Report on the UK Grocery Retailing Industry
Report on the UK Grocery Retailing Industry
Ba Hons Financial Services
Contents
Introduction 3
Key Characteristics of the Industry 4
Key Characteristics of the Market 5
Macro Environmental Influences 6
Information Technology Innovations 6
Organic and Health Foods 6
Changes in consumer characteristics 7
Competition Committee Enquiry 7
Profit Potential of the Industry 9
Five Forces Model 9
Threat of Substitutes 10
Buyers, or Consumers 11
Potential Entrants 11
Competitive Rivalry 11
Conclusion 12
Key Trends Affecting the Industry, Now and in the Future 13
Assessment of the Potential of Acquisition within the Industry 14
Generic Strategies within the Industry 15
J. Sainsbury's 15
Tesco's 15
ASDA 16
Conclusion 16
Appendix 1 17
Bibliography 20
Introduction
The purpose of this report is to analyse the characteristics of both the industry and market in order to identify and examine the current conditions and trends that will affect the potential profitability of the industry, and hence the viability of entry to the industry.
Key Characteristics of the Industry
The UK Grocery Retail Industry, can be identified as those companies who retail groceries with in the United Kingdom, groceries being defined by the Competition Commission report into the industry as "including food, drinks (alcoholic and non-alcoholic), cleaning products, toiletries and household goods, but as excluding petrol, clothing DIY products and financial services."
The industry is essentially an oligopoly, with four major supermarkets (the "Big Four1") that between them control 65.4% of the market, dominating the Grocery Retailing industry. The development of this oligopoly has lead to the gradual and continuing decline in small and medium sized retail businesses within the industry, and an increasing trend from town centre to out of town shopping. As the major players within the industry have grown, they have used their increasing buying power tolower their input costs, widening the range of goods that they sell and so increase their market share and profit margins. Supermarkets now stock exotic foods that would have been unheard of 15 years ago, and have moved away from the core of food retailing to offer added value to their customers by stocking electrical goods, books, and other non-traditional stocks.
In spite of the trend toward broadening the range of goods offered, the industry is characterised by largely homogenous products, and as a result is extremely competitive, with all the major players spending very significant amounts on advertising and marketing in an effort differentiate themselves, and emphasise their corporate identities, in an effort to establish brand loyalty. This competitiveness is further manifested by the continual emphasis on price-cutting within corporate branding and advertising, such as Tesco's "Every Day Low Prices", and the distribution of loyalty cards.
As the trend toward stocking a wider range of goods has increased, the size and number of premises has increased very significantly2, further disenfranchising smaller competitors who lack the capital to keep up in the building race.
Key Characteristics of the Market
The Grocery Retail Industry is one of the very few who can call every member of the public, directly or indirectly, a consumer of their goods. Clearly, everyone must eat, meaning that the industry is in effect in the same position as the utility companies, with a captive market.
As mentioned above, the industry is characterised by a relatively homogenous product, and as such, the market will be extremely price sensitive, meaning that consumers are unlikely to have more than passing loyalty to individual companies with in the industry.
The other major factor of the market to consider is the changing needs and wants of the market. Twenty, or even ten years ago, the market would have demanded little more than reasonable priced quality ingredients from the industry, whereas now there is increasingly a demand for variety, quality and especially for quality convenience foods. This trend is being driven by the rise in consumer earnings, and an increase in awareness of health issues relating to all types of food.
Macro Environmental Influences
There are several main influences on the industry from the macro environment, the most pertinent of which are listed below.
Information Technology Innovations
The Grocery Industry is increasingly harnessing I.T., as all others are. There are three main areas where this will affect influence the industry. The first is the use of Loyalty Cards, which are being increasingly integrated into the marketing strategies of the industry to deliver pertinent information to consumers about discounts and special offers that are likely to be of interest too them. This is vital to companies within the industry, where loyalty to the individual company is so weak.
All of the major players are now developing Internet operations and strategies, aimed again at increasingly loyalty to a company by providing a value added service in order to differentiate themselves from their competitors. The success of these ventures may well have a very significant impact on the future of the industry, perhaps reducing the need for massively capital-intensive new hypermarkets if consumers can be persuaded to use an Internet solution instead. If this becomes the case, barriers of entry to the industry may well become lower, as the investment needed for a web only supermarket of a national scale, though substantial, are far lower than that necessary for a bricks and mortar venture.
Supply chain innovations have been growing over the last two decades, but the opportunity to take advantage of substantial cost savings has been growing recently. Asda, for example, has started to introduce a network based, automatic JIT inventory system modelled on their parent company, Wal-Mart, which promises to reduce inventory costs by significant amounts when it becomes fully operational.
Organic and Health Foods
Due in part to recent food scares, such as Salmonella, BSE, and FMD, the public has, and continues to become more aware of the food that they eat, and the potential health ...
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Supply chain innovations have been growing over the last two decades, but the opportunity to take advantage of substantial cost savings has been growing recently. Asda, for example, has started to introduce a network based, automatic JIT inventory system modelled on their parent company, Wal-Mart, which promises to reduce inventory costs by significant amounts when it becomes fully operational.
Organic and Health Foods
Due in part to recent food scares, such as Salmonella, BSE, and FMD, the public has, and continues to become more aware of the food that they eat, and the potential health risks involved. As a result, there is a growing demand for organic food. This partly driven by the industry itself, as the consumer is currently willing to pay more for food perceived to be better quality, or better for them, then for what they perceive as "normal".
As well as organic produce, there is also increasing demand for health, or low fat foods, as public knowledge of health issues grow. However, once again, this is partly being driven from within the industry itself. Health food is seen as a premium product, so carries a premium mark-up, and is often sold as own brand ready meals, already one of the more profitable items within the industry.
Changes in consumer characteristics
As consumers wealth increases, and time decreases, changes in behaviour are emerging which have, and will continue to force change within the industry. As can be seen from Tables 1 and 2 (Appendix 1), consumer spending within the Grocery industry has failed to keep up with the growth in earnings. This trend is one that the industry must, and is starting to face if the current level of growth is to continue. The main area where this can be seen is the rise of ready meals, both own brand and proprietary. As society works longer hours, and enjoys a busier lifestyle, fewer people are prepared to cook a meal from bare ingredients, and hence will use their increasing affluence to buy takeaway food, or eat in a pub or restaurant. In order to try to bring this spending back within the Grocery industry, companies are increasingly producing a range of premium ready meals, in effect takeaway food. If managed properly, this trend, perhaps combined with effective use of web sites, could drive up both turnover and profit, as the products that are being used to combat this trend are highly value added, and as such contain higher profit potential.
Competition Committee Enquiry
On the 30th of July 1998, against a background of increased suspicion about potential abuses by the large supermarkets, the Competition Commission launched an enquiry into the industry. The remit of this enquiry was to investigate whether consumers were receiving a fair deal, and if the large supermarkets were abusing buying power to force suppliers to accept low prices for their produce. The charge of over pricing was refuted, with the industry in fact being criticised for selling some goods below cost. The charges of abusing buying power were partially upheld, and a new, legally binding code of conduct was announced to govern the relationship between supermarkets and their suppliers. This code was broadly welcomed by consumers, with Phil Evans, principal policy adviser at the Consumers' Association, saying it would clean up one of the "murkiest areas of operation for the big four and it is good to see that it will be cleaned up".
Whilst the supermarkets have escaped this enquiry largely unscathed, the fact that an enquiry has been held in the first place will have an effect on the industry. The industry is now living in a goldfish bowl, with both consumers and regulators far more aware of potential abuses within the sector, and as such, companies must be far more aware of any areas of their business practices that would not stand up to outside scrutiny.
Profit Potential of the Industry
Five Forces Model
(Competitive Strategy: Techniques for analysing Industries and Competitors, M.E.Porter 1980)
Power of Suppliers
There clearly are a massive amount of suppliers of goods and services to the grocery retail industry. The scope of this report does not allow minute examination of each one, so the list below should not be considered exhaustive, but contains those suppliers that have a significant influence on the industry.
Food Producers
As the majority of sales made by the industry are food, clearly the major supplier, directly or indirectly, to the industry are food producers. Food producers will supply to the grocery retail industry in two main ways, depending on their individual sizes. Large producers will supply directly to the retailer via a contract, and small producers will supply indirectly, either via collective organisations set up for the purpose, or by selling to wholesalers, who sell on to the retailer. Generally this relationship can be categorised as one in which the grocery retail industry has dominance over, due to the huge buying power that the industry, and the largest players within it, have over the food producers and wholesalers. The food production industry is highly fragmented, with the majority of food grown by small producers, and as such is extremely vulnerable to the bargaining power of the grocery retail industry, as addressed by the Competition Commission Enquiry into the industry, discussed earlier.
Manufacturers of Household Cleaning Products
Manufacturers of household products such as washing up liquid, etc are in a very different position to that faced by food producers, due to the size of the companies involved. For example, Proctor and Gamble have a market capitalisation of £66,121 million, significantly larger than any of the UK supermarket groups. This difference in size allows companies such as Proctor and Gamble to have a much stronger bargaining power than other suppliers to the Grocery retail industry.
Labour
The Grocery Retail Industry, as a relatively recently emerged large industry, is one who's labour force is mainly un-unionised, and as such does not have the collective power that, for example workers in the Ship Building industry have. Furthermore, the majority of jobs within the industry are either unskilled, or semi skilled, such as shelf stackers, check out assistants, etc, and quite a significant proportion of these workers are employed on a part time basis. These factors, when taken as a whole suggest that the suppliers of labour have low power over the industry.
Threat of Substitutes
If one takes the Grocery Retail Industry to encompass any enterprise, of any size that sells groceries, from a petrol station, to the largest Sainsbury's or Tesco, there are no direct substitutes for the industry. We, as buyers clearly cannot decide not to eat, but to nourish ourselves in some other way.
The threat that the industry must face is the trend, discussed earlier, to eat takeaway food, or eat out. This trend is likely to increase in the future making the threat of substitution moderate, but increasing.[CJMT1]
Buyers, or Consumers
There are two distinct aspects of consumers that should be considered for the purposes of this report. First is the individual consumer, who has very little power over the industry, due to lack of purchasing power. Secondly and more importantly are consumers on masse, who are a very powerful group. Social trends such as the growing awareness among consumers about the benefits of healthy eating, and a growing desire to eat organic food3 have caused very significant changes to happen within the Grocery Retail industry. Buyers, as a group, are in an extremely powerful bargaining position, particularly in dictating the direction that companies must take to ensure their continued loyalty.
Potential Entrants
Four major supermarkets (the "Big Four4") that between them control 65.4% of the market, dominate the Grocery Retailing industry. This level of concentration alone provides a significant barrier to entry.
Another major factor that needs to be taken into account are the economies of scale achieved by the "Big Four, and the policy of using the economies to aggressively compete with one another, and smaller competitors. These economies of scale and aggressive tactics provide considerable barriers of entry to anyone who is not in a position to takeover one of the major players, who's market capitalisation make them safe from all but the largest corporate predators. Overall, there are extremely significant barriers to entry.
Competitive Rivalry
Rivalry within the industry is high, for several main factors. The market for Groceries in the UK is a mature industry, with growth rates below that of GDP and spending. This lack of growth is promoting competition, as the businesses within the industry strive to retain their own customers, and to increase sales by poaching those of their competitors. The industry is also characterised by high level of fixed costs associated with an industry that has to spend very large sums on premises, and significant sums on supply chain technology, such as EPOST and networked JIT supply solutions. Coupled with these two factors is the oligopalistic structure, and relatively undifferentiated nature of the products offered.
Conclusion
Despite the relationship of supermarkets and their suppliers, which would imply a highly profitable industry, the Competition Committee found no evidence to suggest that abnormal profits have been made. This is mainly down to the high level of rivalry between not only the Big Four, but also all the players within the industry. This rivalry puts pressure on the margins achievable, and is gradually pushing out all but the largest players, who have had to invest massively to gain the market share that they currently enjoy, and economies of scale that they have achieved. On balance, profit potential within the industry could probably be judged to be at best medium.
Key Trends Affecting the Industry, Now and in the Future
* Takeaway Foods: The industry must try to capture the money that consumers are spending on food, but outside the Grocery industry. This is probably the only way of increasing the market without moving outside of the core Grocery Retail Industry.
* The Rise of E-commerce: In common with all major retailers around the world, the Grocery Retail Industry must embrace the Internet as a cost effective distribution channel, and develop robust and effective web sites and strategies. This is especially important as a means of reducing the high fixed costs associated with the bricks and mortar side of the industry.
* Organic and Health Foods: There is a growing demand for both organic and health foods from the market, which the industry must satisfy.
* Transparent and acceptable relationship with suppliers: Having received a critical report on these relationships from the Competition Commission, the industry must ensure that the relationship that they have with their suppliers will stand up to public and government scrutiny, otherwise more restrictive legislation may well be passed to ensure a level playing field.
* Sites for expansion: In light of the Competition Commission enquiry, it may well be harder for the Big Four to gain planning permission for new stores, inhibiting their future growth.
Assessment of the Potential of Acquisition within the Industry
In the light of the points made above, the acquisition of a medium sized company operating within the UK Grocery Retail Industry would look to be at best a highly speculative venture and could only be recommended if the acquiring company had certain key skills and resources to bring to the acquired company. These attributes would be as follows.
* Economies of Scale: If the acquiring company was an existing player within its home market, and could bring economies of scale similar to, or greater than the Big Four, to the acquired company, the acquisition may be a success.
* Innovative supply chain and distribution techniques: If the acquiring company had, or was developing techniques that allowed them to make significant cost savings, and hence improve their margins, an acquisition may be profitable.
If these core skills were not present, then it is difficult to see how a move into the industry could be a worthwhile or sensible long-term strategic move.
Generic Strategies within the Industry
In order to establish whether any real differentiation is possible within the industry, generic strategy from the three leading supermarkets have been analysed.
J. Sainsbury's
Sainsbury's are currently perusing a strategy of "Differentiation Focus", first described by Michael Porter. As can be seen from Table 7 (Appendix 1), Sainsbury's, whilst receiving custom from the whole range of social groups, are specifically targeting social groups A to C2. This social group is further narrowed by the company policy of focusing on the South East of the country. Differentiation is achieved by concentrating on selling quality products, both from brand name producers, and more importantly from their own name food and household products. This differentiation is heavily supported by the marketing and advertising policies of the company, which emphasise the premium nature of the products sold, rather than the costs. This can be seen from slogans such as "Taste the Difference".
Tesco's
Tesco appears to be following a "Stuck in the Middle" strategy. As can bee seen from Table 7 (Appendix 1), Tesco has perhaps the widest following from all social groups, indicating that the company is following a strategy with a broad competitive scope, with no specific targeting taking place, either geographically or socially. Within Tesco, as within all companies within the industry, some emphasis is put on value for money, but certainly not sufficient for the company to be aiming for cost leadership, but also conversely little attempt is made to position the majority of products toward the top of the market in order to aim for true product differentiation. Tesco is, successfully, aiming to be all things to all people, with product ranges appealing to all market segments, and a portfolio of stores that are spread through the UK.
ASDA
Asda seems to be following the strategy of Cost Focus. As can be seen from Table 7 (Appendix 1), the target market appears to be the C1 to D social categories, distributed throughout the UK. The company is following a policy of low prices for the consumer, powered by cost savings from within the industry. This has been further improved by their takeover by Wal Mart, allowing ASDA access to the huge economies of scale that can be acquired by the largest grocery company in the world, alongside policies designed to enhance productivity from the work force, such as employee share schemes. Company advertising and promotion further promotes this image, with slogans such as "Every Day Low Prices".
Conclusion
As can be seen from the above comparisons, there are differences in the strategy that each company follow, and what they offer the consumer. These differences are all attempts to differentiate each company from the others, and hence provide a competitive advantage over their peers. These differences in strategy are largely window dressing, as there is very little tangible difference in the nature of the majority of products that they sell. The commodity that they sell (food) is by definition homogenous, so genuine differentiate is virtually impossibly, certainly for any length of time, as any successful innovation can and will be copied by competitors. The only area were real differentiation is possible is in the value added products that they sell, notably "Ready Meals", which are also readily copied if successful.
The differences in strategy mentioned above do however manage to differentiate the companies sufficiently in the eyes of the consumers to ensure a measure of brand loyalty. This differentiation is achieved not via the goods that are purchased, but by the experiences that the consumer has whilst purchasing them. Although not one of the companies discussed here, one could not compare the shopping experience in KwikSave with that in Sainsbury's. Exactly the same basket of goods could be purchased in both, if selected with care, with the KwikSave basket being probably substantially cheaper, which proves that differentiation is possible, as without it Sainsbury's, and the other mainstream supermarkets, would have been over taken by discounters such as KwikSave, Aldi and Lidl.
Appendix 1
Table 1: Consumer expenditure on Food at current prices (£m), 1996-2000
996
998
Growth
998
Growth
999
Growth
2000
Growth
Average
Expenditure (£m)
42070
42566
.18%
42706
0.33%
43209
2.50%
44290
2.50%
.63%
Table 2: Total consumer expenditure at current prices (£m), 1996-2000
996
997
Growth
998
Growth
999
Growth
2000
Growth
Average
Total consumer expenditure (£m)
467,841
498,307
6.51%
530,851
6.53%
562,915
6.04%
589,231
4.67%
5.94%
Table 3: Retail sales of organic foods at current prices (£m), 1996-1999/2000
996/7
997/8
Growth
998/9
Growth
2000
Growth
Average
Sales (£m)
200
260
30%
390
50%
605
55%
45.04%
Table 4: Number of Organic Producers and Processors 1996/7 - July 2001
99617
99718
Growth
999
Growth
2000
Growth
Jul-01
Growth
Average
Organic producers
559
639
14%
897
40%
504
68%
2,465
64%
47%
Organic Processors
264
327
24%
555
70%
,030
86%
,300
26%
51%
Table 5: Market Share (Out of £ 56,601 M)
Tesco
23
Sainsbury
9
Asda
2
Safeway
2
Somerfield
9.8
M&S
4.9
Morrison
3.9
Waitrose
3
Iceland
3
Aldi
.4
Lidl
0.9
Netto
0.7
Budgens
0.7
Booth
0.2
Co-ops:
CwS
2.3
CRS
.9
Other
2.2
Year to Spring
Tesco
Growth
Sainsbury
Growth
Asda
Growth
Safeway*
Growth
Morrison
Growth
990
379
291
99
291
45
991
384
%
299
3%
204
3%
310
7%
49
9%
992
396
3%
313
5%
206
%
322
4%
53
8%
993
412
4%
328
5%
201
-2%
345
7%
59
1%
994
430
4%
341
4%
202
0.5%
365
6%
64
8%
995
519
21%
355
4%
203
0.5%
378
4%
72
3%
996
545
5%
363
2%
206
%
370
-2%
81
3%
997
568
4%
378
4%
213
3%
400
8%
81
0%
998
618
9%
391
3%
219
3%
451
3%
85
5%
999
639
3%
405
4%
225
3%
476
6%
95
2%
Average Growth
6%
4%
%
6%
9%
Growth since 1990
68.60%
39.18%
3.07%
63.57%
11.11%
Table 6: Growth of Store Numbers
Table 7: Consumer Choice of Supermarkets by Social Grade (% of adults) 1998
Social Grade
AB
Cl
C2
D
E
Tesco
52
44
40
37
36
Sainsbury's
52
39
38
29
32
ASDA
22
30
29
38
20
Marks & Spencer
31
30
27
7
9
Safeway
24
28
24
23
7
Iceland
4
9
24
25
28
Co-op
9
4
20
25
20
Somerfield
0
20
6
6
7
Kwik Save
9
0
20
23
26
Wm Morrisons
1
8
4
20
9
Aldi
4
7
2
5
1
Waitrose
8
9
5
2
5
Bibliography
Johnson, G & Scholes, K. Exploring Corporate Strategy (4th Edition)
Haberberg, A & Rieple, A. The Strategic Management of Organisations, 2001
Lynch, R. Corporate Strategy, 1997
Various Authors. SM323, Strategy and Decision Making Assignment Case Study
www.tesco.com
www.sainsburys.co.uk
www.asda.co.uk
Tesco, Sainsbury, Asda, and Safeway. See Table 5 (Appendix 1)
2 See Table 6 (appendix 1)
3 See Tables 3 and 4 (Appendix 1)
4 Tesco, Sainsbury, Asda, and Safeway. See Table 5 (Appendix 1)
[CJMT1] Sort out tables in appendices
Charles Trevor Page 2 of 20 5/17/2007
