In UK economy, several business operates successfully positive contribution to economic growth. The grocery supermarket is one of the widely extended business in UK. Different sized firms operate in the supermarket chain. The report evaluates business strategy of Co-op food, one of the grocery retailers in UK.
Co-op Food is a retail grocery brand operated by co-operative group in UK. In 2016, the company accounted about 6.6% share of grocery market. Despite fall in co-operative society’s market share from a peak of 30% in 1950 to 6.6% today, it still ranks fifth in the list of grocery retailers in UK (co-operativefood.co.uk 2018).
The company operates in an oligopolistic market structure. A market is identified as an oligopoly market when a market with large number of buyers is dominated by only few large firms (Sloman and Jones 2017). The four dominating players in UK grocery supermarket are Tesco, Morrison, Sainsbury and Asda.
In an oligopoly market, the operating firms take several strategies to capture a higher market share by undercutting share of its rival. Some of the commonly used strategy oligopolistic firms include product differentiation, advertising, price war and other specific strategies (Ashwin, Taylor and Mankiw 2016). Co-op Food has taken some of these strategies to retain its position in the market.
The company has made a gradual shift towards becoming one of the leading convenience food retailers in UK. In order to achieve this the company has planned to double size of the convenience stores estates. The firm announced to open 100-150 new stores every year (conveniencestore.co.uk 2018) With this step the firm has no become one of the fastest growing retailer in the supermarket chain with an increase in net worth to £46bn in the next five years from £36bn in in 2013.
The company focused to increase investment in price. The strategy is taken in repose to similar strategies taken by its rivals. The biggest rival Tesco has invested £200m in order to offer customers a low and stable price. Asda has invested £1 bn in every day price to counter the market share of Aldi and Lidl, the two biggest discounter (thegrocer.co.uk 2018). The strategy of lowering price by grocery retailers has triggered a price war in the supermarket. Co-op has reduced the price of 1-pint milk to 45p and that of 2-pint milk to 85p.
In order to compete with the rival firms in the industry, the company often uses two popular strategy of market segmentation and market differentiation. Under market segmentation strategy, the company identifies marketing areas with largest appeal. Then by targeting this market segment the company can have significant scope to expand its business (co-operativefood.co.uk 2018). For market differentiation the company needs to differentiate its product from its close rival and attract more customers.
Co-op food is a grocery retailer brand operating in UK supermarket chain. The company designs exclusive growth strategy to maintain its market share in the supermarket. Investment in price, increasing number of convenience stores, market segmentation and market differentiation are some strategies taken by the company.
In the last 25 years, housing market in UK had undergone as a serious crisis. In 2007, housing price reached to the highest level relative to earnings. Price have particularly risen in London and the South. In determining housing price, the supply and demand of housing play an important role.
Factors affecting housing demand
Affordability: The first primary determinants of housing demand is the affordability. In time of economic growth, average income increases leading to an increases in affordability and housing demand. In UK, housing prices have increased at a much faster rate than affordability does (Kim 2015).
Interest rate: Interest rate is an important factor determining housing affordability. Higher interest rate reduces affordability causing a decline in demand. The average interest rate in UK was at around 4.5% until 2008. After 2008, interest rate reduced drastically. During this time, interest rate had reached to a recorded low level. The interest rate had remained since then had remained at 0.5% (Zhang et al. 2017) The mortgage rate however did not fall in line with the interest rate as many lenders targeted to maintain their stock of liquidity to increases profitability. Additionally, fixed borrowers cannot take the advantage of low interest rate. In 2009, the variable rate of mortgage fell to 3.8%.
Credit availability: The demand for property depends on available credit. During financial crisis of 2008-09, the credit supply has declined causing an associated decline in housing demand and price (Kim 2015).
Price of substitutes: The substitute of buying a house is to rent a house. The cost of renting property influences housing demand.
Expectation: People expectation regarding property prices play an important role in determining housing demand. If property price continues to rise, then people expect to rise it in future (Tsai and Tsai 2018). Increasing house price encourages speculative demand while declining house price discourages speculative demand.
Factors affecting housing supply
The supply of housing depends on the new house construction by property developer. Availability of credit is a primary determinant of housing supply. UK has suffered from a persistent problem of housing shortage. Housing demand increases at a faster rate than housing supply. The housing demand is forecasted to become 232000 by 2033. As against this, housing supply is struggling to reach above 100,000 by the end of this year. The credit crunch of 2008 significantly interrupted housing supply in UK (Zhang et al. 2017). Other factors affecting housing supply are availability of land, profitability on new house construction and restriction placed on construction.
Bank of England though not directly regulate housing market but it does regulate banks through its monetary policy. Bank of England uses the tool of interest rate to influence housing demand and supply. Bank also put restriction on proportion of mortgage loan along with a restriction on people who can borrow. In order to increases affordability of people, Bank of England has abolished stamp duty on first time home buyers for house valued £300,000. In case property price exceed £300,000, no stamp duty needs to be paid on first £300,000 (voxeu.org 2017). Under monetary policy targeting the Chancellor announced a plan of £44 billion in terms of direct government investment, loans and guarantees. The money market reform has taken to increase housing supply.
In UK, demand of housing outweigh the supply of houses putting an upward pressure on housing price. In order to stabilize housing market Bank of England is using monetary policy tools either by restricting amount of credit or by limiting people who can borrow.
The economic performance of a nation depends on number of macroeconomic indicators and their trend. These indicators include Gross Domestic Product (GDP), rate of inflation, interest rate, unemployment rate and others. The report analyzes macroeconomic performance of UK for the last five years.
Gross Domestic Product of a nation measures monetary value of all produced goods and services in an accounting year. GDP is of nominal GDP and real GDP. In nominal GDP, the current year market price is used (Johnson 2017). For real GDP however market price of a fixed base year. The economic growth rate is measured by the percentage change in GDP or growth in GDP.
Figure 1: GDP growth in UK
(Source: statista.com 2018)
The trend in GDP growth of UK indicates that the economy is losing its momentum following a growth slowdown in China, slump in the construction and manufacturing sector. The nation has shown some sign of improvement. Some major factors contributing to growth recovery of UK are improvement in oil and gas production and recovery of the mining sector. The GDP growth at the second quarter was 0.7% (theguardian.com 2018) . Following a slow growth, businesses in UK are facing the problem of slower demand both from home and abroad. The manufacturing sector in UK is struggling to maintain its competitive position a depreciated currency has made their goods and services more expensive abroad. Construction sector, one of the important sector of economy has accounted a slowdown and failed to contribute in GDP growth.
Inflation indicates a situation of sustained increase in price resulting in a decline in value of money and hence, a decline in purchasing power. The two root cause of inflation are increase in overall demand that causes a supply shortage creating upward pressure on price and an increase in production cost. The former is called demand-pull inflation while the latter is known as cost-push inflation (Mankiw 2014).
Figure 2: Inflation trend in UK
(Source: statista.com 2018)
In the past few years, inflation rate in UK has recorded a sharp increase. In December, inflation has slightly dropped to 3% from 3.1% in November. A major factor contributing to rising inflation in UK is the increased cost of import following a devaluation of pound. When inflation in goods sector is taken separately from service sector then it is 3.4% higher than it had been for more than five years (bbc.com 2018).
Interest rate determines the level of investment in an economy. In order to overcome the slow growth, rate the Bank of England has set interest rate to a relatively low level. However, in 2017 because of an upward pressure on price level the bank has decided to raise the interest rate to 0.5% from 0.25% (bbc.com 2018). This is the first increase in the official interest rate since July 2007.
Figure 3: Movement of interest rate
(Source: bbc.com 2018)
Unemployment rate indicates the condition of labor market in the economy. Unemployment rate in UK has declined to a 4.3 percent in the month of January, 2018 (tradingeconomics.com 2018). With a decline in unemployment the average weekly earnings of people in nominal terms is increased by 2.6 percent.
Figure 4: Unemployment in United Kingdom
(Source: tradingeconomics.com 2018)
Conclusion
The UK economy is now experiencing a decline in the economic growth due to both external and internal factor. The inflation has risen sharply because of a weak sterling. BOE to control inflation has increased the interest rate to 0.5 percent. Unemployment in the economy is settled at a comparatively low level.
Financial leverage is referred as the extent to which the securities carrying fixed sum of income and preferred stock is employed as capital structure by an entity. Managers makes the optimum usage of financial leverage when the assets purchased is surrounded by debt capital to generate earnings greater than the cost of debt used to finance the capital structure (Deegan 2013). Managers uses financial leverage as the tool of increasing profit of the organization. The capital structure is regarded as the noteworthy tool for an entity and manager’s uses leverage primarily for making decision regarding the capital required to conduct business activities.
Following the determination of required capital fund to carry out business functions managers uses financial leverage to examine the fiscal market as this will help in ascertaining the medium through which a firm raises capital. Capital structure is vital in making decision as since the unstable market conditions may restrict the manager’s ability in issuing debt securities and common stock to attract the investors (Scott 2015). The managers comply with the systematic process to take decision in the long run strategic planning of the organization and the medium through which managers aspire to expand their company.
Citing an example, ABC Ltd has capital structure which is entirely an equity based. The return on equity is anticipated to fall between 15.6% and 23.4% based on the extent of an organization after tax profit. Consequently, on restructuring the capital structure of ABC to 50% debt and 50% equity the return on equity of an organization might significantly rise between 27.3% and 42.9%.
Small business can use current account as the tool of decision making relating to daily business activities. Managers uses the current account information for observing daily business activities and making reports to enable detailed understanding of business (Williams 2014). The detailed business functions comprises of understanding profit margin and correct use of labour. The primary purpose of applying the current accounting information is give managers with better understanding of the daily business input.
Both small and big managers can leverage the calculation tool to improve the capability of taking business decision to generated higher profit and gain competitive advantage (Schaltegger and Burritt 2017). Current account information is used to by managers to examine the uncertainty of cost associated with business. Managers have placed their emphasis on current account information as to improve the business functions regularly.
For the financial year 2015 Tesco’s current ratio stands 0.60 and in 2016 it marginally increased to 0.75. Earnings per share for Tesco for the year ended 2015 represented a negative figure of -2.12 but bounced back strongly to stand at 0.05. Tesco’s total fixed asset turnover stood 2.78 in 2015 and grew stronger in 2016 to stand at 3.04. This reflects the Tesco is deriving higher revenue from its assets. The debt ratio stayed low for Tesco as it stood 0.80 in 2016 and the net profit margin reported stood 0.25.
Morrison had portrayed a dropping current ratio trend of 0.54 and 0.48 in 2015 and 2016. The EPS for 2016 was 9.51 with stable total fixed asset turnover over 4.31 in 2016. The profit margin for Morrison Plc stood as low as 1.38 in 2016. In spite of reporting a strong net profit margin by Morrison Tesco overall financial performance was comparatively better than Morrison.
Project A should be chosen over Project B since Project A has better NPV.
Reference List:
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Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.
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Zhang, H., Hudson, R., Metcalf, H. and Manahov, V., 2017. Investigation of institutional changes in the UK housing market using structural break tests and time-varying parameter models. Empirical Economics, 53(2), pp.617-640.
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