UK Retail Food Sector

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

2011-2012

Dissertation by:

JIGAR .C.DHABALIA1006497

Contents

Preface ……………………………………………………......…….

4

Acknowledgement ……………………………………..………... 5

1. Research Methodology

1.1 Research Objectives …….………………..………………….…

6

1.2 Research Design ………...…………………………………….…

6

1.3 Research Methodology ………..……………………………....

7

2. Literature Review…………………………………………………….

8

3. Introduction to Retail Food Industry

3.1Introduction to Retail Food Industry in UK………….…………

10

3.2Size of UK grocery market ………………………………….……

11

3.3 Number and Sectors of grocery stores in UK ……………….

12

4. Competitive Analysis of Retail Food Industry

4.1Competitive Analysis of Retail Food Sector in UK …………..

14

4.2Analytical tools for competitive analysis …………………..

23

4.2.1. PESTEL Analysis …………………………….…….. 24

4.2.2. Porters five Force Analysis …..……………..….. 26

4.2.3. SWOT Analysis ………………........………….….. 28

4.3Assessment of top two players on the basis of no of stores

30

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4.3.1. Tesco ……….....………………………….………. 31

4.3.1.1. PESTEL Analysis ………………………… 32

4.3.1.2. Porters five Force Analysis …………… 39

4.3.1.3. SWOT Analysis …………….……………. 41

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……………………

56

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

5.1.2. Sainsbury ….…….....………...…………….…….. 58

5.2Evaluation and Recommendations……………………………

60

6. Conclusion………………………………………………………….

62

References ……………………………………………………..…...

64

Books Referred ……………………………………………………..

66

Web Resources …………………………………………………….

67

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Preface

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.

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“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!!!!”

In spite of my best efforts there may be errors of omissions and commissions,

which may please be excused.

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 hard-

earned 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 DhabaliaDATE: 2/9/2011

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SIGNATURE:

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, porter’s 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.

1 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 Leigh Spark and submitted to Department of trade and Industry retrieved

from :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 Business-

level 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

industry’s 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

CAGR’s 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 Monitor-

June 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.

3.3 Number and Sectors of Grocery Stores in UK

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

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UK Grocery Market Performance: IGD Research 2010

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.

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UK Grocery Retailing - Store Numbers & Sector Value

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 out-

of-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

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

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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.

vi. Environmental Changes and Trends

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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.

ii. Competitive Structure.

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Now a day’s 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

Player’s 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%.

Although most firms have regional dominance they are now extending

their operations from old regional locations to national levels (except

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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.

3 Internal Characteristics and Competencies

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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.

iii. Marketing Activities

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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 customer’s 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)

4.2 Analytical Tools for Competitive Analysis

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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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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

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

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Tools used for competitive analysis

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.

4.2.2 Porters Five Force Analysis

Michael Porter of Harvard Business School developed Porter’s 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.

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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. Porter’s five forces is helpful in

comprehending the strength of an organization’s current and future competitive

position which it may look to move into.

Strategic analysts use Porter’s 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.

Each of these five forces are explained below:

Supplier’s 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.

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Porter Five Force Analysis

Buyer’sPower

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.

CompetitiveRivalry.

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

Threat of Substitution.

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.

Threat of New entry.

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

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

4 [Porter’s Five Forces Model, Available at:

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

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other hand opportunities and threats are external. These strengths, weaknesses,

opportunities and threats are plotted on a simple 2x2 matrix.

SWOT analysis diagram

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

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SWOT Analysis

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

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

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

Service October 2007]

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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, Tesco’s 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.

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

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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 14

countries around the

world. It 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 Which sells approx. 7,000 products including foods at suitable localities;

170 metro stores Which sell a variety of food products in town and city centers;

450 Superstores 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).

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 Tesco’s market share

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

31 | P a g e

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 Tesco’s performance:

Political Factors

Chin

a’s

agre

emen

t

with

WTO

- Te

sco

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

world’s 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

2010 (Tesco, 2009).

Tesco’s international business segment growth is on rise and it is

predicted to account for 1 quarter of the company’s profit.

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Prom

otion

of F

ree

Trad

ing

Bloc

s

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).

This provided Tesco a platform to expand its retail network across

the EU.

Economic Factors

Rece

ssio

n N

egati

ve Im

pact

on

Tesc

o

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).

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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Rece

ssio

n Po

sitiv

e Im

pact

on

Tesc

o 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).

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):

The economic downturn has been brought to light with the

assistance of the following GDP growth graph since 1989 (Mintel,

2009):

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

UK GDP Growth 1989-2009

Social Factors

Age

Fact

or 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.

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.

Attitu

de to

war

ds fo

od

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.

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

checkout.

Technological Factors

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Use

of I

nter

net

Technology is one of the key macro-environmental factors that

have directly influences the supply chain, operations and processes

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).

Loya

lty P

rogr

ams

-

IT

Loyalty programs introduced with the help of information

technology discourages customers from switching over to their

competitors (Sun, 2009).

Mob

ile T

echn

olog

y

Another technology - Mobile technology has also been a good

platform for distribution within food retailing and it is increasing

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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Onl

ine

Reta

il

Shop

ping

Due to increased access to broadband internet in UK, online retail

shopping has gained considerable popularity.

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

Use

of R

eusa

ble

Bags

Environmentally friendly packaging is being promoted by the

Government.

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 Tesco’s

corporate social responsibility image.

Carb

on F

ootp

rint

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).

And it also aims at expanding it to bread and non-food items in

2010 (Tesco, 2010).

Tesc

o’s

Gre

ener

Livi

ng S

chem

e

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).

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Gre

en c

lub

Card

Poin

ts

Tesco rewards its consumers through Tesco’s 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

VAT

Since the government has to finance a huge budget deficit, it has

been predicted that VAT would have to rise to 20%. (HM Treasury,

2010).

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

clothing.

Min

imum

Wag

e

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).

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

supermarkets.

38 | P a g e

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 Porter’s

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.

39 | P a g e

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 Morrison’s 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 Tesco’s 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).

40 | P a g e

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 3rd largest

grocery Retail Company in the world. Its operations are there in

around 4331 stores primarily within the USA, Europe and Asia.

Tesco’s share in UK grocery retail market in the year 2010 was

around 30.7%. (Euromonitor, 2010).

41 | P a g e

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

42 | P a g e

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 company’s 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

Tesco’s 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.

43 | P a g e

Tesco’s 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, Tesco’s 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.

44 | P a g e

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

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

45 | P a g e

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 Sainsbury’s 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

46 | P a g e

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 medium-

sized 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

Incr

easi

ng G

loba

lizati

on

Increase in globalization, poses a challenge as well as an

opportunity to Sainsbury's.

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.

Pric

e Fi

xing

am

ong

the

‘Big

Four

’

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

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.

Corp

orat

e Ta

x The government is planning to decrease the rate of corporation tax

from 30% to 28% in UK. This will save big companies like Sainsbury’s

significant sum of money. (HM Treasury 2008).

Economic Factors

47 | P a g e

Glo

bal F

ood

Cris

es

Global food crises has increased food prices all over the world,

which has resulted in rising the purchasing cost for all the major

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.

Cred

it Cr

unch

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.

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.

Impa

ct o

f Stiff

Com

petiti

on

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.

Social Factors

48 | P a g e

Cook

ing

Styl

e an

d he

alth

y ea

ting

These days more emphasis is given on fresh, easy style cooking. It

gives Sainsbury an opportunity to encourage new recipes and

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

Use

of I

nter

net

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.

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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Que

uing

Sys

tem

s

One of the problems with supermarket shopping is that of the

queuing system which the customers often find themselves in at the

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

RFID (Radio Frequency Identification Device) technology can be

used for significant benefits to the supply chain of Sainsbury.

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

Carb

on F

ootp

rint

These days most of the big western companies gives more

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.

Ethi

cal I

ssue

s

Ethical Issues like sale of organic food and the ethical treatment of

animals, clearly affect Sainsbury on various levels.

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.

Legal Factors

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Stric

t Law

s on

Foo

d an

d

Drin

ks

Sainsbury will have to follow more and more packaging and

labeling policies to deal with ever rigorous and stringent laws on

food and drinks.

This will be an additional Burden on the company.

Sain

sbur

y In

tere

st in

Fina

ncia

l Ser

vice

s 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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Sainsbury’s competitors such as Tesco, Morrison’s and ASDA, the other

three big supermarket chain in UK, each have different competitive

advantage over their competitors. Sainsbury’s 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.

52 | P a g e

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 supermarket doesn’t

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

Sainsbury’s 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

Sainsbury’s 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

54 | P a g e

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), Sainsbury’s 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

Sainsbury’s 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 doesn’t 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 Sainsbury’s 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 Sainsbury’s customers bear the brunt.

Sainsbury’s operations are subjected to various regulatory requirements like

planning, competition, employment, environmental issue, pensions and tax

laws and in terms of regulations over the group’s 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. Tesco’s 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. Tesco’s 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 in 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 retail-

supplier communications systems. Further, it even implemented automatic

replenishment and stock control system.

Acquisition

Tesco’s 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, Sainsbury’s 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 non-

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food spaces and around 2500(approx.) have started providing new non-food lines.

Few stores are also offering clothes and children’s products. Further, the

management has decided to open specialist cook shops in main outlets and take

advantage of Sainsbury’s 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

External Opportunities

Increasing product line which can be added

Further, expansion of stores

Positive trend in the pet care market

Threats

Strong competition in prices

Oversight in govt. regulations

Restaurant business booming in UK.

To understand Sainsbury’s 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 non-

food items also to cater to most needs of their customers.

The UK food retail industry’s 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 Tesco’s 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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