British Grocery Market Essay

The grocery market in the UK is driven by 4 main Players: Tesco, Asda, Morrison’s and Sainsbury (based on TNS till roll data each have overall market shares of more than 10 per cent)- their marketing policies determine the way consumers buy and want. The first part of the paper focuses on the description of the British grocery market and its structuture. There is a wide variety of different types of grocery retail operator. The CC (Competition Commission) report in 2000 is based on publicly available information, supplemented by data provided by the supermarkets and other retailers. The CC describes the market dividing it into 4 groups:

* Supermarket multiples – including Asda, Morrison’s, Sainsbury’s and Tesco; smaller chains such as Summerfield, Waitrose and Marks ; Spencer; and ‘discounters’ such as Aldi, Lidl and Netto

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* Symbol groups – can be loosely defined as multi-store chains where there is a single fascia, but where ownership can be fragmented: examples include Musgrave, which operates the Budgens and Londis fascias, and Spar

* Co-ops – that is, co-operative stores, which usually operate in a similar way to symbol groups, and

* Independents – stores which are independently owned and are not operated under a wider ‘symbol’

This paper aims the four largest supermarkets- Asda, Morrison’s, Tesco and Sainsbury’s- as they have an extremely important part of the market. Perfect competition, imperfect competition, oligopoly and monopoly are some of the most common market structures, but what is the British grocery market structure? Throughout the social science of economics the definition of Perfect competition according to Ison (1996) “refers to a market structure where firms have no power over the market” (p.83) . In this type of market structure, firms are price takers, free to enter the industry and produce identical products (Sloman ; Sutcliffe, 2001). There are a number of companies operating within the industry, however there are major companies that dominate the sector so UK grocery market cannot be considered as a perfect competition.

Imperfect competition is in some ways similar to perfect competition as it is also characterized by several operating firms and freedom of entry. However, the firms in an imperfect competition offer differentiated products; this feature then allows each firm to set the prices of their products.

Oligopoly is one of the prevalent market structures in the business industry. In this structure, there is a small number of firms in the market, competing each other (Ferguson, 2002). Oligopolies can compete by:

� Price competition or

� Non-price competition- N-P comp often to avoid price competition.

Businesses within an oligopolistic structure produce goods and service which are slightly different from competitors: may either produce an identical or differentiated product (Ison, 1996). This means that when the companies produce identical goods/services, the competition is limited to the price factor. That is why oligopolistic companies are interdependent. Anderton (2006) specifies that

The actions of one large company will directly affect another company. In oligopoly structure, ,if one large firm decides to pursue policies to increase sales, this is likely to be at the expense of other firms in the industry, so in an oligopoly structure, each member is subjected to inter-company rivalry, which prevents others from owning the market demand curve

To conclude since there are a few members or participants in this market form, each member is interdependent of the actions of other members- interactivity. Based on these mentioned features, the market environment of the UK grocery market oligopoly. To prove my point the very presence of a few major firms in the industry such as Morrison’s, Tesco Sainsbury, Asda and Safeway, is a distinct feature of an oligopoly structure. The figure 1.1 below shows the estimated market shares for the four largest supermarkets (following the acquisition of Safeway by Morrison’s). This suggests that Tesco has increased its market share from around 25% to more than 30% in the end of2005.

Asda had a 16.5% share, Sainsbury’s 15.9% and Morrison’s 11.3% in the end of 2005. Tesco now appears to have nearly twice the market share (in terms of overall grocery retailing) of its nearest competitor. Among the smaller multiple retailers, Summerfield and Waitrose appear to have made significant gains over the last three years (Summerfield mainly through acquisition of former Safeway stores). Aldi, Netto and Lidl now together have just over a 5 per cent market share by value, representing modest growth over the past five.

However, I should add that the takeover that occurred between Safeway and Morrison’s placed the UK grocery market closer to a monopolistic environment. Environment where “the pure monopolist is the only firm supplying the market [ consequently the monopolistic is the market]” ( Ferguson, 2002, p.99).

Oligopoly Pricing policies:

� Selling at prices below cost

* S.T benefit to consumer

* But unfair competition

* Could drive out smaller firms

� Price Flexing

* Varying prices in localities

� Price competition restricted to small range of products

� Price wars

* Escalating moves to cut prices

* Asda and Tesco

� Shadow pricing

* Form of tacit collusion where each follows other prices

* Price fixing – Milk and Tobacco

In other hand Non-price competition has the follows characteristics:

� Loyalty cards

� Advertising

� Mergers and takeovers

* WalMart and Asda 1999 �6.4bn

* Morrison’s and Safeway �2.9bn

* Rival bids – Big 3 (Interdependence)

Every single individual demands goods and services. The demand for goods and services is the “quantity of the goods or services which purchasers will be prepared to buy at given price, in a given period of time” (Whitehead, 1996, p. 77). Demand is not fixed therefore there are factors affecting the demand and supply.

What would be the impact on the price of potatoes sold in competitive supermarkets if:

A business strategy is a long term plan of action designed to achieve a particular goal, most often win. Win is what all companies want but what is theirs strategy? An exact business strategic can be hard to determine, companies have their strategies in the mission statement.

The Publix’s mission statement according to their website is clear and easy: “Our Mission at Publix is to be the premier quality food retailer in the world. To that end we commit to be: passionately focused on Customer Value, intolerant of Waste, dedicated to the Dignity, Value and Employment Security of our Associates, devoted to the highest standards of stewardship for our Stockholders, and involved as Responsible Citizens in our Communities”. A beautiful statement indeed. Wal-Mart’s more ‘profit-orientated’. As a national discount retailer, they offer a wide variety of general merchandise. Wal-Mart’s uniqueness comes from a business strategy as radically innovative:

* Boosted efficiency and productivity far ahead of their rivals by creating a new management paradigm for their particular industry; Pasted from <http://www.pbs.org/newshour/bb/business/wal-mart/unique.html

* Sophisticated distribution system and information technology to track inventory has significantly improved its efficiency and productivity — making it far more profitable than other retailers. Pasted from <http://www.pbs.org/newshour/bb/business/wal-mart/unique.html

In addition to its overall business strategy, when most of companies establish stores near major urban areas thinking in a potentially large clientele base, Wal-Mart spread out by constructing new stores strategically located near distribution hubs and smaller towns, rather than leapfrogging across the nation like the other retailers.

Tesco’s strategy is far ahead of Sainsbury – Tesco has grown a strong UK core, and built good non-food sales, expanded into retailing services and exploited e-commerce successfully’. Tesco’s success in recent years has mainly come from expanding overseas, shifting to more profitable non-food merchandise and maintaining a strong UK core business. In UK has been built on low prices, cultivating customer loyalty, offering a range of different store philosophies and expanding into retailing services, such as banking and insurance.

The Tesco’s focus on non-food items has led me wondering whether it is fair compare and contrast between Tesco or any other grocery retailers at all. At the annual Institute of Grocery Distribution conference in October 2003, 22 Tesco Chairman David Reid made the assertions that ‘You cannot save your way to prosperity’ and that ‘Growth is crucial to shareholders…staff…and suppliers’. Investing in growth is really at the heart of Tesco’s strategy. Tesco raised �773m by placing 315m new shares23, and in March 2004 announced a joint venture with property group Topland to release �650m from its UK property portfolio.24. pasted from ; http://www.cwatch.webbler.co.uk/?lid=252

The business strategy of Sainsbury falls into the some point as Publix. Sainsbury’s is passionately focused on customer value. Alistair Osborne City Correspondent of the Telegraph news papers (10:50pm BST 30/05/2001) says: “customers were returning because Sainsbury’s food offer was ‘demonstrably better’, boosted by new healthy ranges, such as Taste the Difference, and the Blue Parrot Cafe products, aimed at children”

To conclude:

Walmart

TESCO

1. Cost – low price competitive

1. Price and cost competitive

2. “Every day low price”

2. “Always low prices, always”

3. “Every little helps”

3. For all classes (Value, Brand Finest)

4. Big box, no frills, one stop shopping

4. Non-food sales (Levis), loyalty cards

5. Super efficient distribution

5. Supply chain management

6. Use of high technology

6. “continuous replenishment”

7. Pre-emptive investment strategy

7. Use of planning as barrier

Publix

Sainsbury

1. Customer service and satisfaction

1. More emphasis on quality

2. Customised quality products

2. Environment,

3. Employee welfare

3. Price still important

4. Share ownership, health and education

4. Middle class

Manser ( 1995) in “economics a foundation course for built environment” defines elasticity as a measure of the degree of responsiveness to price change. The more price sensitive consumers or suppliers are, the greater the elasticity of demand or supply. In Tesco case, the company would prevail more with inelastic prices of demand. How could Tesco increase the inelasticity of demand for its products? Making goods repellent , distasteful , unattractive, ugly, making the products difficult to buy.

The result is the increase of the inelasticity of demand. What happens after is that Tesco customers who are price sensitive (elastic demand) and don’t care about packaging will shop at Tesco to get all the value products. However, customers with inelastic- people who grant importance to looks and packaging will avoid it and they will keep paying the higher prices, they joyfully spend 3 times as much for a similar product with nice packaging, driving to bigger profit margins for Tesco’s customers with inelastic demand. Therefore, Tesco can get both segments. If the Tesco value products were attractively designed, the inelastic customers would buy the cheap food and have no reason to buy the expensive varieties with a big profit margin and vice versa.

To conclude:

� Build strong brand image

* Tesco, best, greenest, healthiest etc

� Advertising

� Loyalty cards

� Local monopoly

* Only supermarket in town – price flexing.

How does Tesco lower its costs? Innovations such as reusable plastic trays, which Tesco use in fresh food areas or changing suppliers could help to make savings. The best way of cutting down costs is expanding the size and the output of the company: ” As firms expand in size and output, their long run averages costs tend to fall” (Anderton, 2006, p.325).

Expanded into retailing services and going international is how Tesco lower its costs. Larger companys such as Tesco are more likely to be able to buy raw materials in bulk which only means: lower prices. Some point, long run average costs become constant. However in this case, Tesco/s could became one of the firms that become too large and their average costs begin to rise. For instance , if Tesco’s continue doubled is output they could face costs four times higher, then the average cost of production would double. Adtionally if government imposes a tax upon industry, costs will rise, shifting the diseconomies of scale curve upwards. This pattern of falling and rising long run average costs is show in figure below.

To conclude:

* Important factor in supermarket prices;

* Larger scale = higher output = lower average costs;

* E.g. Tesco 4-5% lower costs;

* Wal Mart “Super Centres”;

* Employ 400-500 wks 7-13% cheaper;

* Average costs reduced- benefit:

* Financial;

* buying – bulk & bargaining power;

* transportation;

* marketing & distribution;

* Use of advanced technology.

References and notes

* Sloman, J., and Sutcliffe, M., (2001). Economics for Business

* Manser, J., E., (1995). Economics: A foundation course for the built environment. London; United kingdom

* (c) Business Insights Limited, 2003- http://0-www.bi-interactive.com.lispac.lsbu.ac.uk/index.aspx?Lang=en&MainPage=renderContent&StoryID=25873&ReportID=1&Highlight=WalMarts#top

* http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2001/05/31/cnsai31.xml

* IGD (April 2008), Grocery Retailing, page 19

* Mintel (April 2008), Convenience Retailing and Convenience Office of Fair Trading

* Anderton, A., (2006). Economics. 4th Edition. United kingdom: Essex

* Ison, S., (1996). Economics. 2nd Edition. Great Britain: Glasgow

* Livesey, F., (1995). A Textbook of Core Economics. 4th Edition.United States of America: New York

* Whitehead, G., (1996). Economics. 15th Edition. United Kingdom: Oxford

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