Using Porters' Five Forces theory, analyse the competitive environment of a business of your choice - Sainsbury's Plc
Using Porters' Five Forces theory, analyse the competitive environment of a business of your choice.
Sainsbury's Plc
Sainsbury's was founded in 1889. The owners of Sainsbury's opened their first dairy shop in London. The dairy farm was a success as a business because of its low prices, the popularity of this shop lead to several other shops being opened in different locations around London. Between the period 1890 to 1900 the number of Sainsbury branches increased from 16 to 48. Sainsbury is one of the lead trading stores in Britain. The corporation employs 153,000 people 68% of these are part time and 32% are full time. 30,000 products are sold, 50% of these are Sainsbury's own brand.
Sainsbury's serves over 14 million customers a week and at the end of the Financial year 26 March 2005 had 727 stores throughout the UK. Nearly 60% of their stores are in centre or edge-of-centre locations, many of these built on previously redundant sites.
The food retail market is very competitve. The firms which dominate the market are the large firms which trade nationally. There are few firms which trade nationally the ones that do trade nationally are Tesco, Sainsbury, Asda and Safeway. These companies have tremondus purchase power and due to this they reign sumpreme on the market.
The UK grocery market was valued at an estimated £103.4bn in 2001. The core business of supermarkets is food sales and expenditure on food in the UK has been growing every year for over a decade. In order to analyse the competitive environment of Sainsbury's I will use Porter five force theory model, as it is the most significant model to analyse a businesses environment.
Figure 1: Source: Competitive Strategy: Techniques for Analysing Industries and Competitors. (M.E Porter)
From the above diagram we can clearly see that Porter identifies five major forces that drive competition.
* Competition from existing rivals
* Threat of new entrants
* Threat of substitutes
* Bargaining power of buyers
* Bargaining power of suppliers
RIVALRY AMONG EXISTING FIRMS
The Sainsbury's supermarket chain is the one of the biggest supermarket chains in Britain. The Sainsbury group has few competitors. In the supermarket business Sainsbury's main competitors are Asda, Tesco and Safeway. Tesco has the highest market share of the food market.
(Anderton (2000). Economics . 3rd ed. Lancs: Legoprint. 162-173.)
(Smith . (1999). Sainsbury. Available: ww.bbc.co.uk.news.sainsbury. Last accessed 11 november.)
The supermarket industry is a oligopoly, the four major supermarkets
between them control 65.4% of the market. Rivalry between the supermarkets is high in the industry. Supermarkets have run over hundreds of years since the 1800's. The supermarket industry seems to be a mature industry. Slow growth has lead to intensified competition between supermarket groups. Supermarkets are clearly striving to retain customer loyalty and increase sales and market share. The merger between Safeway and Morrisons may lead to increased competition in the market. Price wars, ...
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(Smith . (1999). Sainsbury. Available: ww.bbc.co.uk.news.sainsbury. Last accessed 11 november.)
The supermarket industry is a oligopoly, the four major supermarkets
between them control 65.4% of the market. Rivalry between the supermarkets is high in the industry. Supermarkets have run over hundreds of years since the 1800's. The supermarket industry seems to be a mature industry. Slow growth has lead to intensified competition between supermarket groups. Supermarkets are clearly striving to retain customer loyalty and increase sales and market share. The merger between Safeway and Morrisons may lead to increased competition in the market. Price wars, Advertising and promotion campaigns, brand new stores and new products, increased store size may be the things to follow in the forms of competition.
Sainsbury's owns 16.3% of the market and is always striving to increase their market share. The supermarket chains compete with each other by a mixture of different things , such as geographic location, scope of food and non-food products offered, image. Supermarket are tending to move out of the urban areas to the out of town locations due to increased space and increase car ownership by consumers who are willing to travel further to shop in a nicer environment
Threat of new entrants
The number of new competitors entering the supermarket industry depends on how easy it is to penetrate that market. Some industries are easier to enter than others. If the Industry has low barriers to entry it would be easy to enter the market. For new entrants to compete with existing supermarket firms would generally be difficult because barriers to entry are high. ( Porter 1994)
BRAND LOYALTY
Sainsbury's has moved into non-grocery products to increase brand loyalty and profitability. Sainsbury's has expanded into health and beauty, home wares, electricals, books, DVDs, music, clothes and videos to increase its brand loyalty. Sainsbury plc consits of Sainsbury's Supermarkets, Sainsbury's Local, Bells Stores, Jacksons Stores and JB Beaumont, Sainsbury's to You and Sainsbury's Bank. Sainsburys last year launched TU its own label clothing line which is now in 170 stores and this clothing line has received excellent reviews from fashion commentaters for it's range style. (Anderton 2000)
ECONOMIES OF SCALE
Economies of scale may occur at store or company level for Tesco's. At store level it would depend on factors such as:
* How the location and region impact on stores costs and
* Whether there are economies of scale at company level for e.g. (in operating an efficient distribution system) which might act as a barrier to any potential new entrants. www.bized.ac.uk/economics)
At company level factors to consider would include:
* Buying in large quantities and improved supply chain efficiently.
* Using more efficient distribution and
Spreading fixed costs over a large sales volume. (Anderton . (2002). Economies of scale for supermarkets . Available: www.bized.ac.uk/economics. Last accessed 21 Nov 2005. )
The cost of providing retail services will differ across regions and countries due to differences in property costs, staffing and transport costs, variations in the degree to which economies of scale are achievable, and differences in pricing strategies. (Anderton (2000). Economics . 3rd ed. Lancs: Legoprint. 112-113.)
Huge amounts of capital are needed to enter the supermarket industry. The industry in which supermarkets compete is hugely competitive. However the abnormal profits associated with the industry has encourage firms from abroad to merge with UK firms. Wal mart was the first American food chain to merge with Asda having vast experience of the food industry. Following the deal Asda/Wal-Mart had approximately 16.1% market share compared to Sainsbury's 16..9%. In all, this means that four companies will control 80% of the UK grocery market.
GOVERNMENT INTERVENTION AND LEGISLATION
The supermarket and superstore sector has been subject to many pieces of legislation, regarding the safety of food and distribution. There has been particular focus in the areas concerning planning and the supply chain.
Supermarkets have been subject to planning restrictions for many years. Between 1988 and 1993 there was a considerable growth in retail developments until the PPG6 was updated in 1993 leading to a more restrictive stance, not initially on the number of superstores being developed but on the size and location of the new stores. The location of stores is of major importance to Tesco's trading success, as consumers are only prepared to travel a limited distance to shop. Stores began to change operating practices. The legalisation of Sunday trading gave retailers the opportunity to trade 7 days a week. 24-hour and extended opening hours also became more ordinary, especially around busier periods such as Christmas.
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COMPETITION COMMISSION
Investigations has been launched into the supermarket industry in 2000 concerning
:
* A public perception that the price of groceries in the UK tended to be higher than in other comparable EC countries and the US
* A disparity between farm gate and retail prices
* Continuing concern that large out-of-town supermarkets were contributing to the decay of the High Street in many towns. (Source: www.competition-commission.org.uk)
The finding of the investigation found that price fixing and high prices were not being charged by the supermarket firms.
PRODUCT DIFFERENTATION AND SWITCHING COSTS
Since the late 1990's there has been a growth in Supermarkets own label brands. In January 2005 Sainsbury's relaunched it's low price range under the sub-brand 'basics' compromising of 400 products. This approach clearly has universal appeal; customers shop across the price/quality bands depending on their tastes needs and budget. Supermarkets are seeking to enhance their brand identity and exploit sales opportunities to different target groups. Creating a quality image is, therefore, an important element in encouraging own-label sales. (Rieple 2001)
Power of Suppliers
The power of the supplier is likely to be greater when:
* there are a few suppliers and many buyers
* there are no substitutes,
* Witching costs are high
There are many suppliers of goods and services in the supermarket industry. I have listed the suppliers which have a significant effect on the industry.
Food Producers
The majority of sales of supermarkets are generally food items therefore one of the major suppliers are food producers. Producers for large supermarkets such as Sainsbury's have a contract with the food supplier. Small corner shops will usually buy their produce from wholesaler. The grocery retail industry has significant power because a lot of the food is grown in third world countries therefore they are vunerable to the bargaining power of the supermarket industry. Curtis (1998). Buisness functions an active learning approach . Massachusetts : Blackwell . 173-181.
Manufacturers of Household Cleaning Products
Companies which manufacture goods such as washing up liquid are in a different position than that of food producers this is due to the fact that companies which manufacture goods such as Fairy's washing up liquid are companies which are huge in size. This means they have stronger bargaining power than others suppliers in the supermarket industry. (Lynch 1997)
Labour
Students, mums and school leavers usually make a large % of the workforce they tend to be either unskilled or semi skilled and quite a few of these are employed on a part time basis. Taken these factors into account suggest that labour has a low power in the industry.
Buyers, or Consumers
The power of the buyer is likely to be greater when:
* There are few buyers and many sellers
* There are close substitutes
* Switching costs are low
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There are two different types of buyers in this industry. The first one would be the individual consumer. The second group would be consumer on masse. Growing awareness of obesity and Genetically modified food have cause changes in the supermarket world. Sainsbury's have introduced the taste the difference range and other health food products so that they don't lose buyers. Buyers in a group have a powerful bargaining position. (Lynch 1997)
Threat of Substitutes
There are no direct substitutes for the industry. Food needs to be consumed by human beings so that they can survive. However takeaway foods seemed to be the closet substitutes to supermarket food. However time is a factor and over time there may be closer substitutes.
In conclusion we have looked at the interface between the organisation and its immediate environment and examined the impact the supermarket industry has on the nature of competition. Porter's model identifies five competitive forces. The essay has identify the barriers that exist for new entrants and each one of Porters factor has been discussed clearly. (Curtis (1998). Buisness functions an active learning approach . Massachusetts : Blackwell . 173-181.)
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
Alain Anderton. Economics A level. 2000
Competitive Strategy: Techniques for Analysing Industries and Competitors. (M.E Porter) 2002
Butel, L & Curtis,T. Business Functions An active learning approach, 1998
Anderton A. Economics 3rd edition, 2000
www.tesco.com
www.sainsburys.co.uk
www.asda.co.uk
www.bized.ac.uk/economics)
ww.bbc.co.uk.news.sainsbury.
