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Business Analysis of UK Supermarket Industry

Term Paper 2014 27 Pages

Business economics - General

Excerpt

Inhaltsverzeichnis

Introduction

Introduction to the UK Supermarket Industry

PEEST Analysis
Political
Economic
Social
Technological
Environmental
Legal

Porter’s Five Forces
Threat of Substitute Products and Services
Threat of Entry of New Competitors
Intensity of competitive rivalry
Bargaining Power of Buyers
Bargaining Power of Suppliers:
Positioning of Competitors
Tesco
Sainsbury’s
ASDA
Wm Morrison
ALDI
LIDL

Conclusion

Appendices

Critical Evaluation of PESTEL and Porter’s Five Forces

Reference List

Introduction

This business analysis of the UK supermarket industry aims to provide an overview of the factors influencing the industry and the threats they are facing in terms of competitors. For the purpose of this analysis I have chosen to do a PESTEL analysis of the industry looking into the most relevant factors that have an impact on the industry (e.g. Political, Economic, Social, Technological, Environmental and Legal). This should give a broad understanding of the effects of the external environment on the industry. The forces driving the UK supermarket industry will be analysed with the help of Porter’s Five Forces.

I have chosen the UK supermarket industry because, as presented in this paper, there are a great deal of external factors influencing this industry. It is also a very large and steadily growing industry offering vast amounts of information on the single companies competing in it. In addition to that the industry is very competitive and consumer driven, making the analysis very interesting and insightful.

Introduction to the UK Supermarket Industry

illustration not visible in this excerpt

(Source: Mintel, 2013)

This table illustrating the UK supermarket industry including online sales (excluding sales from convenience stores currently est. at 43,300 (£m) for 2013) shows that there has been a steady increase in the last five years. This increase is set to continue according to the Mintel forecast shown in the table above. In 2013 Mintel estimated the market value of the UK supermarket industry to be 102,558 £m. The slight dent in the upward curve does however show the direct impact the financial crisis had on the industry in 2009/2010.

PEEST Analysis

Political

The political factors influencing the UK supermarket industry are issues resulting from actual politics that can have an impact on the entire country.

The first of the political issues is the possibility of Scotland becoming independent. UK retailers have already responded to this with concern stating that it could lead to issues with the supply chain, pension laws and the added administration costs that would be needed would result in higher prices for consumers (Groom, 2014). This would be less of an issue if UK supermarkets were not already present in Scotland. An independence of Scotland would therefore mean increased prices and possibly a loss in profit for supermarkets. This may however be prevented through a reformed Scottish tax system to make the switch more seamless for supermarkets because generally Scotland does offer lower land and labour costs which could be profitable for UK supermarkets operating in Scotland (Groom, 2014).

Another political factor concerning the UK supermarket industry is the possibility of the UK leaving the EU. This could have a rather large impact on the industry since leaving the EU also means leaving the trade zone. All the countries currently importing goods to the UK to be sold in supermarkets could become more reluctant to sell their goods in the UK due to tariff. It could also mean an increase in cost when purchasing from other European countries. This could only be avoided if the UK government would allow the import of goods to continue as though the UK had not left the EU trade zone which would also mean no major changes to the UK supermarket industry.

Economic

The economic factors influencing the UK supermarket industry are largely resulting from the current economic state of the UK. Despite the economy gradually recovering and thus boosting average income, there has been a noticeable food price inflation throughout 2013 (Mintel, 2013). This inflation is outpacing wage growth thus making the effect of the economic recovery rather unapparent for both the UK supermarket industry and UK households (Felsted, Jan 2014).

An increase in fuel prices has also had an effect on UK supermarkets because it keeps customers from shopping at larger out-of-town stores to save on fuel prices (Mintel, 2013). Though it may be argued that consumer buying behaviours are social factors, this behaviour is a direct result of the economic situation and is thus listed as an economic factor.

Another factor influencing UK supermarkets is the high value of real estate held by supermarket retailers. Most UK supermarket chains own two thirds of their stores as free holds, Wm Morrisons even holds 90% (www.ft.com accessed on 08.05.2014). Numbers show that this leaves major supermarkets such as Tesco trading below the value of their property. Selling property and leasing it back would free up more cash to help make their business more competitive (Mintel, 2013).

The following graph shows the employment rates of the UK since the start of 1971. Looking at the most recent years there is a severe drop in 2009 showing the effects of the global financial crisis on employment in the UK. However, it also shows the gradual recovery of the UK economy with the employment rate rising again to 72.1% in the period Sept-Nov 2013. Just one percent short of the highest percentage ever reached. Unemployment rate being measured at 7.1% during the Sept-Nov 2013 period has also been steadily decreasing in the last 2-3 years. The employment/unemployment rate affects the UK supermarket industry because it affects consumer spending. The economic situation influences the employment/unemployment rate which in turn affects consumer spending which then has an impact on the supermarket industry. This is a vicious cycle that can only be broken through encouraging consumer spending, which supermarkets can reinforce through better offers and incentives for their customers.

illustration not visible in this excerpt

Source: www.ons.gov.uk accessed 08.05.2014

Social

Social factors that have an impact on the UK supermarket industry are either a result of the impact the economic situation has had on consumer behaviour or general buying habits of consumers.

One of the factors that fall under the category general buying habits is tradition. Tradition can play a big role for customers in deciding where they do their food shopping. For example if your family has always gone shopping at Tesco then you might continue to only go shopping at Tesco. Another one of these factors could be loyalty not only in terms of “we have always shopped there and received good service, so we will continue to shop there”, but also in terms of I have a child, parent, girlfriend/boyfriend working at ASDA so I will support them by supporting ASDA and only shopping there.

For some people where they shop might be a form of status symbol. People who choose to go food shopping at M&S are less likely to switch and start shopping at one of the discounters like Aldi and Lidl. This shopping habit may well be the consumer saying, I have the money so I am going to spend it in the more expensive food stores. Others might feel they are losing face if they shop in discount supermarkets, the same phenomenon that shows for people that have no other choice than to buy their clothes and such in thrift shops. These two examples show that people may be influenced in their food shopping behaviour through the assumption that they are being judged by where they shop.

Corporate Social Responsibility is an interesting factor when it comes to the effect it has on consumer behaviour. Studies show that a positive CSR image can improve financial performance which would suggest that customers are influenced by CSR (Ruf et al, 2001). Research also suggests that consumers would welcome more locally sourced goods (Mintel, 2013) which can be seen as part of a business’s CSR. Therefore, it is safe to say that a positive CSR image can have a positive effect on a business, however as further research will show, it is not the deciding factor in where to shop for most consumers (Mintel, 2013). Another way of improving CSR is through selling Fairtrade products. With just the three top competitors in the UK currently selling more than 50% of overall sales in the UK, UK supermarkets have the potential to greatly expand the growth of Fairtrade and thus improve CSR (Smith, 2010).

Online food shopping has also become an increasingly popular way of shopping (Mintel, 2013). The increased fuel prices are influencing shoppers to an extent that they either prefer to go shopping at their local stores rather than larger out-of-town supermarkets or do their shopping online through online delivery from supermarket chains (Mintel, 2013). This service does not only appeal to people not wanting to pay the high fuel prices, but also to customers that do not have a car and do not live near any supermarkets or disabled customers that have trouble getting to supermarkets and then transporting their shopping home. It also caters for elderly customers that prefer to have their shopping delivered rather than go to the supermarkets. Another reason for online deliveries becoming continuingly more popular is the convenience. It is a lot less time consuming than going to the supermarket and with the advantage of choosing a time slot for the delivery, customers working during the day can have their food delivered to their homes as late as 11pm weekdays (a), www.tesco.com accessed on 08.05.2014). The following table shows the increase in online food sales from supermarkets and the online grocery market size in the UK.

illustration not visible in this excerpt

(Mintel, 2013)

The current economic situation has had a great impact on consumer behaviour in terms of shopping habits. The average shopper’s disposable income continues to reduce, putting a lot of pressure on their household budget. Many consumers have had to cut their spending on food (Farnham, 2009). This has led consumers to shop around more for their food to find the best offers and also made them shift to “own brands” or shopping at discounters (Mintel, 2013). This trend shows the effect an economic situation can have on customers and the industries that rely so much on them. A decrease in GDP will lead to a fall in consumer spending which in turn leads to a decline in economic growth. However, as will be portrayed later in this paper, there are winners and losers in this situation and some supermarkets are visibly profiting from the social trend of spending less on food. This effect of the economic situation on consumer spending and their choice in supermarkets does however show that though consumers may value positive CSR they cannot afford to take it into account when deciding where to shop. Despite Mintel figures showing that online sales have increased, they have gained much less than discounters proving that neither CSR nor convenience are the deciding factors for consumers. Cost is the main factor influencing shoppers (Mintel, 2013.

The amount of social factors influencing the industry show how dependent the UK supermarket industry is on its consumers and their spending.

Technological

Technological factors influencing the UK supermarket industry mainly result from innovation and the need for supermarkets to keep up with these innovations to provide the best possible and most current service for their customers and to increase customer satisfaction.

The trend for customers to be able to do everything online, for example, is ever apparent through major supermarket chains introducing online food shopping and delivery which as mentioned earlier is showing great success. The same applies to the introduction of the online mobile phone store app which enables customers to do their shopping on their phone wherever they are (b), www.tesco.com accessed 08.05.2014). The encompassing of these innovations to satisfy social trends aims to improve profitability and efficiency of the supermarkets.

Social media has played a rather beneficial role for the UK supermarket industry. Facebook, Twitter, etc. have given supermarkets the opportunity of free advertising through their own Facebook pages and Twitter accounts. It also allows customers to give feedback on products and services offered by supermarkets which can greatly benefit supermarkets in their advertising and the products and services they choose to offer.

Supermarkets including non-grocery online services further embrace the possibility of retaining or gaining customers through technological innovation. These services include video-on-demand, music streaming or downloading, ebooks and non-grocery sales (Mintel, 2013).

A further technological innovation introduced into UK supermarkets in recent years is the self-checkout. These allow customers to do their checkout themselves, avoiding long queues and thus saving time and increasing customer satisfaction. For the supermarkets self-checkout has the added benefit of checking out more customers without having to employ more people to man checkout counters (www.businessbee.com accessed 08.05.2014).

The loyalty cards offered by many supermarkets nowadays are also a technological influence. With the help of loyalty cards supermarkets can offer incentives to keep their customers “loyal” and to gain new customers. They also help supermarkets keep track of how well they are retaining customers and possible shopping habits. Like social media, loyalty cards give supermarkets valuable feedback about their customers which can lead to more targeted advertising. It can also educate supermarkets on the incentives more valued by customers, to which supermarkets can respond directly by improving these incentives and replacing the ones not valued (www.j-sainsbury.co.uk accessed 08.05.2014).

Environmental

Environmental factors influencing the UK supermarket industry largely stem from weather. The weather can for example influence the growth and harvest of crops, fruit and vegetables or possibly destroy them. This can lead to issues with the supply chain which in turn would influence pricing in the supermarkets, making these foods more expensive for consumers. Favourable weather for the growth of crops will also have an effect on pricing in the supermarkets. If there is an abundance and supply is higher than demand prices in supermarkets will be reduced on these foods. The same principle of supply and demand influencing pricing in UK supermarkets also applies to seasonal foods.

As seen throughout the start of 2014 weather can also be an issue in terms of delivering online orders (Urquhart, 2014). Weather is therefore a major influence on the industry because if it stops supermarkets from delivering services to the customers in terms of food or deliveries from online orders it limits their ability to function as the business intended. Not only the home deliveries can be an issue during such weather phenomenon, but also the deliveries to the actual supermarkets can become difficult and affect businesses.

Legal

There are legal factors influencing the supermarket industry such as regulations and laws given by the government that the UK supermarkets need to abide by.

Competition law established by the Office of Fair Trading is a legal factor influencing the supermarket industry. It provides guidelines that businesses need to comply with. Supermarkets for example are not allowed to form any potentially anti-competitive agreements with other supermarkets such as cartels to avoid price fixing. Abuse of dominant position is also covered in competition law by forbidding anti-competitive conduct by the dominant business in the industry (www.oft.gov.uk accessed 08.05.2014).

Another legal factor influencing specifically the expansion of the UK supermarket industry is the Planning Policy Guidance Note 6 also known as PPG6 (Wrigley, 1998). It made gaining planning permission significantly more difficult throughout the late 1990s for out-of-town stores. Though it does have an impact the supermarket industry has learnt to adjust to it and is expanding successfully within the PPG6 guidelines (Wood et al, 2006).

Consumer rights are also a factor influencing the UK supermarket industry. The Consumer Rights Bill gives policies to “clarify the standards a consumer can expect when they buy something”, “set out what to do when goods, services or digital content don’t meet those standards” and “clarify when terms and conditions can be considered unfair” (a), www.gov.uk accessed 08.05.2014). These policies given in the bill need to be abided by and changes within the bill directly affect supermarkets.

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Details

Pages
27
Year
2014
ISBN (eBook)
9783656728450
ISBN (Book)
9783656728436
File size
832 KB
Language
English
Catalog Number
v278978
Institution / College
Loughborough University
Grade
73
Tags
business analysis supermarket industry

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Title: Business Analysis of UK Supermarket Industry