Around the world, developed economies and emerging economies have been influenced by the supermarkets as they have acquired an increasing share of the grocery market, which led to, the impact on the demand of food grown, transporting and packaging, and livelihoods of many consumers (See Appendix 1.4 and 1.6). For the past 10 years, Sainsbury’s, ASDA, Tesco, and Morrisons have dominated the UK supermarket Industry. The market value for the supermarket industry in the UK has drastically increased since 2011 from £163.8 bn to £179.1 bn in 2019 (Statista, 2019). Furthermore, the data provided by IGD shows that the market value for the industry is expected to rise around £196.9 bn by 2021. However, due the economic recession between 2007-2008 has led to an increase in food prices, which led the market of supermarket industry shaken by the consumers in search of better value, for the price they are spending on (See Appendix 1.3) (Law.ox.ac.uk, n.d). Although there is a rise seen in food prices, the quantity of goods purchased by the consumers has not been affected (See Appendix 1.1 and 1.2) (Office for National Statistics, 2019).
Moreover, consumers are more likely to move towards a cheaper alternative in the future. This led to an increase in sales for discounted stores in the United Kingdom (Warner, 2019). Just before 2015, the major competitors had a different target market and was operated under a simple three-tier system where the stores like Waitrose and Marks & Spencer targeted the wealthy consumers. Whereas, the Morrisons and ASDA had focused more on cost-conscious consumers. Lastly, Tesco and Sainsbury’s targeted all the customers in the middle. With the rise in German stores such as Aldi and Lidl have disrupted the industry (Coresight Research, 2019). As these stores focused more on giving discounted products to the customers which attracted the consumers just after the recession who were looking for cheap alternatives. Eventually, this brought a change in the perspective of consumers that Tesco and Morrisons were considered expensive. This has given an intense impact on the market, and the Big ‘4’ such as Sainsbury’s, ASDA, Tesco, and Morrisons were cornered and led to the price wars begin among them (Warner, 2019). This essay analyses the external environment using two external methods such as pestle, and porters 5 forces, then analyses the internal environment of Big 4 supermarkets and discusses briefly the opportunities and threats in the industry with swot analysis.
PESTLE Analysis
Political
The industry of supermarket is affected by the six principles of PESTLE (e.g Political, Economic, Social, Technological, Legal, and Environmental) like any other industry. The issue influencing the industry is due to the politics that impact on the whole country. With the rise in market share of supermarket and influence over the suppliers, the government has intervened to control the relationship between the supermarkets and suppliers. Such as these interventions affect the revenue and the profit of a retail store by the government policies. These policies also impact the spending behaviours of consumers and trade laws (e.g BREXIT). For instance, the probability of Scotland leaving the United Kingdom and becoming independent could have been proven to be a major impact on UK retailers (Maxwell, 2019). On contrary, Retailers in the UK has responded with concern over the issue regarding the supply chain, costs, and the pension laws which would rather increase the prices of goods for consumers again (Groom, 2014). If the supermarkets already existed in Scotland, then the concern would have varied. However, the UK supermarkets are present in England this would lead to an increase in tax and loss of profit to the retailers (Groom, 2014). Currently, a constant rise in the tax on goods and services in the United Kingdom is also a major issue (see Appendix 1.7).
Another concerning factor to the UK supermarket industry is the likelihood of Brexit (I.e UK leaving the EU). As most of the food that is purchased in the UK is imported from the European Union which is around 62% of all fresh food (McKevitt, 2019). Among the 62%, 22% of fresh food arrives in Britain from Spain and 46% of the fresh food is from The Netherlands. Moreover, All the food consumed in the United Kingdom is imported with 32% of food from the EU (McKevitt, 2019). This could have a serious influence on the industry as leaving the European Union means exiting the trade zone. All the investors and importers currently importing goods to the United Kingdom would be reluctant to sell their good as they would have to pay the tariff.
Economic
The economic principle of PESTLE is a factor which influences the UK supermarket industry mainly due to the current economic state of the country UK. A strong economy shows that the consumer’s disposable income increases and can buy any product they want. This also shows that there is more investment in that country in varies industries. Moreover, this also shows that investors are interested in the profits offered by the supermarket industry. Since 2015, the inflation of consumer prices has increased (See Appendix 1.8) and wage growth is steadily increasing (See Appendix 1.9). However, the CPI has outpaced the wage growth that results in a change in consumer behaviour due to hike in prices which is a direct result of the economic situation.
Secondly, another factor influencing the industry is the high market value for the real estate held by the retailers (Wood and McCarthy, 2013). Among the UK supermarkets, Tesco controlled 53% of its space across its group, this led to an increase in rent. As Tesco spends £1bn annually this creates an issue when the first line in real estate falls. Tesco sells of their properties to grow their business with the change in cash flow to be more competitive (Goodley and Franklin, 2015). During the recession, the retail industry was closely stable, and it is known to be one of the industries which scrape through. by the year 2020, the sales are expected to rise and is a great spot to expand, as customers have more income.
Social
The social factors influencing the UK supermarket industry is the impact of the economic situation that led to a change in consumer behaviour or spending habit of the customers. Culture is one of the reasons which influences buying habits in a country. These cultural traditions have a huge impact on the buying decision of the consumer. For instance, if an individual goes to the supermarket since their childhood they tend to continue to shop there even today and shows that they always shopped there and received good customer service. As of few individuals might choose to go shopping at stores like Marks & Spencer as it shows that they are from a wealthy background as a symbol. These situations show that they are being a judge while they shop.
Grocery shopping online has also become popular among customers. As online shopping provides convenience to the customers and the populations in the most developed countries are ageing so the online stores will provide fulfilment to those (IGD.com, 2019). As the world, is modernising the kitchens are getting smaller with less storage space where the stores need to provide new services for better satisfaction. With the increase in the in-fuel prices as well there are customers who do not want to go to the grocery stores for economic reasons. This provides the best alternative for customers who do not want to travel a long distance. However, this avoids consumer to buy things in bulk.
Technological
The increase in online food delivery, social media, and Amazon has resulted in influencing the UK supermarket industry by innovation and requirements of the supermarkets to keep up with the advancements of the technology (See Appendix 2.1). Social media has added a great value to the online food shopping and delivery as the supermarkets can do free advertising and receive feedback from the customer by their page which shows great success in the industry. As these behaviours increase among people, these satisfy the social trends which aim to marginalise profits and increase the efficiency of the supermarkets.
The current innovation in technology among the supermarket industries is the self –checkout system which removes the need for the one-one interactions between the cashier and a customer (Sabadus, 2009). These also decrease the need for employees in the rise of wage growth, it is very cost-effective. This also increases the smooth operational process among the supermarkets without the need for more manpower for the checkout.
For the past few years, the supermarkets have offered loyalty cards to the customers which are also a technological factor. As with the help of the loyalty card customer can receive points based on their purchase every time at a store and send feedback to the designated store online. This also can lead to more specific advertising to customers.
Legal
Legal factors are influencing the UK supermarket industry such as the laws and regulations imposed by the government which should be abided by the supermarkets in the United Kingdom. Competition law was established after the 2008 report when there was a large market investigation taken place in the grocery market. This investigation resulted in the concerns of publics on the dominance of Tesco the largest supermarket. There was a serious competition noticed among the supermarkets and competition commission was introduced as a remedy for the market imperfections. This commission provides the guidelines for the business to abide by and does not allow any anti-competitive behaviour such as price-fixing and bid-rigging (UK Government, 2019; Regulations.org.uk, 2019).
Environmental
The rise in issues for the UK supermarket industry in the environmental factors is the weather. The weather leads to several disruptions to the operations of the supermarket. As it would affect the delivery system and influence on the harvest of crops. For example, the beast from the east in the United Kingdom has caused major disruptions in the cities and transportation where the sales have dropped by 5 % as transportation, communication, and stooging make the quarter of the UK’s economy (Jackson and Plimmer, 2018).
Porter’s 5 Forces
The Porter’s 5 Forces was originally developed may Michael Porter in the year 1979 and it a method to assess the external environment of the industry that influence the competition within the industry. This also looks at the critical point of view where the industry influence on the ways of businesses competition (Porter, 1980).
The UK supermarket industry has no niche in enterprise operations. They have diversity among all products such as food items, kitchenware, soaps, shampoos, furnishing, and fabric market. Among these enterprises, there are few businesses which produce their products with restrictions all competing for the stability in the market. In the last decade, from 18,500 to 35, 000 independent retailers have fallen (Economicsonline.co.uk, 2015).
Now, let’s look at the analyses of Porter’s 5 Forces (Refer Appendix 2.2):
- The threat of new entrants: The probability of new business entering the market is very low, as there is high investment needed to sustain the rivalry among the Big 4 at least for a short period. However, with the rise in popularity of online grocery, e-commerce, there are opportunities for the businesses to enter.
- Bargaining power of buyer: Customers are price-sensitive due to the recession in 2008 which impacted on the purchase behaviours of consumers. Customers are more on the lookout for cheaper or discounted alternatives, as the switching cost is very low.
- Bargaining power of suppliers: Suppliers play an important role in the industry. However, the rise in market share of the supermarkets has gained the power to change the price to their convenience. For example, Tesco is the supermarket, it has more power over the supplier, and they must reduce cost.
- The threat of substitution: As the supermarket provides the consumers with diverse options there is no substitution in the industry. However, the quality of products and customer satisfaction plays a major role in this scenario.
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