Sainsbury Performance in Portugal - Essay Example

Sainsbury in Portugal January 2007 Distribution: Sainsbury in Portugal should be different not just from the nature of its branding in the UK, but from the rest of Europe as well, because the people of Lisbon and of other urban centers in the country have distinct food and beverage preferences. A local economy which is backward and underdeveloped relative to major European Union members, poor educational levels, a casual work ethic, entrenched bureaucracy, and the paucity of well developed chains of branded food stores, are principal issues for Sainsbury to address, for which recommendations are listed in the body of this report. Terms of Reference This report is addressed to the Director of European Operations for Sainsbury, and covers the nature of the Portuguese market, and the steps which the company should take to establish viable operation in that country within a period of 3 years. Introduction Historic trading links, a colonial past, and a strong maritime heritage, are some similarities and ties between the UK and Portugal, but the differences in climate, related to the separation of relative latitudes, cuisine, levels of economic development, and cultural differences, imply that the standard Sainsbury brand and nature of operations will not be entirely suitable for an expansion in to this part of Europe (Beech, Hole, Sterling, and King, 2005). Sainsbury wishes to establish a national presence in Portugal within 3 years, and has chosen to enter the territory through the acquisition route. There is a need therefore to identify potential modes of such entry, and to consider key operational steps which would make the entry and launch successful. This document scans the business and social environment of Portugal, and makes recommendations for a set of actions to achieve the objectives set by Sainsbury. Methodology This report, including its recommendations, is based on reviews of published literature, and of web sites of Sainsbury and food retail chains in Portugal. Standard tourist guides (Beech, Hole, Sterling, and King, 2005) have been used to discern how Portugal is viewed in an international context, and the modern history of the country has been seen through the eyes of an economist (Corkill, 1999), to gain insights in to how Sainsbury could best operate in Portugal. Services marketing concepts (Payne, 2002) have been used to chalk out operational measures for the entry and establishment of business in ways which will add value for the local populace. Findings The Portuguese population of about 10 million has a high GNP compared to Eastern Europe, but it is at just two-thirds that of leading European Union economies (Corkill, 1999). The economy grows at less than 1% (The World Fact Book, 2006). Tourism is an important part of the economy (Corkill, 1999). The cost of living is amongst the lowest for any place in Europe (Beech, Hole, Sterling, and King, 2005). The 'value for money' benefit of the Sainsbury brand will be an advantage, but under pressure in this territory. The domestic food industry is fragmented, under-resourced, out of tune with consumer trends, and poorly staffed in professional terms (Corkill, 1999). There is a clear need for Sainsbury in the country, but the avowed route of acquisition of a domestic chain presents special challenges. Portugal has over 800 kilometers of coastline, and the ocean has strong influences on cuisine, as it does on the history, economy, and recreation habits of people as well (Beech, Hole, Sterling, and King, 2005). Meats, especially of wild boar (Scott-Aitken & de Vitorino, 2002), olives, and cheeses made from milk which has not been sterilized, are some other major food habits. The Portuguese eat their meat well done, and indulge in salted meat and sea-food based snacks between meals as well (Scott-Aitken & de Vitorino, 2002). The country is known for its wines, and the consumption of port is especially common (Beech, Hole, Sterling, and King, 2005). Wine is ordered by the carafe rather than by the bottle (Scott-Aitken & de Vitorino, 2002). Mealtimes are elaborate affairs and people are accustomed to extended breaks for lunch on all days of the week (Scott-Aitken & de Vitorino, 2002). Portuguese cooking is full of flavors, and has African and Muslim influences (Robertson, 1993). The Portuguese are more casual and emotional relative to other European communities (Beech, Hole, Sterling, and King, 2005); they tend to be gregarious and extroverts by nature. However, Portugal remains protective of its identity and resists foreign control of its domestic enterprises (Corkill, 1999). The country is relatively new to democracy, economic development, and to international participation in its national life (Corkill, 1999); the country is in the process of recovery from years of high inflation and bank failures. Portugal has a strong Catholic influence (Corkill, 1999). Education levels and infrastructure are poorly developed in Portugal because it is a late entrant to industrialization (Corkill, 1999) The bureaucracy is in a time warp (Corkill, 1999), and many people in office have exaggerated senses of their importance. The country has been slow to shake off its early 20th past of dictatorial ways in many respects. Consumers want quality, brands, and value for money when shopping for food (Corkill, 1999). Agriculture and food processing are not well developed. Domestic entities are unable to face competition from international companies. Only one chain dominates the food retailing scene in any organized way (El Corte Ingles, 2007). It seems to be stagnating in turnover with just 25% growth over 3 years. The second biggest food retailer is specialized in organic food, with too narrow a product range (Gastronomic Specialties, Not dated). El Corte Ingles has a broader product range than that of Sainsbury, with things such as luggage, though it does not have developed credit and online services. Porto is the second largest town, with many cultural attractions and vibrancy (Beech, Hole, Sterling, and King, 2005). Braga also has business potential with a population of over 100 thousand, and a strong religious fabric (Beech, Hole, Sterling, and King, 2005). However, the other urban centers are relatively undeveloped, especially during times of low tourist arrivals. Analysis Food retailing is as much about service (Payne, 2002) as about tangible values of products. Though the focus of this report is on operations rather than marketing, the elements of the Marketing Mix (Payne, 2002) provides a useful framework for planning a Sainsbury operation in Lisbon and other towns of the country, which have strong bonds with local needs. The product element poses formidable challenges and exciting opportunities at the same time. Customers want quality products, well-known brands, and good values. However, the local cuisine has a character of its own and far removed from that of the traditional home customer base of Sainsbury. Changes in shelf composition to meet Portuguese tastes presents enormous process issues, because the company's existing supply chains are not geared to provide products such as cheese from milk which has not been sterilized, many varieties of olives, and wild boar, as examples. Domestic agriculture and local infrastructure are in poor shape, so garnering regular supplies to quality specifications may also prove to be difficult. A major part of the launch has therefore to concentrate on choosing a range of products to be offered by Sainsbury in Portugal, which meets local tastes, and which is feasible from a logistic perspective as well. The decision to enter Portugal by acquiring a local branded food chain is fraught with even greater potential problems. Ego and nationalist emotions may create strong resistance to take-over proposals, and there are issues of product ranges as well. El Corte Ingles and Gastronomic Specialties must be approached with sensitivity, with slants on the branding, quality, and scale economies which Sainsbury can offer. Sainsbury will need to be flexible in terms of the product range differences, especially for items such as luggage and organic produce, which are new to the company, but which may provide significant revenues to the domestic company sought to be acquired. The economic weakness of Portugal relative to the UK has to be kept in mind for pricing. Purchase efficiencies will hold keys to Sainsbury being able to offer products at attractive prices, while making reasonable margins at the same time. Sainsbury may have to forego some profit opportunities in order to establish a strong presence in Portugal quickly. The matter has some implications for product range as well, because there will probably be no room for premium brands in most product categories. Since Portugal is so dependant on tourism, Sainsbury is bound to experience high seasonality of demand in its own outlets in the country. Promotions during peak spending and consumption times, and deep discounts during lean periods, will be aspects for the management to consider. Portugal does not have a work ethic to match the UK in this respect, and the availability of qualified local personnel will be an important issue. UK employees, at the same time, may not suit the laid-back and casual culture and habits of the Portuguese. Therefore, Sainsbury must start the process of training and developing suitable cadres of people early during its foray in Portugal, and fractious separation of unsuitable employees of the local chain acquired, is something to avoid through advance planning. Finally, there is the issue of store lay-out and amenities. The traditional and formal ambience of Sainsbury in the UK could be off-putting for the Portuguese, especially when it comes to shopping for everyday food needs. Extensive cafeteria facilities for shoppers to spend quality time, or even to have leisurely meals, could be the kind of touch which would help Sainsbury blend in well with the local scene. Overall, Sainsbury should undertake a fresh segmentation and targeting exercise for Portugal (Payne, 2002), and approach entry in to the country with an open mind on all elements of the Marketing Mix. This is not so much for marketing as for operational reasons, so that there is a template on which detailed plans can be made. Conclusions Portugal is one of the most interesting European expansion opportunities for Sainsbury. The 10 million-strong population has a standard of living far superior to that of the recent entrants to the European Union. The people love their food and wine, which marks exceptional potential for a food retailer. Foreign companies are known to have tasted early successes in Portugal, for domestic companies are not well organized. The country is in the process of a major break from its dictatorial past, and domestic consumers are primed for the quality, brand, and value benefits of a company such as Sainsbury. This appealing new business opportunity comes with severe tests for management capabilities, because Sainsbury must change its character and offerings rather sharply to be relevant for Portugal. Local resources are not well developed, so the ambitious growth plans of Sainsbury in Portugal present enormous sourcing obstacles. We may conclude that the intense efforts required to prepare for successful entry are worthwhile considering the country's potential for profits and growth of Sainsbury. Recommendations There are three matters which deserve special management attention, because they could impact the degrees of success and profitability for Sainsbury in Portugal: Firstly, the 'supply something scheme' (J Sainsbury PLC, 2007) should precede entry. Local agriculture, diary, seafood, and wine producers, in Portugal should be developed, perhaps for supplies in to the UK. This will earn Sainsbury goodwill in Portugal, establish a supply base for later leverage, and provide invaluable insights in to the food shopping habits of the Portuguese. Similarly, the company scheme in the UK to provide training in retailing for new graduates (J Sainsbury PLC, 2007) can help overcome the weakness of Portugal with respect to trained people, and the likely culture gaps between experienced Sainsbury hands that could be spared from the UK for the Portugal launch. Finally, Sainsbury should consider kiosks in malls, or even investing in entire shopping areas, as alternatives for acquiring local chains such as El Corte Ingles (Shopping in Lisbon, 2007). This would help Sainsbury establish a presence with even a narrow product range, and could form a strong base for a subsequent acquisition. The stakes are too high, and the risks are large in pursuing an entry strategy through a high-profile acquisition. References Beech, C. Hole, A. Sterling, R. and King, J. (2005) Portugal, Lonely Planet Corkill, D. (1999) The Development of the Portuguese Economy, Routledge (UK) Payne, A. (2002) Services Marketing, Prentic-Hall Robertson, C. (1993) Portuguese Cooking, North Atlantic Books Scott-Aitken, L. & de Vitorino, C. (2002) Portugal, Lonely Planet El Corte Ingles (2007) Company website, retrieved January 17 2007 from: http://translate.google.com/translatehl=en&sl=es&u=http://www.elcorteingles.es/&sa=X&oi=translate&resnum=1&ct=result&prev=/search%3Fq%3Delcorteingles%26hl%3Den%26lr%3D%26rlz%3D1B2GGGL_enIN176%26sa%3DG Gastronomic Specialties (Not dated) Go Lisbon website, retrieved January 17 2007 from http://www.celeiro-dieta.pt/ J Sainsbury PLC (2007) Company website, retrieved January 17 2007 from: www.j-sainsbury.co.uk The World Fact Book (2006) Central Intelligence Agency, U. S. Government, retrieved January 17, 2007 from: https://www.cia.gov/cia/publications/factbook/geos/po.html Shopping in Lisbon (2007) Strawberry World Destination Guides, retrieved January 17 2007 from: http://www.strawberryworld-lisbon.com/lisbon/essential/shopping.html Read More