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A Strategic Analysis:

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Jessica O'Neill

on 17 March 2015

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Transcript of A Strategic Analysis:

A Strategic Analysis:
The UK Supermarket Industry

Current Market Share
Current Trends
The top four supermarkets are losing market share due to a number of factors:

Growth of discounter rivals (Butler, 2014)

Ease of convenience stores (Telegraph View, 2013)

Economic Changes - fuel, disposable income etc (ONS 2012)

The UK supermarket sector is declining in sales with a 0.2% fall compared to 2013 (McKevvit, 2014)
Other Current Trends
Growth of online sales in the UK (KPMG, 2014)

Shift towards healthier eating with the help of government campaigns such as 'Change4Life' (NHS, 2014)

Department of health issue a further £10.9 million into the campaign (CampaignLive, 2014)

Rise in Supermarket Own brands charging similar prices to branded goods (Nicholson & Young, 2012)

Rise in working women and therefore less time to prepare meals (Blythman, 2012)
Defining the Industry
Overall the grocery industry is worth £174.5 billion, a 2.8% increase from 2013.
Forecasted to increase to £203 billion by 2019.
The total market share for the industry accounts for 54.5p in every £1 of UK retail spending
(IGD, 2014)
Market Structure
The market is an oligopoly
The nature of the industry is highly competitive
Consequently there are high barriers to entry
Competitors use game theory as a pricing mechanism (Economics Online,2012)

Its key competitors are:

Our Focus
IGD (2014)
Primary Research
Own observations of "The Big Four"

Secondary Research:
Online Journal Articles
Industry Statistics
Annual reports

Strategic Models
Porters Five Forces
SWOT Analysis
Past Trends
The financial crisis meant that many customers turned towards cheaper alternatives such as Aldi and Lidl and both discount stores saw over a 10% increase in sales (BBC News, 2008)
Due to the financial crisis, the top 4 supermarkets lost some market share and profits didn't meet annual forecasts.
It was the first time in 10 years that Tesco profits increased by less than 10% (Fletcher & Hall, 2009)
Due to the soaring profits in Supermarkets, British farmers are forced to pay the price for this as they have no choice in pricing and many farmers costs rose by over 30% when dealing with the big supermarkets (Renton, 2011)
The horsemeat scandal shocked the entire country and consumers were horrified at what they learnt. This affected Tesco's share price by falling by over 5% (BBC News, 2013)
According to the BBC News (2006), the supermarket industry is dominated by four main competitors. Tesco as the market leader, followed by Sainsburys, Asda and then Morrisons.
(Pettinger, 2014)
Pettinger, (2014)
The supermarkets use of energy efficient vehicles protects the environment reducing carbon emissions. (Gouldson & Sullivan, 2012)

Most supermarkets no longer offer bags and charge a small fee, which discourages consumers to take them. (Gov, 2013)

Tesco creates special supportschildren community based projects and education in order to create a peaceful environment to operate (Tesco, 2014)
National minimum wage has been increasing steadily over the past few years (Mason, 2014).

Supermarkets are banned from discounting multiple wine bottles (Kirkup, 2012).

Laws directly specified by the government can affect supermarkets performance such as fair trading regulations (Gov, 2014)
Supermarkets have taken advantage of the increase in internet use by offering their services online.

Online shopping for food is set to increase by 126% in the next 5 years (Poulter, 2013)

The introduction of self checkouts have benefited customers by making the process more efficient.

Loyalty point cards

Supermarkets also use information technology to create more efficient operations such as Tesco's efficient stock room and supply chain management (Kaminska, 2014)
Population aged under 16 had dropped from 25% in 1971 to 19% in 2010 (ONS, 2012). Therefore supermarkets need to target their advertising to an older audience

Proportion of population aged 65 or over had risen to 17% in 2010 from 13% in 1971.
(ONS, 2012)
Changes in consumer taste
Consumers are more concerned with health and are willing to spend more money on healthier and fresher products as previously stated.

Consumer trends
Consumers are now more inclined to do one stop shopping, instead of bulk buying. By having a geographical advantage, it would appeal to this trend making it easier for consumers to shop (McGoldrick, 2002).

Increases in VAT

UK Government announced in 2010, that from 4th January 2011, the rate would increase from 17% to 20%. Consequently this means higher costs for supermarkets of raw materials and these higher costs passed onto the consumer (HM Revenue and Customs, 2011)

Supermarket Influence

The supermarkets have a large influence on society and contribute to many negative factors in which the government intervene with and then work with supermarkets to address the issue (Eccleston, 2008)
(ONS, 2014)
The Inflation rate has been fluctuating since the dramatic drop in 2008. This would have a constant affect on prices.
ONS (2014)
ONS (2012)
Disposable Income
ONS (2012)
Threat of New Entrants
The big four account for 73% of all grocery shopping in the UK (Pettinger, 2014)
Incumbencies have attained cost and quality advantages over the years in which start up companies will find it difficult to compete with (Porter, 1997)
The big four have an aggressive retaliation strategy (Butler, 2014)
Newer entrants such as Aldi and Lidl have been successful due to lower overheads as they specialize in certain market segments rather than 'everything to all' supermarkets (Kaminska, 2014)
Bargaining Power of Buyers
Large supermarkets can benefit from supply side economies of scale by purchasing in large volumes. They can drive prices down since suppliers will want their custom.

When supermarkets market share increases, they are able to secure better deals with their suppliers.

When these buying prices fall, retail prices fall too making them more attractive to consumers.

Nicholson & Young (2012)
Bargaining Power of Suppliers
Suppliers have little to none bargaining power which leads to supermarkets holding abusive buying practices.

The consequences include:

Buyers demand cheap prices with threats of delisting
Produce that doesn't get sold gets returned to the suppliers at their expense
Large profits from the buyer and supplier relationship means that supermarkets can afford to backward integrate

(Nicholson & Young, 2012)
Competitive Rivalry
Supermarkets are equally balanced, so small changes make the biggest impacts.

Price wars are the most common rivalry found within the industry

A low growth industry means that stores utilize market share as a form of setting themselves apart from one another

The price and service offered are the factors that set supermarkets apart from similar commodities sold.
(Porter, 1997)
SWOT Analysis
(Gov, 2014)
One in 5 UK supermarkets may have to close to restore profits (Wood, 2014)
Other Forecasts
Potential virtual entrant due to the rise in online sales for groceries as online sales are set to increase by 126% in the next 5 years (Poulter, 2013).

Beacon technology introduced to supermarkets where the big four can compete on customer experience alongside the current price wars (Stephens, 2014)

A forecasted rise in oil prices could mean increased transportation costs to deliver raw materials to supermarkets (Forbes, 2014)
Threat of Substitutes
As mentioned previously, there is a threat that due to current trends, discounters could overtake the big four as they are growing positively in market share as the others decline.

Necessity goods eg milk and bread have low substitution as you can purchase from any of the big four, however own brands are exclusive to each store and since these are rising in popularity this is where substitution could be competitive.

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