An Evaluation of the Prospects for Sainsbury’s Supermarkets in the UK Food Retail Industry

Introduction

The food and drink retail sector represents the largest industry in the UK, providing employment for over three million people in primary production, manufacturing and retailing. In 2006 retail accounted for 9.5% of gross domestic product (Datamonitor, 2006). In recent years UK supermarkets have come under increased scrutiny over their treatment of suppliers, particularly of own-label products, yet the development of strategic supply networks has been an integral part of most supermarket strategies for the past decade.

The report below provides an insight into the supermarket company, Sainsbury, with emphasis on its external environment analysis and company’s analysis of resources, competence and culture. Two future strategic options are suggested in regards to the resources based strategies.

Sainsbury is one of the biggest food retailers in the world, functioning around 2,318 stores and has more than 326,000 employees. It offers online services through its subsidiary, Sainsbury.com. The United Kingdom is the biggest market for the company, where it functions under four signs of Extra, Superstore, Metro and Express. The company vends approximately forty thousands food products, together with clothing and other non-food lines. The own-label products (fifty percent of sales) of the company are at three stages, value, normal and finest. As well as convenience produce, many stores have gas stations, becoming one of the largest independent petrol retailers in UK. Other retailing services offered include Sainsbury Personal Finance.

Industry Analysis: PESTEL Framework

Political Factors

Operating in a globalise environment with stores around the globe, Sainsbury’s performance is highly influenced by the political and legislative conditions of these countries, including the European Union (EU).

For employment legislations, the government encourages retailers to provide a mix of job opportunities from flexible, lower-paid and locally-based jobs to highly-skilled, higher-paid and centrally-located jobs (Finch, 2005). Also to meet the demand from population segments such as students, working parents and senior citizens. Sainsbury understands that retailing has a great impact on jobs and people factors (new store developments are often seen as destroying other jobs in the retail sector as traditional stores go out of business or are forced to cut costs to compete), being an essentially local and labour-intensive sector. Sainsbury employs large numbers of; student, disabled and elderly workers, often paying them lower rates. In an industry with a typically high staff turnover, these workers offer a higher level of loyalty and therefore represent desirable candidates.

Economical Factors

Economic factors are of concern to Sainsbury, because they are likely to influence demand, costs, prices and profits. One of the most influential factors on the economy is high unemployment levels, which decreases the effective demand for many goods, adversely affecting the demand required to produce such goods.

These economic factors are largely outside the control of the company, but their effects on performance and the marketing mix can be profound. Although international business is still growing (Appendix A), and is expected to contribute greater amounts to Sainsbury’s profits over the next few years, the company is still highly dependent on the UK market. Hence, Sainsbury would be badly affected by any setback in the UK food market and are out in the open to market concentration risks.

Social/Cultural Factors

Current trends indicate that British customers have moved towards ‘one-stop’ and ‘bulk’ shopping, which is due to a variety of changes in social trends. Sainsbury have, therefore, increased the amount of non-food items available for sale.

Demographic changes such as the aging population, an increase in female workers and a decline in home meal preparation mean that UK retailers are also focusing on added-value products and services. In addition, the focus is now towards; the own-label share of the business mix, the supply chain and other operational improvements, which can drive costs out of the business. National retailers are increasingly reticent to take on new suppliers (Johnson, 2005; Datamonitor Report, 2006).

The type of goods and services demanded by consumers is a function of their social conditioning and their consequent attitudes and beliefs. Consumers are becoming more and more aware of health issues, and attitudes towards food are constantly changing. One example of Sainsbury adapting its product mix is to accommodate an increased demand for organic products. The company was also the first to allow customers to pay in cheques and cash at the checkout.

Technological Factors

Technology is a major macro-environmental variable which has influenced the development of many of the Sainsbury products. The new technologies benefit both customers and the company: customer satisfaction rises because goods are readily available, services can become more personalised and shopping more convenient.

The launch of the Efficient Consumer Response (ECR) initiative provided the shift that is now apparent in the management of food supply chains (Datamonitor Report, 2006). Sainsbury stores utilise the following technologies:

• Wireless devices
• Intelligent scale
• Electronic shelf labelling
• Self check-out machine
• Radio Frequency Identification (RFID).

The adoption of Electronic Point of Sale (EPoS), Electronic Funds Transfer Systems (EFTPoS) and electronic scanners have greatly improved the efficiency of distribution and stocking activities, with needs being communicated almost in real time to the supplier (Finch, 2004).

Environmental Factors

In 2003, there has been increased pressure on many companies and managers to acknowledge their responsibility to society, and act in a way which benefits society overall (Lind-green and Hingley, 2003). The major societal issue threatening food retailers has been environmental issues, a key area for companies to act in a socially responsible way. Hence, by recognizing this trend within the broad ethical stance, Sainsbury’s corporate social responsibility is concerned with the ways in which an organization exceeds the minimum obligations to stakeholders specified through regulation and corporate governance. (Johnson and Scholes, 2005)

Palmer (2005) state that in 2005 the government has intended to launch a new strategy for sustainable consumption and production to cut waste, reduce consumption of resources and minimise environmental damage. The latest legislation created a new tax on advertising highly processed and fatty foods. The so-called ‘fat tax’ directly affected the Sainsbury product ranges that have subsequently been adapted, affecting relationships with both suppliers and customers.

Legislative Factors

Various government legislations and policies have a direct impact on the performance of Sainsbury. For instance, the Food Retailing Commission (FRC) suggested an enforceable Code of Practice should be set up banning many of the current practices, such as demanding payments from suppliers and changing agreed prices retrospectively or without notice (Mintel Report, 2006). The presence of powerful competitors with established brands creates a threat of intense price wars and strong requirements for product differentiation. The government’s policies for monopoly controls and reduction of buyers’ power can limit entry to this sector with such controls as license requirements and limits on access to raw materials (Mintel Report, 2006; Myers, 2004). In order to implement politically correct pricing policies, Sainsbury offers consumers a price reduction on fuel purchases based on the amount spent on groceries at its stores. While prices are lowered on promoted goods, prices elsewhere in the store are raised to compensate.

SWOT Analysis

Strengths

• Strong management team successfully identifying new trends.
• Increasing penetration in non-food and services.
• Successful health oriented food range.
• Increasingly large and profitable business in export markets.
• Well defined multi-format approach.
• Local and flexible approach to international markets.
• Strong brand recognition.
• Significant marketing expenditure, especially in terms of PR and advertising.
• Positive consumer response to “Every Little Helps” pricing campaign.

Weaknesses

• Low level of free cash flow.
• Lateness of international expansion.
• Dependence on UK market.
• Reliance on one main retail brand albeit with various sub-brands.

Opportunities

• Further expansion in export markets.
• Further expansion in non-food and services sectors.
• Consolidation of position in UK market.
• Significant potential in emerging markets.
• Growing penetration and further acquisitions in convenience environment, enabled by Competition Commission ruling regarding convenience retailing as a different industry to 1-stop shop retailing.
• Expansion of online trading systems in international markets.
• Potential expansion into property and automotive sales.

Threats

• Increasingly aggressive competitors in home market.
• Risks in export markets with developing economies.
• Regulatory factors constraining growth in one-stop shop retailing the UK.
• Wal-Mart’s financial muscle resulting in increasing competition from ASDA.
• Recovery in Tesco’s performance.
• Consumer backlash regarding Sainsbury’s dominance and massive profits.
• Potential consumer preference for retail outlet variety in the light of “high-street cloning”.
• Further negative PR such as that received as a result of the railway tunnel collapse during construction of the outlet at Gerrards Cross.

Porter’s 5 Forces

This model gives an understanding of the competitive world in which an organisation exists. The 5 main forces are Threat of new entrants, bargaining power of suppliers, Threat of substitute products of services, bargaining powers of buyers and Rivalry amongst existing competitors.

For our organisation, Sainsbury, it was imperative to be able to understand the workings of the organisation and how Porter’s 5 Forces came into play within. Through detailed analysis of Sainsbury it had been highlighted that one of the most invaluable tools was the Porter’s 5 Forces and the critical evaluation shows this. It had been identified that the threat of new entrants was one of the biggest problems that would pose a threat to Sainsbury and the possibilities of low and high threats. The introduction of government policies are the threats with a high potential; at the same time the inbuilt restraints do prove to be the most harrowing task for Sainsbury to overcome because the more government legislation there are the more Sainsbury have to strain themselves and fall under the legal procedures. In terms of the franchising, which is readily available nowadays it is extremely difficult for a company to still have originality as the more and more companies merge together the individuality disappears.

In terms of the low threats, the product differentiation, entrants of new competition and retaliation are all something, which Sainsbury are in complete control over. These are the threats that Sainsbury have always had to deal with and the multi-million dollar company is firmly secure within its rights to not worry too much of the low threats.

The Bargaining power of the suppliers is another avenue of Porter’s 5 Forces, which is of low threat to them. Since Sainsbury is an extremely well recognised and valuable commodity it is in their favour that the new suppliers want to be able to supply their products to Sainsbury and not the other way around. For any supplier Sainsbury is an extremely valuable asset. In conjunction to the scale of economy the large companies normally to buy in bulk and therefore that actually reduces the power of the suppliers to a minimum and gives large organisation like Sainsbury the opportunity to choose who their supplier can be.

One of the biggest threat is the readily availability of the substitute products in the market nowadays. This level of threat is potentially a high risk one because of the changing times that Sainsbury is operating in. The biggest problem that exists is the freedom of choice and nowadays there is an extremely large market for choices. Substitute is also a form of choice; paying customers have the choice of either Sainsbury or any other substitute that is available and the varied quality and prices is the key driving force behind the power of the substitutes. Product convenience and individual preference is something that has been raised by the substitute products. The more products there are now in the market as substitutes to Sainsbury the more an individual has a choice to change.

One of the forces that effect an organisation is the Bargaining power of the Buyers. This goes hand in hand with the availability to of substitute products and the competitors. Price sensitivity is one of the more common weapons that the customers have. In terms of Sainsbury one of its powerful liaisons is brand loyalty, but it had been highlighted that sometimes loyalty takes a back seat to convenience because if a good substitute is easier to get to then that is the product that wins. Differentiation for Sainsbury is the availability of similar types of products that are available at cheaper prices and convenient locations.

Finally one of the most important forces for Sainsbury is the rivalry amongst its competitors and the biggest weapon in this is the price warfare. One of the biggest competitors that Sainsbury has is Tesco and there have been several occasions where both these major powers have had head-to-head price wars.

Sainsbury Strategic Options: Generic Strategies

Generic Strategies are characterised by an individual retailer’s response to the industry structure. For giant retailer, such as Sainsbury, to obtain a sustainable competitive advantage they should follow either one of three generic strategies, developed by Porter.

The first strategy of cost leadership is one in which Sainsbury can strive to have the lowest costs in the industry and offer its products and services to a broad market at the lowest prices. This strategy will be based on the Sainsbury’s ability to control their operating costs so well that they are able to price their products competitively and be able to generate high profit margins, thus having a significant competitive advantage.

If Sainsbury uses another strategy of differentiation, than it has to try to offer services and products with unique features that customer’s value. Sainsbury will be able to create brand loyalty for their offerings, and thus, price inelasticity on the part of buyers. Breadth of product offerings, technology, special features, or customer service is popular approaches to differentiation.

The last strategy of focus can be either a cost leadership or differentiation strategy aimed toward a narrow, focused market. In pursuing a cost leadership strategy Sainsbury focuses on the creation of internal efficiencies that will help them withstand external pressures. Therefore, it appears reasonable to think that Sainsbury will have frequent interactions with the governmental/regulatory and supplier sectors of the environment.

In accordance to this framework, while both overall cost leadership and differentiation strategies are aimed at the broad market, Sainsbury may also choose to confine their product to specific market areas or may choose to offer a smaller line of products to the broad market, thus pursuing a strategy of focus or niche (Porter, 1980). In other words, Sainsbury pursues a strategy of cost leadership or differentiation either in a specific market or with specific products.

The danger some organisation face is that they try to do all three and become what is known as stuck in the middle. In case of Sainsbury it is not appropriate, as they do have a clear business strategy with a clearly defined market segment.

Future Opportunities and Strategies Implementation

Strategy frameworks and structuring tools are important in assessing the business situation. Risk and value trade-offs are made explicit, leading to concrete proposals to add value and reduce risk. Explicit plans for action, including effective planning need to be developed by Sainsbury as the strategic alternative.

From the generic strategies discussed above, Sainsbury is likely to employ two strategic options of focus on market development though partnerships and diversification through new product development. By entering new markets like China and Japan it can serve as a key growth driver of the company’s revenues and expansion strategy. Sainsbury’s interests in Japan are likely to continue growing in due course, as Asian markets are showing an increase in consumer spending and increased trend towards retailing. These new markets are also demographically high opportunity markets.

In the case of Sainsbury, one of the suggested strategic options is in international alliances with the local retailers in Asian markets. It will be considered as a method of development and may be formed to exploit current resources and competence. By entering into joint ventures or partnerships, in order to gain larger economies of scale and larger market presence, Sainsbury will draw on the extensive local knowledge and operating expertise of the partner whilst adding its own supply chain, product development and stores operations skills to deliver a better shopping experience to customers. However, given the huge scale, potential and complexities of these markets, Sainsbury may feel that being the first mover is not necessarily an advantage. The success of the partnership will be related to three main success criteria: sustainability, acceptability and feasibility. Sustainability will be concerned with whether a strategy addresses the circumstances in which the company is operating. It is about the rationale of this expansion-market development strategy. The acceptability relates to the expected return from the strategy, the level of risk and the likely reaction of stakeholders. Feasibility will be regarded to whether Sainsbury has the resources and competence to deliver the strategy.

Johnson and Scholes (2005) believe that changes in the business environment may create demand for new products and services at the expense of established provision. Ansoff’s matrix also suggests that if new products are developed for existing markets, then a product development strategy has to be considered by the management level of a company. In expanding and diversifying Sainsbury’s product mix, it is also crucial to implement internal development when new products are developed. The nature and the extent of diversification should also be considered in relation to the rationale of the corporate strategy and the diversity of the portfolio. By following the changing needs of the customers Sainsbury can introduce new product lines. This may require more attention to R&D, leading to additional spending.

Retailing industry is experiencing an overcapacity and innovative services and products being the major competitive advantage. Therefore, innovation has to be a major driver for Sainsbury’s product development. For example, Sainsbury can develop a portfolio of different store formats in the UK, each designed to provide a different shopping experience. While the majority of Eastern European and Far Eastern outlets are hypermarkets, Sainsbury can also develop different store types in these markets as well. This value added by the uniqueness will eventually lead Sainsbury to command a premium price. The management of technological innovation is increasingly involved in strategic decision-making. Sainsbury have to exploit their internal strengths and minimise their internal weaknesses in order to achieve sustained competitive advantage.

Several attempts have been made to consumers’ perspicacity of food that have facilitated or prohibited the food choice, consumer attitudes and incentives for purchase/non-purchase (Grunert and Juhl, 1995) for UK food firms in designing marketing strategies. According to subsist research, organic food is identified as food without ‘chemicals’ and ‘growth hormones’, that is ‘not severely’ produced and is grown as “unsophisticated”. People buy food mainly for health motives; in sight of being best for their children because of lesser pesticides and manure residues. Furthermore, very well taste being free from Bovine Spongiform Enciphalopathy, genetic amendment and food additives are incentives for buying food. According to the Grunert’s Total Food Quality Model the propensity towards augmented consumption of food can be correlated to a broader concern as regard to environmental issues. The major reasons that thwart consumers from purchasing food are: high price, be deficient in availability, gratification with conventional food, lack of reliance, the inadequate choice and paucity of perceived value.

Although a number of consumers have shown curiosity in food, the food options of comparatively few people have been affected. Hence, expressed curiosity in food does not play a momentous role in food purchase and a disparity between positive attitude and behaviour is evident. Thus, acquaintance of consumers’ cognitive structures and their impact on the purchase decision will indeed shed light on consumers’ food purchases verdict that facilitates UK food firms in devising their marketing strategies.

Economic theory has shown some confine in explaining the intricacy and multidimensionality of consumer activities. These bounds not only relate to the supposition of consumer rationality (that is utility exploiting behaviour) and flawless information. The majority of economic models uses relative prices and disposable income or budget as illustrative variables of consumer deeds and treats every other sway (for instance social, economic and cultural factors) as cloaked or latent variables: quality inspection is one of them. The analysis of Grunert’s Total Food Quality Model guides United Kingdom food firms devising marketing strategies that how consumer attitude deals primarily with predilections and how predilections are formed in the mind of the consumer. Marketing approaches to consumer attitude may be eminent as cognitive versus behavioural.

According to Grunert the cognitive approaches underscore constructs dealing with cerebral structures and thinking processes; behavioural approaches stress upon direct links among the characteristics of the environment and behaviour. Both approaches are broadly accepted and accredited ways of analysing behaviour, with a high degree of complement. In this analysis one will ponder on the first approach and concentrate on consumer product knowledge, engagement and eagerness in the case of organic products. From a cognitive perspective, one can define consumer behaviour as the activities that people engross in when deciding, purchasing, and using goods and services to gratify desires. Such activities involve cerebral and emotional processes, besides physical actions.

The cognitive approach is based on consumer acquaintance, product perception and the desires consumers want to gratify. Cognition is referred to as the dynamic cerebral constructs and processes involved in thinking, discerning and interpreting stimuli and events from the environment. It includes the information, sense and values that consumers have developed from their practice and stored in their memories. Whilst several aspects of cognition are sentient thinking processes, others are fundamentally automatic. In other words, consumer behaviour doesn’t signify only reasoned action but it is effectively a consequence of consumption-relevant cognitive configuration (Grunert, et. al, 1996).

When a stimulus or event relating to a product, counting new product information, comes in relation with consumer self-knowledge and his remembrance, a connection between him and the product is erected. A network of links between product attributes, personal consequences and ethics can be exposed to give deeper discernment into consumer motivation. These links develop those elements of the cognitive network that the consumer raises in his intellect when presented with product information in the form of product attributes: when this network is structured in a hierarchical form. The means-end strategy recommends that clientele consider about product description or traits in terms of own cost. These may be ostensible as optimistic or pessimistic. You can say that, the means-end sequence model provides the opportunity to unequivocally relate consumers’ desires and product qualities, and divulge his incentives in procuring a product. In Grunert’s Total Food Quality Model user decision building is measured like a pinpointing procedure. Consumers put forth comportment, as a way to achieve an aim or conclusion. Moreover, customers also observe most product characteristics as a source to some result: at the conscious level this can be signified by some constructive consequences, at a more conceptual and involuntary stage their climax is to accomplish a standard, that is selected end states of being and selected modes of conduct. To comprehend why consumers are attracted in acquiring a product, it is required to realize the background of this “finalised decisional process” and, hence, of what they need or strive to accomplish by means of procure.

The concrete incentives of product utilization can barely be found by just soliciting clearly to the purchaser “Why?” as in majority of cases he is not conscious of his conclusion-building process, neither he is capable openly to expose his personal justification for acquisition. Though, Total Food Quality Model study is a practical instrument to effectively attain this logic. Determining the Grunert’s Total Food Quality Model is a chronological process that comprises of three steps:

1. Extraction of product distinctions that are mainly related to the purchaser;
2. An in-detail discussion process named laddering, proposed to make known how the users acquaintances product features to values and expenditures;
3. The foundation of hierarchical value maps (HVM), illustrating the cumulative customer means-end-chains as articulated in the ladders, i.e. the association system of values, characteristics and charges.

Initially, to extort customer pertinent item qualities, clear-cut drawing out was used (free- cataloguing, triadic taxonomy, grading, etc.). Next, a certain amount of most imperative product characteristics were reserved for knowledge acquisition. Consumers were requested to put up their means-end hierarchy by just reiterating a straightforward query: What’s important to you in this product? By this approach the consulter fasten up associations among a range of components of the series and consumers were focused to construct their individual cycle of quality-cost-standard. The growth of this type of practice permits the consumer to obviously expose his explanations, those appealing him to select and that else it would not be done to getting back to the radiance from the past. The procedure has, in real, the benefit to make the customer to return and explain about quality-cost-standard affairs.

Multiple laddering techniques are described: A system where the natural flow of words of the reactant is controlled as modest as possible, as in a confronting each other is termed as “soft” laddering; “hard” laddering is defined as questionnaire and data gathering procedure where the reactant is forced to construct hierarchy separately, and to give reply at an escalating altitude of thought (Grunert, et. al, 1996). In above two cases, at the end of the process, every user composes single or multiple ladders linking his incentives to a product’s characteristics and to their prices, unless ensuing in exposing values related to his preferences. Consequently, incentives related to consumer are interpreted in portions of meaning and then ciphered in classification of attributes-consequences-values.

The advance stage is to figure out the so-called implication model – a square template with a range reflecting the amount of elements an individual is attempting to plot – that notifies the rate of the associations between particular classes of elements, consequences and values. Square template (matrix) is the root to build single or multiple HVMs.

In the Grunert’s Total Food Quality Model, acquaintances and associations are much essential than distinct elements – attributes, benefits and principles – of the string. Associations between particular levels of thought – from the most tangible (attributes) to the most elusive (values) – can describe the power of motivations.

By screening at HVMs it is likely to ascertain what persuades customers to pick a product comparatively something else. The model presents a deep analysis into customer acuity, revealing characteristics the consumer judge more important in their variety and relating them into a form of chronological motivations. In this representation, product’s attributes are ways by which an end user can get benefit in order to achieve his own objective; or they catch up their own goals, by the use of those products’ characteristics they notice as being central and constructing proper consequences to convince their individual values. This statistics is elementary for designing marketing strategies for the product, as well as setting up valuable communication policies.

Conclusion

The success of the Sainsbury shows how far the branding and effective service delivery can come in moving beyond splashing one’s logo on a billboard. It had fostered powerful identities by making their retiling concept into a virus and spending it out into the culture via a variety of channels: cultural sponsorship, political controversy, and consumer experience and brand extensions.

In a rapidly changing business environment with a high competitors’ pressure Sainsbury have to adopt new expansion strategies or diversified the existing in order to sustain its leading market position in an already established retailing market. The company must constantly adapt to the fast changing circumstances. Strategy formulation should therefore be regarded as a process of continuous learning, which includes learning about the goals, the effect of possible actions towards these goals and how to implement and execute these actions. The quality of a formulated strategy and the speed of its implementation will therefore directly depend on the quality of Sainsbury’s cognitive and behavioural learning processes.

In large organizations as Sainsbury strategy should be analysed and implemented at various levels within the hierarchy. These different levels of strategy should be related and mutually supporting. Sainsbury’s strategy at a corporate level defines the businesses in which Sainsbury will compete, in a way that focuses resources to convert distinctive competence into competitive advantage.

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