Largest Supermarket Retailer in the UK - Term Paper Example

Sainsbury’s: A benchmark of diversity in the supermarket industry Introduction J Sainsbury Plc is currently rated as the third-largest supermarket retailer in the UK, currently holding a market share of 15.5 percent over its main competitors including Morrison’s, Tesco and Asda (Thompson 2010). The company’s most dynamic competitor, Tesco, maintains a market share of 28 percent which is supported by a high volume of brand loyalty with many different markets and a significantly-diversified brand portfolio that gives the business much higher revenue growth. In this very competitive industry, Sainsbury’s ability to hold a 15.5 percent share is genuinely an accomplishment when taking into consideration that this type of business model has very high operating costs and with growth in convenience stores in the country that provide competitive threats to the chain. This report identifies long-run prospects for Sainsbury’s over the next five to ten years with an emphasis on specific trends in the external market that will likely serve as the drivers of change with the retailer and with the food sector. The report further provides an evaluation of whether Sainsbury’s is well-positioned for key changes in the external environment. Analysis of industry and market Sainsbury was highly responsive in adapting to changing market conditions, especially as it pertains to consumer growth in ethical consumption. Ethical consumption is a type of consumer activism that dictates whether to boycott a product or make purchases based on consumer perceptions that the organisation offering the product maintains an ethical stance and set of ethical objectives and values (Grande 2007). Contemporary business research recognises that companies with the aforesaid ethical values and focus maintain higher profitability (Lys, Naughton and Wang 2013). As a result of recognising these trends, the company began adding what is referred to as Steering Committees that are involved at the highest level of governance in areas of assessing the firm’s commitment to corporate social responsibility, providing a quality and enjoyable place to work for employees, and even a climate change committee (Sainsbury 2011). All of the activities and strategies developed by the Steering Groups are highly publicised to ensure that consumers are drawn to the ethical framework of business practice provided by the company leadership. Having such a strong ethical set of values and beliefs also provides Sainsbury’s with minimised costs in relation to human resources. Companies that have very strong ethical cultures also have much less problems with employee turnover and employee loyalty (Denison 1996). This allows the company to utilise its human capital more effectively, reduces the high costs of training new employees, and ensures that employees have opportunities for advancement in the firm. Hence, Sainsbury maintains a moderate competitive edge over main competition that do not have this ethical culture and thereby have difficulties gaining commitment, motivation and loyalty from employees. The Great Place to Work Steering Committee provided the excellent foundation for this method of retaining important financial capital and ensuring that the firm maintains its human capital advantages well into the future. Michael Porter identified five distinct forces that can impose risks on businesses today. These include threat of new entrants, competitive rivalry, buyer power, supplier power, and threat of substitutes. All of these factors are relevant for understanding the risks facing Sainsbury’s. First, growth in convenience stores in the UK is beginning to erode the profitability of Sainsbury’s and other supermarket competitors. It is estimated that emerging convenience stores in the UK will experience a growth rate of four percent by 2017 (Euromonitor 2013). This is much higher than the current stagnant rate of growth by major supermarket competitors in the country. Furthermore, a study conducted by Cleeren, et al. (2008) identified that when a third convenience store or discounter enters an established market, supermarkets inevitable lose profitability and consumer patronage volumes. This is a serious competitive risk for Sainsbury’s, especially with four percent growth in convenience store availability throughout the country where Sainsbury’s operates. Sainsbury is not well positioned for combating the growth of convenience stores and discounters (such as Aldi) that use aggressive price discounting strategies to appeal to price-sensitive consumer market segments. Porter against identifies that some companies utilise methods that will create market entry barriers (such as intellectual property protections) in an effort to insulate the company from excessive new market entrants (Thompson, Gamble and Strickland 2005). However, the low start-up costs of owning a convenience store coupled with access to well-develop distribution channels available to all competitors make it very difficult for Sainsbury to come up with strategies to ensure reduction of new market entrants. Furthermore, consumers have a great deal of buying power in this industry and are able to force a legitimate backward integration threat on Sainsbury’s. High buyer power in the market provides consumers with the ability to dictate pricing models at the supermarket, threatening to purchase products from the high volume of potential competitors in this industry. The switching costs for consumers to defect from Sainsbury’s to another competing brand are very low as the business practices of major supermarket competitors are largely homogenous, meaning that they are replicable (i.e. loyalty discount cards and routine price/sale promotions). It is very difficult for Sainsbury’s to develop unique, non-replicable practices that would ultimately drive down buyer power. In fact, there has been explosive growth in the sale of private label brands, which are discount brands, that illustrates how price-sensitive buyers really are in this industry. Tesco witnessed a 100 percent increase in sales of private label products between 1982 and 2004 (Coriolis Research 2004). Growth in private label brands, also, represents a new type of substitute product that poses a profit risk to higher-priced big name brands available at Sainsbury’s. Discounters such as Aldi maintain virtually no large name brands which provides an opportunity for price-sensitive buyer markets to simply defect and choose the discounter over Sainsbury’s. Sainsbury’s, however, is able to combat this utilising a diversification strategy to gain new market following and not force the company to be reliant on sales revenues from price-sensitive consumer segments. The company recently launched a new clothing line, called the Tu line, which is targeted primarily at a more youthful female market. At the time of launch, the brand was not well respected, but recent repositioning of the brand has provided the firm with an additional £680 million in revenues (Reid 2013). Sixty percent of total sales of the Tu clothing line stems from impulse shoppers already shopping at Sainsbury’s. Therefore, even though Tu is now catching on with many mainstream customer segments, Sainsbury’s will require more marketing (with emphasis on promotion) in order to ensure the Tu clothing line is sustainable over the next five to ten years. Customers need to be attracted to the brand through effective integrated marketing communications rather than having the business rely on such a high volume of impulse purchases. Consumption of fashion merchandise is very strongly linked to the social condition, as many consumers believe that fashion justifies their social identity (Kim, et al. 2002). Marketing literature also states that when a brand provides consumers with opportunities to improve their social standing, they are likely to develop very strong emotions and loyalties toward it (Zhang and Chan 2009). Sainsbury’s, therefore, will be well-positioned for ample profit growth if the company utilises more effective promotional strategies that appeal to this lifestyle dimension of the most desirable target markets. The company should be working on building a premium brand reputation and personality for the Tu line to separate it from the grocery store perception to one of higher class fashion prowess. There is also a growing trend in the UK for more organic consumption to avoid potential or perceived health risks of fertilizers and pesticides. However, in the current supply market for non-organic products, Sainsbury’s maintains high negotiation and leveraging controls due to the high volume of domestic and international suppliers. Now that organic product consumption has witnessed double digit demand levels, suppliers now have considerable pricing controls due to limited quantities of the products and the ratio of high demand for them. Sainsbury’s is not well-positioned over the next five years to ensure cost controls if the business is going to continue to procure higher volumes of organic products year on year. Switching costs for Sainsbury’s is quite high and would substantially limit the ability of the firm to satisfy consumers that want organic products. Sainsbury’s may wish to stay out of the organic retailing business completely and allow competitors to respond to this trend which may not be long-lived in the UK market. The high costs associated with the product itself along the supply chain and the limitations of achieving adequate supply amongst all other competitors vying for these products would be a cost hindrance, long-term, for the supermarket chain. Another area where Sainsbury’s is well-positioned for long-term growth and profit sustainability is the company’s current merchandising strategies. Unlike competition, Sainsbury’s utilises a visual merchandising strategy that creates value to consumers by showing customers how products will look in their homes (Prifysgol Cymru University 2009). Sainsbury’s sees visual merchandising as a type of artistry and science to build consumers’ interest about the product. Their visual merchandising strategies make products appear viable for lifestyle usages instead of traditional merchandising of other competitive supermarket chains based on price promotions and shelf position. This would seem to be a viable strategy for long-term positioning against competition by creating an in-store environment that is comfortable and aspirational for consumer segments of varying demographics. SWOT Analysis Strengths Strong brand recognition in many UK markets. Governance utilising stewardship theory, indicating managers are trustworthy overseers of the business (Turnbull 2000). This provides the business with decentralisation and more shared decision-making for innovation production. Strong focus on corporate social responsibility. Weaknesses Ineffective expenditures on marketing to capture diverse target segments. No strategic alliances along the existing supply chain to exploit competencies, share resources, and build better innovations and cost control systems. Little emphasis on promoting the Tu clothing line effectively, a significant revenue opportunity. Opportunities Develop strategic alliances with major fashion producers to supplement the Tu line. Create social media campaigns illustrating Sainsbury’s innovations to engage a younger market more effectively. Diversification of the business model to include real estate or other unique services. Threats Heavy discounting practices by competing companies Recurring social trend changes that impact consumption behaviour and demand for particular products. Major diversification efforts by Tesco and Morrison’s that supply both companies with higher capital availability to expand the businesses. Ongoing problems associated with the recent recession that impacts consumer incomes. Conclusion As indicated by the research, Sainsbury’s is mostly well-positioned for growth and profitability over the next five to ten years. Even though the company cannot create barriers for new entrants that pose competitive risks to Sainsbury’s, the business can still focus on its strengths which include the potential to promote the Tu brand clothing line more effectively. If the company is more diligent in conducting market research, the company will identify changes in consumer behaviour more rapidly, thereby outperforming competition in offering new innovations, pricing structures, or any other strategic response that is driven by the external social environment. It is not likely that Sainsbury’s will be able to outperform its main competitors that hold considerable market share in the United Kingdom, however the business can insulate itself from risks through its current diversification strategies that continue to bring the firm high supplemental revenue growth. The Tu clothing line appears to be the company’s best hope for sustainable growth in profitability over the next five to ten years. References Cleeren, K., Verboven, F., Dekimp, M. and Gielens, K. (2008). Intra- and inter-format competition among discounters and supermarkets. [online] Available at: http://www.econ.kuleuven.be/public/NDBAD83/Frank/Papers/Cleeren,%20Verboven,%20Dekimpe%20&%20Gielens,%202009.pdf (accessed 2 January 2014). Coriolis Research. (2004). Tesco: a case study in supermarket excellence. [online] Available at: http://www.coriolisresearch.com/pdfs/coriolis_tesco_study_in_excellence.pdf (accessed 4 December 2013). Denison, D.R. (1996). 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