Investigation into the UK Supermarket Industry and how Competition has been reduced in recent years
Contents Page
Pages Content
. Aim/ Itroduction
2. Introduction/ Competition in the Market
3. Competition in the Market / Tesco's Growth
5. Tesco's Growth/ New Competitors and Barriers
6. New Competitors and Barriers
7. Conclusion
9. Appendix A
0. Appendix B
1. Appendix C
2. Appendix D
3. Appendix F
5. Appendix G
7 Appendix I
8. Appendix K
23. Appendix L
39. Appendix O
41. Appendix P
42. Appendix Q
43. Appendix R
46. Bibliography
Investigation into the UK Supermarket Industry and how Competition has been reduced in recent years
Aim
This investigation will look at Competition in the UK Supermarket Industry. The main focuses will be on the ways in which the Firms compete and how these ways have been reduced in recent years. Clearly the four firm concentration ratio has increased and therefore the investigation will examine what impact this has on the overall competition in the market.
Introduction
The UK is one of the world's largest grocery retail markets, worth around US$156bn in 2005, putting it in 5th place behind the USA, Japan, China and India (See appendix D).It is predicted to continue to grow in the future. (See appendix C).
There has been an ongoing debate amongst business analysts as to how competitive the UK Grocery market is. Currently Tesco is the market leader with a market share of 30.2%, followed by Asda with 16.6, Sainsbury's in third with 15.7 and Morrison's in fourth with 11.5.(see appendix A)
Figure 1 (Table was produced using4 data from 2004 and 2005 market share figures)
Figure 1 is a table that shows a comparison in market share in 2004 and 2005. Tesco has benefited greatly since 2004 and has gained an increase of 3% in the market whilst the other main competitors have lost market share, Morrison's suffering the most with nearly 4% loss in the market. (see appendix A and B). This simply shows what an enormous advantage Tesco has over its rivals and how it is increasing.
Supermarkets have become even more market oriented by meeting consumer demand. Technology is changing at a rapid pace, therefore supermarkets must keep ahead in order to compete. There is now internet online shopping available at a few of the major supermarkets, such as ASDA, Tesco and Sainsbury's. (see appendix F.1) They realise that, in today's world, there is a growing trend towards convenience, both in terms of products and service. This means that the Supermarkets will want to provide these for the customer.
Arguably the consumer is one of the most important stakeholder in the market, Supermarkets have provided the customer with more flexibility. They have done this through online shopping and by having large Superstores which provide a wider range of products. In order for the companies to be successful in the market they have to be able to compete with the existing competitors in the market and also prevent from new competitors entering the market.
Competition in the Market
The market has a four firm concentration ratio of 72.5%. With such a high four firm concentration ratio, the industry can be considered as a tight oligopoly. As they are in tight oligopoly it means that it isn't very beneficial to compete on prices as it may lead to price wars. This will mean that the companies will suffer from losses and lower profit margins. Growing evidence indicates, however, that the success of these companies is based on trading practices that are having serious consequences for suppliers, farmers, overseas workers, local shops and ...
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Competition in the Market
The market has a four firm concentration ratio of 72.5%. With such a high four firm concentration ratio, the industry can be considered as a tight oligopoly. As they are in tight oligopoly it means that it isn't very beneficial to compete on prices as it may lead to price wars. This will mean that the companies will suffer from losses and lower profit margins. Growing evidence indicates, however, that the success of these companies is based on trading practices that are having serious consequences for suppliers, farmers, overseas workers, local shops and the environment. This is because the Large Supermarkets are superior in terms of power and are able to exploit the different groups. (see appendix I.1)
To maintain higher prices the companies try to gain Competitive Advantage through building strong reputations, maintain good relationships with all their stakeholders and also through innovation. These are all ways in which the firms compete in the market.
Other of the ways in which companies in the market could become more competitive is through mergers. Morrison's in 2003 merged with Safeway to double their market share, but is still struggling to compete with Tesco who have nearly three times as much market share.
Tesco's Growth
Tesco has been growing immensely since 1995 when they took over from Sainsbury's and became market leaders. (see appendix G). The reason for this was because they gained and used competitive advantage very effectively. Tesco have continually had profits rise year after year and this is due to their strong reputation and branding to a large extent. Branding is very important in the supermarket market as it ascertains a valuable intangible asset. Through strong branding they were also able to cement a strong reputation. Tesco exploit the power they gain from having economies of scale, especially when it comes to marketing. Through their strong marketing techniques they have created a very strong slogan to go with their brand 'every little helps'. They have used mass TV marketing to further strengthen the brand and make people more aware of it. Probably the main factor in Tesco's success has been the commitment to use the data gained to drive the business. Many companies have used loyalty schemes as a sort of quick fix, promotion tool. While, to a degree, a loyalty scheme is a form of promotion, it is an expensive way of doing this. The real benefit of a loyalty scheme is the very rich data obtained on customer behaviour. These data improve a retailer's ability to make the whole shopping experience more compelling, with the right products on the shelves at the right prices and with the right promotions. This use of data has been the major difference between the Tesco scheme and other initiatives that were less successful. This allows them to be more market orientated and see exactly what the customers want. (see appendix K.1)
Tesco rely on the good publicity to support their brand image. Tesco claim that by building new stores they are not only benefiting themselves but for local communities as well. Tesco have successfully taken advantage of this, by promoting it against their competitors, that they build their stores in economically deprived areas. This leads to the regional multiplier affect where they boost the local economy and reduce unemployment by attracting other businesses and increasing income to the area (see appendix L).
Figure 2- Shows how market share has changed over the last ten years. (see appendix P)
Figure 2 shows a how over the past 10 years Tesco and Asda have been increasing their market share in a similar pattern whilst Sainsbury's and Safeway have been loosing market share. Although there is still stiff competition it could be said that with the way Tesco and Asda are going the market could become a battle between the two companies.
New Competitors and Barriers to entry
The structure of the market has made it very difficult for new competitors to enter the market. Many of the existing companies have been recording supernormal profits as they benefit from economies of scale.
As supermarkets buy their products for their stores in large quantities, from a select list of supplies they are able to dictate the price and exploit them.( see appendix F.2)
Figure 3 - Is a Internal Economies of Scale Graph.
Through economies of scale the Supermarkets are able to reduce the prices of their products. As the supermarkets sell in large numbers they are spreading their fixed costs out over a larger number of products and therefore reducing the average total cost.
Huge companies like Tesco understand that meeting customer demand is crucial in gaining more market share. Tesco has always had a 'test and learn' philosophy, trying out an idea in, say, ten stores and, if this proves successful, rolling it out to the rest. While risk can never be entirely eliminated, this approach mitigates the risk.( see appendix K.2). As Tesco is so large they are able to experiment and take risks in order to achieve greater marker orientation.
These companies have also spread the risk through risk bearing economies of scale. Many of the Supermarkets have diversified into different markets such as baby foods and the clothing market. Tesco in particular through their marketing campaigns have successfully established two well know clothing brands of Florence and Cherokee. (see appendix Q)
The existing competitors can also maintain high barriers to entry through various pricing strategies. These companies can enforce strategies such as predatory pricing. As these companies are so large they are able to bear the loss of profits for certain periods of time, they are able to force competitors out of the market. Small companies may not be able to bear such a cost.
To enter the market huge start up costs will be needed in order to open the outlets. Through constant takeovers of small convenience retails prices for a convenience store have soared making it almost impossible for smaller chains to acquire new stores. This is linked to porters five forces. (See Appendix R)
Conclusion
The major market leaders have gone through great lengths in order to gain market share. They hold a lot of power when it comes to limiting competition that act as restrictive practices.
Many of the Firms especially Tesco have been under a lot of pressure from the government and from many pressure groups such as FOE. They argue that the Tesco exploit many of its suppliers who have suffered huge drop in profit margins ( see appendix I.2), and also have had negative affects on the environment.
Competition from new companies entering the market is low due to the high barriers to entry so the main competition lies between the existing companies. Although it is evident that competition has decreased, much of that is due to Tesco's Growth, there is still much rivalry between the four main competitors. The Safeway takeover by Morrison's just shows to what lengths the companies are going to through in order to gain more market share.
Growth must now come through attraction and retention of customers, increasing share of a customer's total expenditure or through moving into related, but relevant, products and services
The market is one where many innovations can be easily copied. A sustainable competitive advantage is much more difficult to achieve but this is what the major players need to aim for, and that on a regular basis to create and maintain leadership. Tesco has continually reinvented its brand leadership, which is what many of its competitors have failed to do.
Tesco have a clear advantage over its rivals at the moment and with current patterns they are likely to continue to gain market share (refer to Figures 1 and 2).
However, with so much pressure from the OFT it is unlikely that Tesco will have more than 35%-40% of the market share. OFT are now considering further investigations in the market and especially on Tesco's Growth. (See Appendix O)
Tesco have also implemented many different strategies such as diversifying into foreign markets and non food products. This could prove to be unprofitable as they lose direction and focus in the UK market.
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