Introduction
This paper seeks to analyze the UK supermarket industry and assess how the market is structured to facilitate business. In particular, we analyze Costcutter supermarket to give us an idea of the general challenges facing the industry and the supermarket chain as a player in that industry.
Company outline
This is one of the medium retail franchise supermarkets in the UK operating a chain of supermarkets currently standing at over 1500 stores as per the company’s website. From the same source, we learn that the company was started in 1986 under Colin Graves, the current chairman. The chairman’s philosophy was based on “group trading, but with individual flexibility for retailers to trade to local conditions” This philosophy has seen the company grow to reach a turnover of £500 000 as 2007 and in this year announced a 6.2% increase in profits despite the prevailing credit crunch that is hurting business.
Industry/market outline
In recent times, retailers and suppliers have had to contend with the issue of decreased purchasing power by households as inflation and unemployment levels spread across the UK and the world at large. In the UK, retail giants are worried that shopping queues are increasingly becoming shorter but have shown a bit of hope with the festive season setting in place. Shoppers are now more vibrant in their spending than in the past few months. Most of the supermarkets have reported growth despite the fall in the number of customers. Economists have pointed out that increased sales revenue was due to inflation and the general increase in prices.
Suitability of the market and company for analysis
The US economy has been in turmoil over the last few months. As the world’s leading superpower, the effect is being expected to be felt the world over. International currencies are also giving a hint on where the global economy is headed. Devaluation of the dollar was the first indicator that all things are not well for the US. The UK pound also showed some relative level of instability. If the case of the US was to stick, then the UK is also headed to a period of slowed growth. Apart from a fall in GDP, there are other measures of economic performance such as the performance of individual businesses. Given the fact that supermarkets deal with a wide range of goods, their performance is then best placed to show the general direction of the economy, challenges, and prospects. The chosen supermarket for this study was Costcutter supermarkets as a budget outlet where demand elasticity is highest.
Environmental analysis
The consumer retail goods industry in the UK market is quite complex given that there is a lot of variability in terms of the players in the range of goods they offer, size and terminologies, and titles. For this research, we borrow the classification used by IGD in the study of the market which identifies them as follows and in market share (UK grocery retail outlook, 2008)
- Supermarkets, hyper stores, and supermarkets 68.8%
- Convenience stores 20.6%
- Traditional retailing 4.7%
- Discounters 3.9%
- Online shoppers 2.3%
Unfortunately, such a definitive categorization may have some distortions as many players tend to fall into more than one category. Tesco, Sainsbury’s, Morrisons, and Asda. Each of these four operates a chain of large superstores that stock a variety of goods. According to a report by IGD, these four players control around 75% of the market with the rest shared out among an array of players with Costcutters included.
From the Office of National Statistics, the UK retail market recorded revenues of over £ 246 billion in 2004. In 2006, the industry registered a slight decline with sales being in excess of £ 255.56 billion for that year according to a 2006 report RNCOS. The same report also indicated that there was a further cut in consumer spending in 2007 as interest rates, inflation and a huge national debt had their effects reaching consumers.
Future of Costcustter
The future of Costcutter lays in adapting technology. As the major players embrace online shopping and delivery which is a little bit more expensive due to the cost of laying down the infrastructure required, Costcutter remains rooted in traditional physical shopping. As the industry recovers in few years as expected, the big players are going to fully dominate the market unless the medium players such as Costcutter step up their competitiveness by matching what they have to offer their customer to what the big players are offering in a better way.
Industry forecast
The RNCOS report “UK Supermarket Analysis (2007-2010)”, speculates that success and growth of the UK retail market lay in “product and service innovation to retain the existing customers”. This confirms what different authors have to offer in terms of strategies for companies. Unfortunately, the strategies of cost reduction employed might end up doing contrary to what they were intended for. As such, consumers are increasingly becoming choosy over where they opt to shop making it hard for players to attract new customers and probably easier to retain existing customers.
Source: IGD Research
PESTEL analysis
This is a market analysis tool that seeks to identify the political, economic, socio-cultural, and technological factors affecting a given company in this case Costcutter Supermarket. Having a focused study of these factors results in a clear picture of the situation as it is and vise versa (Jenkins, 2003). By capturing these factors we can assess the suitability of adopted strategies b the company and make recommendations where necessary.
Political
This pertains to the individuality of the company in terms of the structural and operational organization to comply with policies instituted by the central government or local authorities. Costcutters has an advantage in that its operations are only in Britain and the greater UK where variation in policies is minimal. Problems in policy implementation are highest in multinational companies where there may be conflicts between the organization’s policy and those of the authorities in power. Currently, most of the government policies seem to favor Costcutter and the industry in large such as VAT reduction. The company complements this by making shopping offers to customers and promotional activities.
Economic factors
The company is recognized for its low pricing and generally a wide range of items at a lower price than other supermarkets. Currently, the economic downturn and reduced consumer spending are being reflected in decreased sales. Though the company prides itself in being relatively large, it is also at the same time disadvantaged by economies of scale when compared to other large players such as Tesco. Again, cheaper shopping destinations are such as Dubai, Hong Kong, and Turkey are drawing a number of non-food items away from Costcutter
Socio-cultural factors
- The pattern being reported of consumers shopping for fewer food items and more non-food items could lead to losses as the food items expire on the aisles.
- Consumers associate the supermarket with bargain items that favor the market during hard economic times as it is.
- There is a culture of associating low-cost items with poor quality and high prices with premium quality. The pricing policy at Costcutter is thus gaining and losing customers for the company at the same time.
- The slogan “Around the corner… around the country” helps in supporting the culture of shopping closest to home due to logistical and travel issues.
Technologic factors
More and more shoppers are drifting towards online shopping and shunning the traditional shopping at supermarkets and retail outlets. This hurts Costcutter and the industry at large.
Environmental
Corporations with Costcutter included are being forced to redesign some of the processes and adopt new environmental concerns (Scholes, and Whittington, 2008). Costcutter for example has had to reduce the number of plastic shopping bags available for their customers for packing their purchases. The company encourages better environmental protection y use of degradable materials not only for packaging bought items but also in packaging the branded products they sell.
Another way that the supermarket chain is affected by the environment is that degradation of the environment has seen the enactment of tough environmental rules and regulations which companies are expected to follow to the letter. Complying with such new rules has at times been costly and time-consuming.
Legal issues
The law of fair competition in the UK and Europe is strongly upheld and defaulters are highly penalized. Costcutter has to consider this law, especially when seeking new independent retailers as franchisers.
Another legal issue that the company has to comply with is the signing of contracts between the company and franchisees
Five forces analysis
This model enables us to identify how the environment of Costcutter influences its decisions and strategies.
Strength of suppliers
Suppliers to the supermarket chain have so many alternatives to supply and sell their products. Therefore, Costcutter wields very little power since the cost of changing business partners on the side of the suppliers is very low due to the nature and acceptability of the goods handled by Costcutter.
Strengths of buyers
Consumers possess a lot of power over the company. This is because they express their power by making high-value purchases or make frequent visits to the company. Thus the supermarket will have to regulate prices to meet the desires of the consumer.
Threat of substitution
This threat is being presented by online shopping as a new fashion trend among the technology savvy. Shoppers are shunning supermarket aisles and going for the click-and-shop method that is not available at Costcutter.
Threat of new entrants
The company is faced with competition from new entrants in the market who possess the needed infrastructure to enable their customers to do online shopping. Though this is maybe expensive, it might be viewed as an opportunity for a newcomer and a threat to Costcutter
Competitive rivalry
This is competition between the supermarket and other players in the industry. It is presented in form of large superstores (e.g. Tesco, Morrisons, etc) and other smaller supermarkets in the UK.
Critical factors
UK residents are more inclined on spending on clothes than on food items. As such, this realization has led the players to diversify their offers in the aisles with many operating a clothes department in their outlets. Traditionally, supermarkets were relegated to selling food items only but emerging markets trends such as this one have forced them into effecting major changes. Picture this: “sales in household goods fell by over 2.67% leading to declining in overall retail sales. Sales at non-food stores descended by 0.5%, offsetting a 0.2% gain at food stores.”
Though the whole industry is facing a drop, the drop in food items is sharper than in non-food items.
By the look of things, the Bank of England is of the view that consumer spending is ‘flexible’ and holds the key to the prevailing credit crunch. The bank is thus posed to facilitate an increase in consumer spending that will in one way or another spur growth in the whole economy through the multiplayer effect. This is being done through interest rate cutting measures.
Opportunities
- Increase in number of customers due to increase in customers preference to buy non-food items, population growth through immigration and natural means, and changing lifestyles
- The commitment of the Government to promoting consumption as shown by the cut in VAT can provide more business.
- Establishing and maintaining healthy relationships with customers and suppliers can be facilitated through the utilization of computerization and internet technology.
- A strong market intelligence system for asking guests or customers what they want and then tailoring activities accordingly. Active networking with institutions.
- Harmonious relationship with local corporations to negotiate awarding of employee rewards in terms of vouchers to the supermarkets.
Threats
- Decreased consumer spending now and in the future.
- Inflation
- Change in fashion trends that shun conventional shopping
- Decreased consumer purchasing power.
Strategic capability
In the current competitive marketplace, supermarkets and other retail companies have found it necessary to win the loyalty of the reduced number of customers and their reduced disposable income. Therefore the involved players need to reorganize their thinking away from simply attracting customers to retaining customers in these lean times as Johnson, Whittington, Scholes (2008) emphasize. The authors say that changes in market trends might call for individual business processes to be redesigned to fit the new market situation and for the business to remain competitive in the market. Costcutter has shown how its high-quality performance in comparison to other players is superior by winning the 2008 Symbol/Fascia Group Retail Industry Awards. The award was given “for its (Costcutter) strong business performance in 2007, the growing power of its brand, its growing use of TV advertising, the extensive overhaul of its sales and network development operation and major investment in technology bringing huge benefits to its retailers” according to the judges for the awards.
Dess, Lumpkin, and Eisner, (2005) inform us that the idea of retaining customers is more cost-effective than the search for new ones. They say that market research has portrayed that retaining customers is four times cheaper than the search for new ones. According to the authors, this is because there is product/brand awareness among old existing customers hence marketing to them will involve only convincing them to buy unlike wherein new customers have to be informed about the brand. Again, existing customers have experienced the brand and offer free public relations for the company in most cases as noted by Johnson et al (2008). Another advantage highlighted by Heather (2002) of retaining customers is indicated by calculations by PriceWatersHouse Coopers which showed that a 2% increase in retained customers leads to a 10% reduction in costs. Therefore, it goes without saying that having a good loyal customer base goes a long way in earning profits for any corporation.
Conducting good market research forms a major pillar in the formulation and drafting of a marketing plan. The market environment picture generated using data analyzed from the market research determines the procedures and strategies to be adopted in doing business to make reasonable returns on investment and for business growth Lynch R. (2006). The research in most cases has to be carried out both qualitatively and quantitatively to bring into focus what has necessitated and facilitated the observable market trends. For Costcutter, the market research has been directed on finding out why there has been a decrease in sales and the number of customers in general. From secondary data obtained, we assess the factors that determine how a shopper makes a decision on what to buy and where based on several factors such as price, quality, service, care, etc
Core competences
Strategic choice
In any business, there are a number of optional strategies that may favor doing business. Unfortunately, some of the strategies adopted might not be in harmony and may have some conflicting elements. Therefore, the management has to be very careful when choosing a combination of strategies that will work towards achieving the set-out company objectives and goals. Some of the strategies adopted by Costcutter can be identified as strategic location, strategic partnerships, strategic pricing, and strategic marketing. In the first option, the company ensures that the outlets are strategically positioned to attract the highest number of shoppers. Again partnering with franchisees increases the first option of strategic location through expansion.
By organizing strategic business units (SBU) in each of their major markets, Costcutter is hoping to achieve long-term profitability and growth of market share by being geographically close to its major markets as explained by the company slogan “Around the corner….. Around the country.”
Value chain analysis
Lynch (2006) notes that Porter proposed various activities that will create competitive advantage through various activities in the value chain. He says that this may be done mainly by reducing the cost in individual chain activities and be reconfiguring the value chain or what may be called process redesigning. Activities in the Costcutter’s value chain can be described as the key activities which include logistics, services, and operations marketing and sales. Other support services in the value chain that create a competitive advantage for Costcutter are human resource management through training and appraisals of employees and franchisees, technology development, and firm infrastructure. A good example of the technology development level taken by the company is the use of C-PoS Manager & Link. This has included touch screens db electronic top-ups to help retailers in paying for their accounts and top-ups.
Among the many benefits of proper value chain management, Costcutter has been able to realize a favorable geographical location and a good distribution and location of outlets. Others have been economy of scale, price and cost differentiation, and a comprehensive mutual relationship with franchise retailers.
Strategic fit
A strategic fit refers to how the company is organized to achieve the set-out objectives and missions.
The benefits of a good strategic fit include cost reduction, due to economies of scale, and the transfer of knowledge and skills. The success of a merger, joint venture, or strategic alliance may be affected by the degree of strategic fit between the organizations involved. Similarly, the strategic fit of one organization with another is often a factor in decisions about acquisitions, mergers, diversification, or divestment.
Strengths
- The supermarket is associated with low-cost pricing and bargains.
- The company has succeeded in correctly locating its stores to meet consumer needs.
- Has earned the trust of individual independent retailers who easily take up top franchising for Costcutter
Weaknesses
- Bargains and low-cost products are at times associated with poor quality
- Does not enjoy the full benefits of economies of scale as other big players do.
- Has failed to take full advantage of its association with low prices in prevailing harsh economic times
- Financially weak when compared to some of the competitors
- The company has failed to adapt to changing market trends and introduce online shopping for its clients.
References
Rothwell, G., “UK grocery store outlook 2008”, IGD report, 2008.
Johnson G, Scholes K, and Whittington R (2008): Exploring Corporate Strategy, Text and Cases, 8th Edition, (London, Prentice Hall).
Dess G, Lumpkin G and Eisner A, (2005), Strategic Management, 3rd edition, (New York, McGraw Hill).
Lynch R. (2006): Corporate Strategy, 4th edition, (London, FT/Prentice Hall) BBC News.
Jenkins, Y. Modern business strategies, (Johannesburg, EAP).