Supermarkets in UK - An oligopily

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Introduction to super markets

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

The UK supermarket industry is led by the `big four' (Times Online, 2009), Tesco, Asda, Sainsbury's and Morrison's. 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 £146.3bn and is predicted to grow to £175.9bn 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 Asda's 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).

Market share of the UK grocery retailing market as at January 2009:

Tesco: 30.6%

Asda: 16.6%

Sainsbury's: 16.3%

Morrison's: 11.1%

Somerfield: 5.4%

Waitrose: 3.7%

Iceland: 1.8%

Porter's Five Forces

Porter's five forces helps to demonstrates the forces which shape the competitive structure of the UK supermarket industry

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 don't pay the price, they don't 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.
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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

It's more difficult for Asda to try to raise prices and make greater profits if there are close substitutes available at Tesco But, ...

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***** This is an excellent and full analysis of the industry. The writer introduces and applies a number of economic concepts to deliver a sound analysis of an oligopolistic industry.