Provide a detailed analysis of the UK food retailing industry.* Identify the main operators and explore why they are pursuing the strategies they have adopted. Are any of the strategies likely to be more successful and why?

Due to the limited word count Morrison, Tesco and Asda have been chosen as the main companies to be compared and analysed in the following report. These three businesses have been selected caused by their high employee figures, the size of the companies and the information available about their strategies. Nevertheless, a selected amount of small regional supermarkets or other major national players have been mentioned as well, in order to fully complete the report. However, it was not possible to name all UK food retailers in the Strategic Group Analysis.

To give an overview of the environmental issues influencing the UK food retailing industry at first an external analysis, including the PEST, Five Forces and Strategic Group Analysis, was carried out. In a next step, with the help of the National Diamond the UK market as the home base of the three companies has been examined concerning its supportive role for international expansion. Afterwards, there has been a focus on the Financial Analysis and the Cultural Web, both tools of internal measurement. To complete the analytical part, the companies major strengths, weaknesses, opportunities and threats (SWOT) have been defined. Finally, a conclusion is given.

3.1 PESTAnalysis

The PESTAnalysis identifies four main categories influencing any organisation, namely the political, economic, social and technological factors (2002, p.102). The following section therefore, aims to give an overview of the impacts for the food retailing industry.

Findings:

Political Influences

Concerning environmental protection the industry has to be aware of several legislation e.g. laws concerning emission or waste disposal ( , 2001, pp.4-5). Food, so as non-food retailers will be influenced by the forthcoming waste management regulations proposed by EPA (Environmental Protection Agency), which will increase costs of these businesses.

After past food scares such as BSE and the Food and Mouth Disease, new threats by bovine tuberculosis and chronic wasting disease will sharpen national and supranational food safety laws and regulations. An animal disease crisis could even devastate milk-and meat-production and therefore, the production of ice cream, meat, cheese, etc ( August 2002).

Furthermore, there are standards for nutrient descriptors such as light, reduced fat and low fat, set by governmental and European agencies like the European Food

Authority (EFA) (October 20th 2003]). Especially the UK Competition Commission and the Office of Fair trading (OFT) are watching the main players of the UK supermarkets. This is caused by the high cumulative market share of the top five UK supermarkets (between 14%-24%) ( August 2001, pp. 9-30).

Other problems may arise within the e-business, due to too high fees and too complex regulations introduced by the government of the UK and EU compared to other countries such as the USA ( 2003, p. 25).

Economic Influences

The UK food retailing industry is less influenced by seasonality, except the Christmas times were usually a growth in sales occurs. Another important influence can be found in the prediction of an economic growth in the next years. However, sales have dramatically been decreased in the past three years due to the slowly economic recovery of the USA. Other factors may be seen in the weak economy of Europe and other countries which make an upward trend in sales very hard to achieve (ANovember 2003, p.29).

Social cultural influences

The UK is experiencing a trend towards healthier food, as well as implying a strong growing awareness of environmental friendly packaging. However, since the 21st century there has been an increasing consumer preference for quality products with good tastes. The UK population is also becoming more and more experimental within their eating habits. In the past years a trend towards the desire of exotic fruits, fish, etc. may be noted ( August 16th 2003, p. 43).

Technological Influences

In the food retailing industry, specialized equipment and trucks, such as freezer trucks are necessary to guarantee exclusive taste and quality. Therefore, a welltrained workforce is essential.

Criticism: For laymen, it is really difficult to filter out the most important influences within the four categories because there is such a wide range of resources. Hence, without being aninsider the analysis of the business environment appears to be much generalized.

Justification:

The PESTAnalysis represents an overview of the food industry which will then be a good starting point for deeper macro-, micro-environmental as well as internal examinations. Furthermore, it will provide the companies with basic information that needs to be considered for future strategies.

3.2 Five Forces ModelPorters Five Forces Model is based on the simple fact that each industry and market is influenced by several competitive forces namely: threat of entrance, bargaining power of suppliers and buyers, competitive rivalry and threat of substitutes. The intensity of competition and therefore an industrys attractiveness and profitability will mostly depend on these external factors( October 4th 2003]).

Diagram: Findings:

First of all, competition within the food retailing industry seems to be large as well as diversified. Asda, Tesco, Morrison (including Safeway) and Sainsburys need to be named as the major competitors, which have a tremendous range of resources at their disposal. Although, one may

has to mention smaller retailers (Jacksons, Spar, Lateshops, etc.) which are present in regional areas, e.g. in Northern England and can therefore be seen as competitors, as well. What is more, differentiation between the numerous players and their products is scarce. As expensive equipment, factories and estate are required in the food retailing industry, barriers to exit are quite high, too. Furthermore, the costs for customers to switch to rival brands are relatively low. All in all, rivalry may therefore be characterized as intense. The group of buyers is formed by individual customers and restaurants. But as the individual customers represent the most important buyer and therefore, one could speak of a concentration of buyers. As for an almost endless range of products offered, switching costs to rival brands are low. Hence, the bargaining power of buyers is relatively high.

Producers of food and other goods as well as packaging manufacturers have to be seen as the major suppliers in this industry i.e. they do represent a fragmented source of supply. Taking into account that the key players of this industry possess e.g. packaging factories, produce their own branded products and that on the other hand switching costs from one supplier to another are low and do not involve high risk, the food retailing industry faces little pressure on margins from the suppliers.

Diversified products, the offer of different brands within each supermarket and the creation of supermarket own brands are examples of the wide range of substitutes for products within the food retailing industry. The almost non-existence of switching costs and the fact, of the intense offer of similar products, both contribute to a quite tremendous threat of substitutes. Even though these competitive pressures could be by-passed through building up high brand loyalty and close customer relationships as well as through offering high quality, better taste or innovative products.

Entry to the industry of food retailing seems to be quite difficult, as high initial investment will be required for building new stores, manufacturing plants, etc. A relatively strong brand loyalty of customers also contributes to entry barriers. But as switching costs for buyers are low, the threat of new entrants could be characterized as moderate.

Criticism:

To start off, regarding the circumstances that the key players of the food retailing industry created their own supermarket brands and the offer of other products may also represent potential competition within the company itself. It also needs to be considered that the more complicated an industrys market structures are, the less applicable this model is. Furthermore Porters Five Forces Model

does not take into account non-market forces such as public and stakeholders, which could be regarded as a sixth force. (This force will be briefly discussed at the end of this analysis.)

Justification:

It is essential for any business to have an overview of the forces influencing a companys competitiveness. As there is a wide range of environmental, competitive factors,

this tool was regarded as offering a good basis for the location of direct competitors as well as further forces such as the powerful customers. As an analysis of the competitive environment of individual SBUs within the companies has not been possible, it was carried out at a level of the whole business. So it needs to be beard in mind, that this analysis therefore, can only be considered as a starting point in understanding the competitive forces (2002, pp. 112-113).

The Sixth Force:

Public and Stakeholders

The current trend towards an increased demand of healthier food and environmental friendly packaging material has a large impact on the companies. In this context, the companies individual competitiveness depends on how well they adjust their product range and strategy to these new customer needs.

3.3 Strategic Group Analysis

Strategic groups have to be seen as organisations within an industry with similar strategic characteristics, following similar strategies or competing on similar bases ( 2002, p. 122). When identifying such groups one may refer to a broad range of different characteristics e.g. extent of product diversity, company sizes, perceived product quality etc.

Diagram:

a) Size of organisations according to employee numbers b) Extent of geographical coverage

Findings:

c) Extent of product diversity

The number of groups and different companies which form the single strategic groups depend on the characteristics, one refers to. As you may see the main competitors in the UK food retailing industry are Asda, Tesco, Morrisons (including Safeway) and Sainsburys, which are either in the same strategic group or the one next to it. However every supermarket has its own implemented strategy but one may has to mention that each one is mostly (low)-priced based and that only Sainsburys stragy is customer focused relying on quality and offering outstanding value (F October 23rd 2003). However, Asda is with the lowest price offers the cheapest one of the three companies but closely followed by Tesco and then Morrisons ( September 6th 2003). In fact, most of all big supermarkets lost their strategic position and as well their SCA. Therefore, one may has to point out that their strategies are easy to imitate and it also makes it much easier for rivals to win the competition battle. Moreover, whenever a company wants to expand its position and therefore needs a new strategy, it needs to bear in mind the different strategic groups. The mixing up of these strategic groups could have tremendous effects on each individual success.

Criticism:

Even though several companies in the same industry may share common characteristics, each organisation itself may be shaped by more or less specific and original

characteristics. So how can one figure out the right set of characteristics as the basis for an analysis? In addition, the evaluation of several characteristics may be quite subjective in pointing out the leader of the special category.

Justification:

This specific analysis has been applied as the conceptualization of strategic groups can make the process of competitor analysis more manageable ( 2001,). Within the food retailing industry there are numerous competitors. Therefore, it does not seem to be feasible to analyse all of them individually. Furthermore, a knowledge of the strategic group structure can be extremely useful (Aaker, D., 2001, p. 61), when reviewing a companys strategy, according to the knowledge gained on the current and future profitability within the different strategic groups.

3.4 Porters National Diamond

The model of determining factors of national advantage suggests that the national home base of an organisation plays an important role in shaping the extent to which it is likely to achieve advantage on a global scale (October 3rd2003]).

In this context, four basic factors have to be examined demand

conditions, related and supporting industries, factor conditions as well as firm structure and rivalry.

Diagram:

Criticism:

First of all, as not states but companies do compete against each other, competitive advantage should therefore be examined on the basis of the company itself rather than on a national basis. What also seems to be striking is, when having a closer look at the model, the National Diamond seems to be quite generalized, and a complete examination of a companys competitive advantages should require more specification. Furthermore, the four factors are not only interdependent but are also influenced by governmental action and chance.

For achieving competitive advantages, more than just the right policies and strategies are needed. New inventions by chance, price shocks etc. may largely influence future developments within a nation ( October 3rd 2003]).

Justification:

In order to examine whether the UK food retailing industry - as the home base of the chosen three supermarkets is favourable to achieve competitive advantage on a global basis, this tool has been regarded as being very useful. This is particular important as the home base of each company will often largely contribute to the extent of its international strengths(October 3rd 2003]).

4.1 Financial Analysis [1]

In addition to key figures e.g. turnover or cost of sales, several ratios such as performance and activity related ones will be examined in the following analysis.

Diagrams:

Findings:

Even though one might think that the chosen companies are similar in their figures to each otherthis assumption will be proven as wrong. First of all, there has been seen a significant deterioration in performance, as the return of capital employed differs between 12.23% (Tesco), 13.03% (Asda) and 21.24% (Morrison). This is due to a single factor that each company has different costs in delivery, production, etc. However, the return on capital employed considers the

relationship between income and operational assets used to cause this income (Davies and Pain, 2002, p. 159). Therefore, Morrison is showing the best figures and Tesco the worst. Similar results are also stated in the capital gearing ratio, which shows that Morrison and Asda are less financed by borrowing than Tesco.

Nevertheless, the current ratio implies that Asdas financial stability is better than Tescos or Morrisons.

Criticism: First of all, it cannot be denied that all the ratios themselves do not say anything about a company. Ratios will always need to be subject to comparison with ratios from previous years. In case of a comparison with similar companies, one needs to be aware of probably different accounting methods and the availability of material (Boczko, T., 2003, Lecture notes), e.g. the capital gearing number of Tesco differs too much compared to the other companies. Therefore, one may conclude that there is no real use of this analysis.

Justification:

However, a financial analysis has been regarded as a useful tool to facilitate an understanding of absolute values, and performance may be seen in context ( 2003,) - but only in comparison to previous years. It was supposed to help to find out about the financing of the different companies because then it can be seen as a first step towards a stakeholder analysis, as the tool reveals dependencies on creditors but with not being an insider of the companies and not knowing their special assigned accounting methods this analysis failed to meet its objectives.

4.2 The Cultural Web

The concept of the Cultural Web is a representation of the taken-for-granted assumptions, or paradigm, of an organisation and the physical manifestations of organisational structure (Johnson, G. and Scholes, K., 2002, p.230). It is composed of the following elements: stories, symbols, power structures, organisational structures, control systems, rituals and routines as well as the paradigm.

Diagram Morrison: Diagram Asda: Diagram Tesco: Findings[2]:

The origins of the companies lay approximately 100 years back in time. However, each business has its individual paradigm which guarantees either helpfulness or low prices. Therefore, their business strategies are very similar to each other and represent the overall same goal low prices for good value. Even the companies rituals and routines do not show any differentiation from one another. They all like to help the community with special donations and funds, as well as they give money to special charities.

However, one may has to mention that Tesco with its policy No one sells for less may be seen as the winner for consumers in the food retailing industry, due to the award of best reputation in November 2003. Moreover, Asda following on 2nd place was then awarded for best management (Simpson, P., November 28th 2003), p.2). In

fact, these leads to result that Asda and Tesco may be seen as the major competitors with offering the lowest prices in the food retailing industry. On the other hand Morrisons new offer for Safeway will create the 3rd largest supermarket in the UK and therefore an immense threat for Asda and Tesco (Voyle, S., December 16th 2003, p.15).

Nowadays, one may believe that through the remaining and dominant pricing strategies, big companies can only succeed with better and quicker availability/value of products, so that the smaller supermarkets will not take over their position.

Criticism:

The main problem is that internal analysts have a subjective point of view of a companys culture and therefore, they often take rituals and structures for granted. Hence, external consultants would be more suitable to undertake such an analysis, but on the other hand they often do not have access to all of the necessary information. Justification:

The Cultural Web offered a good opportunity to gain useful insights in the characteristics of the companies, contributing to coherence in their cultures. The analysis points out that every employee of an organisation, supported by several organisational and control systems, should work towards a single common goal in this case towards the paradigm The very best for less Morrison; Always happy to help Asda; Every little help Tesco and Sainsburys.

The SWOT-Analysis can be regarded as an essential tool for identifying a companys strengths and weaknesses, but on the other hand also the opportunities and threats within an industry.

Diagram Morrisons: Diagram Tesco: Criticism:

Diagram Asda:

In order to analyse the strengths, weaknesses, opportunities and threats, previous analyses of the external and internal environment would be a useful basis.

Justification:

This analysis points out the most important issues from the business environment and the strategic capability of the three companies, which can probably have an impact on their own strategy (Johnson, G. and Scholes, K., 2002, p.134). Furthermore, it reveals the weak spots, which each individual business has to work on to assure its future competitiveness.

The UK food retailing industry is characterised by an immense high competition and low-price strategies. Nowadays, many of the main competitors such as Asda, Tesco and Morrisons concentrate on good value with cheap offers, as well as their great variety of non-food products.