Sainsbury’s Competitive Edge in Groceries

Introduction

Sainsbury was founded in 1869 with an aim of helping people live well for less which remains its objective to date (Sainsbury 2018). Sainsbury is among the leading organisations in the UK grocery sector (Chakraborty et al. 2014). Over the years, Sainsbury has continued to make profit forcing its competitors to rethink strategies to value addition (Burch and Lawrence 2013). In the 2017/18 financial year, the company’s EBITDAR margin increased 4 basis points while the retail underlying operating margin declined 18 basis points (Sainsbury 2018). The company’s profit margin before tax increased by 1.4% to £589m as compared to the 2016/17 UPBT which was £581m (Sainsbury 2018). Sainsbury Bank profits rose by 11% to £69 million in the year 2017/18. These positive changes in profit are an indication that Sainsbury has acquired and maintained a competitive advantage over its competitors. The UK grocery sector continues to grow and the 2021 projected value is £196.9billion (Gorton et al. 2013). Modern grocery retailers have emerged including discounters, convenience stores and online grocery, which have proven to have the ability to limit the expansion of large companies in this sector (Hood, Clarke and Clarke 2016). The emergence of modern grocery retailers has significantly lowered food prices, forcing incumbents to rethink their operational strategies (Sparks 2014). Despite Sainsbury performance, it faces intense competition from Asda, Tesco, M&S, Morrisons and Waitrose among other companies in the grocery sector. Sainsbury and Asda are significant players in the UK grocery sector but they are not close competitors (Wrigley 2014). The two seek to merge a strategy aimed at maintaining a competitive edge in the grocery sector. This report analyses this strategy.

External Analysis of the Grocery Sector

PESTEL analysis

Political: consumer protection policies

Since 1960s, supermarkets in the grocery sector have realised steady expansion (Felgate and Fearne 2015). In the UK, the government has set various rules and regulations to guide retailers in the grocery sector with an aim protecting consumers and increasing the competiveness of the industry (Richards et al. 2013). For example, the government requires retailers in this sector to create employment opportunities. Under the EU law, companies with large market shares are seen to be dominant (Fernie, Fernie and Moore 2015). As a result, large companies operating in the UK grocery sector have had to consider policies and regulations relating to the way monopolies should be governed. Large companies have always been forced to offer their products and services at lower prices so they do not exploit consumers (Dawson 2013). This stands as a threat to large companies in the UK grocery sector in that despite the high quality of their products, the prices must remain relatively low in contrast to those of new entrants and small firms. This serves to the advantage of small firms while threatening the success of large companies.

Economic: Increase in unemployment rates and inflation in food prices

Over the recent years, UK has realised a span of economic slowdown, which have considerably affected demand, prices, costs, and profitability (Branston, Cowling and Tomlinson 2014). In the era of economic slowdown, companies in different sectors in the UK economy have been forced to cut their operational cost resulting to a decrease in employment opportunities. The bargaining power of consumers have decreased, which has lowered the profitability to firms in operation. This has forced some firms out of operation. At the same time, the UK population has risen thus increasing the demand for goods and services. This relationship between demand and supply has resulted to an increase in commodity prices. The high unemployment rates and high food prices are a threat to companies in the grocery sector since the demand for products will decrease.

Social: Aging population

The UK’s populace is getting aged, which is likely to continue with more people getting pensioned off (Frewer, Risvik and Schifferstein 2013). This has different consequences to organisations in the UK grocery sector. First, aged population has less consumption as compared to the young population which is associated to their decreasing income. This is a threat to firms in the grocery sector in that they are likely to experience a decline in product demand. Second, aged population has mobility difficulties, which implies that distance shopping becomes a factor for the aged (Stenhagen et al. 2013). This is an opportunity to firms in the grocery sector to diversify in delivering groceries to consumers’ places of residence.

Technological: Online Shopping

Technological advancements have given rise in the popularity of online shopping. Online shops do not require consumers to physically visit the shop but instead they display the products, their quality and features, as well as prices to consumers. The consumers then order the products at the comfort of their homes, place orders, and the products are delivered to their door (Rose and Dhandayudham 2014). Online shopping is an opportunity to firms in the grocery sector as new entrants can rely on this innovation while incumbents can diversify to this nature. The incumbents have an added advantage in that they can serve physically and provide online shopping options thus reaching more customers.

Environmental: The Act of Land

The UK government has tightened the act of land requiring more retails shops to be established in town centres (Cotula 2013). This is an opportunity for large supermarkets in that they can respond by increasing the number of small and medium-sized stores in town centres. The supermarkets can devise other ways of reaching customers in rural areas; for example, through opening online shopping platforms.

Legal: Prohibition of cartels and anticompetitive arrangements

The UK antitrust rules ban cartels and other anticompetitive arrangements that could result to realisation of monopolies in the grocery sector. Despite these rules, the big four (Asda, Sainsbury, Morrisons, and Tesco) still have a national market share but below the level they could be termed monopolies (Wood and McCarthy 2014). The level at which a dominant position is normally established serves as an opportunity for the big four to increase their market share. This has warranted the Sainsbury/Asda merger while influencing other firms in this sector to rethink their survival and competitive mechanisms in a way that does not exploit consumers.

Porter’s Five Forces

Threat of new entrants: Low competitive force

The threat posed by new entrants to firms in the UK grocery sector is quite low. Any new entrant will need massive investment in order to operate in the town centres or out of town (Nag, Han and Dong-qing 2014). Additionally, they will require a lot of time to build reputation and make their presence in this sector given the positions occupied by the incumbents. The land tightening regulations in UK have also limited new entrants to the grocery sector. Similarly, the amendment of the Environment Department’s (PPG6) has restricted the storage of groceries and food, which could challenge new entrants. Further, new entrants will require large investment for promotion purposes and a lot of energy to convince consumers why they should acquire their products (Thompson et al. 2012). Finally, the incumbents, particularly the big four, offer their products at low prices, which challenges pricing strategies for new entrants.

Bargaining power of suppliers: Moderate competitive force

Large supermarkets in the UK grocery sector exercise significant powers over suppliers because of the bulky volume of products they purchase from the suppliers (Inderst and Valletti 2011). The large number of large supermarkets in the grocery sector has provided a ready market for suppliers therefore they have the power to determine the prices at which they acquire products from suppliers (Davis and Reilly 2010). This high bargaining power of large supermarkets has compelled them to exploit suppliers with unreasonable terms forcing the suppliers to turn to other retail shops. On the other hand, the number of convenience retailers has significantly increased, which has lowered the bargaining power of huge supermarkets with suppliers shifting to supply the convenience retailers (Segal-Horn and McGee 2012). This has countered the power of the huge supermarket chains thus moderating the power of large supermarkets in deciding the prices suppliers offer the products.

Bargaining power of buyers: High competitive force

The buyer power of large supermarket chains has gradually risen since 2000 and it is higher than that of convenience retailers and other opponents (Swinnen and Vandeplas 2010). This has the potential to lower customer’s choice thus forcing them to remain loyal to the large supermarkets in the grocery sector. According to Miklós-Thal, Rey and Vergé (2011), large retailers in the grocery sector are paying about 13% competition fee lower than the convenience retailers, which implies they will offer their products at lower prices yet maintain their profit margin. As a result, small convenience stores and other opponents will not be able to intensely compete with the large supermarket chains.

Threat of substitute products: Low competitive force

Large supermarkets have a wide array of products where customers can easily switch into other product options without incurring extra cost of moving from one roof to the other (Christopher and Peck 2012). The convenience stores among other small opponents majorly store necessary stock, which forces consumers to get other variables from large supermarkets thus incurring switching costs (Hingley et al. 2011). Therefore, large supermarket stores have low risk of losing their customers to other retails in that they stock in bulk and in varieties.

Existing rivalry between competitors: High competitive force

The big four in the grocery sector experience intense competition from each other (Dawson and Shaw 2012). Additionally, the rise of convenience stores has served the needs of customers out of town thus eliminating the need to travel to town to acquire the products. This has intensified the level of competition in the grocery sector. Further, the emergence on online shops has disrupted purchase behaviours in the grocery sector forcing the incumbents to rethink their strategies in order to remain competitive (Dawes and Nenycz-Thiel 2014).

SWOT Analysis

Below is a representation of the opportunities and threats from the above PESTEL and 5 forces results.

Internal Analysis

Resources

Physical: Strength

Sainsbury has over 1200 stores that seek to serve the needs of different consumer segments (Sainsbury 2018). These range from concessions, convenience stores, and large supermarkets all providing local communities with fresh, quality, and affordable food. The stores are strategically positioned to serve the needs of consumers without incurring huge transport costs (Sainsbury 2018). The stores provide a range of products and services to ensure consumers can get what they need under one roof. Therefore, Sainsbury physical resources are widely spread and strategically positioned, which is a strength towards maintaining its competitive position.

Financial: Strength

In the 2017/18 year, Sainsbury made sales worth £31,735m which was a 9% increase (Sainsbury 2018). With these sales, the underlying profit before tax was £589m, which was a 1.3% increase compared with the 2016/17 year profit (Sainsbury 2018). Despite the intensity in competition in the grocery sector, Sainsbury has been able to maintain its profit margin, which is an indication it is financial able to invest to outperform its competitors. Similarly, the organisation is able to pay its debts as well as pay its suppliers.

Human: Strength

The chief executive has vast experience in the retail industry thus an important resource to the company. The current CEO has previously worked with ASDA and Tesco, which are part of the big four in the grocery sector thus offering essential insight to the company. Sainsbury is also an employer of more than 150000 people and it endeavours to train and develop its human resources to realise excellent customer service (Sainsbury 2018).

Intellectual: strength

Sainsbury has a vast intellectual capital, which facilitates its growth. Its brands are of high quality and informed by the needs of customers, which increase demand for products (Sainsbury 2018). Additionally, Sainsbury has large customer databases, which aid its promotional strategies (Sainsbury 2018). Its business strategies are excellent: they seek to better understand their customers and provide exactly what is required. They have also empowered their employees to make a difference through delivering great customer service.

Technological: weakness

Sainsbury has attempted online shopping but this has not served it well. According to Adewuyi (2016), Sainsbury has not been able to deliver customer order in time, in the right quantity, and sometimes the orders are never delivered. This is a weakness that could force its online customers consider placing orders with Sainsbury competitors.

Competences

Sainsbury Value Chain

VRIO

Evaluation of Sainsbury/Asda Merger Strategy

Suitability

From the above piece of TOWS, Sainsbury/Asda merger would be a suitable SO strategy. Following the merger, Sainsbury will be able to reach more customers in that it will serve even those that were previously served by Asda. Additionally, it will be able to pool more finances to fund its operations. The human resources from the two companies will be combined each carrying along its experience and competence thus the possibility of an outstanding customer service. Therefore, Sainsbury will be able to maximise its presence in the UK grocery sector following the merger with Asda. With the merger, the market share will rise, which will limit the possibility on new entrants. Additionally, the new Sainsbury will be able to provide a wide array of products thus meeting the needs of different market segments, which will increase its market share. The new Sainsbury will purchase bulky products from suppliers, which will potentially lower the bargaining power of suppliers. As a result, Sainsbury will be able offer products and services at lower prices.

Acceptability

Power/Interest Matrix

Customers

Sainsbury and Asda are committed to providing consumers with quality products and at low prices (Chakraborty et al. 2014) and therefore the merger guarantees customers high-quality products at affordable prices. The merger will also increase the number of stores where customers can purchase their preferred products without traveling long distances (Sainsbury 2018).

Suppliers

The merger offers small and medium-sized suppliers an opportunity to expand their operations (Burt, Sparks and Teller 2010). It will also provide outlets to farmers as sourcing from small suppliers and farmers will remain core to the company (Sainsbury 2018).

Employees

The merger will open an opportunity for employees within the two firms to share strong work values and culture (Sainsbury 2018). The 330000 employees of both Sainsbury and Asda will gain job security and greater breadth of career opportunity as no store will be closed. From the above account, Sainsbury/Asda merger is acceptable to customers, suppliers, and employees.

Feasibility

Sainsbury and Asda are among the big four in the UK grocery sector with a market share of 15% and 14% respectively (Haleem and Jehangir 2017). This implies they are financial stable to run a combined business. According to Sainsbury (2018), most of the senior management for the new combined business will be provided by Sainsbury but Asda’s CEO will have a seat in the board of the new business. This implies that the management skills owned by the two companies will be retained thus the strategy is likely to be successful. Additionally, Walmart will remain a significant shareholder with a 42% stake in the combined business (Sainsbury 2018), which is an assurance for external support. Therefore, it is evident the strategy is likely to succeed and the new business gain a significant market share.

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