expensive in Tesco, buyers will exercise their power and move to Sainsbury. Fortunately for Tesco, there are few other large supermarket companies. This means the market is disciplined the supermarkets have a disciplined approach to price setting. Discipline stops them destroying each other in a profit war. Threat of new entrants Tesco, Asda, Sainsbury and other supermarket chains put up considerable barriers to entry. For instance, Tesco may have cornered the market for certain goods; the new supermarket will not be able to find cheap, reliable suppliers. Tesco also has the advantage of economies of scale. Thus, barriers to entry as well as the possibility of sunk costs will help restrict the level of new entrants. Threat of substitutes Its more difficult for Asda to try to raise prices and make greater profits if there are close substitutes available at Tesco But, in some cases, customers may be reluctant to switch to another product even if it offers an advantage. Customers may consider it inconvenient or even risky to change if they are accustomed to using a certain product in a certain way, or they are used to the way certain services are delivered. Competitive rivalry Classical economics predicts that rivalry between companies should drive profits to zero. This is partly down to the threat of substitutes. For instance, Tesco has competition from companies like Sainsbury that can provide substitutes for their goods. This drives the prices of groceries down in both companies. Monopsony issues There has been growing concern over the monopsony power of the big four supermarket chains: Tesco, Asda, Morrisons and Sainsbury. Technically, none is a monopsonist because none is the sole buyer of a particular category of products. Tesco, for example, is not the sole buyer of soap powders or frozen chicken. However because of their size, the big four supermarket chains enjoy much greater buying power than smaller buyers. The OFT has investigated the grocery market on several occasions over the last decade. Researchers asked suppliers for their opinion on the level of negotiating power they felt they had with different retail customers. Their responses showed that they felt they had less bargaining power with the Big Four than with smaller chains and groceries. Supermarket chains argue that they provide value for money to their customers through the efficiency of their operations. Some evidence suggests that the supermarkets do not always pass on cuts in supplier prices. Controversially, between 201 and 2003 when many UK dairy farmers were either barely profitable or making losses, prices paid to them dropped when supermarket milk prices were still rising: Illustration of monopsonistic power in the UK retailing industry Summary of the Big Fours competitiveness The Big Four (Tesco, Asda, Sainsburys and Morrisons) have gained a combined market share of 75.9% by pursuing a hybrid low price strategy with perceived benefits. In recent years Sainsburys has moved towards a differentiation strategy by focusing on quality and has implemented a higher pricing structure. These competitors have diversified their product offering and sell a variety of non-food goods including, financial services, clothing, electrical goods, and DIY products. All four possess huge buying power and high economies of scale. Each has invested in own label brands, which have risen in demand during the recession. All four have prime store locations in out of town and inner city locations. Tesco have over 2,000 UK stores. Tesco have developed a number of store formats including Tesco Express, Extra and Metro. This allows Tesco not only to compete in the convenience market but also get around the rules imposed by the Competition Commission, restricting the number of stores Tesco is allowed to have in one area. In October 2009 the Competition Commission recommended the introduction of new tests that would make UK expansion more difficult for Tesco .This may prove problematic as Tescos like-for-like sales slowed in 2009 and profit increases are driven by new store openings. Asda Relocation to larger, out-of-town sites in the 1980s gave many supermarkets the additional space required for extending their non-food offering. Asda in particular, focuses on non-food sales, because its 400 stores are generally much bigger than its competitors. Some of Asdas non-food brands have been phenomenally successful the George clothing brand has helped the chains clothing sales to outstrip those of Marks Spencer. Asda is currently the only UK supermarket offering the facility to purchase clothing online, in addition to groceries and other non-food items. Asda does not offer a loyalty scheme and claims to invest in a strategy of everyday low pricing. Asda expanded into the South in 1989 by buying out Gateway superstores. Asda became a subsidiary of Wal-Mart (the worlds largest retailer) in 1999 and hence enjoys huge buying power. Sainsburys 830 UK stores are mainly located in affluent areas. Sainsburys have diversified from their superstore format into convenience stores (Sainsburys Local). Sainsburys is the only competitor within the top four that has the strategy of quality goods for a fair price. The other three are positioned as low price supermarkets. Sainsburys hope to double the customer base of its larger stores within five years by expanding its non-food range (TU clothing range is very successful) and branching out into the North of England and Scotland Morrisons have 420 UK stores and three distinct brand values: Fresh, Value and Service. These values provide the flexibility to react to market changes and consumer trends. Morrisons aim to offer more freshly prepared food than any other retailer and have more staff preparing food than any other supermarket. The retailer grew in strength and expanded into the South of England following the acquisition of Safeway in 2004. Unlike its closest rivals Morrisons decided not to enter the convenience store sector. Vertical integration is key to the retailers success; Morrisons own their factories, production facilities and distribution network. With these facilities Morrisons can get food to stores faster so that its fresher. Morrisons have invested heavily in training and their staff is highly skilled and know their trade. Level of contestability A contestable market occurs when there is freedom of entry and exit into the market. Thus there will be low levels of sunk costs. Thus, when considering the contestability of supermarkets it is important to consider the following points: Barriers to Entry Barriers to entry in the supermarket industry are obviously extremely high, due to the massive market share held by the four main UK supermarkets. Small food retailers can be assisted in their growth by the government, with incentives such as tax relief and grants. Economies of scale are the second important barrier to entry. In addition to the usual one, the UK grocery retail market has a special economy of scale arising from the substantial bargaining power which retailers enjoy over their suppliers, the manufactures of food and grocery product. Updating earlier analysis, it has been observed that the European new contracts, Aldi and Netto have some ability to defeat this barrier. Aldi enjoys a buying-power derived economy of scale advantage in the European countries in which it has a large market share. The third major barrier to entry, the shortage of unexploited store sites, is again one that European discounters may be able to penetrate. A preliminary analysis would suggest that the UK market should be a difficult prospect for a new entrant. Unexploited superstore sites are running out. Mintel 91 has an estimated saturation point for superstores in the UK at about 800, only around 150 more than the present total. Furthermore, a barrier of entry may present itself in the sheer amount of land that a store owns; in the case of Tesco which limits the amount of new entrants into the UK market Sunk Costs If Sunk costs are high this makes it difficult for new firms to enter and leave the market. Therefore it will be less contestable. In the supermarket industry, spending on advertising are an example of costs that cannot be recovered when the firm exits the market. High sunk costs are a constraint on the level of contestability. Level of advertising and brand loyalty If an established firm has significant brand loyalty such as Tesco, then it will be difficult for a new firm to enter the market. This is because they would have to spend a lot of money on advertising, a sunk cost, which as explained above reduces the level of contestability in a market Levels of Profit If a firm is making very high profit, this is an indication that the market is not contestable, because hit and run competition should enable new firms to enter and reduce the profitability. Each of the Big Four have seen their profit margins expand while Tesco and Asda have enjoyed abnormal profits continuously Pricing and non-pricing strategies The following section discusses how each firm operates in the competitive environment of the retail grocery industry. Tesco battles by expanding market demand, increasing market share and defending market share with strategies such as flank, pre-emptive or mobile. In return the main competitors Asda and Sainsburys are attacking the market leader by using offensive strategies such as frontal, flank or bypass, in order to gain market share. Tescos understanding of its customers as well as its strong defensive marketing strategies against competitors assure them the leading position in the market. The vast majority of both marketers and practitioners frame a stores pricing decision as a choice between every day low prices or deep but temporary discounts, labeling the first strategy EDLP and the second PROMO. The kinked demand curve theory shows us that firms would lose out if they changed their prices relative to other major players i.e. if the firm increases its price, it will lose out on market share due to an asymmetric response from other competitors. If he firm reduces its price, other competitors would lower their prices too so that very little extra demand would be generated. Successful implementation of EDLP may involve offering a deeper and narrower product line than PROMO, allowing firms to exploit scale economies (in particular categories), reduce their inventory carrying costs, and lower their advertising expenses. Article by Retail Week as at 21 February 2005: Tesco shows no signs of letting up its position of dominance in the UK grocery sector, according to the latest market share figures from Taylor Nelson Sofres. Other EDLP players, such as Asda and Morrisons, also enjoyed solid growth, but Sainsburys and Safeways share dropped. Tescos market share rose by 0.7 percentage points to 26 per cent year-on-year for the 12 weeks to February 2. Asdas share increased by 0.6 percentage points to 16.7 per cent for the same period, while Morrisons share rose by 0.1 percentage points to 6 per cent. In practice, firms can choose a mixture of EDLP and PROMO, varying either the number of categories they put on sale or changing the frequency of sales across some or all categories of products. Not surprisingly, practitioners have coined a term for these practices, hybrid pricing. What constitutes HYBRID pricing is necessarily subjective, depending on an individuals own beliefs regarding how much price variation constitutes a departure from pure EDLP. Because of the price rigidity, supermarkets have resorted to non pricing strategies as a means of capturing market share. Examples of non pricing strategy may include:   Traditional advertising / marketing   Store Loyalty cards   Banking and other Services (including travel insurance)   In-store chemists and post offices   Home delivery systems   Discounted petrol at hypermarkets   Extension of opening hours (24 hour shopping)   Innovative use of technology for shoppers including self-scanning and internet shopping services Legal issues concerning public interest As with any large corporation, the supermarket chain has been involved in lawsuits, usually from claims of personal injury from customers, claims of unfair dismissal from staff, and other commercial matters. Two notable cases were Ward v Tesco Stores Ltd, which set a precedent in so-called trip and slip injury claims against retailers, and Tesco Supermarkets Ltd v Nattrass, which reached the House of Lords and became a leading case regarding the corporate liability of businesses for failures of their store managers (in a case of misleading advertising). Criticism of Tesco includes disapproval of the effects supermarket chains can have on farmers, suppliers and smaller competitors; along with claims of generally poor labour relations with its staff concerning sick leave regulations. Accusations concerning using cheap and/or child labour in Bangladesh amongst other places have also arisen from Sainsbury. Asda and Sainsbury are among companies that have agreed to pay near record fines of 116 million after admitting they fixed the price of milk, cheese and butter between 2002 and 2003. The supermarkets claimed they joined forces to help raise the price of milk to farmers who were suffering badly from falling milk prices and the after effects of an outbreak of foot and mouth disease. In contrast, consumers had to pay an extra 3p for milk and 15p extra for a pound of butter. The total cost to consumers form the higher prices was 270 million. Tesco, Sainsburys and Asda, as well as Imperial Tobacco and Gallaher, were among those accused of increasing profits illegally by the Office of Fair Trading (OFT). Cigarette brands at the centre of the investigation include Embassy, John Player Special, Lambert Butler, Benson Hedges and Silk Cut. Tesco has been heavily criticized by the media in both the UK and Ireland among other places over its comparatively more ruthless and harsh business tactics compared to its rivals, all of whom stand charged, like Tesco, of bullying farmers to lower their prices to unsustainable levels. Waitrose was the only major supermarket to come out of this accusation relatively unscathed. Tesco has been subject to several claims of apparently out-of-date food being back-labeled to appear to still be in date, poor cafà ¯Ã‚ ¿Ã‚ ½ hygiene and a staff member contracting legionnaires disease in the Wrexham store. Tesco has been involved in the areas of employment law, personal injury, intellectual property disputes, and taxation amongst others.