UK Retail Food Sector

A Competitive and Strategic Analysis with Core Focus on Tesco and Sainsbury

2011-2012

Dissertation by:

JIGAR .C.DHABALIA 1006497

Contents
Preface ....... 4 Acknowledgement ..... 5 1. Research Methodology
1.1 Research Objectives .... 1.3 Research Methodology ......
6

1.2 Research Design .... 6

7

2. Literature Review. 8 3. Introduction to Retail Food Industry

3.1 Introduction to Retail Food Industry in UK. 3.3 Number and Sectors of grocery stores in UK .
10

3.2 Size of UK grocery market . 11

12

4. Competitive Analysis of Retail Food Industry

4.1Competitive Analysis of Retail Food Sector in UK .. 14 4.2 Analytical tools for competitive analysis ..
23

4.2.1. PESTEL Analysis ... 24 4.2.2. Porters five Force Analysis ...... 26 4.2.3. SWOT Analysis ........... 4.3Assessment of top two players on the basis of no of stores 4.3.1. Tesco ....... 4.3.1.1. PESTEL Analysis 4.3.1.2. Porters five Force Analysis
28 30 31 32 39

4.3.1.3. SWOT Analysis .. 41

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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 5.1.1. Tesco .......
56 56

5.1.2. Sainsbury ............ 58 5.2Evaluation and Recommendations 60

6. Conclusion.

62

References ..... 64 Books Referred .. Web Resources .

66 67

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Preface
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!!!!

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. In spite of my best efforts there may be errors of omissions and commissions, which may please be excused.
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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 hardearned 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 Dhabalia DATE: 2/9/2011 SIGNATURE:
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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, porters 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.

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 Spark and submitted to Department of trade and Industry retrieved from

Leigh

: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 Businesslevel 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 industrys 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 CAGRs 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 MonitorJune 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.

UK Grocery Market Performance: IGD Research 2010

Food Retail in UK (2010, June) retrieved from www.datamonitor.com

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3.3 Number and Sectors of Grocery Stores in UK

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.

UK Grocery Retailing - Store Numbers & Sector Value

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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 outof-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

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are Income constrained, seeks out low priced/good value food options 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.
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vi.

Environmental Changes and Trends 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.

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ii.

Competitive Structure. Now a days 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 Players 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%.

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Although most firms have regional dominance they are now extending their operations from old regional locations to national levels (except 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.
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3 Internal Characteristics and Competencies 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.

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iii.

Marketing Activities

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 customers 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)

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4.2 Analytical Tools for Competitive Analysis

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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Tools used for competitive analysis

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
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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

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.

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4.2.2 Porters Five Force Analysis

Michael Porter of Harvard Business School developed Porters 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. 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. Porters five forces is helpful in comprehending the strength of an organizations current and future competitive position which it may look to move into.

Porter Five Force Analysis

Strategic analysts use Porters 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.

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Each of these five forces are explained below:

Suppliers 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. 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.

Buyers Power

Competitive Rivalry. Threat of Substitution. Threat of New entry.

The key driver is the number and capability of competitors in the market. Many competitors, offering undifferentiated products and services, will reduce market attractiveness. 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. 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

[Porters Five Forces Model, Available at:

www.businessballs.com/portersfiveforcesofcompetition.htm (Accessed 12/8/2011)]

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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 other hand opportunities and threats are external. These strengths, weaknesses, opportunities and threats are plotted on a simple 2x2 matrix.

SWOT analysis diagram

SWOT Analysis

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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 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

[Source: Strategic Analysis tools: Prepared by Jim Downey and Technical Information Service

October 2007]

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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 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, Tescos 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.

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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 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 around It 14 the

countries world.

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 170 metro stores 450 Superstores Which sells approx. 7,000 products including foods at suitable localities; Which sell a variety of food products in town and city centers; 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).

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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 Tescos market share with other leading players market share (Euromonitor, 2010):

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 Tescos performance:

Political Factors

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

Chinas agreement

with WTO - Tesco

worlds 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

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2010 (Tesco, 2009).

Tescos international business segment growth is on rise and it is predicted to account for 1 quarter of the companys profit.

Promotion of Free Trading

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).

Blocs

This provided Tesco a platform to expand its retail network across the EU.

Economic Factors

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).

Recession Negative Impact on Tesco

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).

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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).

Recession Positive Impact on Tesco

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):

UK Spending on Food as % of Overall Consumer Spending 2004 to 2008

The economic downturn has been brought to light with the assistance of the following GDP growth graph since 1989 (Mintel, 2009):

UK GDP Growth 1989-2009

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Social Factors

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.

Age Factor

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.

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.

Attitude towards food

It was Tesco who introduced Payment by cheques and cash at the checkout.

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Technological Factors

Technology is one of the key macro-environmental factors that have directly influences the supply chain, operations and processes

Use of Internet

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).

Loyalty Programs -

Loyalty programs introduced with the help of information technology discourages customers from switching over to their competitors (Sun, 2009).

IT

Another technology - Mobile technology has also been a good platform for distribution within food retailing and it is increasing

Mobile Technology

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).

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Due to increased access to broadband internet in UK, online retail shopping has gained considerable popularity.

Online Retail

Shopping

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

Environmentally friendly packaging is being promoted by the Government.

Use of Reusable Bags

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 Tescos corporate social responsibility image.

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).

Carbon Footprint

And it also aims at expanding it to bread and non-food items in 2010 (Tesco, 2010).

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).

Tescos Greener

Living Scheme

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Tesco rewards its consumers through Tescos green club card points.

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

Since the government has to finance a huge budget deficit, it has been predicted that VAT would have to rise to 20%. (HM Treasury,

VAT

2010).

Rise in VAT will also affect the non-food sectors of Tesco, such as clothing.

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).

Minimum Wage

This will in turn result in an increase of operating costs of supermarkets.

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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 Porters 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.
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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 Morrisons 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 Tescos 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).

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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 3 rd largest grocery Retail Company in the world. Its operations are there in around 4331 stores primarily within the USA, Europe and Asia. Tescos share in UK grocery retail market in the year 2010 was around 30.7%. (Euromonitor, 2010).
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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

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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 companys 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

Tescos 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.
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Tescos 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, Tescos 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.

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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

(Source: http://www.ivoryresearch.com/sample36.php)

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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 Sainsburys 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

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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 mediumsized 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

Increase in globalization, poses a challenge as well as an opportunity to Sainsbury's.

Increasing Globalization

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.

Price Fixing among the Big

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

Four

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.

Corporate Tax

The government is planning to decrease the rate of corporation tax from 30% to 28% in UK. This will save big companies like Sainsburys significant sum of money. (HM Treasury 2008).

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Economic Factors

Global food crises has increased food prices all over the world, which has resulted in rising the purchasing cost for all the major

Global Food Crises

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.

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.

Credit Crunch

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.

Impact of Stiff Competition

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.

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Social Factors

These days more emphasis is given on fresh, easy style cooking. It gives Sainsbury an opportunity to encourage new recipes and

Cooking Style and healthy eating

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
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. Use of Internet 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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 One of the problems with supermarket shopping is that of the queuing system which the customers often find themselves in at the Queuing Systems 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 (Radio Frequency Identification Device) technology can be used for significant benefits to the supply chain of Sainsbury. RFID 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
These days most of the big western companies gives more Carbon Footprint 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. Ethical Issues like sale of organic food and the ethical treatment of animals, clearly affect Sainsbury on various levels. Ethical Issues 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.

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Legal Factors
Strict Laws on Food and Sainsbury will have to follow more and more packaging and Drinks labeling policies to deal with ever rigorous and stringent laws on food and drinks. This will be an additional Burden on the company.

Sainsbury Interest in

Financial Services

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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Sainsburys competitors such as Tesco, Morrisons and ASDA, the other three big supermarket chain in UK, each have different competitive advantage over their competitors. Sainsburys 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.

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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 super market doesnt 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 Sainsburys 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 Sainsburys 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
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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), Sainsburys 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 Sainsburys 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 doesnt 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 Sainsburys 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 Sainsburys customers bear the brunt. Sainsburys operations are subjected to various regulatory requirements like planning, competition, employment, environmental issue, pensions and tax laws and in terms of regulations over the groups 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. Tescos 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. Tescos 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 i n 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 retailsupplier communications systems. Further, it even implemented automatic replenishment and stock control system.

Acquisition Tescos 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, Sainsburys 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 non58 | P a g e

food spaces and around 2500(approx.) have started providing new non-food lines. Few stores are also offering clothes and childrens products. Further, the management has decided to open specialist cook shops in main outlets and take advantage of Sainsburys 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 Threats Strong competition in prices Oversight in govt. regulations Restaurant business booming in UK.

External

Opportunities Increasing product line which can be added Further, expansion of stores Positive trend in the pet care market

To understand Sainsburys 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 nonfood items also to cater to most needs of their customers.

The UK food retail industrys 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 Tescos 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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References

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 HM Treasury, (2008) ), Evidence on the UK Economic Cycle, November 2008. Available at http://news.bbc.co.uk/1/shared/bsp/hi/pdfs/24_11_08_pbr_economiccycle .pdf [accessed 18/08/2011] HM Treasury (2008). Budget 2008. Stability and opportunity: building a strong, sustainable future. 12 March 2008. www. hm-treasury.gov.uk [Online]. [Accessed 14/8/2011]. Jim Downey and Technical Information Service (Oct 2007). Strategic Analysis tools. Keynote (2010), Keynote Report on Food Industry Market Review, March 2010. Available at http://www.keynote.co.uk/marketintelligence/view/product/2360/food-industry [accessed 23/08/2011] Killgren, L. (2007). 'Sainsbury launches property venture', Financial Times, London, 14 November. King, I. (2009), Tesco shows its claws, Sun, Jan 18, 2009. p.42 Mintel (2009), Food Retail Industry Including Online, Mintel Research National Minimum Wage (2009), Low Pay Commission Report 2009, National Minimum Wage. Available at http://www.lowpay.gov.uk/lowpay/report/pdf/7997-BERRLow%20Pay%20Commission-WEB.pdf [accessed 22/08/2011] O'Doherty, J. (2008). 'Carrefour confident of meeting sales target', Financial Times, London, 10 January. Office for National Statistics (2009), Internet Access Households and Individuals, Office for National Statistics, August 29, 2009. Available at http://www.statistics.gov.uk/pdfdir/iahi0809.pdf [accessed 23/08/2011] Porter, M. (1985), Competitive Advantage: Creating and Sustaining Superior Performance, (Location: The Free Press) Poulter, S. (2009), Debt problems piling up for younger generation, Daily Mail, Nov 14, 2009 Rigby, E. (2008). 'Sainsbury attacks 'scandal' of price inquiry', Financial Times, London, 3 May. Rigby, E, and Killgren, L. (2008). 'Sainsbury buys back sites to fuel non-food growth', Financial Times, London, 27 March.

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Books Referred
Robert A & Vijay G (2008) 12th Edition. Management control systems. The McGraw Hill Companies. Phillip K & Kevin K (2007) 12th Edition.Marketing Management.Pearson Prentice hall. Ireland, Hoskisson& Hitt. (2008). Strategic Management.Cengage Learning. Evans J 1st Edition, Marketing Management. Cengage Learning Gilberth D, 2nd Edition , Retail Marketing Management, Pearson Education Ramaswamy V & Namakumari S, (2009) 4th Edition , Marketing Management, Macmillan Publishers India

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 Pride W, 1st edition, Marketing :Planning, Implementation and control, Cengage Learning. Sullivan M and Adcock D,(2002) 1st Edition, Retail Marketing, Cengage Learning.

Web resources
The major web sites referred are as follows: UK Grocery Retailing (2010, August), The food and Grocery Experts retrieved from : http://www.igd.com/index.asp?id=1&fid=1&sid=7&tid=26&cid=94 Food Retail in UK (2010, June) retrieved from www.datamonitor.com 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 http://www.ivoryresearch.com/sample36.php http://www.swot-pestporter.co.uk/index.php?action=vthread&forum=1&topic=5 http://www.docshare.com/doc/157026/Supermarket-retailingTesco-Vs-Sainsburys)

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