An Investigation of Competition within the UK Food Retail Industry
This dissertation set out to explore the nature of competition within the UK Food Retail Industry as well as to evaluate the competitive strategies undertaken by firms in the market. This task has been undertaken through a critical analysis of a range of literature focussed on establishing the current state of play in the UK supermarket industry, examining general theory on competition and competitive strategy, as well as a review of literature that specifically addresses competition between supermarkets in the UK. Looking first at the nature of competition in the UK food retail industry, it was clear from the literature review that while the industry has many characteristics of an oligopoly as it is dominated by a small number of major firms, it is undoubtedly highly competitive. The evaluation of the competitive strategies undertaken by firms in the industry showed that between the leading firms in the market that Tesco had the best balance between price and customer perceived value but there was clear evidence to suggest that the other leading firms were positioning themselves around Tesco in order to reduce its apparent competitive advantages. While the analysis showed similar competitive strategies for the big four, it revealed different strategies being adopted by other firms in the industry who look to operate in niche markets within the food retail industry, such as Lidl and Aldi, who compete almost entirely on price to a specific market and, at the opposite end to M & S and Waitrose which compete on quality.
Chapter 1: Introduction & Methodology
Competition is an integral part of the market economy. This dissertation will attempt to examine the nature of competition as well as evaluate the competitive strategies undertaken, within the UK supermarket industry. Examining the findings with the context of academic literature and market specific research by looking at research questions.
The inspiration of this dissertation comes from the vast media interest that the subject has achieved as well as a personal interest as to how these firms look to compete within the UK industry.
The topic of competition within the UK food retail industry has been an issue that has sparked much debate in recent history. This is a consequence of the increased power held by the four leading firms in the industry and threats of Tesco becoming a dominant firm, creating a monopoly. Furthermore the industry has been targeted by the media as being anti-competitive towards both consumers and suppliers. This is a source of constant investigation by both the Office of Fair Trading and the Competition Commission.
There is a significant amount of literature on the topic of competition, examining competitive strategy, competitor analyses as well as specific literature looking at competition within the UK supermarket industry. This dissertation will look to examine competition and competitive strategies within the industry using a wide range of sources, including academic literature and theory as well as market specific research.
The research conducted within this dissertation will be conducted to provide answers to the research question:
What is the nature of competition in the UK supermarket industry?
As well as to provide:
An evaluation of the competitive strategies undertaken by incumbent firms within the UK supermarket industry.
Aims and Objectives
From this paper it is hoped that an insight into the competitive nature of the UK supermarket industry can be gained. It is also hoped that the evaluation of competitive strategies can provide an understanding of what aspects of strategies can provide competitive advantage within the industry.
Bryman and Bell (2007) acknowledge that business and management is an applied field of study that borrows theories from a range of disciplines including social science. The analysis of secondary data involves using previously collected data, generated from an earlier study distinct from the current research to be undertaken, in order to look at a new question or perhaps the original subject from a different perspective (Hinds, Vogel and Clark-Steffen, 1997; Szabo and Strang, 1997). Szabo and Strang (1997) suggest that secondary analysis is a more convenient method for certain researchers particularly students. Due to dealing with information relating to such a large industry it is necessary to use the secondary data provided by respected organisation experienced in the provision of statistical information which is well respected. A report produced by Mintel (2009) relating to performance in the food retail sector was chosen and applied to framework.
The dissertation comprises of a series of chapters, starting with Chapter 2 which is a review of literature of competition and the UK supermarket industry. The third chapter is an analysis of the UK food retail industry and the competition within it. Chapter 4 is a competitive analysis of the industry using Michael Porter's Five Forces competitive analysis tool. The fifth chapter is an analysis of incumbent firms' competitive position in comparison with competitors within the UK supermarket industry using the marketing model, the Bowman Strategy Clock. Finally Chapter 8 examines the findings from the research and examines these against the research questions, as set above. From this a series of conclusions are made.
Chapter 2: Literature Review
The following literature review explores recent research and theories relating to; the nature of competition, oligopoly theory, competition theory in the UK supermarket industry, non-price competitive theory, strategic groups, sustainable competitive advantage and industry context.
The Nature of Competition
Merriam-Webster defines competition within business as the effort of two or more parties acting independently to secure the business of a third party by offering the most favourable terms. (Merriam-Webster, 1995)Competition is an integral part of the market economy and has been discussed as a vital element of the capitalist system by a wide range of economists such as Marx, Keynes, Schumpeter, Friedman, Smith, Hayek, Ricardo & Weber. It was proposed, by Adam Smith and later Vilfredo Pareto that competition leads to there being an optimal state of resource allocation (Durlauf et al, 2008).
Competition, according to the theory, causes commercial firms to develop new products, services and technologies, which would give consumers greater selection and better products. (Baye, 2006)
Generally firms look to compete in two ways; price competition and non-price competition. Price competition moves the consumer up and down the consumer demand curve with price variations whilst non-price competition seeks to shift the demand curve to the right, making it more inelastic (Parkin et al, 2005).
The term oligopoly refers to an industry in which there are only a few firms and is characterised by the following distinctions (Davies & Lam, 2001):
- Only a few firms supply the entire market with a product that can be differentiated or standardised.
- At least some of the firms have large market shares and can influence product price.
- Firms in the market are aware of their interdependence and always consider rival reactions when setting prices, output goals and advertising budgets.
- Oligopolies are protected via barriers to entry, similar to those of natural monopolies; inherent cost or technological advances associated with large-scale production.
- Small firms often merge or are bought out to combine assets and lower average costs.
The UK supermarket industry has an oligopolistic market structure, (Davies & Lam, 2001, Burt & Sparks, 2003): "There is, therefore a clear asymmetric oligopoly structure in the UK market." (Clarke et al, 2002: 152)
Competition Theory in the UK Supermarket Industry
One of the first economic models to be proposed for oligopolistic markets was the kinked demand curve by Paul Sweezy. The kinked demand curve has been used to explain why firms keep prices stable in an oligopoly. A fundamental assumption within this model is that there is no collusion between firms within the market. The central beliefs of the model are firms will not change prices if a competitor increases their price and competing firms will lower their prices in response to a rival decreasing prices (Begg et al, 2005). Therefore any increased prices face demand that is elastic and any decreased prices face demand that is inelastic. Consequently the only way in which market share can be maintained is through keeping prices stable. This model suggests that price wars should not occur in an oligopoly as it results in reducing profits for the firms participating in the price war.
Criticisms of this model centre around the proposition that there is no explanation of how the stable price is determined. Another problem with the kinked demand curve model is that firms' beliefs about the demand curve are not always accurate and firms can determine that they are not always correct. If marginal cost increases by enough to cause a firm to increase its price and if all the firms experience the same increase in marginal cost, they all increase their prices together. Consequently the belief that if one firm increases its price, its competitors won't follow is incorrect. If a firm bases its actions on beliefs that are incorrect then profit maximisation will not occur and could lead to an economic loss (Parkin et al, 2005).
As previously stated a key assumption of this model is that is assumes that there is no collusion within the industry. However, an Office of Fair Trading (OFT) investigation (OFT 2007) into the UK supermarket found collusive practices in relation to various dairy products, this is discussed further within the Industry Context section of the Literature Review.
Augustin Cournot put forward a simple model of duopolies that remains a popular model for oligopolistic competition (Begg et al, 2005). This model of non-cooperative oligopolistic market pricing sees firms seeking to profit by setting output, and taking competing firms levels of output as fixed (Sloman & Wride, 2009). The predicted outcome from this model is a price that is between the competitive price and that of a monopolistic price, with the equilibrium price approaching the competitive level the number of firms goes to infinity. This model consequently shows that there is a direct, but non-linear relationship between price and the level of concentration in a market (Puu, 2007).
The Bertrand Model
An alternative assumption to the Cournot model is that rival firms set a particular price and stick to it. This situation is more realistic when firms are not willing to upset consumers with regular price changes or when they want to produce catalogues which specify prices. The aim of a firm competing in an oligopoly in this scenario is to select its own price and quantity in the light of the prices set by rivals (Begg et al, 2005). Joseph Bertrand developed a model that looked at the price setting behaviours of firms in duopolies and oligopolies in 1883, known as the Bertrand model. The outcome of firms setting their prices with the benefit of analysing their competitors' prices is clear. The firm will attempt to set a lower price until all supernormal profits are competed away, through price wars, this will continue until price is forced down to the level of average cost with normal profits remaining (Sloman & Wride, 2009).
The equilibrium outcome in either the Cournot or Bertrand models is not in the joint interests of the firms. In each case, total profits are less than under a monopoly or cartel. But, in the absence of collusion, the outcome is the result of each firm doing the best it can, given its assumptions about what its rivals are doing. The resulting equilibrium is known as a Nash equilibrium, after John Nash's concept introduced in 1951 (Sloman & Wride, 2009).
The Nash Equilibrium is a concept of game theory that has been defined as 'a configuration of strategies, one for each player, such that each player's strategy is best for her, given that all other players are playing their equilibrium strategies.' (Dixit and Skeath 1999,p.82, cited in Davis & Lam, 2002:268).
Comparison of Bertrand and Cournot
Under Bertrand behaviour, Nash equilibrium entails price equal to marginal cost, so industry output is high. Under Cournot behaviour, Nash equilibrium entails lower industry output and a higher price. As marginal and average costs are constant, each firm makes profits since the price is higher, but the firms do not co-operate. A joint monopolist would make more profit by coordinating output decisions. Industry output would be even lower and the price even higher.
Thus, Nash equilibrium depends on the particular assumption each firm makes about its rival's behaviour. Generally, economists prefer the Cournot model. In practice, few oligopolies behave like a perfectly competitive industry, as the Bertrand model predicts. Moreover, since prices can be changed rapidly, treating a rival's price as fixed does not seem plausible. In contrast, we can interpret the Cournot model saying that firms first choose output capacity and then set price. Since capacity takes time to alter, this makes more sense (Begg et al, 2005).
One of the key features of an oligopoly is the interdependence of the firms competing within the market. As there are only a few firms taking part within the oligopoly each firm has to take account of its competitors. Each firm will be affected by its rivals' decisions and a firm's decisions will affect its rivals. Therefore they are mutually dependent or 'interdependent' (Sloman & Wirde, 2009).
Within an oligopoly participating firms can be pulled in two opposite directions. This interdependence could persuade firms to attempt to collude with each other and act collectively as a monopoly, to maximise profits or, firms could be tempted to compete with their rivals to gain a bigger share of the industry profits themselves (Sloman & Wirde, 2009). When oligopolists can collude to maximise their collective profits, taking into account their mutual interdependence, they will produce a monopoly output and price and therefore earn a monopoly profit (Samuelson & Nordhaus, 2005).
Two types of collusion that can take place within an oligopoly are explicit and tacit collusive practises. Explicit collusion is carried out under a formal agreement, known as a cartel. However, cartels are now outlawed in Europe, the US and many other countries (Begg et al, 2005). Under the 2002 Enterprise Act (Her Majety's Stationery Office (HMSO), 2002), in the UK it is a criminal offence to engage in cartel agreements irrespective of whether there are appreciable effects on competition. Along with the Enterprise Act, the Competition Act (HMSO, 1998) was introduced, this provided the UK with two bodies known as the Office of Fair Trading (OFT) and the Competition Commission (CC). The OFT can investigate any firms suspected of engaging in one or more of the prohibited practises. The OFT can refer cases to the CC for further investigation. The CC is responsible for determining whether the structure of an industry or the practices of firms within it are detrimental to competition (Sloman & Wirde, 2009).
Tacit collusion is when oligopolists take care not to engage in price fixing, excessive advertising or other forms of competition. One form of tacit collusion is when firms follow the price set by an established leader. This is known as 'dominant firm price leadership'. This is when the competing firms choose the same price as that set by the dominant firm in the industry. Alternatively, the price leader can also be the firm in the market that has proved to be the most reliable one to follow, this is known as barometric firm price leadership. The price leader in this case is the one whose prices are believed to reflect market conditions in the most satisfactory way (Sloman & Wirde, 2009).
Non-Price Competitive Theory
Non-price competition occurs in market situations in which competitors wish to avoid price wars, so instead of lowering price they focus on extensive promotions to highlight the distinctive benefits or features of their product/service.
Within non-price competition location can be seen as a competitive variable, within oligopolistic competition there are two leading models, Hotelling's Location Model and Salop's Circle Model.
A location model was developed by Hotelling (1929) to explain competition between firms without focussing on price. The model assumes that the firms are homogenous except for their location and consequently look to compete on this variable. The model observes a scenario in which there are two firms (X and Y) located at different ends of a road, where consumers are evenly distributed. There is no preference for either firm, as they are homogenous in nature, however transport costs need to be minimised.
If firm X wishes to increase its market share it will move to the left of Y. This will allow X to receive the majority of the customers with the exception of the minority that are to the right of Y
To counteract firm X's shift of location firm Y would move to the left in order to gain the larger customer base. This change of location would continue until both firms reach an equilibrium point in which they are both in the centre of the street and maintain equal market share.
This model shows that if price is equal the location of the firms can be determined. When firms are settled in their equilibrium locations they will be unlikely to shift, as this can cause a loss of market share and a loss of competitive advantage. The Bertrand equilibrium relates to this model, as in a similar scenario where firms are homogenous and set in an equilibrium location but one of the firms operates at a lower price, they will hold the total market share.
Salop's Circle Model
Salop's circle model is one of the most recognised variation of Hotelling's location model. The circle model also looks to examine consumers' preference in relation to a firm's geographic location. However, the model introduces two significant factors, firstly that firms are located around a circle with no end-points and secondly there is the option for the consumer to choose a second heterogeneous good. The quantity demanded of a competitive firm is the following formula, qc= 2XcL, therefore the competitive demand question is:
Qm= L/C = V - C(1/n - Xc) - P
The Salop and Hotelling location models are relevant to the competition within the UK supermarket industry. This is due to supermarkets usually being located very close geographically to each other. Consequently the models tell us that the competition is related to the geographical location of stores in relation to others.
The marketing mix is the traditional method of analysis used to categorise methods of marketing, developed by McCarthy in 1960. The major marketing management decisions can be classified in one of the following four categories; Product, Price, Place and Promotion. These variables are known as the marketing mix, firms attempt to generate positive response from their target market by blending the four marketing mix variables in an optimal manner. Within the non-price competition aspect of a firm's use of the marketing mix there needs to be focus on the all of the P's with the exception of Price (Brassington et al,2007).
A further updated and more client-oriented marketing philosophy is known as the C's, developed by Robert Lauterborn and put forward by Philip Kotler (1995). Their argument was that the marketing mix was too product-oriented and modern marketing should take into account the convenience of the client when selecting marketing strategy. The change to the categories within the marketing mix is as follows:
- Place becomes Convenience
- Price becomes Cost to the user
- Promotion becomes Communication
- Product becomes Customer needs and wants
The term strategic group was coined by Hunt (1972) whilst conducting an analysis of an industry and it was noticed that a higher degree of competitive rivalry was taking place than expected by the concentration ratios. This more competitive environment was put down to the existence of sub-groups within the industry that cause firms to compete on different dimensions making tacit collusion harder. As a consequence of these asymmetrical strategic groups the industry had more rapid innovation, lower prices, higher quality and lower profitability than traditional economic models would predict. The work of Hunt was then developed by Porter (1980) and included in his overall system of strategic analysis.
A strategic group model for the UK supermarket industry shown in figure 2 was proposed by Lawler & Yang (2003). The model displays the strategic groups present within the market along the axis of price and whether the stores are used as primary or secondary shops. It is suggested that each of the food store formats shown in the figure constitute new strategic groups and each offer a unique mix of price, non-price and service characteristics (Lawler et al, 2003).
Sustainable Competitive Advantage
Within the topic of creating sustainable competitive advantage there has been much debate as to how firms can successfully manage to achieve a long term advantage. This debate has brought two notable approaches, the positioning approach and the resource based view.
The positioning approach deems that firms should focus on competitive analysis in the industry-specific environment in order to gain a sustainable competitive advantage (Porter, 1980). This allows a firm to be able to adjust its strategy in order to achieve improved performance. Porter argued that a company had to position itself within its industry so that it outperforms its competitors in price and/or quality. This may be by exploiting the underlying economic factors such as economies of scale. The outside-in nature of this strategy is malleable depending upon the external environment of the specific industry. This places importance upon analyzing the external environment for which Porter developed a five forces framework (Porter, 1979) using Industrial Organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. These forces are:
- The threat of substitute products
- The threat of the entry of new competitors
- The intensity of competitive rivalry
- The bargaining power of customers
- The bargaining power of suppliers
Positioning depends upon using the sources of competitive advantage and how the following generic strategies are used, cost leadership, differentiation and market segmentation (Porter, 1980). Market segmentation is narrow in scope whereas both cost leadership and differentiation are generally broad in scope. As a low cost leader a company seeks to be the lowest cost supplier, serving the most customer segments. By fashioning the lowest possible cost base the firm stands to increase their possible cost margins, as long as this is above average within the industry the company stands to be profitable. This may be achieved through economies of scale, the experience to foresee greater efficiency and scope of the activities over which an advantage is sought.
The alternative segment to focus on is differentiation. If a company is able to differentiate itself from its rivals by creating a unique selling point it can gain a competitive advantage. This can be achieved through Kirznian entrepreneurship where the firm notices something that is costless knowledge, but that nobody else knew or had previously acted upon. By adding to an existing a product in terms of a features, branding or delivery system it can create a higher perceived value for customers.
Porter's generic strategies received criticism regarding the fixed nature of the strategies he described when Miller (1992) questioned the idea of being caught in the middle; he maintained that there is viable middle ground among the strategies.
Later work that has offered clarity to some of these questions, whilst still being consistent with the overall positioning approach was produced by Cliff Bowman and David Faulkner (1996), known as the strategy clock. Bowman claims that the key variables from a consumer's perspective are price and perceived quality. Different areas of the clock represent different areas of customers' requirements in terms of value for money coupled with the different areas for achieving competitive advantage. These strategies can be described as market facing or as an outside in approach and enable a heterogeneous approach to strategy (Johnson et al, 2008).
The resource-based view of the firm seeks to explain sustainable competitive advantage through the rent earning capability of internal scarce resources while the marketing paradigm stresses the need for external market orientation to achieve competitive success. (Hooley, Broderick & Moller, 1998)
A firm is said to have a sustained competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors and when these other firms are unable to duplicate the benefits of this strategy (Barney, 1991). The resource-based view states that competitive advantage can be obtained by using valuable resources and capabilities that its competitors are unable to imitate (Barney 1986, 1991). This perspective emphasises the importance of the unique resources and capabilities of a firm as they provide the direction for corporate strategy, the main source of profits as well as any sustainable competitive advantages held by the firm. Consequently resource and capabilities are treated as the foundation of long-term corporate strategy and emphasis in strategic thinking (Wernerfelt 1984, Grant 1991).
The dynamic capabilities view is based from the resource-based theory, further explaining the dynamic capabilities that an organisation needs to possess for it to transform resources into its competitive advantages. Under the viewpoint of resource-based view, a firm can obtain its competitive advantage by means of the valuable resource and capabilities that its competitors can hardly imitate (Barney, 1986, 1991; Peteraf, 1993). However, facing an ever-changing environment, resource-based view meets the difficulty in application due to its focus on static resources. The firm has its own specific resources, and its competitive advantages lie on its unique and inimitable upstream markets and resources (Teece, 1982, Rumelt, 1984, Wernerfelt, 1984). The resource-based view has its constraints like emphasizing too much on internal resource and capabilities and neglecting the influence of external factors on a firm; and its inability to explain adequately how or why does a firm obtain the competitive advantage in a rapidly changing environment (Eisenhardt and Martin, 2000).
Teece et al. (1994, 1997) extended the resource-based view and developed the dynamic capabilities view. "Dynamic" as capacity which renew competences so as to achieve congruence with the changing business environment. Meanwhile, "capabilities" emphasizes on key role of strategic management and adapting, integrating and reconfiguring organization and functional competences to match requirements of changing environment (Teece et al., 1997). Therefore, dynamic capabilities is originated from the resource-based perspective, while emphasizes that an organization has to possess dynamic capabilities in order to transform its resources and capabilities into competitive advantages.
Power in the supermarket industry
Due to the high market share held by the leading firms much of the modern literature concerning the UK supermarket industry has been regarding power in the sector (Burt & Sparks, 2003, Lawler & Yang, 2003, CC, 2000, 2003, 2008).There has been evidence of leading firms using excessive power over both suppliers and consumers (CC, 2000, 2008). Firms such as as Tesco plc (Tesco), Asda Group Ltd (Asda), J Sainsbury plc (Sainsbury's) and William Morrison Supermarkets plc (Morrisons) were found guilty of collusion in regards to the price of certain dairy products. These anti-competitive practices saw the leading firms use their power to the detriment of the consumer (OFT, 2007). Tesco in particular have been found to use regional monopolistic environments in order to leverage power over the consumer, setting anti-competitive prices (CC, 2008). As the largest retailer, Tesco has definitely managed to use its power over suppliers. The Competition Commission report on supermarkets (2000) observed that the bigger a retailer is, the more able it is to extract lower prices from suppliers. The commission found that Tesco consistently paid suppliers 4% below the industry average (CC, 2000).
Concentration in the supermarket industry
Burt & Sparks (2003) propose from their 'spiral of supermarket growth', that with the emergence of a market leader (Tesco) other incumbents will have difficulty competing and maintaining market share. They claim that 'the current use of vertical and horizontal power has lead to a situation where one [or two] dominant chains emerge' (Burt & Sparks 2003:250) which will further increase the concentration of the market. However in the 2009 financial year Tesco has been said to be faltering while Sainsbury's, Morrisons and Asda have been performing well (Mintel, 2009). Although Mintel's report also commented that while Tesco's growth has fallen behind that of its competitors in 2009 they have managed to report growth for the last 15 years consistently.
Chapter 3: Analysis of the UK Food Retail Sector
The following analysis of the UK food retail sector has been put together through the use of market research performed by Mintel in the last few years. Mintel reports offer product and industry market research reports that cover domestic and international marketplaces. Each report combines data and analysis of the competitive landscape, supply chain, market-share size and trends, and consumer profiles. The reports attempt to offer explanation of consumer behaviour and demonstrate the structure of the market.
The analysis of the UK food retail sector (also known as the grocery retail sector) will be carried out looking at the following categories; The Players, Concentration, Structure, Current State of Play, Suppliers, Pricing and Non-price Competition.
The UK food retail industry is dominated by main firms; Tesco, Asda, J Sainsbury's and Wm Morrisons.
The market leader is Tesco who hold a dominant market share of 25.7%. Tesco have shown consistent growth over past decade. Not only are they the leading food retailer but they are also the largest retailer in the UK.
Sainsbury's are the second largest grocery retailer in the UK based on consolidated turnover however Asda are larger when taking into account the turnover created through the sale of fuel. Sainsbury's currently have 12.9% of the market share whereas Asda have 13.7%.
WM Morrisons are the fourth firm in the 'Big Four' leading firms that make up the market and control a market share 9.6%. Morrisons had previously controlled less market share however became fourth largest firm due to their acquisition of former fourth largest player, Safeway (Mintel 2006).
During the 1990's J Sainsbury's Plc controlled a similar share of the market as Tesco, however they have lost ground since (DEFRA 2006). Sainsbury's has endured a lengthy period of decline but is now in a well established recovery phase and competing successfully with the other firms in the 'Big Four'. The breakdown of the market shares for these firms is shown in the figure 3.1. Also identified in the figure below in red are the 'Big Four' group, which emphasises the significant amount of market share they control compared to the other retailers in the sector.
The Other Players
Outside of the 'Big Four' there are several other retailers who contribute to the sector. Within these retailers there are a number of sub-sectors, such as discounters and premium positioned retailers. The discounters' market share has grown significantly since it entered the UK sector through the German discounters Aldi and Lidl in the 1990's. However the market share of these firms is still relatively low with Aldi controlling 1.3% and Lidl having 1.6% of the market. With such high competition in the market other retailers have looked to position themselves in niche markets, where, for example, both Waitrose and Marks and Spencer function in a quality market sector. The premium placed firms control more share than the other niche operaters such as the hard discounters, with Waitrose and M&S being the sixth and seventh largest firms in the market with around 3% market share. This positioning has placed them at the top end of the 'Other Players' section of the market but their share is still minute compared to the 'Big Four', which emphasises the gap between the leading firms and the rest (Mintel, 2009).
All through the 1990's the industry's concentration of large multiple stores rose dramatically and this trend continues to the present day. The UK has one of the more concentrated grocery retail sectors in Europe, as measured by the market share of the 3 or 5 largest firms (DEFRA, 2006). This has been shown in figure 3.2 which shows the concentration ratio of the UK as of 2004 compared to other European grocery markets.
The concentration was enhanced in one way by various takeovers and mergers in the industry by leading players. Another method in which concentration has increased is by the development of new stores by the leading players, 'Concentration has increased markedly in the 1993-96 period with the major multiples pursuing active policies of new store development.'(Clarke et al, 2002:152). In figure 3.3 a clear pattern has been displayed, throughout the last century that the grocery market has been increasingly become more dominated by multiples (DEFRA 2006).
The concentration of the industry has been a concern of the regulatory bodies, such as the Competition Commission (CC), and this has lead to several inquiries into this area. The Competition Commission's 2000 supermarket report made a clear distinction separating the supermarket sector and convenience stores, this has allowed leading supermarket retailers to aggressively enter the convenience store market though vehicles such as Tesco Express or Sainsbury Local, since the distinction has created a loophole in anti-monopoly laws and has allowed a further increase in the concentration of the food retailing industry in the UK (Mintel, 2008).
Structure of the Market
Within the UK food retail industry there are a number of different categories of retailer. The main categories of retailers are; large grocery retailers, convenience stores, hard discounters (also known as Limited Assortment Discounters, LADs) and specialist grocery retailers (CC, 2008).
Set out in figure 3.4 is the structure of the UK grocery retail sector, including store numbers, sales and floorspace by category of grocery store and by category of grocery retailer. Convenience stores and specialist grocery stores account for over 90% of all grocery stores in the UK by number but only around 20% by sales. Large and middle-sized grocery stores represent just 5%of all grocery stores by number but account for approximately 75% of national grocery sales by value. Internet sales are estimated to account for 1-2% of total grocery sales (CC, 2008)
Current State of Play
The four leading firms are currently competing for market share in a very aggressive manner. The food retailing sector is a mature market, consequently firms are competing fiercely through price, range, services and other non price factors. It has also meant that firms have looked to diversify into a wide variety of non-food products and services in order to find competitive edge (Mintel, 2009).
The leading four companies and other retailers have now assumed a homogenous store format and facilities. There is relatively little difference between stores, as many factors are now common among all stores (Clarke, 2002). Stores are regularly located out of town, have a high level of service, have similar product offerings with similar product quality, offers a variety of non-food goods and services, have additional facilities such as car parking, petrol stations, food courts and almost all assume the same store format (Mintel 2009).
Despite the recession facing the economy, food retailers have been doing well, this can be attributed to fewer people eating out and instead cooking from scratch more frequently, as well as people being willing to cut back on food least of all (Mintel 2008&2009). With food dominating the sales mix of the food retailers there has been an increase in retail sales in the sector however the increase of sales year on year is projected to slow, as shown in table 2.1.
As a consequence of the recession there is a pattern emerging of consumers trading down, this has seen the leading firms emphasising their own value brands. For the same reasons hard discounters such as Aldi and Lidl have substantially outperformed in the last financial year as a result of consumers' search for 'value'. Despite the improved performance of discounters, the market leaders are still well placed as they can adapt easily to changing demand for food and can retail low priced good value non-foods (Mintel, 2009).
Suppliers to Grocery Retailers
Large grocery retailers purchase goods directly from grocery suppliers, this allows the large firms to benefit from the economies of scale that are produced from large volumes. While regional grocery retailers and convenience store operators tend to purchase goods from suppliers through wholesalers and buying groups (Competition Commission 2008).
There are a large number of firms that supply groceries to UK grocery retailers either directly or indirectly. This includes food and drink manufacturers, primary producers and fresh food suppliers, including packers, processors and wholesalers (DEFRA 2006).
Grocery retailers purchase relatively little of their fresh produce directly from UK farmers. Most fresh produce is supplied through intermediaries such as packers, processors and fresh food wholesalers. Six large retailers (Asda, M&S, Morrisons, Sainsbury's, Somerfield and Tesco) told the Competition Commission that the combined total value of their direct purchases from farmers amounted to approximately £295 million in 2006 compared to a total annual agriculture production of £14.3 billion and £16.7 billion in fresh food sales by those firms. The competition also noted that the majority of the direct purchases from farmers were undertaken by Morrisons as a result of their vertical integration of food processing (CC 2008). The small value of direct purchases can however be attributed to the use of intermediaries in which farmers may be shareholders.
The Competition Commission in their review of the market in 2008 commented on the large variation in the size of businesses supplying grocery retailers. Grocery suppliers include branded goods' producers such as Coca-Cola, Unilever, Kimberly-Clark and Proctor & Gamble (CC 2008).
Shown in figure 3.5 above there is some evidence of consolidation in the groceries supply chain in recent years. Supply chain consolidation has begun to appear in the milk processing, sugar distribution, salt and carbonated soft drinks sectors as early as 2000 (DEFRA 2007). According to the competition commission two grocery retailers claimed that 'sourcing from fewer suppliers reduced the complexity in buying and was usually more economic for suppliers, who could therefore offer a more competitive price'. (CC 2008)
Within this industry there has been considerable price competition. In the past there have been numerous price wars between retailers, however these price wars have been on a limited range of goods, such as bread, baked beans as well as on supermarket fuel prices. These price wars are often very short term and are regularly criticised as being publicity stunts instead of actual competitive rivalry between firms, (Burt & Sparks, 2003 & CC 2000).
The Competition Commission's 2000 report into the supermarket industry investigated the pricing policies that were present in the market. Within this report it was revealed that average prices in the UK were between 12-16% higher than Germany, France and the Netherlands in 1999, however it wasn't proven that excessive prices were being charged as exchange rates and high lands in the UK can affect prices, consequently explaining possible reasons for higher prices (Clarke et al 2002 & CC 2000). There were a number of activities being carried out by market leaders, such as 'price flexing', continually selling some product lines below cost (loss leaders), pricing own branded products in relation to branded equivalents instead of cost as well as competing on price on a relatively small proportion of their product lines.
Price flexing was acknowledged by the Competition Commission as being anti-competitive and against public interest when the large market leaders used this policy. The use of loss leaders does offer consumers the best deal as it reduces the price, however, it also impedes competition from smaller retailers who are in the industry, as they are unable to provide similar prices below cost. The competition on price on only a small proportion of their product lines also opened up the market to a complex monopoly situation where retailers are exposing themselves to a limited amount of price competition, (CC 2000).
Non-price competition focuses the industry on other strategies for increasing market share. The extent to which the UK supermarket industry is actively involved in non-price competition is shown by the examples below:
Media advertising and marketing
Discounted petrol at hypermarket forecourts
24 hour shopping
Financial incentives to shop at off-peak hours
Buy one Get one free Later schemes
Self checkout points
Charity sponsorship and community projects
Non-food items to improve service and choice
Chapter 4: Porter's 5 Forces Analysis of UK Supermarket Retailing
This chapter will be looking to observe the UK Supermarket industry with the use of Porter's framework for industry analysis. The conclusions developed from this analysis will assist in the answering of the research questions set out at the beginning of this report. The forces will be examined using secondary data from sources such as published literature on the supermarket industry and market research data collected and analysed by Mintel (Mintel, 2009).
The 5 Forces Framework
Michael Porter introduced a framework to allow for the analysis of competition within a particular industry, in his published work 'Competitive Strategy' (Porter, 1980). His work was influenced by the Structure- Conduct- Performance model that preceded him however he developed his framework further to allow for its use as a management tool instead of merely as a predictive device. According to Porter, regardless of the scope of an industry or whether an industry produces a commodity or a service, the level of competition is dependent on the strength of the competitive forces it is exposed to (Johnson et al 2008). He identified 5 forces that can ultimately determine the profit potential of the industry and as a result the structure of the industry as;
- threat of new entrants;
- bargaining power of suppliers;
- bargaining power of buyers;
- the threat of substitutes, and
- competitive rivalry (Porter 1980).
Understanding the nature of each of these forces gives organisations the necessary insights to enable them to formulate the appropriate strategies to be successful in their market (Thurlby, 1998)
'The state of competition in an industry depends upon five basic competitive forces....The collective strength of these forces determines the ultimate profit potential in the industry...' (Porter, 1980).
Competitive Rivalry amongst existing firms
The UK food retail industry has seen noticeable growth however this growth has slowed in recently due to the global economic downturn. Consequently competition within the market is fierce, and with no new market share being available through growth, incumbent firms are being forced to compete directly for each other's market share (Mintel 2009). Although growth has slowed it is worth noting that the long term trends suggest that growth will continue once an upturn occurs.
Number and Size of Competitors
Within the market the size of competitors varies significantly, as shown in the Analysis of the UK Food Retail Industry. The market leader, Tesco, holds 25.7% of the market share and the other 'Big four' firms hold collectively around 37%. The remaining market share is held by smaller firms such as Iceland and Lidl that hold relatively little share in their own right. The substantial share held by the 'Big four' increases the interdependence of these firms. A result of having a high concentration within the industry is that rivalry is strong, however there are worries that through collusion their power in the industry can be abused (Burt & Sparks, 2003, Lawler & Yang, 2003, CC, 2000, 2003, 2008).
Threat of new entrants
A number of factors have a significant impact on the ability of new entrants to enter the market.
Economies of Scale
Significant economies of scale are present in the UK supermarket industry (CC, 2003; CC, 2000; Clarke et al, 2002). The leading firms utilise the benefits of economies of scale through securing more favourable buying terms, improving their distribution efficiencies and spreading any fixed or semi fixed costs over large volumes (CC, 2003). Leading firms can exploit these economies of scale to provide competitive advantages within their value chain that will not be able to be matched by new entrants, consequently providing a major barrier to entry.
Tightened UK land-use planning regulation governing retail development has limited the number of new planning applications approved for new supermarket developments. The revisions of the Department of the Environment's PPG6 has meant for a new era of more restricted and redirected food store expansion (Wrigley, 1998). This has therefore created a significant barrier to entry into the UK market as potential new firms are restricted when trying to build new stores in out of town developments.
Within the UK food retailing industry firms have invested significantly in strengthening their brands through various marketing techniques. The aim of this is to create a strong brand identity which hopefully inspires brand loyalty within its customers. This could mean that a new entrant would need to invest heavily into this side of the business in order to make an impact in the sector however once a brand is established there are low switching costs for customers. Therefore any new entrants to the market would be subverted to high investment into branding which could pose some threat to entry.
The pricing policies within the UK supermarket industry will act as a barrier to new entrants to the market. New entrants may not be able to compete with the use of loss leaders by the larger firms in the industry. Competition Commission (2000) reports have also found the use of price flexing within the industry which may provide a barrier of entry to the market as new entrants would have to compete with rival firms adjusting prices according to local competitive conditions.
The supply chain within this industry consists of a highly complex domestic and international distribution channel. In order to negotiate this some firms, such as Morrison's, have vertically integrated whereas other firms own part of their distribution network in order to decrease the overall cost to the firm and generate further economies of scale (CC, 2008).
Two possible cost advantages for large grocery retailers that might act as a barrier to entry are distribution costs and purchasing costs. The competition commission found that large grocery retailers' purchasing cost advantages were likely to be of much greater significance than their distribution cost advantages since purchasing costs make up a substantial proportion of grocery retailers' total cost base (CC, 2008). Tesco has a significant advantage in purchasing terms over other large grocery retailers and wholesalers. Asda, Morrison's and Sainsbury's also have a purchasing terms advantage relative to other large grocery retailers and wholesalers, but to a lesser extent than Tesco. Small wholesalers have the highest purchasing costs which restrict their ability to compete in the broad market environment (CC, 2008).
Bargaining Power of Suppliers
The volumes purchased by the major supermarkets enable them to exercise huge buying power over suppliers. However this buying power is not just restricted to the Big 4 as many smaller firms have entered into buying groups or created buying arrangements (Clarke et al, 2002). For example the Today buying group has represented 59% of Tesco's turnover (Clarke et al, 2002). With the high concentration of supermarkets there is more power over suppliers due to the amount of choice and relatively low switching costs firms have. These factors allow retailers to increase profit margins even when they maintain or even reduce prices to consumers as they can obtain more favourable terms from suppliers.
The emergence of own brand product ranges has reduced the bargaining power of the suppliers further as own ranges have become increasingly popular therefore seeing national brands hold less importance (Mintel, 2009).
The size and the amount of power held by the leading supermarket firms have lead to some anti-competitive behaviour as well as unfair treatment of suppliers (Clarke et al, 2002; CC, 2000 & 2003; Burt & Sparks, 2003). Major retailers have often dictated unreasonable terms such as over-riders, drop allowances and special promotions that suppliers have had no chance but to agree to (Clarke et al, 2002). The lack of power from suppliers has been highlighted as an issue by reports into the industry by the Competition Commission (CC, 2000).
The Competition Commission concluded in 2008 that, based on the size of grocery retailers, wholesalers and buying groups relative to suppliers, together with the evidence on supplier pricing and margins, all large grocery retailers, wholesalers and buying groups have buyer power in relation to at least some of their suppliers. However, they also found that the buyer power of even the largest grocery retailers may be offset by the market power possessed by suppliers of the most prominent branded goods (CC, 2008).
Anti-Competitive Behaviour of Retailers
There have been many claims that the leading retailers abuse the market power held to the detriment of the suppliers (Clarke et al, 2002; CC, 2000, 2003 & 2008; Burt Sparks, 2003). Major buyers dictate unreasonable terms to suppliers which they have no choice but to accept such as over-riders, drop allowances and special promotions (Clarke et al, 2002:156). These practises weaken bargaining power of suppliers and increase the power of the leading retailers. The CC formally called on the Department of Business, Innovation and Skills (BIS) to install an ombudsman who would have the responsibility of investigating complaints levied at grocery retailers under the recently drawn up Grocery Supply Code of Practice (CC, 2009).
Bargaining Power of Buyers
With the extremely high number of buyers in the market it is difficult for any collective bargaining to take place against the retailers. This reduces the bargaining power held by the buyers. In relation to the retailers income the purchases made by buyers are very small therefore the bargaining power remains low. However what does provide buyers with some power is the fact that there are very low switching costs, allowing buyers to have more choice. In order to weaken this perceived buyer power some leading retailers have used Loyalty cards that provide benefits to customers who show loyalty to the specific retailer.
The price sensitivity of consumers is a key element of the bargaining power held by buyers. With the current economic environment buyers could be perceived to hold more bargaining power than previously due the increasing amount of price-sensitive consumers. Lawler et al (2003) proposes that buyers in the food retail industry can be divided into two groups; buyers that are strategic and those that are time constrained. He drew conclusions that the average quality store customer is constrained by time and not price. The quality segments of the market offer the greatest market share so consequently on the whole the buyers bargaining power is weakened due to their lack of time to shop around.
Mintel suggested that although individual buyer power is low, the media have a significant amount of bargaining power and can act collectively for consumers. Firms attempt to protect themselves from this power with the use of corporate social responsibility (Mintel, 2008).
Threat of Substitute Product/Service
The ability to be substituted by competing firms is seen as high due to the low nature of switching costs. Switching costs are interpreted in the UK food retail sector as being the cost of transport to a retailer and the potential loss of 'loyalty points' held by a customer.
Switching to other retailing methods is unlikely, consequently consumers are more likely to switch the method in which they shop. This could potentially see customers shift from grocery shopping at hypermarkets to ordering online, however it has been noted by Mintel that the adoption of this method has been particularly slow (Mintel,2008).
The analysis of the UK food retail industry using Porter's Five Forces has examined the forces in the industry that determine competitive intensity and consequently the 'attractiveness' of the market. The conclusions drawn from each force are displayed in table 4.1 below.
Chapter 5: Analysis of Competitive Strategies in the UK Supermarket Industry
Within this chapter an evaluation of the competitive strategies undertaken by firms within the UK food retail industry will be carried out. This will be performed with the use of the Bowman's Strategy Clock, a tool that aids the analysis of a company's position within a competitive environment (Johnson et al, 2008). The following analysis is carried out with the research carried out so far in this dissertation, using literature and market specific research as carried out by Mintel (Mintel, 2009).
There are a number of different strategies that can be used by firms in order to compete with other incumbents. Michael Porter suggested in his Generic Strategies (Porter, 1980), referred to in Chapter 2, that firms can compete through cost leadership, differentiation or through focusing on market segments. However there has been much debate about the exact meaning of these terms, with confusion surrounding Porter's cost leadership with low price strategy. The 'market-facing' generic strategies used by Cliff Bowman and Richard D'Aveni removes such confusion and focuses on the principle that competitive advantage is achieved by providing customers with what they want/need more effectively (Johnson et al, 2008).
In competitive situation, customers make choices on the basis of their perception of value for money, the combination of price and perceived product/ service benefits. The 'strategy clock' represents different positions in a market where customers have different 'requirements' in terms of value for money. These positions also represent a set of generic strategies for achieving competitive advantage. Figure 5.1 shows examples of different competitive strategies followed by firms in terms of these different positions on the strategy clock.
As the market leader Tesco's strategy has clearly been successful. They have managed to report growth successively for the last 15 years, showing consistency not matched by their competitors (Mintel, 2009).
Tesco is firmly targeted toward the middle mass-market and appeals right across the socio-economic and age spectrum see figure 5.2. Tesco aims to provide good value for money and use their adaptability to quickly respond to changes in the market. During the recent economic downturn Tesco has been building on their 'good value for money' reputation through a number of initiatives. Specifically the launch of Tesco's new budget range called 'Discount Brands' to go alongside their current product ranges. As a middle market retailer Tesco's product ranges target a good/ better/ best hierarchy although the current trading down by consumers has seen Tesco adapt by offering this new 'Discount Brands' range to discourage customers from switching to discounters such as Aldi or Lidl. The positioning of this new range is slightly higher than the entry level products on offer in order to target consumers willing to trade down but not ready to fully compromise on quality.
Tesco's differentiation into non-food products has also been a major success, with non-food offerings gaining importance and offering an increasing proportion of sales each year (Mintel 2009). There has also been differentiation in the form of moving into the convenience sector within the last few years attempting to build sales in a different segment of the market. Tesco also operates a large amount of non-price competition in order to produce customer loyalty, referred to in the non-price competition section of this chapter, most notably their Clubcard loyalty scheme which has seen £150 million in investment recently to offer Tesco customers more incentive to be loyal. Tesco look to combine their low prices with a large range of product offerings as well as keeping the quality of products and services they produce high, as shown from extracts from their annual report.
A route 2 strategy seeks to achieve a lower price than its competitors whilst maintaining a similar quality of product and services to those offered by competitors. This is currently the strategy Asda can be seen to be employing within the UK supermarket industry.
In the current climate, Asda is well positioned to benefit from consumers trading down due to their reputation for 'keeping low prices down'. They have looked to emphasise this reputation throughout the recession by publishing results of an independent price checker comparing the leading firms (Mintel, 2009). Asda target the lower end of the mass market, in recent years it had looked to promote the quality of its offer, although in the current economic climate the focus has reverted back to price. The promotion of their perceived value was beginning by developing their reputation in other areas, such as quality, freshness and ethical issues but these have been relegated in importance as consumer confidence has fallen in 2008 and 2009 (Mintel, 2009). This shows that a shift towards achieving a higher customer perceived value was being undertaken prior to the recession and suggests a movement away from the low price strategy in a long term strategy however they can currently be seen to be operating a route 2, low price strategy. A shift towards a more route 3 orientated strategy could resume once the economy recovers but in order to successfully adopt a new strategy the firm will need to refocus on those areas to increase their perceived value and improve their overall appeal.
Asda places a heavy focus on its pricing and it often competes with market leader Tesco directly. They have been aggressive in their price decreases over the past couple of years, particularly in current economic climate which has seen competitors Tesco and Morrison's respond in kind.
An issue that occurs when operating a route 2, low price strategy is that of reduction of margins as there is pure price competition with incumbents and little additional income that can be resultant of differentiation. This has shown in Asda's financial accounts over the last few years as when price competition has become a more important part of competition in the market, e.g. in 2007/2008, the firm's profit margin has decreased, as shown in the table 5.3 below.
Morrison's original focus was very much on value and low prices for the mass market consumer. As the company has grown it has looked to broaden its appeal, with a greater focus on freshness and quality of its products, whilst maintaining a competitive pricing stance. This is a move from a route 2, low price strategy to a route 3, hybrid strategy. In 2007 it began targeting a position as the 'food specialist for everyone', looking to improve the freshness of its products, the value on offer and the quality of service. This approach has seemed to balance perceived quality and price well and led to some of the strongest rates of growth in the sector in 2008 and 2009 (Mintel, 2009).
Morrison's vertical integration has allowed greater opportunity to lower distribution and processing costs, particularly in fresh foods which has allowed low prices with greater margins. The vertical integration has also helped Morrison's monitor and assure quality levels as well as keeping costs low.
Morrison's have a heavier focus on foods than their competitors and only offer non-food ranges of electrical, entertainment products and home wares. They have also opted out of investing into the convenience sector outlining the organisation's tendancy to avoid differentiation.
Morrison's 'Our aim is to provide all our customers with the very best value for money wherever they live and uniquely, we have always charged the same prices in every one of our large stores.' Website
Sainsbury's targets the upper end of the market with its offer looking to appeal on the grounds of high quality and good value. Sainsbury's market share has been through a period of decline which was due to a myriad of factors; one issue that specifically caused their decline was that they were offering products and services at a higher price than their competitors without producing a higher customer perceived value (Mintel, 2008). Sainsbury's had a reputation for having a higher emphasis on quality than their competitors and have never attempted to be a price leader within the industry. They operated under the maxim of 'great food for fair prices' with prices benchmarked against the competition throughout the year. The recovery programme put in place by Sainsbury's in 2007, looked to improve food competitiveness, accelerate non-food and online development and expand into the convenience sector. Substantial investments in both quality and price have boosted appeal in recent years. Improvements in Sainsbury's price competitiveness have taken place over the last few years and were accelerated in 2008/09 investing strongly in its Basics range during the year. This shift of focus and attempt to develop their reputation regarding value for money has been carried out in order to expand its demographic.
Sainsbury's can be said to operate between route 3 and 4 strategy. The differentiation strategy looks to provide products and services that offer benefits different from those competitors and that are widely valued by buyers (Sharp and Davies, 2001). They have taken measures out to decrease their price perception and look to balance a lower price with a high quality of product/services. Ultimately Sainsbury's has seen a shift of strategy, moving closer to a route 3, hybrid strategy.
OTHER FIRMS IN THE MARKET
Outside the 'Big four' market leaders there are other competitive strategies that allow smaller firms to operate and gain market share. The two strategies that are successful for small firms are a route 1, 'no frills' strategy or a route 4/5, differentiated strategy.
Route 1: A 'No frills' strategy
Route 1 looks to combine low prices with products and service that have a lower perceived quality. This combination of price and perceived value looks to target the price-sensitive segment of the market. This strategy can be seen to be deployed by the 'hard discounters' such as Aldi, Lidl and Netto.
This 'no frills' approach targets price-sensitive customers, who either cannot afford to purchase better quality goods or choose not to. This market maybe unattractive but offers an opportunity for firms in the market to prise price-sensitive customers away from the leading four firms, which approximately 80% of consumers use for their main grocery shop (Mintel,2009). Where major providers compete on other bases, a low price segment may be an opportunity for smaller players or a new entrant to carve out a niche or to use a route 1 strategy as a bridge to build volume before moving on to other strategies (Johnson et al 2008), the approach Tesco adopted within the market, moving away from their original 'pile it high, sell it cheap' strategy.
The recession has had a positive effect on the 'hard discounters', they are the top performers in the market at present. This is due to their format being ideally suited to the recession as their emphasis on low prices appeal to the price-sensitive consumers and with trading down occurring price is seen as an important part of consumer's decision making. Research undertook by Mintel looking into consumer's key factors for choosing a store concluded that 46% of people saw price as a defining factor in 2009. However, it is doubtful that they will be able to maintain their performance when an upturn in the economy occurs (Mintel 2009).
Route 4/5: a 'Differentiated' strategy
Route 5, a focused differentiation strategy provides high perceived product/service benefits, typically justifying a substantial price premium, usually to a selected market segment (Johnson et al, 2008). The firms that take out this differentiated strategy are Waitrose and Marks & Spencer (M&S) food. Both these firms target the upper end of the market, and had seen growth prior to the recession due to a trend of consumers trading up. However in the downturn they have not performed as well and have had to take measures to lower price. These lower prices have been carried out in a softer approach than many of the supermarket players as these firms are keen not to undermine their traditional positioning. These firms have a premium stance focused on quality, health, innovation and ethical sourcing. The premium nature is reflected in the high prices that are set (Mintel, 2009).
The reason that the firms, Waitrose and M&S, are positioned between route 4 and 5 is because they are not typically seen as a destination for a full week shop and are typically used as a special occasion purchase (Mintel, 2009).
Morschett et al (2005) found when investigating the types of competitive advantage in the food retailing industry that there are three basic types of competitive advantage; price, quality and convenience. He also found that quality leadership and price leadership are independent factors that can be achieved without conflicting with each other. Therefore using this theory, the firm who will succeed in achieving competitive advantage is the firm that can strike the best balance between quality and price for consumers in the food retail industry.
As Tesco have performed so consistently well over the last 15 years and have managed to become such a dominant force within the market, their strategy can be seen to be particularly successful. It could be said that at this current time Tesco have been able to find this best balance between price and quality and have been able to exploit their hybrid position strategy to become dominant in the market. Consequently there has been a pattern for the other leading firms to alter their strategies to become more like Tesco. To alter their current balance between price and quality in order to achieve some form of competitive advantage. Before Tesco became so dominant Morrison's operated with a route 2 strategy, a low price strategy and Sainsbury's were operating a strategy more in line with route 4, a differentiated strategy.
Chapter 6: Conclusions
This dissertation sets out to:
- investigate the nature of competition within the supermarket industry in the UK, and
- to evaluate the competitive strategies undertaken by incumbent firms within that industry.
This task has been undertaken through a critical analysis of a range of literature focussed on establishing the current state of play in the UK supermarket industry, examining general theory on competition and competitive strategy, as well as a review of literature that specifically addresses competition between supermarkets in the UK.
An analysis of the current state of play in the industry was compiled from market specific research predominantly undertaken by Mintel. This analysis looked at the industry from a firm specific level as well as the industry as a whole, and explored the structure of the market, identified the key players and looked at competition both in terms of price and non-price factors. Having established the current state of the UK supermarket industry, the following chapter looked to examine competitive strategy in the industry primarily be reference to Porter's five forces framework and Bowman's strategy clock
Looking first at the nature of competition in the UK food retail industry, it was clear from the literature review that while the industry has many characteristics of an oligopoly as it is dominated by a small number of major firms, it is undoubtedly highly competitive. This is illustrated by the strategies the firms adopt in the form of price and non-price strategies to protect and grow their share of the market and the fact that research shows clearly that there is a constant change in the size of market share held by each firm. Despite the existence of competition, it is also clear that the market share of the leading firms is high, with no signs of this shrinking despite the current economic environment.
An examination of competitive behaviour in the industry by reference to Porter's five forces analysis showed that while there is a strong rivalry between the major incumbent firms, the position of each of the major firms appears to be secure as there is only a very limited threat from new entrants, or even other major firms massively growing their share of the market, principally because of difficulties they would face in obtaining new sites given current planning restrictions, the strength of the brands and brand loyalty and the low threat of others being able to create substitute product offerings or create a major competitive advantage without an immediate response from the other firms. The position of the major firm's is also assisted because of the bargaining power they have with suppliers through the volumes of goods that they buy. This point has been recognised by the CC but it will take time to see whether the new appointment of an ombudsman to cover this side of the industry changes this in the longer term.
While the position of the major firms seems safe, the analysis considered in Chapter 3 shows that the major firms have grown their share of the market rapidly at the expense of the small firms. The analysis conducted using Porter's five forces suggests that this market share is unlikely to be reclaimed for the reasons set out above.
Turning to the second question, an evaluation of the competitive strategies adopted by firms in the UK supermarket industry was performed using market research and literature relevant to the supermarket industry and by referring to the strategy clock developed by Cliff Bowman and Richard D'Aveni. This theory develops Porter's five forces analysis and looks at the strategies that firms adopt to gain and preserve competitive advantage by providing customers with what they want/need more effectively than their competitors.
An analysis of the competitive positions of the major four firms showed that three were now operating a route 3 strategy as defined by Bowman as they were looking to compete on a combination of price and high perceived customer value. This was a change from the historic position of the firms in that Tesco moved from a 'pile it high, sell it cheap' philosophy to a position of providing a range of products from 'value' at one end to high quality, high price at the other. By contrast, Sainsbury's had moved the other way from an almost totally high quality and price product that at one time allowed them to be the largest firm in the sector before they lost sales to Tesco and others, to a range close to that offered by Tesco. Morrison's has followed Tesco in moving from a value base to offer a wider range of products such that all three are now very similar.
The other big four firm, Asda, can still be seen to be operating a route 2 low price strategy, however, it has shown signs of a strategic shift to raise their perceived customer quality.
Between the big four, the evaluation suggested that Tesco had the best balance between price and customer perceived value but there was clear evidence to suggest that the other leading firms were positioning themselves around Tesco in order to reduce its apparent competitive advantages. This approach is one that means it is harder for any one firm to make a major change to its market position as each is able through careful monitoring to respond to moves made by another player. This can be seen during the recent recession where all of the major firms increased their focus on value to preserve market share first from each other but also from the firms in the industry who compete almost wholly on price. It is also apparent in the efforts the big four make to retain customer loyalty, e.g. through card schemes or by providing an ever increasing range of services such as financial products and consumer electronics through to dry cleaning. While these products and services obviously provide additional sales, they also have the effect of creating a strong loyalty between the customer and the firm, making it harder for the customer to change to someone else.
While the analysis showed similar competitive strategies for the big four, it revealed different strategies being adopted by other firms in the industry. This was very clear for the value retailers, e.g. Lidl and Aldi, who compete almost entirely on price to a specific market and, at the opposite end to M&S and Waitrose which compete on quality. Both of these approaches have been successful for the firms involved but are based on the firms targeting 'niche' markets, mainly the lower socio-economic groups for Lidl and Aldi and the higher ones for M&S and Waitrose. Although they are successful, as they target niche markets, the strategy is unlikely to create an opportunity for the firms to ever challenge the dominant position of the major firms who supply the mass market.
Overall, the analysis supports the conclusion that the UK supermarket industry is highly competitive and likely to remain this way. Although very different strategies are adopted by different firms in the industry are, e.g. the big four compared with the value or quality retailers, which means that there is competition between price and quality, there is also evidence of a high level of competition between the big four even though they have in many ways and moved to very similar competitive strategies.
Areas for Future Research
From this research there are a number of areas that have been identified as needing further research. The research could be improved significantly by conducting a survey of experts within the industry as much of the literature does not appear to have had noteworthy input from individuals from within the retailers.
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