“Provide a detailed analysis of the ‘UK food retailing industry’.

* Identify the main op

erators and explore why they are pursuing the strategies they have adopted. Are
any of the strategies likely to be more successful and why?”
Due to the limited word count Morrison, Tesco and Asda have been chosen as the m
ain companies to be compared and analysed in the following report. These three b
usinesses have been selected caused by their high employee figures, the size of
the companies and the information available about their strategies. Nevertheless
, a selected amount of small regional supermarkets or other major national ‘player
s’ have been mentioned as well, in order to fully complete the report. However, it
was not possible to name all UK food retailers in the Strategic Group Analysis.
To give an overview of the environmental issues influencing the ‘UK food retailing
industry’ at first an external analysis, including the PEST, Five Forces and Stra
tegic Group Analysis, was carried out. In a next step, with the help of the ‘Natio
nal Diamond’ the UK market as the home base of the three companies has been examin
ed concerning its supportive role for international expansion. Afterwards, there
has been a focus on the Financial Analysis and the ‘Cultural Web’, both tools of in
ternal measurement. To complete the analytical part, the companies’ major strength
s, weaknesses, opportunities and threats (SWOT) have been defined. Finally, a co
nclusion is given.
3.1 PEST–Analysis

The PEST–Analysis identifies four main categories influencing any organisation, na

mely the political, economic, social and technological factors (2002, p.102). Th
e following section therefore, aims to give an overview of the impacts for the f
ood retailing industry.
Findings:
Political Influences
Concerning environmental protection the industry has to be aware of several legi
slation e.g. laws concerning emission or waste disposal ( , 2001, pp.4-5). Food,
so as non-food retailers will be influenced by the forthcoming waste management
regulations proposed by EPA (Environmental Protection Agency), which will incre
ase costs of these businesses.
After past food scares such as ‘BSE’ and the ‘Food and Mouth Disease’, new threats by bo
vine tuberculosis and chronic wasting disease will sharpen national and supranat
ional food safety laws and regulations. An animal disease crisis could even “devas
tate milk-and meat-production” and therefore, the production of ice cream, meat, c
heese, etc ( August 2002).
Furthermore, there are standards for nutrient descriptors such as “light”, “reduced fa
t” and “low fat”, set by governmental and European agencies like the European Food
Authority (EFA) (October 20th 2003]). Especially the UK Competition Commission a
nd the Office of Fair trading (OFT) are ‘watching’ the main players of the UK superm
arkets. This is caused by the high cumulative market share of the top five UK su
permarkets (between 14%-24%) ( August 2001, pp. 9-30).

Other problems may arise within the e-business, due to too high fees and too com
plex regulations introduced by the government of the UK and EU compared to other
countries such as the USA ( 2003, p. 25).
Economic Influences
The UK food retailing industry is less influenced by seasonality, except the Chr
istmas times were usually a growth in sales occurs. Another important influence
can be found in the prediction of an economic growth in the next years. However,
sales have dramatically been decreased in the past three years due to the slowl
y economic recovery of the USA. Other factors may be seen in the weak economy of
Europe and other countries which make an upward trend in sales very hard to ach
ieve (ANovember 2003, p.29).
Social – cultural influences
The UK is experiencing a trend towards healthier food, as well as implying a str
ong growing awareness of environmental friendly packaging. However, since the 21
st century there has been an increasing consumer preference for quality products
with good tastes. The UK population is also becoming more and more experimental
within their eating habits. In the past years a trend towards the desire of exo
tic fruits, fish, etc. may be noted ( August 16th 2003, p. 43).
Technological Influences
In the food retailing industry, specialized equipment and trucks, such as freeze
r trucks are necessary to guarantee exclusive taste and quality. Therefore, a we
ll–trained workforce is essential.
Criticism: For laymen, it is really difficult to filter out the most important i
nfluences within the four categories because there is such a wide range of resou
rces. Hence, without being an”insider” the analysis of the business environment appe
ars to be much generalized.
Justification:
The PEST–Analysis represents an overview of the food industry which will then be a
good starting point for deeper macro-, micro-environmental as well as internal
examinations. Furthermore, it will provide the companies with basic information
that needs to be considered for future strategies.
3.2 Five Forces Model
Porter’s Five Forces Model is based on the simple fact that each industry and mark
et is influenced by several competitive forces namely: threat of entrance, barga
ining power of suppliers and buyers, competitive rivalry and threat of substitut
es. The intensity of competition and therefore an industry’s attractiveness and pr
ofitability will mostly depend on these external factors
( October 4th 2003]).
Diagram: Findings:
First of all, competition within the food retailing industry seems to be large a
s well as diversified. Asda, Tesco, Morrison (including Safeway) and Sainsbury’s n
eed to be named as the major competitors, which have a tremendous range of resou
rces at their disposal. Although, one may
has to mention smaller retailers (Jacksons, Spar, Lateshops, etc.) which are pre
sent in regional areas, e.g. in Northern England and can therefore be seen as co
mpetitors, as well. What is more, differentiation between the numerous players a
nd their products is scarce. As expensive equipment, factories and estate are re
quired in the food retailing industry, barriers to exit are quite high, too. Fur
thermore, the costs for customers to switch to rival brands are relatively low.
All in all, rivalry may therefore be characterized as intense. The group of buye
rs is formed by individual customers and restaurants. But as the individual cust
omers represent the most important buyer and therefore, one could speak of a con
centration of buyers. As for an almost endless range of products offered, switch
ing costs to rival brands are low. Hence, the bargaining power of buyers is rela
tively high.
Producers of food and other goods as well as packaging manufacturers have to be
seen as the major suppliers in this industry – i.e. they do represent a fragmented
source of supply. Taking into account that the key players of this industry pos
sess e.g. packaging factories, produce their own ‘branded’ products and that on the
other hand switching costs from one supplier to another are low and do not invol
ve high risk, the food retailing industry faces little pressure on margins from
the suppliers.
Diversified products, the offer of different brands within each supermarket and
the creation of supermarket own brands are examples of the wide range of substit
utes for products within the food retailing industry. The almost “non-existence” of
switching costs and the fact, of the intense offer of similar products, both con
tribute to a quite tremendous threat of substitutes. Even though these competiti
ve pressures could be by-passed through building up high brand loyalty and close
customer relationships as well as through offering high quality, better taste o
r innovative products.
Entry to the industry of food retailing seems to be quite difficult, as high ini
tial investment will be required for building new stores, manufacturing plants,
etc. A relatively strong brand loyalty of customers also contributes to entry ba
rriers. But as switching costs for buyers are low, the threat of new entrants co
uld be characterized as moderate.
Criticism:
To start off, regarding the circumstances that the key players of the food retai
ling industry created their own supermarket brands and the offer of other produc
ts may also represent potential competition within the company itself. It also n
eeds to be considered that the more complicated an industry’s market structures ar
e, the less applicable this model is. Furthermore Porter’s Five Forces Model
does not take into account non-market forces such as public and stakeholders, wh
ich could be regarded as a “sixth force”. (This force will be briefly discussed at t
he end of this analysis.)
Justification:
It is essential for any business to have an overview of the forces influencing a
company’s competitiveness. As there is a wide range of environmental, competitive
factors,
this tool was regarded as offering a good basis for the location of direct compe
titors as well as further forces such as the powerful customers. As an analysis
of the competitive environment of individual SBUs within the companies has not b
een possible, it was carried out at a level of the whole business. So it needs t
o be beard in mind, that this analysis therefore, can only be considered as a “sta
rting point in understanding the competitive forces (2002, pp. 112-113).”
The “Sixth” Force:
Public and Stakeholders
The current trend towards an increased demand of healthier food and environmenta
l friendly packaging material has a large impact on the companies. In this conte
xt, the companies’ individual competitiveness depends on how well they adjust thei
r product range and strategy to these new customer needs.
3.3 Strategic Group Analysis
Strategic groups have to be seen as “organisations within an industry with similar
strategic characteristics, following similar strategies or competing on similar
bases ( 2002, p. 122).” When identifying such groups one may refer to a broad ran
ge of different characteristics e.g. extent of product diversity, company sizes,
perceived product quality etc.
Diagram:
a) Size of organisations according to employee numbers b) Extent of geographical
coverage

Findings:
c) Extent of product diversity
The number of groups and different companies which form the single strategic gro
ups depend on the characteristics, one refers to. As you may see the main compet
itors in the UK food retailing industry are Asda, Tesco, Morrisons (including Sa
feway) and Sainsbury’s, which are either in the same strategic group or the one ne
xt to it. However every supermarket has its own implemented strategy but one may
has to mention that each one is mostly (low)-priced based and that only Sainsbu
ry’s stragy is customer focused relying on quality and offering outstanding value
(F October 23rd 2003). However, Asda is with the lowest price offers the cheapes
t one of the three companies but closely followed by Tesco and then Morrisons (
September 6th 2003). In fact, most of all big supermarkets lost their strategic
position and as well their SCA. Therefore, one may has to point out that their s
trategies are easy to imitate and it also makes it much easier for ‘rivals’ to win t
he competition battle. Moreover, whenever a company wants to expand its position
and therefore needs a new strategy, it needs to bear in mind the different stra
tegic groups. The mixing up of these strategic groups could have tremendous effe
cts on each individual success.
Criticism:
Even though several companies in the same industry may share common characterist
ics, each organisation itself may be shaped by more or less specific and origina
l
characteristics. So how can one figure out the “right” set of characteristics as the
basis for an analysis? In addition, the evaluation of several characteristics m
ay be quite subjective in pointing out the ‘leader’ of the special category.
Justification:
This specific analysis has been applied as “the conceptualization of strategic gro
ups can make the process of competitor analysis more manageable ( 2001,).” Within
the food retailing industry there are numerous competitors. Therefore, it does n
ot seem to be feasible to analyse all of them individually. Furthermore, “a knowle
dge of the strategic group structure can be extremely useful (Aaker, D., 2001, p
. 61)”, when reviewing a company’s strategy, according to the knowledge gained on th
e current and future profitability within the different strategic groups.
3.4 Porter’s National Diamond
The model of “determining factors of national advantage suggests that the national
home base of an organisation plays an important role in shaping the extent to w
hich it is likely to achieve advantage on a global scale (October 3rd
2003]).” In this context, four basic factors have to be examined – demand
conditions, related and supporting industries, factor conditions as well as firm
structure and rivalry.
Diagram:
Criticism:
First of all, as not states but companies do compete against each other, competi
tive advantage should therefore be examined on the basis of the company itself r
ather than on a national basis. What also seems to be striking is, when having a
closer look at the model, the National Diamond seems to be quite generalized, a
nd a complete examination of a company’s competitive advantages should require mor
e specification. Furthermore, the four factors are not only interdependent but a
re also influenced by governmental action and chance.
For achieving competitive advantages, more than just the right policies and stra
tegies are needed. New inventions by chance, price shocks etc. may largely influ
ence future developments within a nation ( October 3rd 2003]).
Justification:
In order to examine whether the UK food retailing industry - as the home base of
the chosen three supermarkets – is favourable to achieve competitive advantage on
a global basis, this tool has been regarded as being very useful. This is parti
cular important as the home base of each company will often largely contribute t
o the extent of its international strengths
(October 3rd 2003]).
4.1 Financial Analysis [1]
In addition to key figures e.g. turnover or cost of sales, several ratios such a
s performance and activity related ones will be examined in the following analys
is.
Diagrams:
Findings:
Even though one might think that the chosen companies are similar in their figur
es to each otherthis assumption will be proven as wrong. First of all, there has
been seen a significant deterioration in performance, as the return of capital
employed differs between 12.23% (Tesco), 13.03% (Asda) and 21.24% (Morrison). Th
is is due to a single factor – that each company has different costs in delivery,
production, etc. However, the return on capital employed considers the
relationship between income and operational assets used to cause this income (Da
vies and Pain, 2002, p. 159). Therefore, Morrison is showing the best figures an
d Tesco the worst. Similar results are also stated in the capital gearing ratio,
which shows that Morrison and Asda are less financed by borrowing than Tesco.
Nevertheless, the current ratio implies that Asda’s financial stability is better
than Tesco’s or Morrison’s.
Criticism: First of all, it cannot be denied that all the ratios themselves do n
ot say anything about a company. Ratios will always need to be subject to compar
ison with ratios from previous years. In case of a comparison with similar compa
nies, one needs to be aware of probably different accounting methods and the ava
ilability of material (Boczko, T., 2003, Lecture notes), e.g. the capital gearin
g number of Tesco differs too much compared to the other companies. Therefore, o
ne may conclude that there is no ‘real’ use of this analysis.
Justification:
However, a financial analysis has been regarded as a useful tool to facilitate a
n understanding of absolute values, and performance may be seen in context ( 200
3,) - but only in comparison to previous years. It was supposed to help to find
out about the financing of the different companies because then it can be seen a
s a first step towards a stakeholder analysis, as the tool reveals dependencies
on creditors but with not being an ‘insider’ of the companies and not knowing their
special assigned accounting methods this analysis failed to meet its objectives.
4.2 The Cultural Web
„The concept of the Cultural Web is a representation of the taken-for-granted assu
mptions, or paradigm, of an organisation and the physical manifestations of orga
nisational structure (Johnson, G. and Scholes, K., 2002, p.230).” It is composed o
f the following elements: stories, symbols, power structures, organisational str
uctures, control systems, rituals and routines as well as the paradigm.
Diagram Morrison: Diagram Asda: Diagram Tesco: Findings[2]:
The origins of the companies lay approximately 100 years back in time. However,
each business has its individual paradigm which guarantees either helpfulness or
low prices. Therefore, their business strategies are very similar to each other
and represent the overall same goal – ‘low prices for good value’. Even the companies’
rituals and routines do not show any differentiation from one another. They all
like to help the community with special donations and funds, as well as they giv
e money to special charities.
However, one may has to mention that Tesco with its policy ‘No one sells for less’ m
ay be seen as the ‘winner’ for consumers in the food retailing industry, due to the
award of best reputation in November 2003. Moreover, Asda following on 2nd place
was then awarded for best management (Simpson, P., November 28th 2003), p.2). I
n
fact, these leads to result that Asda and Tesco may be seen as the major competi
tors with offering the lowest prices in the food retailing industry. On the othe
r hand Morrison’s new offer for Safeway will create the 3rd largest supermarket in
the UK and therefore an immense threat for Asda and Tesco (Voyle, S., December
16th 2003, p.15).
Nowadays, one may believe that through the remaining and dominant pricing strate
gies, big companies can only succeed with better and quicker availability/value
of products, so that the smaller supermarkets will not take over their position.
Criticism:
The main problem is that internal analysts have a subjective point of view of a
company’s culture and therefore, they often take rituals and structures for grante
d. Hence, external consultants would be more suitable to undertake such an analy
sis, but on the other hand they often do not have access to all of the necessary
information. Justification:
The Cultural Web offered a good opportunity to gain useful insights in the chara
cteristics of the companies, contributing to coherence in their cultures. The an
alysis points out that every employee of an organisation, supported by several o
rganisational and control systems, should work towards a single common goal – in t
his case towards the paradigm “The very best for less” – Morrison; “Always happy to help” –
Asda; “Every little help” – Tesco and “” – Sainsbury’s.
The SWOT-Analysis can be regarded as an essential tool for identifying a company’s
 strengths and weaknesses, but on the other hand also the opportunities and thre
ats within an industry.
Diagram Morrisons: Diagram Tesco: Criticism:
Diagram Asda:
In order to analyse the strengths, weaknesses, opportunities and threats, previo
us analyses of the external and internal environment would be a useful basis.
Justification:
This analysis points out the most important issues from the business environment
and the strategic capability of the three companies, which can probably have an
impact on their own strategy (Johnson, G. and Scholes, K., 2002, p.134). Furthe
rmore, it reveals the weak spots, which each individual business has to work on
to assure its future competitiveness.
The UK food retailing industry is characterised by an immense high competition a
nd low-price strategies. Nowadays, many of the main competitors such as Asda, Te
sco and Morrisons concentrate on good value with cheap offers, as well as their
great variety of non-food products.