a competitive and strategic analysis with core focus on tesco and sainsbury
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UK Retail Food Sector
A Competitive and Strategic Analysis with Core Focus on Tesco and Sainsbury
2011-2012
Dissertation by:
JIGAR .C.DHABALIA1006497
Contents
Preface ……………………………………………………......…….
4
Acknowledgement ……………………………………..………... 5
1. Research Methodology
1.1 Research Objectives …….………………..………………….…
6
1.2 Research Design ………...…………………………………….…
6
1.3 Research Methodology ………..……………………………....
7
2. Literature Review…………………………………………………….
8
3. Introduction to Retail Food Industry
3.1Introduction to Retail Food Industry in UK………….…………
10
3.2Size of UK grocery market ………………………………….……
11
3.3 Number and Sectors of grocery stores in UK ……………….
12
4. Competitive Analysis of Retail Food Industry
4.1Competitive Analysis of Retail Food Sector in UK …………..
14
4.2Analytical tools for competitive analysis …………………..
23
4.2.1. PESTEL Analysis …………………………….…….. 24
4.2.2. Porters five Force Analysis …..……………..….. 26
4.2.3. SWOT Analysis ………………........………….….. 28
4.3Assessment of top two players on the basis of no of stores
30
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4.3.1. Tesco ……….....………………………….………. 31
4.3.1.1. PESTEL Analysis ………………………… 32
4.3.1.2. Porters five Force Analysis …………… 39
4.3.1.3. SWOT Analysis …………….……………. 41
4.3.2. Sainsbury ….…….....………...…………….…….. 46
4.3.2.1. PESTEL Analysis ……….………………… 47
4.3.2.2. Porters five Force Analysis …………… 51
4.3.2.3. SWOT Analysis ………………….………. 54
5. Strategic Analysis of Retail Food Industry
5.1Strategic Analysis of Tesco and Sainsbury……………………
56
5.1.1. Tesco ……….....………………………….………. 56
5.1.2. Sainsbury ….…….....………...…………….…….. 58
5.2Evaluation and Recommendations……………………………
60
6. Conclusion………………………………………………………….
62
References ……………………………………………………..…...
64
Books Referred ……………………………………………………..
66
Web Resources …………………………………………………….
67
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Preface
With the same note, to make the best of my academics from Masters of
Management and as a part of my course curriculum, I had prepared a Dissertation.
The objective behind preparing this Dissertation is to relate the theoretical
concepts taught in classroom to their practical application. Further,
“Life is like a flute, it may have several holes and emptiness.
But if we work on it, the same flute can produce magical melodies.....”
Similarly, education nurtures talent through learning and experiencing that is
personally meaningful to each individual. My practical study is a matter of
application, introspection and experience.
My work in this project is, therefore, a humble attempt towards this end.
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“Some of the best music was composed by
Beethoven.
He was deaf.....
Some of the best poetry was written by Milton.
He was blind....
One of the greatest Leaders was Franklin Roosevelt.
He served from a wheel chair...”
It is up to us how we turn our SCARS into STARS!!!!”
In spite of my best efforts there may be errors of omissions and commissions,
which may please be excused.
Acknowledgement
It is truly said,
“By the time we realize the value of people around us, it might be the time for them to leave...
So one should never miss a chance to say.....THANK YOU!!”
Hence, acknowledgement presented here, is an effort to thank all such people who
contributed to my project in one way or the other.
First and foremost, we would like to thank almighty for blessing me with
competitive senses a platform to spruce myself.
I would also like to thank my parents for their silent extensive support provided
during preparation of this project.
I am heartily grateful to respected director Adina Luila for providing a wonderful,
challenging and learning environment in Management as I would have never got a
chance to face and stand by the competition and get prepared for it.
Also, I would like to thank my internal guide Prof. David Logan, whose direction,
positive value additive criticism and encouraging remarks, made me through hard-
earned success. Thank you for being a True Guide....
My extended appreciation, to staff members of librarian for long hours support in
library and last but not the least, administrative staff for their backend everlasting
support.
NAME: Jigar DhabaliaDATE: 2/9/2011
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SIGNATURE:
Chapter 1: Research Methodology
This chapter includes the Research objectives, Research Design and the Research
Methodology.
1.1 Research Objectives
Primary Objective
To study UK retail food sector in brief and conduct strategic and competitive
analysis with special reference to top two retail supermarkets namely Tesco
and Sainsbury.
Secondary objectives
To conduct competitive analysis through PESTEL Analysis, Porters five
force Analysis and SWOT Analysis.
To conduct strategic analysis of retail food sector by studying
Business unit level strategies, corporate level strategies and
international strategies and strategy development. analyzing the
study the different areas where the bank faces credit risk and to find
the area where they faces credit risk the highest
1.2 Research Design
Research design
This project includes the descriptive and exploratory research design
Descriptive: As it is a form of conclusive research that aims to describe
various strategies followed by Tesco and Sainsbury.
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Exploratory: As it explores various new dimensions in various aspects
through tools like PESTEL Analysis, porter’s five forces and SWOT Analysis.
1.3 Research Methodology
Data Sources
Secondary data: Secondary data was collected from various magazines,
internet, journals and the thesis carried out by professionals.
Sampling plan
1. Target Population: Top two retail hypermarkets namely Tesco and
Sainsbury.
2. Sample Size: The study is based on the data collected for two companies
namely Tesco and Sainsbury.
3. Sampling Method: The sampling method used here is stratified sampling
method as the companies are selected as per the number of stores.
Tesco and Sainsbury are the top two companies having the highest
number of stores as per research by “BBC Panorama special programme
called Supermarkets: What price cheap food?”
4. Elements: supermarkets.
5. Instrument of data collection: Websites and Journals
6. Analytical tool: Graphs like pie charts, & tables have been used to
analyze & interpret the data when necessary.
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Chapter 2: Literature Review
This dissertation is divided into five chapters starting from Research methodology.
This chapter mainly focuses on the research objectives, research design and
research methodology used in the Project.
The chapter Introduction to Retail food Industry gives a brief overview of UK retail
Food Industry. The total revenue of UK food retail industry was approximately
$186.1 billion in 2009, with a compound annual growth rate (CAGR) of 4.2% for the
period of year 2005-2009. It is expected to slow down, with projected CAGR of
approx 3.4% for the five-year time duration ranging from 2009-2014. This will drive
the industry to a value of $219.4 billion by the end of 2014. (Data Monitor- June
2010) 1 .This chapter also focuses on the size of UK Grocery market, number of
Grocery stores and also shows how big each sector is on the basis of the research
conducted by IGD research in the year 2010.
The chapter Competitive analysis of Retail food Sector focuses on the three major
components which can be derived from PESTEL Analysis, Porter five forces Analysis
and SWOT Analysis. These major components are drivers for change, sector
structure and internal competencies and characteristics as derived from
competitive analysis of Retail sector in UK2. It also focuses on the competitive
analysis of Tesco and Sainsbury using PESTEL Analysis, Porter five forces Analysis
and SWOT Analysis.
1 Food Retail Industry Profile: United Kingdom, June 2010, p1, 35p, [online] Business
Source Premier [Accessed August 26th, 2011]
2 Competitive analysis of the Retail sector in UK (2003), prepared by Professors Steve
Burt and Leigh Spark and submitted to Department of trade and Industry retrieved
from :http://www.bis.gov.uk/files/file11029.pdf
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The chapter Strategic analysis of Retail food sector focuses on the strategies of
Tesco and Sainsbury. These strategies are analyzed in three parts namely Business-
level Strategy, Corporate-Level and international Strategy and strategy
Development.
The dissertation ends with the conclusion that the UK food retail industry is
distinguished by an immense high competition and low-price strategies. Within the
highly turbulent retail segment, where companies are required to pursue both cost
leadership and differentiation strategies, Tesco still maintains to hold its leadership
position. While talking about Sainsbury, its performance (in terms of both image
and profit) has improved tremendously. However, it is still not insulated to many
outside risks like recession and rising material costs as highlighted in PESTEL
analysis.
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Chapter 3: Introduction to Retail Food Industry
This chapter gives us the highlights about the retail food Industry. It focuses on an
overview to food retail industry, the size of UK Grocery Market, number of grocery
stores in UK and how big each sector is.
3.1 Introduction to Food Retail Industry in UK
Food retail industry lost pace in 2009 to moderate growth levels. This is expected
to remain steady throughout the forecast period. The retail food market in UK
consists of hypermarkets, supermarkets and discounters accounting for
approximately 60% of all sales.
Discussing about the facts and figures of UK
food retail industry, it had a total revenue of
approximately $186.1 billion in the year 2009.
The compound annual growth rate (CAGR) was
4.2% for the period ranging from 2005-2009.
During same time frame the CAGRs for French
and German were 2.9% and 2.1% respectively
to reach respective values of $224.6 billion and
$234.8 billion in 2009.
Most important sector of UK Food Retail industry i.e. hypermarkets, supermarkets
and Discounters proved to be the most rewarding sector for UK in the year,
accounting for total revenues of $114.1 billion, which equals to 61.3% of the
industry’s overall value. While comparing them with the convenience stores and
gas stations, they generated revenues of $39.2 billion in the year 2009, equivalent
to 21.1% of the industries aggregate revenues.
It is forecasted that the performance of the UK food retail industry is going to
decelerate, with an anticipated CAGR of 3.4% for the five year period 2009-2014.
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This deceleration will drive the industry to the value of $219.4 billion by the end of
year 2014.
While the German and French industries are forecasted to be accelerated with
CAGR’s of 2.5 % and 3% respectively, during the same period of time to reach the
respective values of $265 billion and $ 260 billion in the year 2014. (Data Monitor-
June 2010)3
3.2 Size of UK Grocery Market
The worth of UK grocery market was £150.8bn for the year 2010. This is an
increase of around 3.1 % over the year 2009. While looking at food and grocery
expenditure, it accounted for 53p in every £1 of retail spending. 21p of every £1
spent in food and grocery is spent in convenience stores.
3.3 Number and Sectors of Grocery Stores in UK
3 Food Retail in UK (2010, June) retrieved from www.datamonitor.com
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UK Grocery Market Performance: IGD Research 2010
The number of grocery stores in UK is 91,509. These grocery stores can be divided
into four sectors further namely convenience stores, traditional retail,
hypermarkets, supermarket and superstores and the online channel. Each of these
are defined as follows.
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UK Grocery Retailing - Store Numbers & Sector Value
1. Convenience stores:
Convenience stores are the stores with the sales area of less than 3,000 sq.
ft. These stores are open for long hours and they engage themselves in
selling products from at least 8 different grocery categories. (e.g. Londis
SPAR, Co-operative Group).
2. Traditional retail:
Traditional Retail stores are the stores with the Sales area of less than 3,000
sq ft. For example: grocers, news agent, off-licenses, and some forecourts.
3. Hypermarket, supermarkets & superstores:
Hypermarket are the ones whose size is over 60,000 sq. ft. Superstores are
bit smaller and have sales area above 25,000 sq. ft. and supermarkets are
the ones which have a sales area of 3000-25000 sq. ft.
All of these engage themselves in selling mainly grocery items. Non-food
items are also sold. For example: ASDA, Tesco, Sainsbury etc.
4. Online channel:
This sector includes selling with the help of Internet.
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Chapter 4: Competitive Analysis of Retail Food Sector
4.1 Competitive Analysis of Retail Food Sector
This chapter focuses on the three major components which can be derived from
PESTEL Analysis, Porter five forces Analysis and SWOT Analysis. These major
components are drivers for change, sector structure and internal competencies
and characteristics. It also focuses on the competitive analysis of Tesco and
Sainsbury using PESTEL Analysis, Porter five forces Analysis and SWOT Analysis.
The major subject matter of retailing is the subject matter of drivers of change. It
effects the environment within which retailing operates. The major effect can be
summed up as concentration, price and cost pressures and complication.
These drivers for change will impact, and will have impacted on, the sector
structure. The retail sector can be recapitulated as innovative, polarized,
expanding, polarized & open. The sector is expanding from both the dimensions
i.e. vertical as well as horizontal, as the retailers engages themselves to take on
more activities and develop more broader strategies. Polarization in the sector
improves as the biggest companies continue to grow in scale as they operate in
larger range. Innovation too is very important which has occurred at operations,
product and brand levels. Finally, the UK market is open, as it allows the overseas
retailers for easy entry and thereby increasing competition.
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The processes by which retailing is done and all the activities are undertaken are
also affected by drivers for change. The Retailers can now easily manage various
aspects of their businesses and developing their approaches practices and systems.
They did this in terms of their own processes, outsourced or partnered activities
and by taking advantage of their scale, data and reach.
Thus these are the major three aspects of competitive analysis which we will look
at in the following section.
1. Identifying and assessing the major drivers for change which influences
the retail sector : Identifying and assessing the major drivers for change
which influences the retail sector includes various factors which are external
to individual businesses within the sector. But these factors help to shape
the broad competitive environment within which retailers operate.
2. Structural characteristics of the retail sector: This allows analysis of the
organization in terms of ownership, competitive structure and scope of
retail sector – mapping the shape and resource base of the sector.
3. Internal characteristics and competencies within retailing: requires
recognition of core operating competencies in order to gain success within
retailing.
This sort of analysis will help to have an accurate view of the retail activity and
competitiveness.
1. Drivers for Change
The analysis starts with an assessment of the environment within which a business
operates. This report focuses on using the framework considering the major
drivers for change.
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The Change within each of these interconnected drivers contributes to the overall
broad environment in which retailing operates.
i. Political Trends and Structure:
This is an important driver for change for the retail segment. We will have a
look how various structure and trends impact the change. The further out-
of-town development will be restricted by the Planning policy; the Cost
structures and customer use will be impacted by the Transport policy (e.g.
potential car park charging); the policies of Government regeneration and
inclusion includes need for food retailing (big stores, local food); the policy
of Competition has and will continue to look at competitive structure and
pricing ; Cost structure will also impacted by business related tax increase;
Pricing structures will be affected by possible introduction of VAT on food;
Moreover, cost structure will also be influenced by minimum wages,
especially for smaller operators. Thus these are the major political structure
and trends which acts as drivers of change for food retail industry.
ii. Economic Structure and Trends:
Economic structure and trends is also an important driver which also affects
the food retail industry. The retail food industry will have a limited impact of
recessionary pressure as food is an essential product; the consumers who
are Income constrained, seeks out low priced/good value food options
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rather than the superior products; the consumers who have Time constraint
uses home delivery internet suppliers. Thus these are the important drivers
which have impact on food retail industry.
iii. Socio-Cultural and Lifestyle Aspirations:
The major socio cultural and lifestyle aspirations drivers are Changing time
budgets influence when (and where) consumers shop and stimulate
“convenience” product ranges and services ; Health related issues ,
stimulates the growth of farm assured products, organic ranges, farmers
markets etc. ; Service expectations have risen and must be met ; Core
cooking skills diminishing, stimulating readymade meal demand, yet at same
time cooking programmes stimulate demand for particular
products ;Widening of travel horizons creates demand for nontraditional
food products and food styles .
iv. Demographic Structures and Trends
The major demographic structure and trends relates to Changing size of
family and household unit influences products purchased, pack size and
shopping behavior.
v. Product and Process Innovation:
Drivers related to product and process innovation includes Packaging and
presentation innovation which helps in stimulating sales ; Innovation in
product use is high e.g. convenience meals steam cuisine etc; Use of
technology in supply chain increases reach of product sourcing ;Technology
infrastructure and application high within the sector ; Store innovation quite
high in terms of product display etc.
vi. Environmental Changes and Trends
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The environmental drivers of changes and trends are the awareness of
waste disposal is high. (reinforced by EU legislation) and Energy efficiency is
sought in larger stores
2. Sector Structure and Control
The structural characteristics of the retail sector moderates the influences of the
external environmental drivers and the ability for retail organizations to react to
the opportunities and threats created by these changes. This adds to competitive
investigation through an understanding of the implications for organizations arising
from problems surrounding scale, scope, the organization of businesses and
resources. Major considerations are:
i. Size and Scope
One of the major considerations is that the Market size is approximately
£93-97 billion which shows steady low digit growth which is less prone to
peaks and troughs as compared to most other sectors; Due to sales of high
value product and continued product innovation and product development
the natural growth in the market is stimulated; moreover with the extension
in product range into non-food ranges and core food extension, the large
stores growth also has been driven.
ii. Competitive Structure.
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Now a day’s most of the sales is done through large units typically the
grocery based superstore. Also most of the chains are now developing range
of targeted shop formats in order to maintain growth and suit local
environments. (Small towns, in-town markets, and hypermarkets) . Major
Player’s consolidation at National level took place during the time duration
of 1980s and 1990s, further national consolidation is possible but format fit
will establish viability and it may attract monopoly consideration unless a
chain is broken up. Moreover International involvement is more likely.
Rather than competing in the superstore market most of the Middle-sized
tier of chains focuses on particular formats (e.g. Co-op and Somerfield on
neighborhood store/convenience market). Moreover although issues are
emerging, growth of temporary farmers markets provides specialist niche
and allows direct to customer sales.
With the changing world demographics and scenarios, and increasing
competition, on-line experimentation is increasing. Tesco appears the most
fully committed and fully resourced company as compare to other related
companies.
iii. Organizational Structure and Competition
The food retail sector is dominated by “big four” with 68% of grocery
market which is around 55% of food market. Among the big four i.e.
Tesco, Sainsbury, ASDA and Morrison, Tesco is the most dominant
player. Its share in grocery market is approximately 25% and food
market is approximately 20%.
Although most firms have regional dominance they are now extending
their operations from old regional locations to national levels (except
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Waitrose). Looking at the examples of Spar, Londis and Mace, the
independent sector is now more getting organized via voluntary chains
and buying groups.
Unless strong local customer franchise is produced, traditional true
independents are decelerating just as the specialist trades (Butcher,
Fishmonger).
iv. International Opportunities and Threats
International arrivals major focus is format driven. It does not include the
main line superstores and supermarkets. It focuses on limited line discount
format and cash and carry or wholesale club format. Non UK retailers like
Aldi, Netto and Lidl dominates the limited line discount segment.
The arrival of Wal-Mart focused attention on the price structures and
reinforced move into non-food ranges as well. But hyped “Devastation” of
the sector is yet to take place.
In spite of internationally recognized expertise of UK grocery retailers, the
companies are moving outside UK at a very slow pace. Tesco has developed
various international business strategies and is moving towards
international business in the emerging markets but the future of Sainsbury
USA operation is still very vague.
Also the British food retailing is found quite to be stereotyped and ‘boring’ in its
presentational skills. The potential for good merchandising, local sourcing and
‘slow food’ is fairly high as response to sameness.
3 Internal Characteristics and Competencies
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An analysis of internal characteristics and competencies within retailing provides
an assessment of core competencies and capabilities. Although operational areas
are intrinsically inter-linked, for purposes of analysis core competencies are
identified in:
i. Retail Operations
The companies are now moving to larger units on edge/ out of the town
sites because of economies in cost additional service benefits. Apparent
move to multi-format channel operations from single format operation
(superstore) had been seen. Moreover there has been well-built
centralization of decision making all over the sector.
ii. Employment Characteristics
Part-time employment is high, approximately 75% particularly at store level.
There has been increase in labor turnover levels but strong retention
policies have been followed like higher hourly rates etc. There has been
increase in graduate recruitment for store management and head office
positions.
iii. Marketing Activities
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The segmented retail brand has been developed in very high proportion.
Moreover, there has also been high segmentation of shop formats and
larger shops for understanding the customer’s in-store behaviors.
The product ranges have been widened especially in non-food items and
also there has been addition of variety in core ranges. Addition of services
and general increase in service level like checkout speed, car parking policies
and range of trolleys etc. are also observed.
Customization has also increased with the scope for customization salad
bars. And now you can create your own customized pizza and hot-chicken
meals. The category management approach has been used to
merchandising and supply chain activities. The concept of price focus is
applied to key product lines so as to increase sales and revenue.
iv. Supply Chain Management
An analysis of supply chain management within retailing will also help
assessing the core competencies and capabilities. It has been observed that
there is better involvement in and management of all aspects of the supply
chain which is a very good indicator. Also efficient customer response
systems and sales based ordering systems are implemented. Centralized
distribution systems are taking place via Regional Distribution Centers.
Moreover very advanced systems and procedures are introduced and the
companies using them effectively are seen as industry leaders.
(Source: Competitive analysis of the Retail sector in UK prepared by Professors Steve Burt and
Leigh Spark and submitted to Department of trade and Industry)
4.2 Analytical Tools for Competitive Analysis
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Analytical methods and tools are very vital to ensure that proper level of
consistency and strictness is applied to the analysis. There are number of
considerations that one should be aware of while making the use of these
analytical tools for competitive analysis.
The tool which is used must help the organization to answer the question for which
the tool is being used. Or else it is not worth using that tool. First the expected
benefit of using the tool must be defined properly. Because if the tool is defined
clearly then it is more likely that the purpose for which analysis is done will be
solved and the objective can be accomplished successfully.
Enough time should be given for collaboration and advance warning should also be
given so that people can accommodate the analysis as many tools benefits from
input and collaboration with other people, functions or even organizations.
Using of these analytical tools may be time consuming as each and every aspect is
to be considered properly. The key stakeholders like the board, senior directors
and company departments should be aware of this analysis. Only then they will be
able to provide proper commitment which is very essential to complete the
analysis.
The main motive of using this analytical tool is to sharpen the focus of the analysis
and to make sure that a proper methodological and balanced approach is followed.
These analytical tools rely on historical data to predict the future assumptions. It is
very essential to take care when interpreting results of this analysis.
The tools which we will be using for our report for competitive analysis are as
follows:
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4.2.1 PESTEL Analysis
PESTEL analysis refers to the scan of external macro-environment in which a
business operates. It helps to understand the political, economic, socio-cultural
and technological environment in which the organization operates.
It can be mainly used for the purpose of evaluating the market growth or decline
and also the position, potential and direction for a business.
Political Factors
Includes government regulations and legal issues and define both formal and informal rules under which the firm must operate. Some examples are:
Tax policies Environmental Regulations Political Stability Trade Restrictions and Tariffs Employment Laws
Economic Factors
Affects the purchasing power of potential customers and the firms cost of capital. some examples are:
Economic Growth Inflation rate Exchange rates Interest rate
Social Factors
Includes the demographic and cultural aspects of the external macro environment. These factors affect customer needs and the size of potential markets. Some social factors include:
Health consciousness Career attitudes Emphasis on safety Age distribution Population growth rate
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Tools used for competitive analysis
Technological Factors
Technological factors can lower barriers to entry, reduce minimum efficient production levels, and influence outsourcing decisions. Some of the technological factors includes:
R&D activity Automation Rate of technological change Technology incentives
These factors of PESTEL analysis can be classified as opportunities or threats in a
SWOT analysis. It is often practical to complete PESTEL analysis before completing
SWOT analysis.
The four paradigms of PEST analysis varies in importance depending on the type of
the business. Like, social factors are more relevant to consumer business or B2B
business near the consumer end of the supply chain. While for a defense
contractor or aerospace manufacturer, political factors are of more significance.
Thus, the level of significance depends on the type of business.
4.2.2 Porters Five Force Analysis
Michael Porter of Harvard Business School developed Porter’s five forces of
competitive position analysis in the year 1979 for the purpose of assessing and
evaluating the competitive strength and position of a business organization.
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This theory is based on the concept of five forces. These five forces helps
determine the competitive intensity and attractiveness of the market. It helps to
identify where power lies in a business situation. Porter’s five forces is helpful in
comprehending the strength of an organization’s current and future competitive
position which it may look to move into.
Strategic analysts use Porter’s five forces to examine whether new products or
services are potentially profitable or not. By understanding in which area the
company has power, it can be used also to identify areas of strengths so as to
improve weaknesses to avoid mistakes.
Each of these five forces are explained below:
Supplier’s Power
An assessment of how easy it is for suppliers to drive up prices. This is driven by:
the number of suppliers of each essential input the uniqueness of their product or service the relative size and strength of the supplier The cost of switching from one supplier to another.
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Porter Five Force Analysis
Buyer’sPower
An assessment of how easy it is for buyers to drive prices down. This is driven by:
the number of buyers in the market the importance of each individual buyer to the
organization The cost to the buyer of switching from one supplier to
another.
If a business has just a few powerful buyers, they are often able to dictate terms.
CompetitiveRivalry.
The key driver is the number and capability of competitors in the market. Many competitors, offering undifferentiated products and services, will reduce market attractiveness.
Threat of Substitution.
Where close substitute products exist in a market, it increases the likelihood of customers switching to alternatives in response to price increases. This reduces both the power of suppliers and the attractiveness of the market.
Threat of New entry.
Profitable markets attract new entrants, which erodes profitability. Unless incumbents have strong and durable barriers to entry, for example, patents, economies of scale, capital requirements or government policies, then profitability will decline to a competitive rate. 4
4.2.3 SWOT analysis
A SWOT analysis helps in understanding the strengths, weaknesses, opportunities
and threats involved in a project or business activity.
It commences by defining the objective of the project or business activity and
identifies the internal and external factors that are important to achieving that
objective. Strengths and weaknesses are internal to the organization, while on the
4 [Porter’s Five Forces Model, Available at:
www.businessballs.com/portersfiveforcesofcompetition.htm (Accessed 12/8/2011)]
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other hand opportunities and threats are external. These strengths, weaknesses,
opportunities and threats are plotted on a simple 2x2 matrix.
SWOT analysis diagram
The following things are to be kept in mind while using SWOT analysis.
It is to be ensured that only specific, verifiable statements are used. For
example instead of using ‘good value for money’, ‘price is £2 per unit lower
than competition’.
All the Internal and external factors are prioritized so that time is not wasted
on the factors which are not important and is utilized concentrating on the
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SWOT Analysis
most important factors. It should also include proper risk assessment so as to
ensure that high impact threats and opportunities are clearly identified and
dealt with in priority order.
The Issues which are identified are preserved and used later in the strategy
formulation process.
This analysis is mainly used and focused at the project level or the business
activity level rather than that of the total company level, which may be
comparatively less actionable.
SWOT analysis is not a tool which is similar in all the scenarios. No one tool is
likely to fully comprehensive. Thus, a mixture of options generating tools
should be used. 5
4.3 Assessment of top two players (Retail superstores) on the
basis of number of stores
As per the study conducted by panorama and the BBC news team, ‘the big four’
companies i.e. Tesco, Sainsbury,
Morrison and ASDA got permission for
5 [Source: Strategic Analysis tools: Prepared by Jim Downey and Technical Information
Service October 2007]
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480 stores in England, 67 stores in Scotland, 22 stores in Wales and 8 stores in
Northern Ireland.
In two years’ time span up to November 2010, Tesco’s applications for 392 stores
got approved. It was three times more than Sainsbury, which had 111. The
application succeeded for Morrison was 41 and it was 33 for ASDA.
This project carries out the competitive assessment of the top two players on the
basis of number of stores in UK. As per the study by panorama and the BBC news
team top two companies are Tesco (392 stores) and Sainsbury (111 stores). (BBC
Panorama, 2010)
4.3.1 Tesco
Overview
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Tesco is one of the largest food retailers in the world. It had revenue in excess of
£54 billion in 2009 and employed over 470,000 people. Tesco operates
approximately in 4331
stores in around 14
countries around the
world. It operates
primarily in USA, Europe
and Asia and its Head
Office is at Hertfordshire,
UK.
As per the data collected
by Data monitor (2010), the commercial network portfolio of Tesco comprises:
Over 960 Express stores Which sells approx. 7,000 products including foods at suitable localities;
170 metro stores Which sell a variety of food products in town and city centers;
450 Superstores Which sell both food and non-food items including books and DVDs.
Tesco has its online portal namely tesco.com and tescodirect.com through which it
provides online retail services. It provides broadband I internet connections and
also financial services through Tesco Personal Finance (TPF).
Tesco was founded in the year 1919. It launched its first store in Edgar, London, UK
in the year 1929 (Tesco, 2010). Over the decades it has evolved to become the
market leader within the UK food retail segment (Datamonitor, 2010). The
following pie chart represents the comparative positioning of Tesco’s market share
with other leading players market share (Euromonitor, 2010):
31 | P a g e
Share of Leading Players in UK Food Retail Market
4.3.1.1 PESTEL Analysis
The PESTEL framework presented below analyses the dynamic and unpredictable
environment in which Tesco operates. This analysis is done by identifying the
forces which have impact on Tesco’s performance:
Political Factors
Chin
a’s
agre
emen
t
with
WTO
- Te
sco
The recent agreement of China with WTO, promoted free flow of
foreign trades by removing all the barriers. With this it encouraged
the western companies, including Tesco, to introduce itself to
world’s most profitable market encircling over 1.3 billion people
(Straits Times, 2010).
Tesco signed an agreement in the year 2009 to set up a planned
series of joint ventures for the development of shopping malls in
china. It included three malls namely Anshan, Fushan and
Qinhuangdao.
Moreover, 18 new hypermarkets are expected to open in China by
2010 (Tesco, 2009).
Tesco’s international business segment growth is on rise and it is
predicted to account for 1 quarter of the company’s profit.
32 | P a g e
Prom
otion
of F
ree
Trad
ing
Bloc
s
Globalization benefited the promotion of free trading blocs by
government. It has been presented in the writing (Lynch, 2003).
Ten more countries got immersed into EU (European Union) which
took place in 2004 for the purpose of encouraging trade between
Western and Eastern European countries (BBC, 2009).
This provided Tesco a platform to expand its retail network across
the EU.
Economic Factors
Rece
ssio
n N
egati
ve Im
pact
on
Tesc
o
Economic factors are of vital importance as it directly impacts the
buying behavior of customers.
The UK economy was declared officially under recession in the
2008. However, the substantial reduction in interest rates by the
government helped to minimize further rises in unemployment
during 2009 (Euromonitor, 2010).
Due to this, the spending power of consumers is again on a steady
rise as they are more confident about their current financial
situation.
But still there is a lot of financial uncertainty due to which
consumers are likely to spend very amount less on the premium
products, encompassing organics and ready prepared meals, which
will negatively affect both sales value and margins of Tesco.
(Keynote, 2010).
33 | P a g e
Rece
ssio
n Po
sitiv
e Im
pact
on
Tesc
o The positive aspect of recession is that people will now eat out less
and eat more at home which provides opportunities for grocery
retailers like Tesco to increase their output (Guardian, 2010).
It is much obvious that food is the last thing that customers will cut
back on.
The percentage of overall consumer spending on food has risen
considerably over the years, as shown below (Euromonitor, 2010):
The economic downturn has been brought to light with the
assistance of the following GDP growth graph since 1989 (Mintel,
2009):
34 | P a g e
UK Spending on Food as % of Overall Consumer Spending 2004 to 2008
UK GDP Growth 1989-2009
Social Factors
Age
Fact
or There are more retired people than children in UK as per the
analysis conducted, representing the baby Boom generation
(Herald Scotland, 2010).
It is seen that the ageing population is discouraging for the food
and the older people tend to eat less.
They are less likely to travel to supermarkets to shop compared
with the younger generation.
It has predicted that the ageing population would find online
shopping more convenient although the internet literacy level
drops over the age of 65 years within the population (Turban et al,
2001).
But, smaller deliveries are still considered to be ineffective and
more expensive.
Attitu
de to
war
ds fo
od
The attitude of consumers towards food is continually changing as
they have become more health conscious.
Tesco considering this factor has accommodated the demand of
consumers for organic food. It provides wide range of organic food
so as to meet the consumers demand.
It was Tesco who introduced Payment by cheques and cash at the
checkout.
Technological Factors
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Use
of I
nter
net
Technology is one of the key macro-environmental factors that
have directly influences the supply chain, operations and processes
of grocery and food retailers.
Usage of internet for online grocery retailing has affected the
operation of supermarkets. This usage is showing a steady growth.
Internet Subscriptions have grown by over 50% and it has been
estimated that the Internet is being used by 70% of the population
in the UK (Office for National Statistics, 2010).
Loya
lty P
rogr
ams
-
IT
Loyalty programs introduced with the help of information
technology discourages customers from switching over to their
competitors (Sun, 2009).
Mob
ile T
echn
olog
y
Another technology - Mobile technology has also been a good
platform for distribution within food retailing and it is increasing
day by day.
Tesco uses an application named New Wine App which was
developed by Cortexica Vision Systems since 2009. It is through this
application that the customers are directed to Tesco Wine helping
them to buy the selected wine directly from their mobile phone
(Tomlinson& Evans, 2010).
36 | P a g e
Onl
ine
Reta
il
Shop
ping
Due to increased access to broadband internet in UK, online retail
shopping has gained considerable popularity.
As per the analysis by Keynote 2010 the number of broadband
users in the country is 15.5 million which accounts 70% of the
overall market.
Environmental Factors
Use
of R
eusa
ble
Bags
Environmentally friendly packaging is being promoted by the
Government.
As per the data collected by the Office for National Statistics
(2010), the percentage of consumers using reusable bags has
raised from 71% to 74%.
The consumers trying to cut down the number of plastic bags they
take from the shops have risen from 65% to 68%.
This leads to reduction in overall cost and is good for Tesco’s
corporate social responsibility image.
Carb
on F
ootp
rint
Tesco has added carbon footprint data on dairy products, potatoes
and orange juice due to the consumer awareness of the carbon
footprint of the firm (Wood, 2009).
And it also aims at expanding it to bread and non-food items in
2010 (Tesco, 2010).
Tesc
o’s
Gre
ener
Livi
ng S
chem
e
Tesco introduced its Greener Living Scheme.
With this scheme it gives consumers advice on environmental
issues, including how to reduce food waste and their carbon
footprint when preparing meals (Yuthas, 2009).
37 | P a g e
Gre
en c
lub
Card
Poin
ts
Tesco rewards its consumers through Tesco’s green club card
points.
Those Consumers reusing bags, recycling mobile phones and
aluminum cans and preferring bag less deliveries are being
rewarded through these points.
Legal Factors
VAT
Since the government has to finance a huge budget deficit, it has
been predicted that VAT would have to rise to 20%. (HM Treasury,
2010).
Rise in VAT will also affect the non-food sectors of Tesco, such as
clothing.
Min
imum
Wag
e
The 2008 and 2009 combined up-ratings have resulted in an
increase in the minimum wage of 15.5% as per the Low Pay
Commission Report (National Minimum Wage, 2009).
This will in turn result in an increase of operating costs of
supermarkets.
38 | P a g e
4.3.1.2 Porter five force analysis
In order to find effective sources of competitive advantage, an investigation of the
structure of the industry should be undertaken (Porter, 1985). I have used Porter’s
five force analysis in order to analyze the competitive environment.
Threat of substitute products and services
The threat of substitutes is considerably low for food items and medium to high for
non-food items in the grocery retail market.
In the food retail market the major substitutes are small chains of
convenience stores, off licenses and organic shops. But this cannot be seen
as a threat to supermarkets like Tesco that offer high quality products at
considerably lower prices (Financial Times 2009).
Furthermore Tesco is getting hold of these shops by introducing Express
stores in local towns and city centers creating an obstacle for these
substitutes to enter the market.
On the other hand the threat of substitutes for non-food items is fairly high
(for example clothing). It should be kept in mind that so long as the
economic recession prevails customers will be inclined towards discounted
prices and hence Tesco is a threat to the specialty shops.
Threat of entry of new competitors
For the food retail industry the threat of entry of new competitors is low.
A huge capital investment is required in order to be competitive and to
create a brand name. Tesco, ASDA, Sainsbury and Morrison are the major
brands that have already captured the food retail market. They account for
approx. 80% of all shopping in the UK (Mintel, 2010). So the new entrants
have to produce something impressive at an exceptionally low price and
high quality in order to create and then sustain (once entered) their market
value.
39 | P a g e
New entrants also have barrier to entry as gaining planning authorization
from local government takes an ample amount of time and resources to
establish new supermarkets.
Intensity of competitive rivalry
The intensity of competitive rivalry in the food and grocery retail industry is
very high. Tesco has severe competition from its direct competitors,
including, Sainsbury, ASDA, Waitrose and Morrison, which are competing
with each other over price, products and promotions every now and then.
The following things about the competitors must be highlighted:
ASDA is one of the key competitors in this segment with an increase
of market share from 16.6% to 16.8% during the fiscal year
2010/ 09
Sainsbury has shown an increase to 16.1% from 15.8% and Morrison’s to
11.6% from 11.3% through the same period (Euromonitor,
2010)
The slow market growth essentially means that these increasing market
shares from competitors have intensified the market rivalry, which is
threatening Tesco’s market leadership position.
In rural areas where the next-door superstore are some distance away,
majority of the consumers residing in those rural areas are attracted by such
retailers like Somerfield and Co-op.
Consumers are more interested in discount offers especially during the time
of recession. It was found that hard discounters like Aldi and Lidl recorded
growth of sales of over 25% in the year 2008 (Keynote, 2010).
40 | P a g e
Bargaining power of buyers
The bargaining power of buyers is fairly high.
The switching cost is very low in cases where products have a slight
differentiation and are more standardized. The buyers can easily switch over
from one brand to another. It has been proposed that customers are
attracted towards the low prices. Moreover, with the availability of online
retail shopping, the prices of products can easily be compared and thus can
be selected easily.
Bargaining power of suppliers
The bargaining power of suppliers is fairly low.
The position of the retailers like Tesco, Asda, Sainsbury and Morrison is
strengthened further and also the negotiations are positive in order to get
the lowest possible price from the suppliers. This is mainly because the
suppliers are inclined towards major food and grocery retailers and dread
losing their business contracts with large supermarkets.
4.3.1.3 SWOT Analysis
The following is the Strengths, weaknesses, opportunities and threats
(SWOT) analysis of Tesco.
Strengths
As per the statistics of Data monitor 2010, Tesco is ranked 3rd largest
grocery Retail Company in the world. Its operations are there in
around 4331 stores primarily within the USA, Europe and Asia.
Tesco’s share in UK grocery retail market in the year 2010 was
around 30.7%. (Euromonitor, 2010).
41 | P a g e
Tesco showed a strong financial performance over years which
underline its strategic capabilities. As per the statistics of Data
monitor (2010), the turnover of Tesco is £ 54billion which was an
increase of 14.9% when compared to 2008. The primary strategy that
Tesco adopted is product and services customization as required by
the consumers and thereby in accordance with the market demands.
The following chart depicts the efficiency in performance of the
company over the last decade with the help of growth in following
indicators ( Fame, 2010):
Tesco – Yearly Growth in Key Performance Indicators
Tesco also uses the strategy which gives prime focus to product
affordability in order to ensure that the customer gets the product
which can suit their budget without compromising on the quality
aspect of the product.
By introducing the loyalty scheme called ‘Tesco
Club Card’ Tesco has proved customer retention strategy. The
42 | P a g e
company uses the data which is collected from this loyalty scheme in
its powerful CRM systems named Crucible and Zodiac. This
information is then used for various direct marketing and other
promotional techniques.
Weaknesses
Comparing Tesco with its competitors, it has not been able to
perform well over the last year although being a market leader. As
per the Mintel report 2010, there were number of products which
were recalled by Tesco in the year 2010, which had resulted in a
financial loss as well as damage to its brand image. These products
included company’s value lines, which had been marketed as a high
quality cheaper alternative to key brands.
The lack of geographic diversification can also be seen as a key
weakness for the firm as the majority of the operations of the
company are concentrated within UK retail sector only (75% of its
revenue – fiscal year 2009 ) (Tesco 2009). It becomes a major
weakness as it is subjected to systematic risks of UK market.
Opportunities
Tesco’s commercial network portfolio is ascending year on year.
Around 620 stores were opened in the year 2009 out of which 435
were international (Mintel, 2010). By this geographic diversification
the company will get benefit and will be able to improve on its
economy of scale, while minimizing its systematic risk exposure.
Tesco.com is gaining popularity day by day and is growing rapidly. It
accounted for over 1 million customers in the year 2010 (Guardian,
2010). This provided an opportunity to the company to attract new
customers and decrease the overall cost and thereby raising profit.
43 | P a g e
Tesco’s focus is on global expansion. This can be seen from the
evidence of it entering into the Indian market. Entering into Indian
market will indeed strengthen its global market position. Tesco has
signed a limited franchise agreement with Trent, a retailer of Tata
group. Tata Group is one of the largest industrial corporations in
India (Daily Mail, 2010).
It is forecasted that the food retail market will rise from £125 billion
in 2009 to £145 billion in the year 2014 (Euromonitor, 2010). It is
basically due to fact that even at the time of recession food retail is
toughest segment as having enough to eat is a basic priority.
Threats
Global financial crises resulted in the reduction of UK's economy by
2.4% in the year 2009 which is estimated to contract further by 4.2%
by IMF (Poulter, 2009). Thus, Tesco’s concentration in the UK market
can have a harmful impact on its financial standings.
With the rise in unemployment and decrease in the income, the
discretionary buying behavior of consumers has adversely impacted
the sales of the company, particularly in the non-food items segment.
Severe competition prevails in UK grocery market. Even though Tesco
has been leading this market since 15 years (Mintel, 2010), it now
faces an intense competition from its competitors which are gaining
the market share. These competitors includes the rest of the 'big
four' i.e. Asda, Sainsbury and Morrison.
44 | P a g e
After looking at the key strengths, weaknesses, opportunities and
threats, the abridged SWOT analysis can be seen from the following
diagram. 6
Tesco Abridged SWOT Analysis
6 (Source: http://www.ivoryresearch.com/sample36.php)
45 | P a g e
4.3.2 Sainsbury
Overview
J Sainsbury PLC is one of the most leading UK food retailers with interests in
financial services. It comprises of Sainsbury’s Supermarkets, Local, Bells Stores,
Jacksons Stores and JB Beaumont, Sainsbury Online and Sainsbury's Bank. The
Porters five force analysis discusses briefly its decision to diversify into
convenience stores.
The major objective of Sainsbury is
"to serve customers well and thereby provide shareholders with good,
sustainable financial returns. They aim to ensure all colleagues have
opportunities to develop their
abilities and are rewarded for their
contribution to the success of the
business. The company's policy is to
work with all of our suppliers fairly,
recognizing the mutual benefit of
satisfying customers' needs; a
concept which is considered in the
Porter's 5 forces analysis. They also aim to fulfill responsibilities to the
communities and environments in which they operate" (Sainsbury's, 2008).
This is further discussed in a PESTEL analysis.
There are around 455 supermarkets and 301 convenience stores across the
country. The company serves 16 million customers each week. It employs 148,000
colleagues who are committed to deliver 'Great Food at Fair Prices'.
One of the strength which is discussed in SWOT analysis is that it sells £6bn of
British food every year. In order to expand its local sourcing wherever possible, the
46 | P a g e
company works closely with smaller- scale suppliers. It has a network of over 3,500
local suppliers.
Sainsbury also introduced an innovative scheme in May 2006, named 'supply
something new' with the purpose of making it easier for the small and medium-
sized suppliers to gain access to Sainsbury. They can with the help of that make the
locally produced food available to more customers (Annual Report 2007).
4.3.2.1. PESTEL Analysis
Political Factors
Incr
easi
ng G
loba
lizati
on
Increase in globalization, poses a challenge as well as an
opportunity to Sainsbury's.
The main challenge it will face will be to compete against the
unknown forces & to give the best quality / financially viable
products from world over.
With the increase in globalization it can also enter the markets of
emerging companies through joint ventures or partnerships so as to
investigate these new markets, even though it does not have any
plans on the horizon to do so.
Pric
e Fi
am
ong
the
‘Big
Four
’
The current investigation of price fixing between the big four
retailers within the UK i.e Tesco, Sainsbury, Asda and Morrison can
have some negative impact to the industry in general and Sainsbury
in particular, as it is at the forefront of this allegation (Rigby 2008).
These allegations may lead to a negative public image as the people
might feel cheated, even though Sainsbury is very well established
among the consumers.
Corp
orat
e Ta
x The government is planning to decrease the rate of corporation tax
from 30% to 28% in UK. This will save big companies like Sainsbury’s
significant sum of money. (HM Treasury 2008).
Economic Factors
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Glo
bal F
ood
Cris
es
Global food crises has increased food prices all over the world,
which has resulted in rising the purchasing cost for all the major
companies including Sainsbury.(economist.com 2008 [online]).
Moreover, this will impact the margins of the organization and it
may lead to passing over the cost to consumers by increasing prices
of most things in the supermarket.
In addition to this, rising fuel costs will also have implication right
throughout the supply chain of Sainsbury's leading to an overall
state of escalating prices.
Cred
it Cr
unch
As Sainsbury also runs a financial services company with HBOs,
credit crunch can have a two way impact on Sainsbury (Annual
Report 2007).
One impact may be that the credit crunch might reduce the
purchasing power of consumers. Even though they will buy the
essentials, but still they may be more cautious.
Due to reduction in the purchasing power of consumers, it is
possible that they may spend less on luxury items, something that
has a greater profit margin for Sainsbury's.
In case of Sainsbury bank, credit crunch directly affects its ability to
provide credit especially because it is not an established name in
the financial services industry.
Impa
ct o
f Stiff
Com
petiti
on
Due to cut throat competition within every segment of retail sector,
retailes are now giving a lot of incentives to the consumers (Annual
Report 2007).
Due to this the prices will have to be driven down most of the time
thus it will affect Sainsbury.
Social Factors
48 | P a g e
Cook
ing
Styl
e an
d he
alth
y ea
ting
These days more emphasis is given on fresh, easy style cooking. It
gives Sainsbury an opportunity to encourage new recipes and
unfussy eating.
Moreover huge emphasis is also given by the government to
promote healthy eating (eatwell.gov.uk 2008 [online]), primarily for
for the reason of reducing the increasing level of obesity within the
UK (department of health 2008 [online]).
Due to this many consumers have shifted towards healthier food
which shows an opportunity for Sainsbury to stock up with more
healthy food. It can also create healthier food at a price lower than
its competitors so as to benefit from this new trend.
Technological Factors
Use
of I
nter
net
Internet phenomenon has become very popular in western
countries.
As per the prediction, the online retail sales in Europe will reach to
Eur263bn, with British shoppers accounting for more than a third of
all revenue by 2011.
The Internet accounts for 8% of global advertising spend and is
growing rapidly (The Economist, 2007).
Sainsbury can also use internet and can make better services for
customers. If used cleverly, it can leverage the internet to its
advantage. While comparing to its competitors like Tesco, Tesco use
its own online delivery model successfully.
However, specialist delivery companies like Ocado (working in
partnership with Waitrose) provide an alternative for the
outsourcing of non-core work.
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Que
uing
Sys
tem
s
One of the problems with supermarket shopping is that of the
queuing system which the customers often find themselves in at the
checkout.
Companies like ASDA and Tesco has employed Self-checkout
machines which can help solve this problem, especially for
customers who have to queue up for very few items.
Moreover it can also help Sainsbury to boost sales as it can help in
opening stores for 24 hours.
RFID
RFID (Radio Frequency Identification Device) technology can be
used for significant benefits to the supply chain of Sainsbury.
If adopted, this technology may lead to fewer inventories for the
supermarket firms leading to a leaner, more profitable organization
(directions magazine 2008 [online]).
Environmental Factors
Carb
on F
ootp
rint
These days most of the big western companies gives more
emphasis on reducing the carbon footprint and increasing energy
efficiency (Bream 2008).
This is just not a backburner issue anymore and each and every firm
will have to prove that they are reducing their impact on the
environment.
This means that Sainsbury will have to invest more on green issues.
Ethi
cal I
ssue
s
Ethical Issues like sale of organic food and the ethical treatment of
animals, clearly affect Sainsbury on various levels.
It means that the growing importance of such issues will compel
companies to cater to those consumers as well as the consumers
governed by price.
This is a very sensitive issue as the company will have to balance
their public stand on environment without losing the consumers
due to the increase in prices.
Legal Factors
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Stric
t Law
s on
Foo
d an
d
Drin
ks
Sainsbury will have to follow more and more packaging and
labeling policies to deal with ever rigorous and stringent laws on
food and drinks.
This will be an additional Burden on the company.
Sain
sbur
y In
tere
st in
Fina
ncia
l Ser
vice
s Sainsbury also has interest in the financial services besides the
supermarket concept. Due to this interest in financial services,
there is even more legal scrutiny in the operations of Sainsbury
bank which indicates that there is more responsibility regarding
legal compliance and other risk measures.
4.3.2.2 Porters Five Force Analysis
Competitive rivalry
Competitive rivalry
The UK retail market is very competitive and crowded market. Many
companies have entered into non-food sectors (Rigby and Killgren 2008) and
many more are still trying to get into non-food sectors thereby further
intensifying the competition.
Sainsbury enjoys a market share of 14.9% in the year 2007. The market
share has been steadily increasing since its restructuring programme in the
year 2004 (Annual Report 2007). Although this is a positive trend, it is
lagging well behind its competitor and market leader Tesco and it has to get
more market share.
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Sainsbury’s competitors such as Tesco, Morrison’s and ASDA, the other
three big supermarket chain in UK, each have different competitive
advantage over their competitors. Sainsbury’s competitive advantage is its
reach in the convenience stores thereby having a larger customer reach.
Sainsbury is also into non-food products such as financial products. These
products face stiff competition from Banks and building societies as it is not
a core business for Sainsbury.
Barriers for entry
Barriers to entry are extremely high especially in retail Food sector due to
various factors. Firstly, organized retail is amongst the most sophisticated
sectors within the UK and requires heavy investments, along with significant
brand development, which takes years to establish (Doyle 2002). Secondly,
UK has reached its maturity level and is at an advanced stage within the UK
and most of the western world, which means there is little scope for new
entrants to establish themselves.
Local knowledge plays a very crucial role in the retail food sector. Hence,
foreign firms may find it difficult to replicate. This is corroborated by the
presence of few global supermarkets within UK.
Threat of substitute products and services
The threat of substitute products in the retail food sector is low as the
consumers view it as a necessity in the developed world and emerging
markets
There is continuous innovation in the retail market with respect to food
products or alternative businesses, so as to increase the buying experience
of the customers. This makes it very difficult to substitute.
52 | P a g e
The major threat of substitute is an internal industry threat whereby one
supermarket can acquire all the businesses of other supermarkets.
Buyer power
Due to presence of many competitors and almost every competitor
selling the same product, the Buyer power is very high in this industry.
The only difference is the price and customer loyalty and increasing
adoption of green standards. Moreover, it is easy and cheap for
consumers to switch over.
As the economy goes further towards recession (O'Doherty 2008)
consumers' needs are likely to be given more weight, increasing their
power considerably.
Supplier power
Supplier power is a little complicated as it is difficult to categorize it. It
would be advisable to call it a mutually dependent relationship as
suppliers themselves are huge companies like Unilever, P&G, and
Cadbury etc. which have huge brand appeal. If any supermarket doesn’t
sell these products which are very popular, then consumers will shift
their loyalties to other supermarkets while will lead decrease in their
total sales volume. Hence this makes the Suppliers very powerful. For
eg. when sales of Cadbury's dairy milk increased through the successful
Gorilla ad campaign (Wiggins and Urry 2007).
Supplier suppliers will not be much considerable because of their sales
volumes on dependence on these supermarkets.
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4.3.2.3 SWOT Analysis
Strengths
Sainsbury’s demonstrated real turnaround in its business by showing
thirteen straight quarter of growth (Rigby and Braithwaite 2008). In the year
2007 it recorded an increase of 7% in its turnover and a huge increase in
profit after tax of 450% (Annual Report 2007).
Sainsbury has built an excellent team lead by a very experienced Chief
Executive Mr.Justin King, who is very well known for his work at Sainsbury’s.
(timesonline.co.uk 2008 [online]).
Sainsbury has successfully adopted green and environmental issues and also
started with various recent initiatives like buying fair-trade bananas
(economist.com 2008 [online]). Furthermore its effort in closing gangmaster
(Taylor 2008) has created a positive effect on general public. Further
Sainsbury’s enjoys the reputation of an innovative and positive consumer
brand and is like by green activists as well as consumers.
It has a strong advertising campaign where several celebrities are endorsing
its products and has resulted in increased sales. "With Jamie Oliver, it has
been simple for Sainsbury's to see uplifts in sales of specific ingredients that
have been featured in ad campaigns. Apparently the supermarket had to
order nine tons – the equivalent of two years' supply – of nutmeg to meet
demand when it appeared in one of Oliver's hundred-plus ads" (Dickinson
2008)
Weakness
The takeover bid by the Qataris Private equity firm last year (Arnold and
Politi 2008) may have some implications as people are gravitating towards
British Companies and any prospect of Sainsbury being taken over and
54 | P a g e
governed by a foreign company may lead to customers changing their
loyalties.
As compared to Tesco, which is more aggressive on global expansion
(economist.com [online] 2008), Sainsbury’s has not entered international
markets. This is a cause of worry as if they is any problem in regards to food
retail in UK, then there needs be another source of revenue.
Opportunities
Sainsbury’s senses great opportunity for future growth through its
alternatives businesses like investment in property (Killgren 2007). Also its
goal of £40 million profit through its bank seems to be a good strategy to
pursue.
With increasing popularity of online shopping, e-commerce seems to be
great opportunity as well, since overheads costs are less and margins are
more and it doesn’t require heavy investments.
Threats
Sainsbury has taken initiatives into green and other environmental issues.
However, these require heavy investment without any immediate benefit.
The main issue to balance both the things, for eg., to curb global emissions
Bio-fuel is an important tool and moreover its use affects Sainsbury’s supply
chain also directly. However, a spurt in bio-fuels has made corn dearer
(independent.co.uk [online] 2008) affecting its prices within the UK and
thereby making Sainsbury’s customers bear the brunt.
Sainsbury’s operations are subjected to various regulatory requirements like
planning, competition, employment, environmental issue, pensions and tax
laws and in terms of regulations over the group’s products and services.
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5.1 Strategic Analysis of Tesco and Sainsbury
Strategic Analysis is:
‘… The process of conducting research on the business environment within which
an organization operates and on the organization itself, in order to formulate
strategy.’
-BNET Business Dictionary
The strategies of Tesco and Sainsbury's are discussed in three parts: Business-Level
Strategy, Corporate-Level and international Strategy, and Strategy Development.
5.1.1 Tesco
Business-Level Strategy
The Business-Level Strategy means the competitive strategies of the company and
its choice. Different companies adopt different strategies. In case of Tesco, it
adopts a hybrid strategy as its business-level or competitive strategy. Tesco’s main
strategy is to be different from its competitors and at the same time offer lower
prices compared to its competitors. For eg. the website of Tesco or the store
advertisement always focusses on those products which are cheaper than other
stores. Tesco’s other competitive strategy is excellent customer service. For this
Tesco held a Customer Champions service where around 800 Tesco champions
greet the customers as they enter the store and help them with any questions or
concerns.
Corporate-Level and International Strategy
Corporate-Level strategy refers to an overall strategy of an organization and the
strategic decision regarding the scope of an organization. In case of Tesco, due to
strong competition in UK retail sector in UK and mature markets, Tesco has
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adopted the strategy of business diversification. Tesco offers more product
categories and also provides non-food products with grocery. For eg. In the year
1997 Tesco diversified into offering non-food business of personal finance and
petroleum products. Their strategy was clear “To be as strong in everything we sell
as we are in food”. In fact, recently Tesco is focusing more on the non-food items.
As per data, in the third quarter of 2005 non-food products shows excellent sales
growth. In the year 1999 Tesco went online and started its e-commerce website
‘Tesco.com’. Their goal was clear “To be an outstanding international retailer in
stores and online”. Further, due to rapid globalization, Tesco adopted the strategy
of globalization and further diversified into different countries. As per Tesco
website (Tescoplc.com), currently they operate in 14markets across Europe, Asia
and North America.
Strategy Development
The method of strategy development can be classified into 3 types : internal
development, acquisition and joint development.
Internal development
Due to rapid advancement in technology, Tesco understood that it requires
adopting new technology if it wants to enhance its efficiency and develop its
capability. Thereby it upgraded its technology and adopted electronic retail-
supplier communications systems. Further, it even implemented automatic
replenishment and stock control system.
Acquisition
Tesco’s prime strategy of organic growth has been Acquisition. For eg: To
further increase its market share in UK, it acquired 862 T&S convenience
stores. It also purchased 13 HIT stores in Poland.
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Joint development
Tesco has always adopted the strategy of diversification and offering its
customers vide range of products including non-food items. Hence, it has
entered into various joint ventures to fulfill its commitment of offering
different products, for eg., to offer Financial products and Personal Finance
it entered into joint venture with Royal Bank of Scotland, to offer Petroleum
products it entered into joint venture with Esso and BP at its various Express
and other large format stores.
5.1.2 Sainsbury's
Comparing with Tesco, Sainsbury's strategy in the three aspects can be list as
follow:
Business-Level Strategy
Sainsbury's is one of the oldest retailers in food sector in the UK. Compared to
Tesco, which at present is the largest food retailer in UK and is known to offer
customers very cheap prices, Sainsbury’s main focus has always been on providing
high quality products. To demonstrate this, Sainsbury gives details on the process
of food production and how it chooses the raw materials to process the food.
However, due to entrants of various competitors, Sainsbury has started
concentrating on price of the product along with quality.
Corporate-Level and international Strategy
Just like its major competitor Tesco, Sainsbury has adopted the strategy of
business diversification. On similar lines of Tesco, Sainsbury has also increased the
number of non-food lines along with regular food products and thereby offer more
variety to its customers. Currently around 80stores are providing dedicated non-
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food spaces and around 2500(approx.) have started providing new non-food lines.
Few stores are also offering clothes and children’s products. Further, the
management has decided to open specialist cook shops in main outlets and take
advantage of Sainsbury’s reputation for giving fresh products and thereby capture
more up market lines.
Sainsbury had opened stores in other countries such as USA and Egypt, however
due to lack of proper market research and implementation of proper strategies, it
failed to establish itself. Since then it has not achieved any success in international
markets and even had to wind up the stores it opened in USA and Egypt.
Strategy Development
Internal development
Sainsbury opted to give proper training to its employees. Hence, it
introduced a two-day training course. Around 1000 employees including
store managers and central team members including the senior
management and Board attended this training course. Further, every
salesman was giving special training on customer service and thereby aim to
improve the service quality.
Acquisition
Sainsbury took over and purchased 14 stores from Morrison including 13
Safeway branded stores and one Morrison stores which was primarily
located in the Midlands and north England. This strategy would help
Sainsbury to expand its market share.
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Joint development
Sainsbury opened stores in USA and Egypt, however due the lack of market
research it had to shut down its stores. Hence, it decided to tie-up with
other companies like Shaw supermarket and then enter the US market
5.2 Evaluation and Recommendations
We have already seen the SWOT analysis of both Tesco and Sainsbury in the
chapter of competitive analysis. After studying these strategies it is now important
to analyze how this SWOT Analysis can be used to frame various strategies.
Sainsbury's strategy has been greatly changed during the last ten years, and it has
obtained some improvement. For example, Sainsbury's has raised its share from
15.6% to 15.9% till June 2005. However, there are deficiencies on its strategies.
Internal Strengths
Strong brand equity Innovative financial
services business
Weaknesses
Decrease in profitability Lack of exposure in
international markets Supply chain disruptions
External Opportunities
Increasing product line which can be added
Further, expansion of stores
Positive trend in the pet care market
Threats
Strong competition in prices
Oversight in govt. regulations
Restaurant business booming in UK.
To understand Sainsbury’s business environment as well as its strategic capability
we can do a SWOT Analysis. The SWOT Analysis matrix will help by giving an
indepth understanding which will further help to develop effective strategies.
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SO (Strength-Weaknesses) Strategic Options
It involves listing down of options that make use of the strengths so as to
take advantage of the opportunities.
WO Strategic options
It involves listing down of options that take advantage of opportunities by
overcoming weakness
ST Strategic options
It involves listing down options that make use strengths so that threats can
be removed.
WT Strategic options
It involves listing down options that can help to minimize weaknesses and
avoid threats.
According to the analysis of Sainsbury's strategy, some recommendations are
raised as follows:
Sainsbury is a very popular and well established brand in UK. Due to sheer
size of Sainsbury and strong store network, it is recommended that
Sainsbury should further expand the number of stores and thereby further
increase its market share.
Sainsbury can increase its profitability by exploring more into pet care
market as there is a positive and favorable trend in pet care market.
Over the period of time, the competition for Sainsbury has grown from
various stores such as ASDA, Tesco etc.. The competitors such as Tesco are
offering products at very low price resulting in Tesco becoming the largest
supermarket in UK. Hence, it is highly recommended that Sainsbury also
offers more competitive prices along with quality. Sainsbury can make use
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of its effective operations and cut down on costs and thereby offer most
competitive prices to its customers.
Sainsbury mainly focuses on food items and it appeals more to ‘food lover’.
However, in the recent times the restaurant business has flourished and
customers love eating out at restaurants. Hence, Sainsbury needs a serious
relook at its strategies. It should offer more product categories and try to
avert this threat.
[Supermarket retailing Tesco vs Sainsburys (online) www.docshare.com (Accessed
on 25th August, 2011)]
Chapter 6: Conclusion
The UK Food Retail Industry faces immense high competition and low-price
strategies. Recently, all big food retail companies such as Tesco, ASDA, Sainsbury
and Morrison realized this and are focussing on offering its customers value for
money products, cheap and exciting offers and even add products other than non-
food items also to cater to most needs of their customers.
The UK food retail industry’s total revenue was approximately $186.1 billion in
2009, with a compound annual growth rate (CAGR) of 4.2% for the period of year
2005-2009. It is expected to slow down, with projected CAGR of approx 3.4% for
the five-year time duration ranging from 2009-2014. This will drive the industry to
a value of $219.4 billion by the end of 2014.. The above analysis shows the
competitive and strategic analysis of top two supermarkets namely Tesco and
Sainsbury for which we can conclude the following.
Within the highly turbulent retail segment, where companies are required to
pursue both cost leadership and differentiation strategies, Tesco still maintains to
hold its leadership position. Tesco has been able make the strategic use of
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information technology and also it has been able to attain both by using lean and
agile supply chain management. Thus we can say that Tesco’s core competencies
have been seen to be allied with the business environment and thereby showing a
positive future outlook for the company.
Using the competitive analysis tools, we can say that Sainsbury is an iconic food
brand, which is well loved by its consumers. It suffered a lot during its initial phases
but since the year 2004 it has been able to improve tremendously its image, and
importantly its profits. However, as highlighted in PESTEL analysis it is not
protected to many outside risks like recession and rising material costs.
Even though it has shown good performance and steady growth it is very vital for
Sainsbury's to go one step ahead by challenging Tesco, as identified in the Porters
5 forces analysis. Sainsbury can do it either by thinking of international expansion
or on price. Not only this will do, it should be done in combination with its
increasing property portfolio and alternate businesses so that it can continue the
strong growth path and can come over its threats (SWOT) in its external
environment.
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action=vthread&forum=1&topic=5
http://www.docshare.com/doc/157026/Supermarket-retailing-
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