Supermarket in UK holds important position in the retail industry as it makes a contribution of almost 5% to the gross domestic production of the nation. The supermarket or grocery market experiences annual sales of total value GBP 358 million. It provides employment to almost 2.8 million population of UK (Hutchinson 2013). The supermarket sector is strongly dominated by four big players namely Tesco, Sainsbury’s, ASDA and Morrisons over the years. The recent trend shows turn toward emergence of low-cost retailers like Aldi that reduces the domination as well as market concentration of the big four. The emergence of new firms in market indicates the growing demand and increasing proportion of retail purchase. Moreover their existence reshapes the market competition evoking importance for taking up proper strategies to conduct and survive.
This report aims at presenting a structure, conduct, performance analysis of the UK retail grocery market with substantial focus vested upon the strategies entering, expanding, and what barrier to entry poses challenges in the course of market development.
The supermarket sector undergoes annual growth rate of 3% indicating rising pattern in consumers purchase. As per data, one third of the consumer’s spending goes to the retail purchase that boosts the growth of supply and emergence of new firms like Lidi and Aldi .The SCP paradigm is an analytical framework used by firms to assess the underlying relationship of structure of market with the conduct and performance it exerts on the market under certain industry. Market structure has deterministic role in defining economic conduct of a firm, which further influences how it performs.
The variables determining the operative structure of the retail supermarket are the number of operating firms and their concentration in the local market. Number of consumers the firms faces monthly and yearly shapes up the demand that the retailer encounters. The composition of buyers and seller determine the market structure the firm operates in. Next important structural element is the cost pertaining to entry, exit and cost related advantages firm incurs (Fitzroy et al. 2012). The differentiation of products or heterogeneity among firms also determines the popularity of the firms and detects the taste, preference and turnover of the consumers.
Figure 1: UK Grocery Market Share (2016)
(Source: Kantar World Panel, Jan 2016)
UK supermarket is intensely dominated by several popular supermarket retailers like Tesco, Sainsbury’s, Morrison’s and ASDA with presence of small retailers John Lewis, M&S, and many new entrant emerging firms. Presence of these top brands having greater market share in domestic, international market and the presence of growing demand makes the market structure follow oligopolistic framework. The operation of supermarket through concentration of few big retailers tend to exert concentration and monopsony power to the growers, farmers and suppliers (Clarke, Kirkup and Oppewal 2012). The biggest attraction of the consumers for these firms is prices, which vary, based on differentiation and heterogeneity of products. This is one of the defining market strategy followed by Tesco even to capture the market share and lead in customer and brand loyalty. Pricing of Tesco is derived from the cost structure is has. Like other brands in the industry, this firm too has greater entry cost which mostly consist of higher sunk cost. Supermarkets are the collection of various types of consumer goods and almost all the brands sell similar category and products with some basic differences. Implementation of product differentiation strategy is the biggest source of competition in the market and price wars among brands.
Figure 2: S-C-P of UK Retailer Supermarket Tesco
The conduct of the supermarket sector in UK is determined by its very structure and it further shapes up the performance and contribution to industry as whole. A general business model is followed at the core of these firms with a common retail management design that sets the prime focus on customers, products, channel and reinvestment.
The business of grocery retail revolves around prioritizing customers owing to the fact it serves almost entire population in meeting its necessities. The huge operational scale and reach of the sectored firms indicate the better understanding of the trend and patterns of the consumers. This allows them to deliver the quality offered with reasonable prices for different brands of products. This helps the firm earn greater loyalty and brand image.
Attention given to product development and quality management is one of the best operative excellences the firms focus in. This is possible due to strong relationship with suppliers who never fail to meet the delivery of the firm and consequently the demands of the customer. Undertaking partnership with eminent suppliers and reviewing its quarterly. Product team maintains the creation of the satisfaction through services.
The channel is the component that determines how the products reach customers. It not only consists of the supply chain management but also important decision and execution related to that. For example, operating in small shops and moving to large stores and overtime follow the online shopping trends and establish the virtual markets. Amid the existing firms, Tesco is the first supermarket in UK to remain open and provide 24 hours service which was followed by others eventually. The firms came up with several Click & Collect points across the country for the convenience of the customers (Clarke, Kirkup and Oppewal 2012).The efficient channelization and its improvement materialized through substantial research and investment in the sector.
The huge amount of market operation and sales figure consolidates the greater performance of the included firm. The firms charge affordable prices which is further derived from the cost efficiency maintained by the operating firm. The new low-cost retail brands has provided access to quality at reasonable price which brought them growing amount of market share and greater customer base. Happy customers visit frequently, gives good ratings and positive feedbacks in form of recommendation. This further boosts the sales of the firm. Not only the customers but also the staffs’ satisfaction make the retailers greater workplace and turn into higher sales.
Figure 3: Comparative Supermarket Share of UK Grocery Market
(Source: Wiley Online Library)
More partnerships are offered to Tesco owing to the increasing market share. The increasing market demand and operation in form of both real and virtual market the firm is expanding in cross-border market fast. The important performance indicators like sales growth, profit delivery, operating cash flow figures and amounts show increasing pattern of the business operation and GDP contribution of the sector.
The present condition of UK retail market is full of competition due to the presence of various firms that has substantial market share. Firms like Tesco, Wal-Mart etc over time gained much popularity and customer base that actually operates as threat to the new entrants. Existence of many firms in the same industry creates competitive pressure that lead the firm to come with better quality of service at perfect price. The trend shows somehow reverse of the expected scenario for the new entries like Aldi and Lidi who managed to sustain growing market share even being small and new just by taking up strategy of product differentiation at low-cost. Higher start up cost in form of sunk cost restricts new entrants in the market. Hence, the important entry and expansion strategy can be affordable pricing, improved and differentiated product ranges, greater customer service and building brand loyalty.
To overcome the challenges while entering the market and mobilizing the business operations, firms go for exploring untapped market demand through store, outlet expansion across regions of the country. They can apply better management techniques and build trust through partnership or tie-ups with popular brands. Access to capital can be another solution for these firms to survive the greater entry cost and cost of operation initially.
The inception point of market development is analysis of market which outlines the structure, conduct and performance if the market. This operates through providing feedback effect among the components of market analysis that allow all the important market factors to be accounted. The SCP analysis brings forth static level of analysis based upon the neo-classical theories of firm. The market structure in the UK retail industry is oligopoly which operates in utmost competition (Alsmadi, Almani and Jerisat 2012). Even tough competition is non-price in nature, somehow the differentiated products of same category by different brands put concern on rivals who thinks of calibrating price as counter strategy. This leads to price war or price based negotiations along with qualitative differences. This leaves evident impact in form of increasing profit shares of the big firms like Tesco, ASDA etc which also questions the price-sticky attitude of the oligopolistic firm (Lusch, Serpkenci and Orvis 2015). Thus, utilization of oligopolistic theory is not enough to explain the phenomenon going on the market. Exogenous factors like loyalty, popularity, perception bias etc also contribute in the market operations are being excluded from the analysis. To capture the development tracking, dynamic analyses are to be conducted over time. Operative abnormal profits, competition of the new entrants actually pushes toward proper allocation of resources and brings efficiency acting as factors of innovation.
Conclusion:
The structure conduct performance analysis of grocery retail in UK highlights the recent increasing trend and pattern of business. Being one of the biggest market players in the industry, Tesco has higher significance in the economy of UK as whole. The new firms are breaking the concentration of big players through its low price and launching differentiated range of products. Higher growth of sales propels the market expansion that further creates business for the firm as well as immense source of employment for the population. The basis of the firm’s operation is customer priority and high quality of service. Oligopolistic competition did not curb the performance of the firms rather it is facing rising trend on the face of growing market demand.
Reference:
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