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The purpose of this report is to analyse the food retail industry in the

United Kingdom. The reasons of the industry selection can be

concentrated to the broad range of provided products and services, the

financial activity of the industry, the influence in the people's life and the

various external factors that affect the sector. The analysis will begin

with a presentation of the food retail industry and a highlight of its

significant features. Furthermore, to assess the remote environment of

the industry a PEST analysis will be conducted, analysing the political,

economical, social and technological factors that affect the industry.

Furthermore, a Porter's 5 forces analysis will be used to evaluate the

operating environment and the nature of competition. Moreover the

major competitors and their competition strategies will be identified.

Additionally, the effect of the remote and operating environment on the

players of the industry will be highlighted. Also, a critical analysis of the

industry's strength and its future will be presented. Finally, a critical

evaluation on the used business analysis techniques will be illustrated.

The UK food retail industry is an established sector of the UK economy.

During the last thirty years the food retail corporations expanded their

activities to serve various consumer needs. The products that are

provided to the public include food and its sub-products, but also alcohol,

tobacco, health and beauty products, clothing, electrical products,

homeware, fuel and financial services. However, according to the Mintel

report 2009, more than half of the total sales in 2008 were assigned to

food. Furthermore, concerning the size of the industry an increasing

trend of sales can be observed of about 4% per year from 2004 to 2008

and a total amount of 108.1 billion pounds in 2008 (National Statistics -

Mintel report 2009).

The food retail industry is mainly controlled by large supermarket chains

that possess the overwhelming majority of the industry's market share,

as it will be analysed further in the report. Concerning the size

diversification of the retail stores, the majority are large units like

hypermarkets, supermarkets and discounters with a percentage of 62%

of the total number of stores. Furthermore, small units as convenience

stores and gas stations represent the 21.2% and food and drink

specialists the 11.3%. The minority are drug stores, warehouses and cash

and carry stores (Datamonitor 2009).

3. PEST analysis Macro-environment

To analyse the macro-environment or otherwise known remote

environment of the food retail industry, a PEST analysis will be used to

specify how Political and legal, Economical, Social and Technological

issues affect the industry.

3.1 Political

There are many political and legal factors that affect the food retail

industry. Future political decisions concerning taxation or the retail

industry legislation will definitely have an impact in the industry

competitors' policies and strategies. The current legislation and

regulation concern competition, employment, environmental, food and

grocery safety, financial services and health issues.

Specifically, the UK food retailers are obliged to follow food hygiene

legislation set by the Food Standards Agency and the equivalent

European Union regulation such as the General Food Law Regulation. In

the UK the food safety act of 1990 was enacted to set the food safety

requirements for food intended for human consumption. The Food

Standards Agency was created in 2000 after the food standards act of

1999, which was enacted to further secure the public health related to

food safety (Office of Public Sector Information, 1999). The UK food

retailers are obliged to follow the above regulations in conjunction with

the General Food Regulations 2004 that set the rules about the

transportation, distribution, quality, hygiene, maintenance, advertising

and selling of food and its substances.

Especially for the food hygiene and maintenance the rules and

requirements of the Food Hygiene Regulations of 2006 and the

internationally recognised Hazard Analysis Critical Control Point

(HACCP) must be followed (Food Standards Agency, 2010). Therefore,

possible disobedience of the above regulations by the supermarkets will

cause legal problems and the enforcement of fines, harming their budget

and social image.

The competition in the UK is observed and controlled by two government

bodies, the Competition Commission and the Office of Fair Trading. The

two government bodies ensure that the companies in the UK comply with

the competition law and practices. Therefore, they observe and interface

the market to avoid monopoly, oligopoly and cartel phenomena. Their

role beyond the control of competition between the competitors within

the industry is to ensure the fair trade between the supermarkets and

their supplies. According to recent press publications the fair trade is

currently the most important issue (Haurant S., 2009). In 2001 the Office

of Fair Trading enacted the Supermarkets Code of Practice to regulate

and assure the trade between supermarkets and suppliers, who include

amongst others, farmers and breeders (Office of Fair Trading, 2001).

Additionally, the major supermarket chains had been often accused for

anticompetitive, unfair practices and failure to meet the necessary

requirements. For example, in April 2010 the Office of Fair Trading fined

nine retailers for anticompetitive practices at their tobacco pricing

between 2001 and 2003 (Mintel report, 2009). For this reason the

Competition Commission planned to change the existing Supermarkets

Code of Practice to a new Grocery Supply Code of Practice (Haurant S.,

2009). The new code of practice added intensive pressure to the Grocery

retailers because they were forced to comply with stricter regulation and

to cover the costs of the observation body. This new regulation led to

greater competition which toughed the operations of the supermarkets

but reduced slightly the prices to benefit the consumers.

Another important group of regulations are those concerning the

planning and environmental law. The grocery retail companies need to

comply with the planning law to be able to expand their activities in new

places. During the past years, the grocery retailers tended to expand

their stores in places away from town centres. The reason was primary

the reduced property prices and the ability to construct large

supermarket units, maximising their profits.

However this trend provoked a series of issues such as the increased

pollution from the consumers' transportation leading the government to

change the legislation, demanding the presence of town centre stores at

first. Therefore, the reaction of the supermarket chains was to increase

the number of mid-size and small stores who complied with legislation

and increased the supermarkets' points of presence (Tescopoly; Butler S.,

2006). Furthermore, the grocery retail corporations need to comply with

environmental law and regulations concerning goods transportation

pollution, aesthetics, proper disposal and recycling. For example the

supermarkets were forced by new legislation to charge their customers a

certain cost for each provided plastic bag (Brogan B., 2008).

There is a significant percentage of the workforce that is employed in the

food retail industry. Therefore, the food retail companies are obliged to

comply with the UK and EU employment legislation exactly as the rest of

the employers. Labour law such as the Employment Rights Act 1996 and

the Employment Act 2002 specify the workers' rights including wages,

working conditions, work hours and job security Also, during the past

thirty years, a series of anti-discrimination laws were enacted to

establish equality and diversity in the workforce (Businesspme.com,

2008; direct.gov.uk, 2010). Also, the food retail corporations are obliged

to comply with health and safety standards in the workplace in

operations like the use of machinery, electrical equipment, transportation

of goods, violence etc (Shropshire, 2010). These regulations are mainly

set by the Health and Safety at Work Act 1974 and the Workplace

regulations of 1992. Therefore, any political decision leading to more

complex employment legislation can increase the labour costs in the

industry and reduce the profitability. Additionally, non compliance with

the labour regulations can lead to long term litigations with former or

employees or the government.

During the last years the large supermarket chains expanded their

activities to provide financial services such as credit cards, loans and

deposits. Therefore the supermarkets are obliged to comply with the

legislation and regulations enacted by the Financial Services Authority

(Financial Services Authority, 2010). Therefore, a possible change in

financial services taxation or regulation will affect their profitability.

Furthermore, the supermarkets are obliged to pay the equivalent

corporate tax at the HM Revenue and Customs.

3.2 Economical

The economic factors, incidents and situations that affect the food retail

industry can be concentrated in the following categories: Consumer

spending and disposable income, inflation, taxation, interest rates,

unemployment, monetary issues, and the recent financial crisis.

The recent financial crisis has definitely brought many important changes

in the food retail sector as well as to the majority of the industries.

However, the effect of the financial crisis did not affect negatively the

consumer demand. On the contrary the consumer spending in the food

retail industry increased from 2007 to 2008 especially in the food

products and continues to increase at an approximately rate of 5%

(National Statistics; Mintel report, 2009).

The main implication for this trend was that because of the recession, the

consumers cut their eating out expenses and started to consume food at

home as it is much cheaper. Furthermore the sales of organic food,

specialised products such as television and sound systems and expensive

products declined (Mintel report, 2009).On the contrary, the sales of own

brand products and hard discounters chains increased indicating the

consumers' turn in low cost products.

The price competition and the importance of food increased the

consumer demand and expenditure; however it is doubtful if it will

continue to rise mainly because of the general economic uncertainty and

the higher upcoming personal income taxation.

In macroeconomic terms, the GDP after a massive decline in its change

rate started to increase after the mid 2009 to reach a positive 0.5% in

early 2010. Also, the inflation after a decline during the recession

increased in late 2009 which probably led to an increasing trend at

groceries prices (National Statistics, 2010). However, the Bank of

England continues to maintain the interest rates at a low level (0.5%), to

protect the fragile economy (BBC, 2010). This low interest rate will lead

to increased consumption because consumers will favour to spend than

to save their funds and the food retailers will be able to borrow funds at a

low costs to cover their liabilities. This fact will act as compensation to

the increased inflation and will probably maintain the prices.

Concerning the monetary issues, during the last three years the sterling

faced a significant decline of approximately (-26%) towards the euro and

approximately (-25%) towards the dollar which increased the cost of

imported goods in the UK (Yahoo Finance, 2010). Therefore, this

situation might force the UK food retailers to construct food

manufacturing plants in the United Kingdom and prefer UK suppliers.

Thus, the grocery retailers will be able to have a stable pricing policy and

larger price margins. From 2009 to 2010 the exchange rates fluctuated

causing uncertainty and maintaining the food prices high

One of the most important parts of the economic factors that affect the

food retail industry is taxation. This is divided to personal income tax for

the consumers and to corporation tax for the supermarkets. After May

2010 elections a coalition government between the Conservatives party

and the Liberal Democrats party formed and changes are expected in

taxation. Concerning income tax an increase in tax contributions is

expected in 2010/2011 which will lead to a decline in consumption

possibly affecting the more expensive goods and food retailers. On the

other hand the corporate tax will be probably reduced during 2010 to

boost economy and development. (Vincent, 2010) Therefore, the food

retail corporations will be able to afford larger margins to price

competition. The above facts will possibly lead the supermarkets to a

trend of decreasing prices in basic goods and making offers to maintain

consumer spending levels. For example there is a trend at supermarkets

to offer products in rounded prices (£1, £2) creating an offer impression

(Felsted A., 2010).

3.3 Social

The next sector of the PEST analysis is consisted by the social factors

that affect the industry such as the demographics, lifestyle, culture and

population trends.

It is well known that Europe's population is getting older and as years

are passing this phenomenon will be more intense. In the United

Kingdom (Mintel report, 2009) the average age and the percentage of

retired people are rising. This trend has many implications to the food

retail industry.

First of all, elder people tend to consume less than younger people. This

happens because their income which mainly comes from pensions is

lower.

Secondly, elder people tend to shop from the cheaper discounter

retailers. Therefore, the market share of the discounter chains will

increase against the rest of the competitors in the industry (Mintel

oxygen, 2009).

Also, the additional needs of this age group leads to an increasing trend

of online and distance shopping which increase the home grocery

deliveries. Thus, the operational costs of the supermarkets increase due

to increased expenses for vehicles and personnel. Another implication

coming from the ageing population will be the need for new product lines

designed for people with various chronic ailments which are common

amongst elder people.

An important issue that concerns the society is obesity. According to the

Health Survey for England, there is an increasing trend of obesity

especially in children (NHS, 2009). The health problems and their

consequences led the government and various organisations to promote a

healthier lifestyle in Britain. Therefore, the consumers' health awareness

increased and they turned their interest to healthier foods and to more

fruit and vegetables. Thus, it can be supposed that the food retail

corporations will continue to adapt to the consumers demand enhancing

their existing product lines with new healthier products such as organic

foods, low fat and low sugar products and healthy food campaigns. Also,

it will be possible to appear products for specific social groups such as

people suffering from diabetes, cardiovascular diseases and allergies.

Therefore, by targeting these consumer groups the food retail

corporations will increase their income and improve their corporate

social image.

Furthermore, the increasing trend of more women entering the

workforce, led to the need for ready meals at the supermarkets because

women had less time to prepare food after work (International Labour

Organisation, 2008). As this trend continues the supermarkets will

expand their ready meals variety and create new categories depending

into cost, calories and taste covering different needs.

Also, the presence of different people from different background and

culture in the UK changed the structure of the society. According to the

UK National Statistics approximately the 10% of the UK population is

non-British (UK National Statistics, 2001). Different cultures mean

different habits and different food preferences. Therefore, the food

retailers often provide goods from all over the world to serve those

needs.

3.4 Technological

The final element of the PEST analysis concerns the technological factors

that are related to the food retail industry. The technological

development affected and changed the industry in different categories

including consumers, environment, cost, distribution, and logistics.

During the last decade, the supermarkets in the United Kingdom took

advantage of the internet and they are offering online shopping to the

consumers. Through this innovative feature the supermarkets offer their

entire catalogue of products to the consumers and the ability to compare

prices, search for a product, pay and order for their groceries. Therefore,

the food retailers reduce their personnel costs while they are able to

advertise almost free and make consumers aware of their offers. Also it is

not unusual that many products cannot be found inside the stores and

are available only through e-commerce (Tesco annual report 2009). This

is another example of minimising operating costs while increasing sales.

Furthermore, the food retail corporations used the information

technology to organise their operations and maximise the organisation's

efficiency and profitability. Specifically, the management of each

organisation's functions is assigned to specialised software and

digitalisation of processes. Through the use of innovative technology the

cost and the paperwork is reduced and time is saved. Also, the logistics

department increases its efficiency because the supply chain is more

efficient controlled and the stock management provides a real and

immediate view (Sainsbury's annual report 2009).

The implementation of technology can be beneficial for both retailer and

consumer. The self-checkout machines reduce the labour costs of the

company because they usually require one person per five machines to

observe. Also, in that way the consumers save time and control their

groceries shopping. The introduction of point earning cards offers

discounts and rewards to the consumer while it provides valuable

information to the supermarket company about the preferences and

habits of each individual. The analysis of this information assists to the

company's advertising planning and strategy while it offers the ability of

targeted marketing (Moody, 1997).

The effective application of technology in the distribution and

transportation process through energy efficient vehicles protects the

environment as it reduces the vehicle's carbon emissions. Furthermore,

the food retail company improves its corporate social responsibility and

reduces the goods transportation cost.

Finally, the Universal Product Code or in other words bar-code was an

innovation that brought a revolution in the industry. Each product could

have its specific bar-code, simplifying the pricing and check-out while

saving time and establishing accuracy. Also, the use of wireless

technology and the attachment of electronic chips on the products can

prevent theft and measure the product availability on shelves. Therefore,

the inventory is the supply process becomes faster and the food retail

corporations avoid unexpected losses that due to their volume can have a

significant cost for the organisation (Food Marketing Institute, 2010).

4. Porter's five forces analysis - Operating Environment

To analyse the operating environment of the food retail industry and

evaluate its competitive nature, a Porter's Five Forces Analysis, created

by E.M Porter professor at Harvard University Business School, will be

used. According to Porter the five forces are: the industry competitors'

rivalry, the threat of new entrants, the bargaining power of suppliers, the

bargaining power of buyers and the threat of substitutes products or

services (Porter, 2004).

4.1 The industry competitors' rivalry.

The competition in the food retail industry is intense. The named big4

supermarkets which are: Tesco, Sainsbury's, Asda, Morrisons own the

73.3% market share, fact that makes the industry an oligopoly (Mintel

report 2009). Below are the identified the major competitors in the

industry and their competitive strategies.

4.1.1 Tesco

Tesco is the market leader with a market share of 31%, and a total

number of outlets 2,282, is traded in the London Stock Exchange and had

£41,520m sales and £2,381m profit in 2009. Beyond food products it sells

electrical equipment, health products, petrol, clothing, homeware,

telecommunications through a joint venture with O2, and financial

services through Tesco Bank (Datamonitor, 2009). Also, Tesco is

expanding to land telecommunications, construction and youth clothing

(Parker; Felsted; Poulter; Minton, 2010) Tesco's expansion plans target

to the development of the small "Tesco Express" who satisfy the legal

size requirement of Sunday trading act to operate on Sunday (DEFRA,

2006). The objectives of Tesco's strategy are concentrated in five areas:

"to be a successful international retailer, to grow the core UK business,

to be as strong in non-food as in food, to develop retailing services - such

as Tesco Personal Finance, Telecoms and tesco.com and to put

community at the heart of what we do" (Tesco Annual report 2009).

4.1.2 Sainsbury's

Sainsbury's is a supermarket chain in the United Kingdom with a market

share of 15.4%, and a total number of outlets 792, is traded in the

London Stock Exchange and had sales £18,911m and £466m profit in

2009. Sainsbury's sells food products, home and garden products,

electrical appliances, clothing, health products, sports and leisure

products, petrol and offers financial and insurance services. Also,

Sainsbury's is expanding to Electricity and Gas, broadband and digital

TV. Furthermore, Sainsbury's collaborates with convenience store chains

Bells Stores, Jackson's Stores, and JB Beaumont Stores in a strategic

alliance move to increase its market share in the convenience stores

battle.

Sainsbury's concentrate its corporate objectives in five areas: Great food

at fair prices, Expansion in non-food products and services, Reaching

more consumers through alternative distribution channels (online

shopping), growing supermarket space and active property management

of existing stores (Datamonitor, 2009; Rigby and Killgren, 2008;

Sainsbury's annual report, 2009).

4.1.3. Asda

Asda is a supermarket chain owned by Walmart a United States of

America supermarket corporation. Asda operates in the United Kingdom

with a market share of 15.1% and a total number of outlets 356 and had

sales £18,573m and £520m profit in 2009. Asda sells food products,

health and beauty products, household products and petrol. Also it offers

telecommunication services through its own mobile network "Asda

mobile" and clothing through the "George" stores. Asda's competitive

strategy is to differentiate from the competition emphasises in the fresh

food, including bakers and butchers in its stores. Also, Asda operates a

discount store "Asda Essentials" with own brand products competing

directly with the discounters Lidl and Aldi. In a generic view, Asda

targets in price competition boasting better prices and offers.

(Datamonitor 2009; Corporatewatch.org.uk, 2004)

4.1.4. Morrisons

Wm Morrison supermarkets or otherwise Morrisons is the fourth

supermarket chain in the United Kingdom. Morrisons have a market

share of 11.8% and a total number of outlets 420. Morrisons sells

groceries, household products, petrol and dry cleaning and photo

services. Morrisons operates through its own stores and its subsidiaries

with Safeway among others. Morrisons' target is to become the "Food

Specialist for Everyone" as it owns 13 manufacturing plants and a fresh

food factory. Morrisons concentrates its strategy around three brand

values: Fresh, Value and Service. This means that Morrisons targets to

offer fresh food in competitive prices in a premium consumer service.

Generally, Morrisons is an emerging power in the industry and tries to

gain competitive advantage by connecting the gap between value and

high quality products. (Datamonitor, 2009; Wm Morrison annual report,

2009)

Examining the nature of competition and the competitive rivalry it can be

observed that the market share of mid-size and local grocery retailers is

too small and the increasing appearance of big4 convenience stores and

the large fixed costs. This leads to the implication that the competition in

the industry is mainly concentrated among the major competitors.

The major competitors are operating in a mature market, which pushes

them to "fiercely compete for market share through price, range and

service" (DEFRA 2006).

In a mature market with a stable population like in the UK the

consumption cannot be increased significantly. Thus, the main objective

is to acquire a bigger percentage of the market share pie. Therefore, this

situation has driven the grocery retailers to compete in a price war to

maintain their customers and if possible to attract more to increase their

revenues (Felsted, 2010).

For this reason the grocery retailers aim to innovate and minimise the

cost to be able to allow larger price margins. Also, taking into account

the recent financial crisis and the recession it can be observed that the

consumers were cutting their expenses and turned to hard discounters'

chains such as Lidl and Aldi. (Mintel report, 2009) This situation

strengthens the price competition from sophisticated to basic products

such as milk, poultry and bread. Also, the major competitors adopted

aggressive advertising policy comparing often their prices with

competition (Leroux, 2009).

Furthermore, to increase their competitiveness supermarkets expand

their activities and increase their product range. For example they offer

in their stores non-food products like electrical equipment, homeware,

pharmacy, financial services etc. This action widened their competitive

arena, as they compete with a large portion of the retail sector such as

electrical equipment, clothing, DoItYourself, furniture and health and

beauty stores. The existence of petrol stations at the supermarkets

competes directly with the petroleum providers e.g. BP and SHELL. Also,

the supermarkets' expansion to financial services e.g. Tesco Bank, place

supermarkets to compete with retail banks. It can be suggested that the

supermarkets because of the mature food market aim to provide a total

"package" of products and services to their customers covering all their

consuming needs; thus increasing the food retail industry's sales and

profits.

4.2 The threat of new entrants.

The entrance of new competitors in the food retail industry faces several

difficulties. The creation of a new supermarket chain requires large

capital investment, funds for corporate planning, advertising and trading

capital. Furthermore, the majority of the industry's market share is

acquired by the established big4 chain supermarkets and the margins for

expansion are very limited. Also, the acquisitions are very difficult to

realise because of the high value of the existing chains. However possible

mergers or strategic alliances might take place. Other barriers to entry

in the industry are the large fixed costs and the developed supply chains.

Also, the existing dominants of the market benefit from the economies of

scale which gives them the ability to adopt an aggressive pricing

strategy. Therefore, it is very hard for the smaller retailers to compete

and survive in that environment.

According to the Competition Commission (2008) there are three

different factors that lift entry barriers to the industry: a) cost

advantages that large grocery retailers have b) the planning regime for

grocery retailing and c) the control of land of large grocery retailers.

The Competition Commission report divides the large grocery retailers

cost advantages in two categories: distribution costs and purchasing

costs.

The large grocery retailers gain benefits from reduced distributions costs

occurring by economies of scale and economies of density. The

economies of density benefit the supermarkets because they operate

satellite distribution centres that serve groups of stores. This process

reduces the distribution costs because the distribution centres supply

only the short and medium distance branches saving time distance and

transportation costs.

The economy of scale impact is that the supermarket chains use

technology to control the products availability, to maintain the sensitive

groceries such as meat and vegetables. Also, the supermarket maximise

the efficiency of the distribution from and to suppliers, supermarket

stores and consumers.

Therefore this acts as another barrier to entry because the large

supermarket chains have established channels of distribution and a cost

effective distribution network supported by their own distribution fleet

which covers the majority of the British territory (Competition

Commission, 2008).

The purchasing costs act as a barrier to entry to the food retail industry.

The large supermarket chains because of their high volume purchases

are able to deal better prices with their suppliers.

Therefore, they are able to offer their products at a lower price in

contrast with the smaller retailers who are obliged to purchase at a

higher price (Competition Commission, 2008). Also, the big4 chains have

already a competitive advantage because they possess knowledge and

information about the suppliers. The volume of their sales gives them the

ability to make large orders of supplies in lower prices.

Another barrier to entry in the industry is the current planning regime

for grocery retailing. The planning regulation sets limitations to the

ability of new and existing competitors to open new stores in the

positions they want. The reasons for this include environmental,

competition and town planning issues. Also, the continuous development

of supermarket outside towns led the UK government to demand the

town centre development since 1996 (Competition Commission, 2008).

Additionally the large supermarket chains already control the suitable

land and the best locations, which make the rest of the sites expensive

and difficult to find.

All the barriers to entry in the industry are beneficial to the oligopolistic

big4 supermarket chains and allow them to increase their profitability

through the reduced costs and by controlling the goods prices.

4.3 The bargaining power of suppliers.

According to the Datamonitor report (2009) the suppliers in the grocery

retail industry include: food manufacturers, food processors, farmers,

and agricultural co-operatives. The most powerful suppliers are the food

manufacturers and the food processors because their number is smaller

and in some cases they are irreplaceable. The bargaining power of the

suppliers is high when they supply the supermarkets with branded goods

that are highly demanded by the consumers. The supermarkets cannot

apply big pressure to secure low prices and the suppliers can negotiate

better prices. Therefore the supermarket chains make long term

contracts with certain suppliers while maintaining their deals with a

variety of suppliers to keep the switching costs low.

Furthermore, the presence of the supermarkets own brands weakens the

position of the suppliers and reduces their bargaining power. For

example the supermarket chain "Sainsbury's" includes in their product

line their own branded "Sainsbury's ham" and the "Danepak" ham and

the consumers prefer them because they are usually sold at lower prices

(Ali, 2009). The implication is that the supermarkets gain bargaining

power because they are able to change suppliers or to make big orders.

However when the food retailers choose to cooperate with only a few

suppliers they give bargaining power to suppliers. For example big food

manufacturer like "Nestle" have loyal consumers who give high value to

the brand. Therefore, the supermarkets are obliged to bargain with

different terms with the big suppliers and make concessions to their

profits (Hill, 2007).

During the last years the big4 competitors demanding for lower prices,

were often accused for price wars with the suppliers. Unfair competition

practices like late payments were often adopted which led the Office of

Fair Trading and the Competition Commission to conduct deep

investigations in the industry and to impose big fines to the supermarkets

(Peel et al, 2010).

Additionally, according to Financial Times publications in 2008, the

Office of Fair Trading discovered the adoption of cartel practices and

price sharing plans between the big4 supermarkets and big suppliers like

Unilever, Nestlé, Cadbury, Mars, Coca-Cola Enterprises and

GlaxoSmithKline (Peel and Rigby, 2008). Therefore, to ensure the health

competition in the food retail industry, the Grocery Supply Code of

Practice (GSCOP) introduced, to improve the supermarket chains

relationships with the suppliers and establish a fairer trade of goods

(Dickinson, 2010).

On the other side, during the spring of 2010 publications from the press

revealed the intention of small suppliers like farmers, to unite under one

syndicate to achieve better prices for their products. In that form they

will be able to gain bargaining power and add pressure to the oligopoly

of the supermarket chains (Kuchler, 2010; Lawrence, 2010). If this move

succeeds, the grocery retailers will be obliged to squeeze their profits,

buying the suppliers products in higher prices.

4.4 The bargaining power of buyers.

The buyers in the food retail industry are considered the consumers. The

objective of the consumer is to satisfy his need and minimise the cost

(Ratchford, 1982).

Therefore, if the quality and the features of the product are the same, the

consumer will prefer the product with the lower price. The consumers

buy products in small quantities which imply that the switching costs for

the buyers are low and pressure is applied to the supermarkets,

providing bargaining power to the buyers (Perner, 2008). Also, there are

lots of buyers and they have intelligent consumer consciousness.

The price sensitivity of the basic products is high due to their

homogeneity and the small differences that they have. However the

supermarkets obtain higher bargaining power when they provide high

quality products such as organic or specialised products. The price

sensitivity of luxury and high quality products is low because they are not

a lot of substitutes; their sales volume is low and the consumers pay high

prices to acquire them. Additionally, to increase their consumers' loyalty

they use promotions, special offers and loyalty cards (Trench, 2010).

Furthermore, the consumers have the necessary information because

they are able to compare prices through the online internet catalogues.

Another important factor that increases the bargaining power of buyers

is the large proportion of supermarkets to consumer in each town

(DEFRA, 2006). The presence of hypermarkets, supermarkets, express

and convenience stores from all the supermarket chains does not force

the consumers to prefer a specific chain due to geographical reasons.

Also the big4 supermarkets do not differ too much among each other

which give to the consumers the ability to choose. The implication is that

the supermarket chains to maintain their revenues and profits need to

retain their existing customers. Therefore, they are obliged to continue

their offers, loyalty programmes and low prices.

4.5 The threat of substitutes products and services.

It is not valid to say that the food retail industry has substitutes, a more

proper characterisation is that it has alternatives. Due to the range of

products and services that the grocery retail industry offers the

substitutes can include Banks, Restaurants, Petrol stations, Electrical

equipment stores, clothing stores, pharmacies and homeware stores.

Food and its sub products equals to approximately 50% of the total sales

in the industry (Mintel report, 2009). Food cannot be substituted;

everybody needs it to satisfy one of his basic needs for living. Also, in the

modern way of living, people have less time and do not prepare food at

their homes. Despite the recession there is still a big percentage of the

population that buys food from restaurants or takeaways (Kuhn, 2008).

However, the food consumption remains stable; the restaurants are only

a process stage from the food production to the food consumption. The

supermarkets often act as food wholesalers and sell food products to

businesses. Therefore, the threat from food substitutes is low.

Concerning the other products and services, the supermarkets have to

oppose and compete with specialised retailers in their sector such as the

BP in the petrol, Curry's in the electrical equipment, Primark in clothing,

IKEA in the furniture and Boots in the health and beauty. It can be

supposed that each one of these retailers has more knowledge and

information in the sector than the supermarkets. Also, the retailers gain

competitive advantage through the variety and quality of their product

range. Furthermore, through discounted large orders from big suppliers

they reduce the prices and make special offers. Thus, in conjunction with

the low switching costs the threat of substitutes in the above categories

increases.

Additionally, the threat from substitutes creates a complex situation for

the grocery retailers. On the one hand the supermarkets have

competitive advantage due to the variety of products that they offer in a

single place. On the other hand, the supermarkets cannot fully compete

with the specialised retailers because a supermarkets' expansion in more

specialised products will be risky, costly and dangerous for their

profitability.

5. Remote environment and competitive arena effect

Examining the remote environment impact on the players of the industry

and specifically the political/legal factors, a long term involvement is

revealed between the big4 supermarkets, the Competition Commission

and the Office of Fair Trading. The new regulation, planning law,

restrictions and fines that were imposed to the supermarket chains

increased their costs, reduced their profitability and changed their

expansion plans.

In the economic factors, an expected decrease in corporate tax will

increase the industry players' profitability. Also, the weakened sterling

acts pressure on the competitors due to the increased cost of imports,

fact that will probably make them turn to domestic suppliers.

Furthermore, social changes such as the ageing population, increased

obesity, diversity of the UK ethnic groups forces the food retailers to

adapt their product lines and strategies.

Also, the advancing technology changes the supermarket operations,

reducing the operating costs and increasing security and effectiveness

and allows offering more products online, therefore increasing

supermarkets' profitability.

Furthermore, examining the operating environment, the fierce

competition forces the major players in the industry to price and offers

wars. The food market is mature; therefore the supermarkets expand in a

variety of products and services, to increase their market share and

profits.

Also, there are strong barriers to entry in the industry due to cost

advantages, economies of scale and the control of land and the big4

supermarkets take advantage of the oligopoly and maximise their profits.

Generally, the bargaining power of suppliers is low, giving the ability to

the supermarkets to negotiate better prices and increase their profits.

The bargaining power of buyers is high due to the low switching costs

and the variety of options. Therefore, the major players in the industry

try to differentiate from the competition and increase their loyalty in

order to retain consumers.

Finally, the supermarkets are not significantly threatened by substitutes

in the food market but are weaker in the specialised non-food categories.

6. Conclusion

The food retailing industry in the United Kingdom is an established and

highly profitable industry (Datamonitor, 2009). Food is one of the basic

needs of humans; therefore its providers are irreplaceable in a society.

Additionally it has a significant impact in people's everyday life and is

still developing as it expands in almost all the retail industries. During

the last years the industry proved its strength by continuing to succeed

in the most severe financial crisis after the World War II. However, the

industry is characterised by oligopoly practices and the supervisory

bodies often set limitations in its actions. It is also tested by the socio-

cultural changes and the evolution of technology.

Also, the fierce competition might lead to harder price wars which can

increase the competitors' financial risk. Furthermore, due to

technological evolution it is possible that the vast majority of grocery

shopping will be online in the future, eliminating the physical presence

stores. Also, in a possible severe deterioration of the recession the

supermarkets' social responsibility will be tested as the country's main

food supplier. Therefore, in order to maintain the industry's strength, the

major players of the industry need to adapt fast and effectively in the

remote environment changes while maintaining healthy competition in

the operating environment and the competitive arena.

7. Appendix - Critical Evaluation of Techniques

The PEST analysis concentrates in the external factors that affect an

industry, captures the current trends and is useful to understand the

environment that operates and predict its future. Using the PEST

analysis tools the companies can plan their future corporate strategy and

assess a possible expansion in a new market or country. Additionally,

when in an industry analysis PEST is combined with Porter's five forces

the analysis of the macro-environment and micro-environment can reveal

the industry's profitability potential. According to the creator of the five

forces model, Michael Porter, the analysis of the competitive forces

reveal profitability but also provide with a template for the future

competitive strategies (Porter, 2008).

Porter's five forces identify the source, strength and nature of

competition. However, it cannot easily capture the unexpected changes

as it is based on the current competition. For example, a possible

financial crisis or significant technological discovery can completely

change the existing competition characteristics. On the contrary no one

is able to forecast the future and the past is the best predictor for the

future. Finally, it can be suggested that the combination of PEST and

Porter's five forces with accurate information can provide a realistic and

valuable analysis of an industry's remote and operating environment.