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Pest Analysis Macro Environment

Marketing Essay
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The purpose of this report is to analyse the food retail industry in the United
Kingdom. The reasons of the industry selection can be concentrated to the broad
range of provided products and services, the financial activity of the industry, the
influence in the people's life and the various external factors that affect the sector.
The analysis will begin with a presentation of the food retail industry and a highlight
of its significant features. Furthermore, to assess the remote environment of the
industry a PEST analysis will be conducted, analysing the political, economical, social
and technological factors that affect the industry. Furthermore, a Porter's 5 forces
analysis will be used to evaluate the operating environment and the nature of
competition. Moreover the major competitors and their competition strategies will
be identified. Additionally, the effect of the remote and operating environment on the
players of the industry will be highlighted. Also, a critical analysis of the industry's
strength and its future will be presented. Finally, a critical evaluation on the used
business analysis techniques will be illustrated.
The UK food retail industry is an established sector of the UK economy. During the
last thirty years the food retail corporations expanded their activities to serve various
consumer needs. The products that are provided to the public include food and its
sub-products, but also alcohol, tobacco, health and beauty products, clothing,
electrical products, homeware, fuel and financial services. However, according to the
Mintel report 2009, more than half of the total sales in 2008 were assigned to food.
Furthermore, concerning the size of the industry an increasing trend of sales can be
observed of about 4% per year from 2004 to 2008 and a total amount of 108.1 billion
pounds in 2008 (National Statistics - Mintel report 2009).
The food retail industry is mainly controlled by large supermarket chains that
possess the overwhelming majority of the industry's market share, as it will be
analysed further in the report. Concerning the size diversification of the retail stores,
the majority are large units like hypermarkets, supermarkets and discounters with a
percentage of 62% of the total number of stores. Furthermore, small units as
convenience stores and gas stations represent the 21.2% and food and drink

specialists the 11.3%. The minority are drug stores, warehouses and cash and carry
stores (Datamonitor 2009).

3. PEST analysis Macro-environment


To analyse the macro-environment or otherwise known remote environment of the
food retail industry, a PEST analysis will be used to specify how Political and legal,
Economical, Social and Technological issues affect the industry.

3.1 Political
There are many political and legal factors that affect the food retail industry. Future
political decisions concerning taxation or the retail industry legislation will definitely
have an impact in the industry competitors' policies and strategies. The current
legislation and regulation concern competition, employment, environmental, food
and grocery safety, financial services and health issues.
Specifically, the UK food retailers are obliged to follow food hygiene legislation set by
the Food Standards Agency and the equivalent European Union regulation such as
the General Food Law Regulation. In the UK the food safety act of 1990 was enacted
to set the food safety requirements for food intended for human consumption. The
Food Standards Agency was created in 2000 after the food standards act of 1999,
which was enacted to further secure the public health related to food safety (Office of
Public Sector Information, 1999). The UK food retailers are obliged to follow the
above regulations in conjunction with the General Food Regulations 2004 that set
the rules about the transportation, distribution, quality, hygiene, maintenance,
advertising and selling of food and its substances.
Especially for the food hygiene and maintenance the rules and requirements of the
Food Hygiene Regulations of 2006 and the internationally recognised Hazard
Analysis Critical Control Point (HACCP) must be followed (Food Standards Agency,
2010). Therefore, possible disobedience of the above regulations by the supermarkets
will cause legal problems and the enforcement of fines, harming their budget and
social image.
The competition in the UK is observed and controlled by two government bodies, the
Competition Commission and the Office of Fair Trading. The two government bodies
ensure that the companies in the UK comply with the competition law and practices.
Therefore, they observe and interface the market to avoid monopoly, oligopoly and
cartel phenomena. Their role beyond the control of competition between the

competitors within the industry is to ensure the fair trade between the supermarkets
and their supplies. According to recent press publications the fair trade is currently
the most important issue (Haurant S., 2009). In 2001 the Office of Fair Trading
enacted the Supermarkets Code of Practice to regulate and assure the trade between
supermarkets and suppliers, who include amongst others, farmers and breeders
(Office of Fair Trading, 2001). Additionally, the major supermarket chains had been
often accused for anticompetitive, unfair practices and failure to meet the necessary
requirements. For example, in April 2010 the Office of Fair Trading fined nine
retailers for anticompetitive practices at their tobacco pricing between 2001 and
2003 (Mintel report, 2009). For this reason the Competition Commission planned to
change the existing Supermarkets Code of Practice to a new Grocery Supply Code of
Practice (Haurant S., 2009). The new code of practice added intensive pressure to
the Grocery retailers because they were forced to comply with stricter regulation and
to cover the costs of the observation body. This new regulation led to greater
competition which toughed the operations of the supermarkets but reduced slightly
the prices to benefit the consumers.

Another important group of regulations are those concerning the planning and
environmental law. The grocery retail companies need to comply with the planning
law to be able to expand their activities in new places. During the past years, the
grocery retailers tended to expand their stores in places away from town centres. The
reason was primary the reduced property prices and the ability to construct large
supermarket units, maximising their profits.
However this trend provoked a series of issues such as the increased pollution from
the consumers' transportation leading the government to change the legislation,
demanding the presence of town centre stores at first. Therefore, the reaction of the
supermarket chains was to increase the number of mid-size and small stores who
complied with legislation and increased the supermarkets' points of presence
(Tescopoly; Butler S., 2006). Furthermore, the grocery retail corporations need to
comply with environmental law and regulations concerning goods transportation
pollution, aesthetics, proper disposal and recycling. For example the supermarkets
were forced by new legislation to charge their customers a certain cost for each
provided plastic bag (Brogan B., 2008).
There is a significant percentage of the workforce that is employed in the food retail
industry. Therefore, the food retail companies are obliged to comply with the UK and

EU employment legislation exactly as the rest of the employers. Labour law such as
the Employment Rights Act 1996 and the Employment Act 2002 specify the workers'
rights including wages, working conditions, work hours and job security Also, during
the past thirty years, a series of anti-discrimination laws were enacted to establish
equality and diversity in the workforce (Businesspme.com, 2008; direct.gov.uk,
2010). Also, the food retail corporations are obliged to comply with health and safety
standards in the workplace in operations like the use of machinery, electrical
equipment, transportation of goods, violence etc (Shropshire, 2010). These
regulations are mainly set by the Health and Safety at Work Act 1974 and the
Workplace regulations of 1992. Therefore, any political decision leading to more
complex employment legislation can increase the labour costs in the industry and
reduce the profitability. Additionally, non compliance with the labour regulations can
lead to long term litigations with former or employees or the government.
During the last years the large supermarket chains expanded their activities to
provide financial services such as credit cards, loans and deposits. Therefore the
supermarkets are obliged to comply with the legislation and regulations enacted by
the Financial Services Authority (Financial Services Authority, 2010). Therefore, a
possible change in financial services taxation or regulation will affect their
profitability. Furthermore, the supermarkets are obliged to pay the equivalent
corporate tax at the HM Revenue and Customs.

3.2 Economical
The economic factors, incidents and situations that affect the food retail industry can
be concentrated in the following categories: Consumer spending and disposable
income, inflation, taxation, interest rates, unemployment, monetary issues, and the
recent financial crisis.
The recent financial crisis has definitely brought many important changes in the food
retail sector as well as to the majority of the industries. However, the effect of the
financial crisis did not affect negatively the consumer demand. On the contrary the
consumer spending in the food retail industry increased from 2007 to 2008
especially in the food products and continues to increase at an approximately rate of
5% (National Statistics; Mintel report, 2009).
The main implication for this trend was that because of the recession, the consumers
cut their eating out expenses and started to consume food at home as it is much
cheaper. Furthermore the sales of organic food, specialised products such as

television and sound systems and expensive products declined (Mintel report,
2009).On the contrary, the sales of own brand products and hard discounters chains
increased indicating the consumers' turn in low cost products.
The price competition and the importance of food increased the consumer demand
and expenditure; however it is doubtful if it will continue to rise mainly because of
the general economic uncertainty and the higher upcoming personal income
taxation.
In macroeconomic terms, the GDP after a massive decline in its change rate started
to increase after the mid 2009 to reach a positive 0.5% in early 2010. Also, the
inflation after a decline during the recession increased in late 2009 which probably
led to an increasing trend at groceries prices (National Statistics, 2010). However,
the Bank of England continues to maintain the interest rates at a low level (0.5%), to
protect the fragile economy (BBC, 2010). This low interest rate will lead to increased
consumption because consumers will favour to spend than to save their funds and
the food retailers will be able to borrow funds at a low costs to cover their liabilities.
This fact will act as compensation to the increased inflation and will probably
maintain the prices.

Concerning the monetary issues, during the last three years the sterling faced a
significant decline of approximately (-26%) towards the euro and approximately (25%) towards the dollar which increased the cost of imported goods in the UK
(Yahoo Finance, 2010). Therefore, this situation might force the UK food retailers to
construct food manufacturing plants in the United Kingdom and prefer UK suppliers.
Thus, the grocery retailers will be able to have a stable pricing policy and larger price
margins. From 2009 to 2010 the exchange rates fluctuated causing uncertainty and
maintaining the food prices high
One of the most important parts of the economic factors that affect the food retail
industry is taxation. This is divided to personal income tax for the consumers and to
corporation tax for the supermarkets. After May 2010 elections a coalition
government between the Conservatives party and the Liberal Democrats party
formed and changes are expected in taxation. Concerning income tax an increase in
tax contributions is expected in 2010/2011 which will lead to a decline in
consumption possibly affecting the more expensive goods and food retailers. On the
other hand the corporate tax will be probably reduced during 2010 to boost economy

and development. (Vincent, 2010) Therefore, the food retail corporations will be able
to afford larger margins to price competition. The above facts will possibly lead the
supermarkets to a trend of decreasing prices in basic goods and making offers to
maintain consumer spending levels. For example there is a trend at supermarkets to
offer products in rounded prices (1, 2) creating an offer impression (Felsted A.,
2010).

3.3 Social
The next sector of the PEST analysis is consisted by the social factors that affect the
industry such as the demographics, lifestyle, culture and population trends.
It is well known that Europe's population is getting older and as years are passing
this phenomenon will be more intense. In the United Kingdom (Mintel report, 2009)
the average age and the percentage of retired people are rising. This trend has many
implications to the food retail industry.
First of all, elder people tend to consume less than younger people. This happens
because their income which mainly comes from pensions is lower.
Secondly, elder people tend to shop from the cheaper discounter retailers. Therefore,
the market share of the discounter chains will increase against the rest of the
competitors in the industry (Mintel oxygen, 2009).
Also, the additional needs of this age group leads to an increasing trend of online and
distance shopping which increase the home grocery deliveries. Thus, the operational
costs of the supermarkets increase due to increased expenses for vehicles and
personnel. Another implication coming from the ageing population will be the need
for new product lines designed for people with various chronic ailments which are
common amongst elder people.
An important issue that concerns the society is obesity. According to the Health
Survey for England, there is an increasing trend of obesity especially in children
(NHS, 2009). The health problems and their consequences led the government and
various organisations to promote a healthier lifestyle in Britain. Therefore, the
consumers' health awareness increased and they turned their interest to healthier
foods and to more fruit and vegetables. Thus, it can be supposed that the food retail
corporations will continue to adapt to the consumers demand enhancing their
existing product lines with new healthier products such as organic foods, low fat and
low sugar products and healthy food campaigns. Also, it will be possible to appear

products for specific social groups such as people suffering from diabetes,
cardiovascular diseases and allergies. Therefore, by targeting these consumer groups
the food retail corporations will increase their income and improve their corporate
social image.
Furthermore, the increasing trend of more women entering the workforce, led to the
need for ready meals at the supermarkets because women had less time to prepare
food after work (International Labour Organisation, 2008). As this trend continues
the supermarkets will expand their ready meals variety and create new categories
depending into cost, calories and taste covering different needs.
Also, the presence of different people from different background and culture in the
UK changed the structure of the society. According to the UK National Statistics
approximately the 10% of the UK population is non-British (UK National Statistics,
2001). Different cultures mean different habits and different food preferences.
Therefore, the food retailers often provide goods from all over the world to serve
those needs.

3.4 Technological
The final element of the PEST analysis concerns the technological factors that are
related to the food retail industry. The technological development affected and
changed the industry in different categories including consumers, environment, cost,
distribution, and logistics.
During the last decade, the supermarkets in the United Kingdom took advantage of
the internet and they are offering online shopping to the consumers. Through this
innovative feature the supermarkets offer their entire catalogue of products to the
consumers and the ability to compare prices, search for a product, pay and order for
their groceries. Therefore, the food retailers reduce their personnel costs while they
are able to advertise almost free and make consumers aware of their offers. Also it is
not unusual that many products cannot be found inside the stores and are available
only through e-commerce (Tesco annual report 2009). This is another example of
minimising operating costs while increasing sales.
Furthermore, the food retail corporations used the information technology to
organise their operations and maximise the organisation's efficiency and
profitability. Specifically, the management of each organisation's functions is
assigned to specialised software and digitalisation of processes. Through the use of

innovative technology the cost and the paperwork is reduced and time is saved. Also,
the logistics department increases its efficiency because the supply chain is more
efficient controlled and the stock management provides a real and immediate view
(Sainsbury's annual report 2009).
The implementation of technology can be beneficial for both retailer and consumer.
The self-checkout machines reduce the labour costs of the company because they
usually require one person per five machines to observe. Also, in that way the
consumers save time and control their groceries shopping. The introduction of point
earning cards offers discounts and rewards to the consumer while it provides
valuable information to the supermarket company about the preferences and habits
of each individual. The analysis of this information assists to the company's
advertising planning and strategy while it offers the ability of targeted marketing
(Moody, 1997).
The effective application of technology in the distribution and transportation process
through energy efficient vehicles protects the environment as it reduces the vehicle's
carbon emissions. Furthermore, the food retail company improves its corporate
social responsibility and reduces the goods transportation cost.
Finally, the Universal Product Code or in other words bar-code was an innovation
that brought a revolution in the industry. Each product could have its specific barcode, simplifying the pricing and check-out while saving time and establishing
accuracy. Also, the use of wireless technology and the attachment of electronic chips
on the products can prevent theft and measure the product availability on shelves.
Therefore, the inventory is the supply process becomes faster and the food retail
corporations avoid unexpected losses that due to their volume can have a significant
cost for the organisation (Food Marketing Institute, 2010).

4. Porter's five forces analysis - Operating


Environment
To analyse the operating environment of the food retail industry and evaluate its
competitive nature, a Porter's Five Forces Analysis, created by E.M Porter professor
at Harvard University Business School, will be used. According to Porter the five
forces are: the industry competitors' rivalry, the threat of new entrants, the
bargaining power of suppliers, the bargaining power of buyers and the threat of
substitutes products or services (Porter, 2004).

4.1 The industry competitors' rivalry.


The competition in the food retail industry is intense. The named big4 supermarkets
which are: Tesco, Sainsbury's, Asda, Morrisons own the 73.3% market share, fact
that makes the industry an oligopoly (Mintel report 2009). Below are the identified
the major competitors in the industry and their competitive strategies.
4.1.1 Tesco
Tesco is the market leader with a market share of 31%, and a total number of outlets
2,282, is traded in the London Stock Exchange and had 41,520m sales and 2,381m
profit in 2009. Beyond food products it sells electrical equipment, health products,
petrol, clothing, homeware, telecommunications through a joint venture with O2,
and financial services through Tesco Bank (Datamonitor, 2009). Also, Tesco is
expanding to land telecommunications, construction and youth clothing (Parker;
Felsted; Poulter; Minton, 2010) Tesco's expansion plans target to the development of
the small "Tesco Express" who satisfy the legal size requirement of Sunday trading
act to operate on Sunday (DEFRA, 2006). The objectives of Tesco's strategy are
concentrated in five areas: "to be a successful international retailer, to grow the core
UK business, to be as strong in non-food as in food, to develop retailing services such as Tesco Personal Finance, Telecoms and tesco.com and to put community at
the heart of what we do" (Tesco Annual report 2009).
4.1.2 Sainsbury's
Sainsbury's is a supermarket chain in the United Kingdom with a market share of
15.4%, and a total number of outlets 792, is traded in the London Stock Exchange
and had sales 18,911m and 466m profit in 2009. Sainsbury's sells food products,
home and garden products, electrical appliances, clothing, health products, sports
and leisure products, petrol and offers financial and insurance services. Also,
Sainsbury's is expanding to Electricity and Gas, broadband and digital TV.
Furthermore, Sainsbury's collaborates with convenience store chains Bells Stores,
Jackson's Stores, and JB Beaumont Stores in a strategic alliance move to increase its
market share in the convenience stores battle.
Sainsbury's concentrate its corporate objectives in five areas: Great food at fair
prices, Expansion in non-food products and services, Reaching more consumers
through alternative distribution channels (online shopping), growing supermarket

space and active property management of existing stores (Datamonitor, 2009; Rigby
and Killgren, 2008; Sainsbury's annual report, 2009).
4.1.3. Asda
Asda is a supermarket chain owned by Walmart a United States of America
supermarket corporation. Asda operates in the United Kingdom with a market share
of 15.1% and a total number of outlets 356 and had sales 18,573m and 520m profit
in 2009. Asda sells food products, health and beauty products, household products
and petrol. Also it offers telecommunication services through its own mobile network
"Asda mobile" and clothing through the "George" stores. Asda's competitive strategy
is to differentiate from the competition emphasises in the fresh food, including
bakers and butchers in its stores. Also, Asda operates a discount store "Asda
Essentials" with own brand products competing directly with the discounters Lidl
and Aldi. In a generic view, Asda targets in price competition boasting better prices
and offers. (Datamonitor 2009; Corporatewatch.org.uk, 2004)
4.1.4. Morrisons
Wm Morrison supermarkets or otherwise Morrisons is the fourth supermarket chain
in the United Kingdom. Morrisons have a market share of 11.8% and a total number
of outlets 420. Morrisons sells groceries, household products, petrol and dry cleaning
and photo services. Morrisons operates through its own stores and its subsidiaries
with Safeway among others. Morrisons' target is to become the "Food Specialist for
Everyone" as it owns 13 manufacturing plants and a fresh food factory. Morrisons
concentrates its strategy around three brand values: Fresh, Value and Service. This
means that Morrisons targets to offer fresh food in competitive prices in a premium
consumer service. Generally, Morrisons is an emerging power in the industry and
tries to gain competitive advantage by connecting the gap between value and high
quality products. (Datamonitor, 2009; Wm Morrison annual report, 2009)
Examining the nature of competition and the competitive rivalry it can be observed
that the market share of mid-size and local grocery retailers is too small and the
increasing appearance of big4 convenience stores and the large fixed costs. This leads
to the implication that the competition in the industry is mainly concentrated among
the major competitors.
The major competitors are operating in a mature market, which pushes them to
"fiercely compete for market share through price, range and service" (DEFRA 2006).

In a mature market with a stable population like in the UK the consumption cannot
be increased significantly. Thus, the main objective is to acquire a bigger percentage
of the market share pie. Therefore, this situation has driven the grocery retailers to
compete in a price war to maintain their customers and if possible to attract more to
increase their revenues (Felsted, 2010).
For this reason the grocery retailers aim to innovate and minimise the cost to be able
to allow larger price margins. Also, taking into account the recent financial crisis and
the recession it can be observed that the consumers were cutting their expenses and
turned to hard discounters' chains such as Lidl and Aldi. (Mintel report, 2009) This
situation strengthens the price competition from sophisticated to basic products such
as milk, poultry and bread. Also, the major competitors adopted aggressive
advertising policy comparing often their prices with competition (Leroux, 2009).
Furthermore, to increase their competitiveness supermarkets expand their activities
and increase their product range. For example they offer in their stores non-food
products like electrical equipment, homeware, pharmacy, financial services etc. This
action widened their competitive arena, as they compete with a large portion of the
retail sector such as electrical equipment, clothing, DoItYourself, furniture and
health and beauty stores. The existence of petrol stations at the supermarkets
competes directly with the petroleum providers e.g. BP and SHELL. Also, the
supermarkets' expansion to financial services e.g. Tesco Bank, place supermarkets to
compete with retail banks. It can be suggested that the supermarkets because of the
mature food market aim to provide a total "package" of products and services to their
customers covering all their consuming needs; thus increasing the food retail
industry's sales and profits.

4.2 The threat of new entrants.


The entrance of new competitors in the food retail industry faces several difficulties.
The creation of a new supermarket chain requires large capital investment, funds for
corporate planning, advertising and trading capital. Furthermore, the majority of the
industry's market share is acquired by the established big4 chain supermarkets and
the margins for expansion are very limited. Also, the acquisitions are very difficult to
realise because of the high value of the existing chains. However possible mergers or
strategic alliances might take place. Other barriers to entry in the industry are the
large fixed costs and the developed supply chains. Also, the existing dominants of the
market benefit from the economies of scale which gives them the ability to adopt an

aggressive pricing strategy. Therefore, it is very hard for the smaller retailers to
compete and survive in that environment.
According to the Competition Commission (2008) there are three different factors
that lift entry barriers to the industry: a) cost advantages that large grocery retailers
have b) the planning regime for grocery retailing and c) the control of land of large
grocery retailers.
The Competition Commission report divides the large grocery retailers cost
advantages in two categories: distribution costs and purchasing costs.
The large grocery retailers gain benefits from reduced distributions costs occurring
by economies of scale and economies of density. The economies of density benefit the
supermarkets because they operate satellite distribution centres that serve groups of
stores. This process reduces the distribution costs because the distribution centres
supply only the short and medium distance branches saving time distance and
transportation costs.
The economy of scale impact is that the supermarket chains use technology to
control the products availability, to maintain the sensitive groceries such as meat and
vegetables. Also, the supermarket maximise the efficiency of the distribution from
and to suppliers, supermarket stores and consumers.
Therefore this acts as another barrier to entry because the large supermarket chains
have established channels of distribution and a cost effective distribution network
supported by their own distribution fleet which covers the majority of the British
territory (Competition Commission, 2008).
The purchasing costs act as a barrier to entry to the food retail industry. The large
supermarket chains because of their high volume purchases are able to deal better
prices with their suppliers.
Therefore, they are able to offer their products at a lower price in contrast with the
smaller retailers who are obliged to purchase at a higher price (Competition
Commission, 2008). Also, the big4 chains have already a competitive advantage
because they possess knowledge and information about the suppliers. The volume of
their sales gives them the ability to make large orders of supplies in lower prices.
Another barrier to entry in the industry is the current planning regime for grocery
retailing. The planning regulation sets limitations to the ability of new and existing

competitors to open new stores in the positions they want. The reasons for this
include environmental, competition and town planning issues. Also, the continuous
development of supermarket outside towns led the UK government to demand the
town centre development since 1996 (Competition Commission, 2008). Additionally
the large supermarket chains already control the suitable land and the best locations,
which make the rest of the sites expensive and difficult to find.
All the barriers to entry in the industry are beneficial to the oligopolistic big4
supermarket chains and allow them to increase their profitability through the
reduced costs and by controlling the goods prices.

4.3 The bargaining power of suppliers.


According to the Datamonitor report (2009) the suppliers in the grocery retail
industry include: food manufacturers, food processors, farmers, and agricultural cooperatives. The most powerful suppliers are the food manufacturers and the food
processors because their number is smaller and in some cases they are irreplaceable.
The bargaining power of the suppliers is high when they supply the supermarkets
with branded goods that are highly demanded by the consumers. The supermarkets
cannot apply big pressure to secure low prices and the suppliers can negotiate better
prices. Therefore the supermarket chains make long term contracts with certain
suppliers while maintaining their deals with a variety of suppliers to keep the
switching costs low.
Furthermore, the presence of the supermarkets own brands weakens the position of
the suppliers and reduces their bargaining power. For example the supermarket
chain "Sainsbury's" includes in their product line their own branded "Sainsbury's
ham" and the "Danepak" ham and the consumers prefer them because they are
usually sold at lower prices (Ali, 2009). The implication is that the supermarkets gain
bargaining power because they are able to change suppliers or to make big orders.
However when the food retailers choose to cooperate with only a few suppliers they
give bargaining power to suppliers. For example big food manufacturer like "Nestle"
have loyal consumers who give high value to the brand. Therefore, the supermarkets
are obliged to bargain with different terms with the big suppliers and make
concessions to their profits (Hill, 2007).
During the last years the big4 competitors demanding for lower prices, were often
accused for price wars with the suppliers. Unfair competition practices like late
payments were often adopted which led the Office of Fair Trading and the

Competition Commission to conduct deep investigations in the industry and to


impose big fines to the supermarkets (Peel et al, 2010).
Additionally, according to Financial Times publications in 2008, the Office of Fair
Trading discovered the adoption of cartel practices and price sharing plans between
the big4 supermarkets and big suppliers like Unilever, Nestl, Cadbury, Mars, CocaCola Enterprises and GlaxoSmithKline (Peel and Rigby, 2008). Therefore, to ensure
the health competition in the food retail industry, the Grocery Supply Code of
Practice (GSCOP) introduced, to improve the supermarket chains relationships with
the suppliers and establish a fairer trade of goods (Dickinson, 2010).
On the other side, during the spring of 2010 publications from the press revealed the
intention of small suppliers like farmers, to unite under one syndicate to achieve
better prices for their products. In that form they will be able to gain bargaining
power and add pressure to the oligopoly of the supermarket chains (Kuchler, 2010;
Lawrence, 2010). If this move succeeds, the grocery retailers will be obliged to
squeeze their profits, buying the suppliers products in higher prices.

4.4 The bargaining power of buyers.


The buyers in the food retail industry are considered the consumers. The objective of
the consumer is to satisfy his need and minimise the cost (Ratchford, 1982).
Therefore, if the quality and the features of the product are the same, the consumer
will prefer the product with the lower price. The consumers buy products in small
quantities which imply that the switching costs for the buyers are low and pressure is
applied to the supermarkets, providing bargaining power to the buyers (Perner,
2008). Also, there are lots of buyers and they have intelligent consumer
consciousness.
The price sensitivity of the basic products is high due to their homogeneity and the
small differences that they have. However the supermarkets obtain higher bargaining
power when they provide high quality products such as organic or specialised
products. The price sensitivity of luxury and high quality products is low because
they are not a lot of substitutes; their sales volume is low and the consumers pay high
prices to acquire them. Additionally, to increase their consumers' loyalty they use
promotions, special offers and loyalty cards (Trench, 2010).
Furthermore, the consumers have the necessary information because they are able to
compare prices through the online internet catalogues. Another important factor that

increases the bargaining power of buyers is the large proportion of supermarkets to


consumer in each town (DEFRA, 2006). The presence of hypermarkets,
supermarkets, express and convenience stores from all the supermarket chains does
not force the consumers to prefer a specific chain due to geographical reasons. Also
the big4 supermarkets do not differ too much among each other which give to the
consumers the ability to choose. The implication is that the supermarket chains to
maintain their revenues and profits need to retain their existing customers.
Therefore, they are obliged to continue their offers, loyalty programmes and low
prices.

4.5 The threat of substitutes products and


services.
It is not valid to say that the food retail industry has substitutes, a more proper
characterisation is that it has alternatives. Due to the range of products and services
that the grocery retail industry offers the substitutes can include Banks, Restaurants,
Petrol stations, Electrical equipment stores, clothing stores, pharmacies and
homeware stores.
Food and its sub products equals to approximately 50% of the total sales in the
industry (Mintel report, 2009). Food cannot be substituted; everybody needs it to
satisfy one of his basic needs for living. Also, in the modern way of living, people have
less time and do not prepare food at their homes. Despite the recession there is still a
big percentage of the population that buys food from restaurants or takeaways
(Kuhn, 2008). However, the food consumption remains stable; the restaurants are
only a process stage from the food production to the food consumption. The
supermarkets often act as food wholesalers and sell food products to businesses.
Therefore, the threat from food substitutes is low.
Concerning the other products and services, the supermarkets have to oppose and
compete with specialised retailers in their sector such as the BP in the petrol, Curry's
in the electrical equipment, Primark in clothing, IKEA in the furniture and Boots in
the health and beauty. It can be supposed that each one of these retailers has more
knowledge and information in the sector than the supermarkets. Also, the retailers
gain competitive advantage through the variety and quality of their product range.
Furthermore, through discounted large orders from big suppliers they reduce the
prices and make special offers. Thus, in conjunction with the low switching costs the
threat of substitutes in the above categories increases.

Additionally, the threat from substitutes creates a complex situation for the grocery
retailers. On the one hand the supermarkets have competitive advantage due to the
variety of products that they offer in a single place. On the other hand, the
supermarkets cannot fully compete with the specialised retailers because a
supermarkets' expansion in more specialised products will be risky, costly and
dangerous for their profitability.

5. Remote environment and competitive arena


effect
Examining the remote environment impact on the players of the industry and
specifically the political/legal factors, a long term involvement is revealed between
the big4 supermarkets, the Competition Commission and the Office of Fair Trading.
The new regulation, planning law, restrictions and fines that were imposed to the
supermarket chains increased their costs, reduced their profitability and changed
their expansion plans.
In the economic factors, an expected decrease in corporate tax will increase the
industry players' profitability. Also, the weakened sterling acts pressure on the
competitors due to the increased cost of imports, fact that will probably make them
turn to domestic suppliers.
Furthermore, social changes such as the ageing population, increased obesity,
diversity of the UK ethnic groups forces the food retailers to adapt their product lines
and strategies.
Also, the advancing technology changes the supermarket operations, reducing the
operating costs and increasing security and effectiveness and allows offering more
products online, therefore increasing supermarkets' profitability.
Furthermore, examining the operating environment, the fierce competition forces
the major players in the industry to price and offers wars. The food market is mature;
therefore the supermarkets expand in a variety of products and services, to increase
their market share and profits.
Also, there are strong barriers to entry in the industry due to cost advantages,
economies of scale and the control of land and the big4 supermarkets take advantage
of the oligopoly and maximise their profits.

Generally, the bargaining power of suppliers is low, giving the ability to the
supermarkets to negotiate better prices and increase their profits.
The bargaining power of buyers is high due to the low switching costs and the variety
of options. Therefore, the major players in the industry try to differentiate from the
competition and increase their loyalty in order to retain consumers.
Finally, the supermarkets are not significantly threatened by substitutes in the food
market but are weaker in the specialised non-food categories.

6. Conclusion
The food retailing industry in the United Kingdom is an established and highly
profitable industry (Datamonitor, 2009). Food is one of the basic needs of humans;
therefore its providers are irreplaceable in a society. Additionally it has a significant
impact in people's everyday life and is still developing as it expands in almost all the
retail industries. During the last years the industry proved its strength by continuing
to succeed in the most severe financial crisis after the World War II. However, the
industry is characterised by oligopoly practices and the supervisory bodies often set
limitations in its actions. It is also tested by the socio-cultural changes and the
evolution of technology.
Also, the fierce competition might lead to harder price wars which can increase the
competitors' financial risk. Furthermore, due to technological evolution it is possible
that the vast majority of grocery shopping will be online in the future, eliminating the
physical presence stores. Also, in a possible severe deterioration of the recession the
supermarkets' social responsibility will be tested as the country's main food supplier.
Therefore, in order to maintain the industry's strength, the major players of the
industry need to adapt fast and effectively in the remote environment changes while
maintaining healthy competition in the operating environment and the competitive
arena.

7. Appendix - Critical Evaluation of Techniques


The PEST analysis concentrates in the external factors that affect an industry,
captures the current trends and is useful to understand the environment that
operates and predict its future. Using the PEST analysis tools the companies can plan
their future corporate strategy and assess a possible expansion in a new market or
country. Additionally, when in an industry analysis PEST is combined with Porter's
five forces the analysis of the macro-environment and micro-environment can reveal

the industry's profitability potential. According to the creator of the five forces
model, Michael Porter, the analysis of the competitive forces reveal profitability but
also provide with a template for the future competitive strategies (Porter, 2008).
Porter's five forces identify the source, strength and nature of competition. However,
it cannot easily capture the unexpected changes as it is based on the current
competition. For example, a possible financial crisis or significant technological
discovery can completely change the existing competition characteristics. On the
contrary no one is able to forecast the future and the past is the best predictor for the
future. Finally, it can be suggested that the combination of PEST and Porter's five
forces with accurate information can provide a realistic and valuable analysis of an
industry's remote and operating environment.

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