Your task is to carry out a critical analysis and evaluation of the strategies adopted by world-class food retailers, using the various sources of information and materials researched.
You will be expected to select and apply appropriate theories, techniques and models in a constructive manner.
Tesco, Sainsbury’s and ASDA are among the top UK food retailers. Using examples from these food retailers, critically examine the main arguments for and against ‘globalization’ in the food retail Industry in terms of:
(a) Threat of New Entrants and Substitutes, and
(b) Bargaining power of suppliers and buyers.
Your answer should be based on critical analysis of developments in the global food retail supermarket Industry over the past 2-3 years.
Introduction or Overview
“Globalization” refers to increases of collaboration and interdependencies between economies or individuals of different nations.
The cross-border trades have been growing rapidly since 1990’s (Scholte, 2000). Subsequently, organizations comprehended the criticalness and interest to go worldwide to offer or sell the products or services as part of business expansion and global Strategy. As various companies results indicate, internationalization or globalization is a result-oriented approach in today’s business environment where companies have enormous opportunities to strengthen market share and revenue.
The global demand is another pulling factor for companies to extend their products or services across the globe.
In current scenario, multinational enterprises (MNEs) have turned out to be intense in global markets, as they are also playing vital role in country’s economic measurements.
The statistical reports revealed that around 52% of world Resources are controlled and possessed by multinational organizations; in the meantime there are around 63,000 multinational enterprises with around 700,000 foreign affiliates on the planet (Saee, 2007).
It shows that the business sectors are uniting and consumer purchasing power is growing on the grounds that there is a vacuum in the global market.
Despite the opportunities, there are challenges and pitfalls that need to be understood, analysed and evaluated profoundly from different perspectives.
Critical analysis and the key arguments for and against ‘globalization’ in the food retail industry
The structure of global food industry is continuously changing, where consumer’s requirements are prevalently changing due to wider range of products or services availability, advanced technological platforms (i.e. e-commerce, internet), substitute’s availability and life style. Moreover, competitors and new entrants are arriving with unique products and services to captive consumers. All these consequences are persuading consumers in terms of purchasing decisions. In order to meet the requirements of consumers; the manufacturers, suppliers and retailers should need to be focused on producing and providing quality products that eventually keep customers with the company for long run.
The changes of consumer habits and preferences are making food retailing companies to be innovative. In this regard, companies are focusing in changing supermarket formats to increase the sales and profits. According to research reports, the significance for supermarket and hypermarkets are growing where both are generating about $ 4 trillion sales in the global market (www.ers.usda.gov.). The leading global retailer are from USA and Europe; and they are now focusing on expansion in developing markets like India, China, Indonesia, Brazil and others.
In this scenario, TESCO and Morrison Supermarkets are taken as examples to support these arguments. TESCO was opened its first store in 1929 in London by 1960’s it was a familiar feature of most UK high streets. Currently, TESCO is a biggest and most profitable supermarket chain in the UK; they mainly sell the grocery, foods, and electronic devices and so on, they always focus on quality and value to the customer. The Tesco was started its International Operations in the year of 1994.
Another company is ‘Morrison Supermarkets Plc.’ which is one of the leading food retailers. By January 2011, it had totally 439 stores in UK (Reuters, 2011), the company wholly owned subsidiaries include Bos Brothers Fruit and Vegetables BV, Farmers Boy Limited, WM Morrison Produce Limited, Safeway Limited, Rathbone Kear Limited and Optimisation Developments Limited (www.forbes.com). To understand the major food retail market leaders in UK, the following figure 1.1 shows the captured market shares from leading retailers.
Figure 1.1: Share of Leading Players in UK Food Retail market
Source: Euromonitor, 2010
As figure 1.1 states, the highest market share occupied retailing company is TESCOs which got 30.6%. The second position goes to ASDA with 16.6% of market share in food retailing. The third position goes to Sainsbury’s with 16.3% and next Morison’s with 11.1 % of market share. These are four key players influencing the UK’s retail industry.
In today’s food retailing industry, there is huge competition in all directions such as pricing, special deals, quality, new entrants, new products, substitutes and others. Moreover, the companies like Tesco and Morrison are facing challenges with the companies which are entering into Britain’s market because new entrants are mainly focusing on price strategy as a strategic tool.
In the global perspective, the food retailing can be critically analysed by considering forces like threat of new entrants and substitutes, and bargaining power of suppliers and buyers. To understand the competitor analysis in retail industry context, the Porter’s Five Forces model framework is important where it helps to evaluate the potential threats from rivalries. The figure 1.2 shows how Porter’s five forces aligned in the model. It was developed by Michael E. Porter in the year of 1985.
Figure 1.2: Porter’s five forces model
Source: Porter (2008).
As figure 1.2 shows, the key five forces entails industry competitors potential threats from new entrants, threats from substitutes, bargaining power of suppliers and bargaining power of customers. These are potential considerations to analyse the rivalries and potentiality of strategies to assume for further strategic decisions. The following sections are going to make understand how five forces simulation is being implemented in food retail industry.
1. Threat of New entrants and substitutes
In the global retailing industry, there are competitors with new products or services to captivate the market share followed by gaining long term sustainability. Indeed, today’s technology and innovation are the key driving forces that help to manufacture and deliver quality products or services. Taking these factors into consideration, most of the companies are spending majority of revenue on R&D (Research & Development) activities, because companies are always keen in discovering products which would attract consumers in order to create Competitive Advantage. The consequences of these strategic approaches may result in the form of new product development and others. Moreover consumer habits are also changing every time, so the companies are eagerly putting efforts to attract them. All these strategic formations and plans will eventually come up with a right product to the right people in order to give tough competition to the existed companies.
These are the challenges to the companies which are already in the market and which got superior market share. The new entrants which often come up with innovative products with premium quality, market standards and value to the customer, those products likely attract consumers and capture the market share. When new products hit the market, customer are always curious to try it out; and if that product meets anticipations in terms of quality, price and features, then he/she may switch to new product or company.
These are the major challenges to the existed companies. Thus, in order to be competitive and want to build customer loyalty, it is essential to think different, consequently create differentiation in different areas.
When it comes to the TESCO’s case, the company has new entrants threat especially from the companies like Amazon, ASDA and other supermarkets which are already in the same concept, but there are some analysis reports revealed that the threat from new entrants is low for TESCO, because it has already captured 30.6% market share in food retailing which is highest market share in the UK (Mintel, 2010).
As understand the TESCO’s market situation, it is highly difficult to entrants to beat Tesco unless they come with very competitive prices and high quality.
When it comes to threat of substitute products and services for TESCO’s and Morrison’s it is considerably low for food products and medium to high for non-food items. In food retailing market, the substitutes are majorly small chains or convenience stores, organic shops and off-licences; but market study report says that these are not seeming strong threats because the Tesco’s and Morrison’s are delivering with quality products with the competitive prices (Financial Times, 2009). Nevertheless, to come out of these challenges; the Tesco’s started emphasising on street stores in the name of TESCOs express.
The overall analysis makes understand the leading supermarkets such as Tesco, Morrison’s, ASDA and Sainsbury’s are not considerably facing high level threat from new entrants and substitutes according, but scenarios would change in near future because of growing competition in the retail industry.
2. Bargaining power of suppliers and buyers
The bargaining power influences markets in various directions; and they are considered as the key players in the competitive analysis. When it comes to bargaining power of suppliers in the food retailing industry, it depends on the relationship with suppliers and based on demand for the particular product in the market, The consequences from these factors could change the bargaining power of suppliers. When it comes to big supermarkets like Wal-Mart, Tesco, Sainsbury’s, Morrison’s and Asda, the bargaining power is considerably low or medium , because these companies are big clients to the suppliers where suppliers need to build relationship with large companies. In this respect, negotiations are likely positive for big players and they have sound chances to get products at low prices from the suppliers.
As understand the current global corporate retailing business scenario, the bargaining power of suppliers is not high. However, if the relations are collapsed with suppliers then the consequences would be in different scenario.
In the global food retailing industry, the bargaining power of buyers is fairly high because buyers are easily motivated to switch other brand if that particular brand has differentiation in terms of quality, design, quantity, price, features and others. There are various reasons beyond switching to other brands or products; the competition is becoming high every day, the information technology and innovation is making consumers easy accessing to choose and purchase the products and there are number of leading international companies entering into global market with strong strategies. Thus, all these options are attracting consumers, thereby consumers often switch to other products or brands to get benefits available in the market. This analysis makes understand how bargaining of buyers is strong in the global food retailing. In order to sustain for a long run in the market and strengthen customer base, companies should need to keep prices low, sell quality products, deliver high standard services and build customer relationships.
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