Environmental Analysis of Supermarket Industry in the UK

[Abstract] The UK supermarket industry has changed its characteristics over the last twenty years and has developed as a distinctive system of retailing in the UK. Based on the secondary research， the four key issues from external business environment such as planning regulation， value added tax， lifestyle change and technology innovation have been examined and the competitive intensity within the industry has been analyzed as well with high barrier for new entrants， low bargaining power of suppliers， medium power of customers， medium threat of substitutes and intense competition. The four largest companies have been dominated the industry with their own distinctive strengths. Furthermore， industry trends in the next five years were predicted at the end of this paper in order to contribute to the scenario planning.

[Keywords] Business environment；Supermarket；Retailing

1.Introduction

With the society and economy development， supermarket industry has dramatically changed in the UK during the last two decades. A number of factors from internal and external business environment have resulted in a new market structure and some distinctive phenomenon in the UK supermarket industry.

1.1 Definition of the UK Supermarket Industry Boundary

A supermarket is defined as a self-service grocery store providing a wide range of products and services such as food， beverage， clothing， household products， mobile phone and insurance， generally with a space of more than 15，000 square feet （Encyclopedia Britannica， 2009）. According to Griffiths1 （2009）， there are currently eight large grocery retailers in the UK， which are Tesco with 31% market share in 2008， ASDA （16.5%）， the Co-operative （4.3%）， Morrison （11.5%）， Sainsbury’s （16%）， Waitrose （3.8%）， etc. These sets of firms account for an important proportion of food sales such as baked goods， dairy products， meat and also have increase in the sale of non-food product lines covering OTC pharmaceuticals， clothing， electrical products， music and insurance. Generally， supermarkets use a common fascia with a franchise mode， membership agreement or alternatively or they may be directly owned by the symbol groups. They are aiming at the shoppers in the UK covering men， women and kids who require different items from different sectors such as food sector and non-food sectors.

1.2 Aims and Objectives

This report examines the external environment and competitive intensity of supermarket industry in the UK based on the secondary data. The competitive advantages and characteristics of the three leading companies in the UK such as Tesco， Sainsbury’s and Asda would be analyzed as well. In particular， the future of the industry in five years can be covered for the scenario plan to some extent combining with the environment scanning.

2.External Environmental Analysis

2.1 Planning Regulations

In 2000， the department of the Environment， Transport and the Regions （DETR） stated：

‘The government remains firmly committed to the objectives of PPG6 （Planning Policy Guidance No.6） which seeds to sustain and enhance the vitality and viability of our existing city， town， district and local centers and to make them the focus for retail investment’.

Therefore， it has been very difficult for supermarkets to get permission for new out-of-town stores. Due to the environmental damage resulted from building on green field expansion， Tesco and Sainsbury， in particular choose to expand based on smaller format in urban area （Wiggin， 2007）.

2.2 Value Added Tax

In times of recession， government had implemented value added tax with 15% from December 2008 to January 2010 in order to boost consumer spending but after Jan. 2010， VAT had returned to 17.5%. However， the new coalition government， in its June 2010 budget， announced an ‘unavoidable’ rise in VAT to 20% from January 2011 （Capstick， 2010）. According to BBC news1 （2010）， Tesco has been accused of raising prices of certain items ahead of tax rise. Thus， thousands of products will have increased in price， which would put further pressure on cash-strapped consumers. Consumers would probably buy more own label products instead of branded ones and common food instead of organic food due to the increasing price of items in supermarkets.

2.3 Modern Life Style

With industries and technologies development in modern society， women are increasingly required in the workplace， which lead to the society life change. According to Capstick （2010）， the busy lifestyles and demands on the leisure time for most shoppers would contribute to the convenience of one-stop supermarket in the UK. Supermarkets can provide free parking and competitive price for convenience. As for the one-stop shop， most things can be found under one roof. Therefore， retail sectors can be widely developed such as clothes， households， financial service and pharmaceutical products. The opening hours are long with shift workers.

Online shopping is another aspect because of lifestyle change， which meets the requirements for some people who prefer shopping at home， especially for those with short of time. There is a new idea about online shopping developed by Tesco as an example. According to Guardian news （2010）， Tesco has tried to provide the first drive-through supermarket service in August， 2010， which is aimed at customers who want convenience online shopping but cannot afford the time to stay in for their groceries to be delivery. The service can be ordered online and the goods can be collected in two-hour slot.

2.4 Technology Application

Technology innovation has brought supermarket industry into a new era and it can have positive effects on supply chain management， logistical distribution and sales in the UK supermarket industry.

IT system has improved the efficiency of supply chain management. For example， the Electronic Data Interchange （EDI） is used by numbers of supermarkets to communicate with their suppliers in real time. Supermarket buyer has an opportunity to take over stock control， balance the supply and demand on the shelves， order and deliver （Loughlin，1999）.

Logistics is another example to reveal the UK supermarket developing due to hi-tech application. Eastburn （2007） pointed out that computer delivery planning system， which installed in the distribution center of the UK supermarket， can reduce around 40% delivery vehicle fleet.

Furthermore， online shopping is the extension of supermarket development with advanced internet technology. Grocery retailers have used the advanced network technology to construct their distribution networks and design their new websites. Wiggin （2007） pointed that contact center and internet connections have improved substantially since 2000. Online shopping meets a group of customers’ requirement of home shopping， has gained more and more customers and becomes a more reliable and faster experience. Griffiths2 （2009） found that the turnover of online supermarkets was around ￡2.8bn with a 27% increase in 2008.

In particular， check-out technology is another aspect to significantly affect the UK supermarket industry. Self-scan technology speed up the shopping and improve the efficiency. It is believed that this system can save nearly 500，000 hours per year waiting time for customers and contribute to 3% of staff abuse incidents （Capstick， 2010）. Moreover， Near Field Communication （NFC） is being tested by many countries including the UK. It means customers could pay for their shopping with their mobile phones which equipped with NFC， using existing online pin payment infrastructure.

2.5 Industry Uncertainty

Business environment has been formed by a combination of issues from politics， economics， and social， technology and others. Kilduff （2000） described that the uncertainty of environment can be classified into four dimensions， which are related to the degree of simplicity/complexity， dynamic/ static， stable/unstable and turbulent/transitional.

Supermarkets have their roots in 19th century and had rapidly developed since1960s. The industry has been in a stage of transition from the industrial era to the information or knowledge era； so they are being re-organized （Telegraph， 2008）. Overall， after turbulent years， the UK supermarket industry is becoming relatively stable and simple but still dynamic nowadays based on effective supply chain system， large ranges of products， especially non-food lines and online delivery.

3.Competitive Intensity Analysis

According to Porter’s five forces model， internal business environment covering threat of potential entrants， threat from potential substitutes， bargaining power of customers and suppliers and the rivalry within the competitive arena can be analyzed in the UK supermarket industry as follows.

3.1 Threat of New Entrants

Barrier to entry the UK supermarket industry is very high due to the powerful supply chain management， distribution system and other technology facilities. The continual investment in electronic point of sale （EPOS） and EDI （electronic data interchange） system creates further barrier. Furthermore， self-scan service facilities have been applied in the UK supermarket nowadays， which have also increased the barrier. In addition， it is very difficult and expensive to acquire new sites in prime positions， especially out-town places due to the government regulation as part 2.1 mentioned （Thompson， 2005）

3.2 Bargaining Power of Suppliers

Bargaining power of suppliers has been much smaller because of popular own-label products during the recession in the UK. Griffiths （2009） pointed out there was an obvious increase from 39.3% in 2004 to 42.3% in 2008， which own label products account for in total grocery sales. Hence it is believed that there is a considerable change in power between supermarket retailers and their suppliers owing to the expansion of own label products. Supermarket can set prices for the items and decide promotion in store. Fierce price competition between retailers makes them bargain ever lower prices from suppliers. Take production for example， some supermarkets are turning to overseas suppliers such as China and India which can produce food for lower cost compared producing the same food in the UK. Baxter （2007） claimed that the increasing bargaining power from supermarket will enable them to drive hard bargains with individual suppliers， with large quantity of purchasing from suppliers.

3.3 Bargaining Power of Buyers

Individual buyers will have more than one supermarket that they can access， especially if they are car owners. The internet shopping and home delivery service have provided another option for customers. There will be loyalty but only if prices and service are competitive （Thompson， 2005）. Some supermarkets have tried to build up loyalty card scheme， which can lead to monetary rewards or discounts on goods and services， to hold a group of customers. Therefore， customers have a medium bargaining power.

3.4 Threat of Substitutes

Small independent stores and convenient stores have a niche market， but supermarkets are dominant. Nevertheless， supermarkets are vulnerable on price for those products and brands offered by smaller， discount stores. However， customers are willing to one-stop stores for convenience as a whole. In particular， home shopping via IT continues to be a large sector of the market； so supermarkets should develop online service rather than relinquish （Thompson， 2005）.

3.5Existing Rivalries

Thompson stated that the UK supermarket industry is highly competitive with more chains competing for the family shopping budget. In particular， the ‘big four’ such as Tesco， Sainsbury’s， Asda and Morrison have different competitive strategies （product ranges， pricing strategies， etc.） and different appeals； but they remain largely interchangeable. It is believed that these companies must all invest to try and create differences as well as pricing competitive. According to BBC news2 （2008）， Co-operative Group， the UK’s fifth largest supermarket chain， had bought rival Somerfield with ￡1.57bn to strengthen its position in the UK supermarket industry. BBC news3 （2004） also pointed out Morrison had completed its ￡3bn takeover of rival supermarket retailer Safeway， which illustrates how intense the rivalry is.

Thus， a framework of competitive intensity within UK supermarket industry can be concluded. See Table 1.

It is believed that it is different between industry average profitability and profitability of firms within the industry. If a firm has underperformed the industry average， the industry seems to be attractive for that firm as a whole and vice versa.

The growth rate has been significantly increasing for years within the UK supermarket industry. The four major firms such as Tesco， Sainsbury’s， ASDA and Morrison have formed the oligopoly market structure with high industry profitability. Take Sainsbury’s for example. The profit before tax has increased from 104 million pounds to 733 million pounds during the five years in Sainsbury （Sainsbury， 2010）. According to annual report （2010） from Morrison， the profit has increased up to 858 million in 2010 in Morrison as well. See figure 1 and figure 2.

According to BBC news4 （2010）， at least 392 Tesco supermarkets have opened in the last two years， followed by Sainsbury’s at 111， Morrison with 41 and ASDA at 33 as ‘a concern’， especially when almost 12，000 independent shops closed their doors in 2009.

Therefore， combining internal environment analysis and profitability from two of ‘big four’ firms within this industry， it can be concluded that the UK supermarket industry would be attractive for other firms within or without this industry.

4.Competitor Analysis

The UK supermarket industry boundary is defined as part 1.1 mentioned. Nowadays， the UK supermarket industry is dominated by the four major retailers called ‘big four’-Tesco， Asda， Sainsbury’s and Morrison. The ‘big four’ totally account for over two third of retailing sales in the UK with their own competitive advantages.

4.1 Tesco PLC

Tesco PLC is the biggest supermarket chain in the UK with 30.8% market share. Tesco has delivered a solid performance in competitive market condition and is growing faster than the industry as a whole. The revenue in the UK has increased up to ￡38.6bn in 2010 （Tesco， 2010）.

According to SWOT analysis， （Datamonitor1， 2010）， the customer strategy of Tesco is sustainable for the long term because Tesco can differentiate in a unique way with double points Clubcard， low prices and improvements to the customer shopping trip and these are likely to lead to permanent productivity gains.

Secondly， Tesco has obtained market share in non-food categories， which is also primary growth driver. Capstick （2010） described that the sales revenue from non-food offering was up to ￡13.1bn by 6.2%， which accounts for nearly 35% in the whole sale revenue.

Thirdly， Tesco has increasingly focused on its retailing services to drive incremental sales. The firm offers online retailing， banking， telecom and market research. For instance during 2008/09， the operating margin and Return on Capital Employed （ROCE） of the group was 6% and 13% respectively while that of retailing services have been 13% and 19% （Datamonitor 1， 2010）

Furthermore， Tesco has also focused on investments in IT system to optimize costs and enhance performance. The firm has invested heavily in IT over the years and this has played a strong role in improving sales， the supply chain and efficiency. Such solutions which keep the cost efficiency result in less waiting time for customers and enhance their in-store experience.

4.2 ASDA Limited

Asda is the second largest supermarket in the UK with 17.2% market share. Datamonitor 2 （2010）described that Asda offers a broad range of products and services covering food and non-food lines as its first competitive advantage. Asda is more focused on out-of-town supermarket than other UK chains， which makes it a one-stop store.

Secondly， Asda sells a higher percentage of products under its own-label of household products with low price. One of its most successful non-food offerings is ‘George’ clothing sector which was founded in 1990.

Moreover， Asda was acquired by Wal-Mart in 1999 and thus became a part of the world’s biggest retailer. Asda has implemented Wal-Mart’s low pricing strategy and has produced positive results. Asda has not only owned the strong brand recognition under the umbrella of Wal-Mart but also contributes top line growth to the home company.

4.3 Wm Morrison PLC

Morrison is the fourth largest supermarket in the UK with 11.4% market share and the revenue of 15.4bn in 2010 （Capstick， 2010）. Yorkshire-based Wm Morrison PLC was traditionally prevalent in the north of the UK and it acquired the rival Safeway in March 2004 in order to strengthen its position in the industry. Therefore， Datamonitor3 （2009） stated that strong market presence is one of the strength of Morrison.

Vertically integrated operation is another advantage for Morrison strategy. Morrison is unique in having its own manufacturing and packing facilities and being farmers itself. As a food specialist， Morrison differentiates its major competitors， all of whom have significant non-food lines. They also prepare more food and employ more specialist butchers， fishmongers and bakers in-store than its competitors （Morrison， 2009）.

The third significant strength for Morrison is value conscious consumers focus. This strategy has helped Morrison to drive sales during depressed economic environment. For example， the company launched over 21，000 price cuts throughout the year and switched more of its promotions into ‘half price’ rather than ‘buy one， get one free’ （Datamonitor3， 2009）.

5.Forecasts

Combining the external issues， internal competitive analysis and the advantages of dominant four companies， it can be seen that the UK supermarket industry is likely to develop as the following trends in the year of 2015-2020.

5.1 Increasing Consumer Market

According to National Statistics （Capstick， 2010）， the UK population is to reach 63.9 million by 2014 with 0.7% growth rate， which could yield an increasing potential consumer goods market in the near five years.

5.2 The Expansion of Non-food Lines for One-stop Supermarkets

Harvey （2000） pointed out that customer can go to supermarket and do all his/her shopping， saving on both time and travel costs although it requires a big space investment. At the meantime， non-food lines such as clothes， household， electronics， etc. could be required to hugely develop in one-stop stores.

5.3 Internet Shopping Development

Online sale has already accounted for a greater proportion of the total revenue due to the lifestyle change； so internet shopping and home delivery could have a unsaturated market in the near five year.

5.4 Smaller Format Supermarkets in Urban Areas

With stricter planning permission regulation for new stores， fewer out of town supermarket and much more neighborhood shopping would reduce transfer and emission costs； so smaller format supermarkets are likely to expand in urban areas.

5.5 Technological System Investment

According to Tesco as part 4.1 mentioned， investments in IT system could optimize costs and enhance performance. Check-out facilities such as Near Field Communication could be applied after successful trial and supply chain system could be upgraded in the next five years. It would play a strong role in improving sales， the supply chain and efficiency.

6.Conclusion

Overall， supermarket industry remains strong in the UK with a high growth rate. The key issues such as regulation permission， increasing value added tax， modern lifestyle change and technology innovation could affect the whole industry to some extent. After the turbulent years， the supermarket industry in the UK has become relatively stable， simple but dynamic nowadays. The industry has been growing with high barrier to new entrants， low power of suppliers， medium power of customer， neutral threat of substitutes and intense competition. The big four companies have dominated within the industry with their unique advantages. Furthermore， during a period of 2015-2020， non-food lines for one-stop stores could be deeply required with an expanding market. Online delivery could continue to highlight and upgrading technological systems could be invested for a long term strategy.

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作者簡介：

李田，女，1985年11月出生， 漢族， 四川溫江人，碩士研究生，就職于西安外國語大學商學院，研究方向為國際商務。