Business Economics Concepts – Market Structure, SMEs, And Growth Strategy In A UK Local High Street Store

Small and Medium sized enterprises provide a great support to UK economy

Small and Medium sized enterprises provide a great support to UK economy. The expansion strategies of SMEs open up new market and create new job opportunities. In order to grow bigger these companies invest in innovation leading to intense competition in the marketplace. As per 2014 statistics, UK has nearly 5.2 million SMEs. In UK, a wide majority of business is currently employing less than 10 people, accounted for 33 percent employment and enjoys a turnover of 19 percent (uk.wsj.com 2018). However, the small and medium enterprises has accounted a disproportionate growth rate. It is found that 6% of total SMEs in UK experience higher growth rate and responsible for generating fifty percent of new jobs between 2002 and 2008 (fsb.org.uk, 2018). The grocery supermarket chain in UK is one of the interesting aspect to be discussed. The supermarket chains some large and small retailers.

Waitrose belongs to the chain of British supermarket structure, forming the division of food retailers in Britain. It has nearly 352 branches in United Kingdom. Among these branches 30 are convenience shops. Currently Waitrose occupies a market share of 5.1 percent in grocery supermarket chain.

The supermarket structure in UK resembles the feature of an oligopoly market. An oligopoly market is characterized by the dominance of few large firms in the market (Sloman and Jones 2017). The grocery supermarket in UK is now increasingly dominated by few large sized firm such as Tesco, Sainsbury and ASDA. The concentration has been accelerated largely until 2012. Thereafter, two low cost retailers Aldi and Lidle have successfully expanded their business. this has reduced the four firm concentration ratio from 75% in 2011 to 72.3% in 2016 (ibisworld.co.uk, 2018)

Figure 1: Grocery market share in UK

(Source: bbc.co.uk 2018)

In order to survive in a concentrated market Waitrose has undertaken a number of strategies. The strategies are discussed below

Advertising

 Advertising is one of the key marketing strategies for oligopoly players. Advertise provides information to the customers about the unique feature of a product. It is a low cost, time and energy saving way for customer to get knowledge about a product. Advertising helps to reduce concentration or monopoly power by offering information regarding new and competing goods. Waitrose has successfully increased its market share and stimulate sales growth by focusing on advertising and creativity designing. The retail advertising of Waitrose has two objectives – providing price message tactically and offering a strategic quality message (dandad.org 2018). Waitrose has released a series of advertising on different platform like national television, internet and others. As a part of brand promotion the company has sponsored England Cricket team from 2013 to 2016.  

Waitrose: Advertising and Product Differentiation as a Strategy Against Concentrated Market

Product differentiation

Product differentiation is another important strategy devised by business to increase its market share. The objective of product differentiation is to make own product different from its rival as much as possible. A differentiated product attracts more attention of the customers and thus helps to achieve sales growth. Waitrose has a differentiation strategy covering both the price and quality aspects. Waitrose differentiation strategy focuses on upper market segments and offers a wide range of fresh products with good quality services (accaglobal.com, 2018). Unlike taking a diversification strategy of four big retailers, operation of the company is mainly concentrated on the market of food and drinks. Waitrose make its stores the most convenient place for customer to have desired product at the cheapest price. The Waitrose customers have low stress regarding quality of product and often willing to pay premium price.

Marketing Mix of Waitrose

 The term marketing mix refers to the business strategy where business uses a combination of different tactics to achieve the marketing objective for different targeted customer group (businessinsider.com 2018). Different factors encourage the company to vary product mix. Waitrose use promotional offer pricing varied from stores to store.

The different marketing strategy of Waitrose provide the company an important position in the grocery supermarket chain and opens up future scope for business expansion.

By definition, housing market indicates a market that deals with demand and supply of housing in a specific nation or region. The housing market of UK has experienced some dramatic changes since 1990s. The ownership trend in the housing market of UK gradually shifted from private ownership to a continuous rise of public housing offered by local authorities. There are different factor affecting demand and supply of housing and hence, play an important role in determining housing price.

Affordability:

Affordability is a principle determinant of housing demand. When people’s income rises that people are able to spend more on property. During economic growth people’s income increases leading to an increase in housing demand.

Figure 2: Housing affordability index in UK

(Source: Wilcox and Perry 2014)

The above graph depicts that housing price and demand can rise at much faster rate than income. This suggests that apart from earning there are other factors that significantly influences housing demand.

Interest rate refers to the cost of mortgage repayment and hence plays an important role in determining housing demand. Most of the homeowners in UK has a preference toward variable rate of mortgage. Consequently, when Bank of England changes base rate then it affects mortgage payment as well.

Marketing Mix of Waitrose

Figure 3: UK inflation and base rates

(Source: Hilber and Vermeulen 2016)

When interest rate in 1992 reached to 15% then housing demand collapsed. Conversely, the low rate of interest between 1990s and 2000s encouraged people to buy more house. However, exception has seen in 2008-2009 (Hilber and Vermeulen 2016). During this time, despite a low interest of 0.5% housing demand remained low because of persistent recession and increasing unemployment.

Population

A growing number of population raises the housing demand. Apart from aggregate population, housing demand is subject to average size of household.

Figure 4: Population projection of UK

(Source: Hilber and Vermeulen 2016)

Other factors affecting housing demand include confidence of the consumers, availability of mortgage and renting cost.

The supply of housing depend on the tendency of building new houses in the economy. Availability of land determines housing supply. In UK, a big issue in housing supply is the restriction in housing planning and limitation imposed on building houses on the green-belt land. Builders also considers the profitability of building houses.

In UK, housing demand increases at a faster rate than demand leading to housing shortage.

Figure 5: Demand and supply projection of housing

(Source: Favara and Imbs 2015)

The continuous supply shortage results in a rising house price in the long-run.

Figure 6: Real house Price in UK

(Source: Favara and Imbs 2015)

The Bank of England intervene in the housing market through regulating banks and interest rate. In 2015, Government in UK introduced two new instruments through which BOI can limit mortgage. The first is restricting the proportion of people who can borrow the money relative to their housing valuation. This is done to reduce loss of the banks. When house price declines and borrowers fail to repay loans then bank loss money in situation where housing valued less than loan (McCrone and Stephens 2017). The second restriction is placed in form of limiting borrowing in relation to income. People taking large amount of loans tend to cut their spending in times of rising interest rate.

In response to rising housing price, the Bank of England has taken action to restrict the mortgage borrowing. A cap is imposed on the loan taken compared to the income of the borrowers (homesandproperty.co.uk 2017). The cap is designed in such a way that it would not restrict lending ability of banks if housing price grow as per expectation. However, if price goes beyond expectation then the policy will be effective to curb it by restricting credit boom.

An Overview of the Housing Market of UK

Figure 7: new mortgage by loan to income multiple

(Source: ft.com 2018)

To curb housing demand and control housing prices the Bank of England has attempted to increases the interest rate to 0.50 percent from the historic low levels of 0.25 percent (ft.com 2018).

The macroeconomics performance of a nation depends on a number of indicators. These indicators are related to output market, labor market, price level and other related measures.

Aggregate production or GDP is the most important indicator of economic performances. Gross domestic product in general measures the market value of all the produced goods and services in a nation. The goods can be values in either current year’s price or taking prices from a chosen base year. The former is called nominal GDP while later is known as real GDP. The percentage change in the real GDP between two consecutive years reflects growth in GDP (Sloman and Jones 2017). The overtime trend in real GDP growth indicates the trend in economic growth. The per capita income obtained by dividing GDP by population gives an average income measures and help to identify the standard of living in the nation.

Figure 8: Gross Domestic Product in UK

(Source: ons.gov.uk 2018)

In 2016, the Gross Domestic Product of UK was valued 2647.90 billion US dollar. The GDP in UK represents 4.27% of average world’s average income. The average GDP between 1960 and 2016 is stood at 1137.23 billion. In the last ten years, the highest GDP was recorded in 2014 with GDP valued at 3022.83 billion USD. After than growth slows down.

Figure 9: GDP growth rate in UK

(Source: ons.gov.uk 2018)

The GDP growth rate UK has considerably slowed down in recent years. In the first quarter, the sluggish growth rate was contributed by a lower confidence of consumers. The income of average consumer has come under significant pressure following a slow growth of employment and wages. The rising inflationary pressure further hurts consumption demand. The growth rate of 0.3% is the slowest in a year (theguardian.com 2017). Along with a slow GDP growth, per capita GDP in UK has also declined. Per capita GDP has risen only by 0.1% as compared to 0.5% growth rate in the last quarter.

The performance of labor market is reflected from the prevailing unemployment rate in the economy. Unemployment refers to a situation when some members in the labor force fail to find jobs suitable for them at the existing wage. Other indicators of labor market performances include participation rate of the labor force, growth of wages, full time and part time employment and such others.

Factors Affecting Housing Demand in UK

Figure 10: Trend in unemployment rate

(Source: ons.gov.uk 2018)

The unemployment rate in UK has recently increased to 4.4 percent from in the last quarter of 2017. Prior to that unemployment rate was settled at 4.3 percent in the third quarter of 2017. There is 1.47 million people unemployed in UK. In the economy there are nearly 8.77 million people aged from 16 to 64 years. The unemployment rate though slightly increased in last quarter of 2017 but unemployment rate has declined for a prolonged period of 2008-2014. During this time, there was a persistent fall in real wage rate. The nominal wage growth rate in 2014 was only 0.7%. The labor market has become highly flexible with enforcement of Zero hour contracts. The economy faces both cyclical and structural unemployment.

The trend in price level is captured by the prevailing inflation rate in the economy. Inflation indicates a situation when there is gradual rise in the general price level.

Figure 11: Trend inflation rate in UK

(Source: ons.gov.uk 2018)

The graph above shows the core inflation rate in UK. The core inflation rate excludes prices of food, alcohol and tobacco and food price while computing the inflation rate. The core inflation rate has increased from 2.5 percent in the third quarter of 2017 to 2.7 percent in the fourth quarter. The import in UK have become costlier because of weakness of sterling. This has made imported food and fuel expensive (theguardian.com 2017). This factor in combination with higher prices of crude oil lifted the price level up.

Financial leverage is regarded as the extent to which securities having fixed income and preferred stock are put into use in organization capital structure. The managers use the financial leverage when the assets that are purchased by them are inside the debt capital to generate earnings greater than the cost of debt which is used to finance them (Atrill and Mclaney 2017). The managers make the use financial leverage to increase to increase the organization’s profit. Since the capital structure is regarded as the important component of an organization. The primary objective of leverage by managers is to undertake the decision on the amount of capital needed to functions its business.

Once the amount is ascertained, the managers uses the financial leverage to examine the financial markets in order to ascertain the terms through which the firm can raise the capital. This step is considered crucial in decision making by management since the market environment might curtail the capability of the firm to issue the debt securities and common stock at the attractive level. As a result of this, once this query is resolved, the managers of the company can design the correct capital structure policy and construct the package of financial instrument which is required to be sold by the investors (Besley, and Brigham 2013). By following the systematic procedure manager’s financial decision is implemented in respect to the long run strategic plan and the way through which they want to expand the company.

Supply of Housing in UK

For example, ABC has generated the capital structure comprising of 100% equity capital. Consequently, the ROE is anticipated to fall amid the range of 15.6% and 23.4% based on the level of organization before tax earnings. Similarly, when the organization ABC capital structure is re-engineered comprising of 50% debt capital and 50% of equity capital, the organization ROE increases significantly to wide range falling amid 27.3 and 42.9%.

Managers of small and big business owners makes the use of the current account in decision making when they are faced with the daily business (Atrill, McLaney and Harvey 2014). Managers makes the use of the current account information for their daily operations to generate reports that offer them with inside into the business performance namely the determination of the profit margin and utilization of the labour. Relatively the objective of implementing the current accounting decision is to enable the managers to gain an insight into the data driven input such as making every day decisions (Besley, and Brigham 2013).

Both the managers of small and big business can leverage the powerful trove of computations in order to improve the decision making over the period of time for gaining higher amount of profit and gaining greater amount of competitive advantage (Atrill, McLaney and Harvey 2014). The managers to ascertain what should be sold use current accounting information. For example, the manager of the business might be not sure where they must focus their efforts. To further assess this decision, the accounting manager may examine the cost that create a difference between each product and common associated to the product.

The current account information that offer the management with the data driven look on the methods of growing the small business. Financial statements and projections are some of the examples of how the managers of accounting information makes the use of the information to assist management for the future growth (Warren and Jones 2018). By placing the focus on the such current account information the managers can undertake the decision of aiming for the constant improvement and are justifiable based on the intelligent analysis of the organization data.

Tesco Plc
		2016	2015
Liquidity Ratios	Current Ratios
	Current Assets	14,828	11,958
	Current Liabilities	19,714	19,810
		0.75	0.60
Market Value Ratios	Earnings Per Share	2016	2015
		0.05	-2.12
Asset Management Ratio	Fixed Asset Turnover	2016	2015
	Net Sales	54,433	56,925
	Fixed Assets	33025	36791
	Less: Accumulated Depreciation	15125	16351
	Total Fixed Assets	17900	20440
		3.04	2.78
Debt Management Ratio	Debt Ratio	2016	2015
	Total Liabilities	35,278	37,143
	Total Assets	43,904	44,214
		0.80	0.84
		2016	2015
Profitability Ratio	Net Profit Margin
	Net Profit	138	-5,741
	Total Revenue	54,433	56,925
		0.25	-10.09

Sainsbury PLC
		2016	2015
Liquidity Ratios	Current Ratios
	Current Assets	4,444	4,505
	Current Liabilities	6,724	6,923
		0.66	0.65
Market Value Ratios	Earnings Per Share	2016	2015
		23.9	-8.7
Asset Management Ratio	Fixed Asset Turnover	2016	2015
	Net Sales	23,506	23,775
	Fixed Assets	15259	14854
	Less: Accumulated Depreciation	5495	5206
	Total Fixed Assets	9764	9648
		2.41	2.46
Debt Management Ratio	Debt Ratio	2016	2015
	Total Liabilities	10,608	10,998
	Total Assets	16,973	16,537
		0.62	0.67
		2016	2015
Profitability Ratio	Net Profit Margin
	Net Profit	471	-166
	Total Revenue	23,506	23,775
		2.00	-0.70

The current ratio of Tesco for the year 2016 stood 0.75 whereas Sainsbury reported the current ratio of 0.66. This represents that Tesco is better placed in terms of liquidity to meet its short term financial obligations. The market value ratio comprises of earning per share which represents that in 2015 Tesco reported negative EPS of -2.12 while in 2016 it positively reported EPS of 0.05. Sainsbury on the other hand reported EPS of -8.7 in 2015 while in 2016 it significantly improved to 23.9.

The Intervention of Bank of England in UK’s Housing Market

The fixed asset turnover ratio for Tesco stood 2.78 in 2015 while in 2016 it stood 3.04. Meanwhile Sainsbury in 2015 reported fixed asset turnover of 2.46 which eventually declined in 2016 to 2.41. Tesco is making greater sales revenue from its assets than the Sainsbury. The debt and net profit ratio for Tesco stood 0.80 and 0.25 in 2016 whereas Sainsbury reported 0.62 and 2.00. The overall performance of Sainsbury is better than Tesco since the company has reported better proportion of debt ratio and strong net profit in 2016.  

Computation of Present Value
Interest Rate	4.50%
Year	Start Principal	Start Balance	Interest	End Balance	End principal
1	£                    –	£             –	£       –	£          650.00	£     650.00
2	£            650.00	£      650.00	£  29.25	£       1,329.00	£  1,300.00
3	£         1,300.00	£   1,329.00	£  59.82	£       2,039.07	£  1,950.00

Initial Investment Amount	-50,000
Total Number of Years	5		NPV
	Project A	Years	Project B
Number of Years	Annual Cash Flow	0
Year 0	-50,000		-£ 50,000.00
Year 1	£        26,000.00	1	£              –
Year 2	£        17,625.00	2	£              –
Year 3	£        15,000.00	3	£              –
Year 4	£        10,000.00	4	£              –
Year 5	£        32,000.00	5	£ 99,500.00
Npv	£        23,811.83		£   8,387.92

As evident from the above stated computation an assertion can be bought forward by stating that the NPV of project A is better than the NPV of the project B. Therefore, it would be wise to select project A over project B.  

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