Analysis of the UK Retail Industry
Table of Contents
Political Factors and Trends. 5
Analysis Using Porter’s Five Forces. 9
Bargaining Power of Suppliers. 10
Bargaining Power of Buyers. 10
Introduction
Retailing is an important facet and a crucial contributor to the economy of the UK, as is shown in table 1 below. At the baseline level, it provides a link between the producers and consumers for a substantial quantity of goods and services. Moreover, the sector is also an indispensible source of employment to many citizens, particularly the female and the youth segments of the workforce. Beyond the horizon of large independent body of retail shops, there exists a plethora of other privately-owned retail outlets that provide self-employment to numerous citizens (Abdou, Kuzmic, Pointon & Lister, 2012).
Despite the overarching significance of this sector, the identification of the dimensions of the whole retail industry is an uphill task. Official statistics from the government showing clear trends of performance of the sector are minimal, though through PESTEL analysis and dichotomy of Porter’s five forces, a lucid picture of the industry can be brought into light. The sector has numerous segments, where the size of businesses varies enormously, from the largest players to small stall-holders. This report analyses the trends in the industry incorporating the PESTEL analysis, and Porter’s five forces.
Industry Profile
The UK retail sector is an established industry, representing over 13.02% of the UK economy (Clark & Bawden, 2011). In the last ten years, the industry has been dominated by a chain of supermarkets, which have since fought for supremacy and market leadership. Some of the leading supermarkets include Tesco, Asda, Marks and Spencer, J. Sainsbury, and Waitrose (Yüksel, 2012). Tesco and Sainsbury have been on the brink of leadership fall-out due to the heated competition in the industry. Lately, the turbulent two recent years of UK’s economy have left the industry struggling to stabilize, though there is still a challenge of reconciling the goals of economic recovery and deficit reduction.
The UK retailers are in constant experience of dealing with changed playing fields; including thrifty consumers, less store space and ever increasing price competition. Thus, many retailers have been involved in price wars, though some other resilient ones like Tesco have sought further expansion plans. In support of retail business in the economy, the government has also initiated various developmental strategies like the pipeline construction, though lately, investors have shrunk their efforts to bolster the improvement of the sector (Yüksel, 2012). In a trendy manner, the construction volume has been on the decline since 2007, from 22% to 10% in 2010. This is, however, expected to increase in the coming years, with a greater improvement projected in 2014 (Shakur, 2011). There are numerous market opportunities for retailers in the UK, but forces driving change, entry and exit are further discussed in the proceeding sections of this report. The sector, just like any other segment of the economy, is subject to forces of the market, political influence, as well as critical issues addressed by Porter. The report discusses key trends in the industry with regards to these forces, and includes recommendations for improvement.
Framework for Analysis
This report uses a framework that is based on three main stages. First, it involves identification and thorough assessment of major drivers for change that influences the UK retail sector. Included in these factors are individual and external businesses participating in the sector, and contribute in shaping the competitive environment in which industry players operate. Secondly, the structural characteristics of the industry are also analyzed, which allows for detailed study of the retailing business organization within various sectors, as regards competitive structure, scope, and ownership, thereby giving a clear analysis of the resource base of the industry. Lastly, a clear focus is made on the internal competencies and characteristics within the system of retailing, which call for identification and assessment of core competencies of operation that guide the system of retailing, following the format of Porter’s five forces and PESTEL analysis. Competitive analysis assesses the environment, in which the retail sector operates, considering some of the key drivers for change, including political factors and trends, economical factors, social/cultural factors, technological factors, environmental factors, and legislative factors (Shah, 2007). The changes within each of the drivers, which are interrelated in nature all contribute to change of environment within which the UK retailing sector operates.
Political Factors and Trends
In the retail sector, activities are of both retailers and shoppers are largely influenced by the political structure, factors and trends. Though this might not be seen as a direct relationship since the political environment has no overarching legislative influence on the activities of the retail sector, trends in retailing have been functions of national debates and political structures in a number of ways (Yadav, 2008). In the UK, it might be blankly concluded that the political environment is enabling for the operation of retail businesses, but further analysis of trends show finer details of this relationship. Politicians exert their power and influence on retailing through the levers of business location and land-use systems. While this is a mandate of the local authorities, the national government constituted by politicians usually intervenes to give guidance and directions on assessment of development proposals and opportunities.
Competition in the UK retail sector is controlled by two major autonomous bodies; that is the Office of Fair Trading and the Competition Commission (Chang & Travaglione, 2012). These ensure that all the players in the industry comply with set rules and standards, as well as practices that are inherent in a fair competition. Thus, they close observe and interphase the retail market to avoid occurrence of oligopolies, monopolies, and cartel formations which would make it difficult to enter and exit the market. Recent publications show that the government’s political role of ensuring fair competition between supermarkets is the issue with the gravest concern. In 2011, the Supermarkets Code of Practice was enacted by the Office of Fair Trade to regulate trade between players (Yadav, 2008). Lately, this code has been changed to Grocery Supply Code of Practice, which even puts more pressure on the supermarkets, and further reduced prices of commodities as competition heightened. Regulations concerning environmental and planning law have also been put in place, which all retail companies have to abide with in order to operate, such as transportation of goods, pollution, and decongestion of town centers. Since the retail sector employs quite a number of citizens, it has to comply with labor laws including Employment Act 2002 and Employment Rights Act 1996 (Shiwakoti, Keasey & Hudson, 2008). Some large supermarkets have moved to offer other financial services like credit cards, deposits and loans, and are thus guided by legislations enacted by Financial Services Authority (Clarke, Kirkup & Oppewal, 2012). In relation to this trend, the government of UK has moved to better the environment for retail businesses in the industry.
Economic Factors
The economic incidents, factors and situations which are influential in the retail industry are categorized as follows: inflation, consumer disposable income and spending, interest rates, monetary issues, taxation, financial crisis, and unemployment. The recently experienced financial crisis of 2008 has brought numerous substantial changes in the retail sector, though it did not have a negative impact on the demand of consumers. Instead, a marked increase in consumer spending was recorded between 2007 and 2008, and is now on a constant progressive rate of 5% (Bunn & Ellis, 2012). Since the economic structure has a broad effect on the landscape of the retail sector, businesses must be willing to engage in built environment, so as to widen the landscape for product consumption. The broad economic structures in Britain, according to wise projections, remain in place, and the retail sector might still remain in the same ranking as it is now, though there are major changes taking place with respect to innovative ideas for ensuring customer convenience and comfort (Van Camp, Souza Monteiro & Hooker, 2012). Maintaining high levels of confidence of customers has become a key trend in the industry, as it is multi-faceted in every nature; and it has a close relationship with the amount of disposable income as well as tax and interest rates (Revoredo-Giha & Renwick, 2012).
Socio-cultural Factors
Changing socio-cultural factors as well as lifestyle aspirations have had tremendous influence on changes regarding shopping in retail outlets, as well as the retailing practice itself. This has to do with needs, wants, beliefs and attitudes of people, which continue to develop and transform the retailing trend in the UK (Renko, Sustic & Butigan, 2011). Particularly, attitudes regarding leisure and work are important to this analysis, as they seem to be the key social drivers of change. Rational speaking, modern consumers of the retail industry have a varied mass of contradictions that is generally inexplicable. Consumer tastes and demands have been altered due to their exposure to new horizons, events, and unique ways of carrying out certain practices. Moreover, the differentiation of people’s backgrounds has been a major pillar of change, as currently, approximately 10% of UK’s population is not of British origin (Miah & Hossan, 2012). Different cultures imply diverse habits in lifestyle and shopping. Another remarkable trend is the age of the majority of the population. As years go by, UK is becoming an economy dominated by older people, which has implications on the retailing industry.
Technological Factor
Just like any other sector in the current economy, the UK retail industry has benefited a lot from technological advancement. In the past decade, all the leading supermarkets in the UK seized the opportunity to embrace the capabilities of internet shopping (Nickson, Warhurst, Commander, Hurrell & Cullen, 2012). Ever since, there is a marked increase in online shoppers, which has increased customer comfort and convenience. Through this innovative technological feature, supermarkets are able to offer their entire catalog of products offered, where consumers are able to compare prices, select their desired product, and make purchases at the comfort of their homes. On the hand of retailers, this has greatly reduced personnel costs, as well as costs incurred while advertising products. It is thus not surprising that some products in the UK retail market are only available through the e-commerce channel, as technology also increases the efficiency of the logistics department, as well as distribution and process of transportation (PR, 2012). The universal product code, which has been embraced by all supermarkets in the industry today, save for the small-holder outlets, has greatly revolutionized the sector, establishing accuracy and reducing bulk of work, as well as reducing chances of product theft. It is worth mentioning, though, that technology has seen many retail centers retrench their workers, thereby increasing rates of redundancy.
Legislative Factors
The UK retail market remains highly regulated, incorporating issues of market entry and exit. Government policies and legislations have direct impact on the operations of the retail industry, such as the Code of Practice, which bars players from demanding money from suppliers, as well as changing prices of products without notice or retrospectively (Kumar, Anselmo & Berndt, 2009). As much as the market forces of demand and supply create a platform for price determination, the government legislation is clear on maximum and minimum prices of basic commodities. The presence of heightened competition in the market brings a threat of price wars. Moreover, the government has policies regulating issues of monopoly, which limits entry into the market, and at the same time barring the formation of cartels and oligopolies.
Analysis Using Porter’s Five Forces
The operating environment of the UK retail sector is compliant with Porter’s five forces, which are competitors’ rivalry, bargaining power of suppliers, threat of new entrants, bargaining power of buyers, and threat of substitutes (Corstjens & Lal, 2012).
Competitors’ Rivalry
In this industry, there are four major leading supermarkets that fight to win the trust of consumers, including Tesco, Asda, Sainsbury’s, and Morrisons, which own over 73% of the market share. Tesco is the leading outlet, with a market command of about 31%, boasting of over 2,282 outlets across the UK. Apart from food products, the retail market leader is also expanding its wings into telecommunications, youth clothing, and construction. Sainsbury’s has a market share of 15.4%, with a total number of 792 outlets. It offers superb foods at fair prices, online shopping, other non-food products and services, and rebuilding its infrastructural base to conform to modern consumer demands. Asda, owned by Walmart, is third in command with a market share of 15.1%, while Morrisons has 11.8% with 356 and 420 outlets respectively (Clarke, Kirkup, & Oppewal, 2012). Beside these four major players, there are a plethora of other small competitors, including the local retail outlets. The large supermarkets survive in the business because of changing habits of shopping among the consumer fraternity.
Threat to New Entrants
In the UK retail industry the entrance of competitors is faced with several barriers. For instance, the leading players have a large capital base, which is difficult to raise at a go. Apart from the startup capital, there are huge requirements concerning corporate planning, trading, and advertising. Moreover, the majority of the shares in the industry are acquired by the above mentioned four key players, and expansion margins are very minimal (Puiu, 2010). Despite these difficulties, possible mergers and coalitions can occur, leading to formation of a strong force. Other barriers to market entry include enjoyment of economies of scale by firms dominating the market, and large fixed costs among others. This implies that it is generally difficult for smaller firms to join the sector, thus players have to deal with existing competition only.
Bargaining Power of Suppliers
Suppliers in the retail sector, for example for food products, are smaller in number, and practically irreplaceable. This translates to a high bargaining power, especially those who supply branded goods which attract a lot of demand (Gedeon, 2007). It follows that supermarkets cannot use pressure to undermine the prices of good supplied, and instead, make long-term contracts with most suppliers so as to keep the switching costs as low as possible. In some products, supermarkets produce their own brands, especially those that do not need manufacturing like cereals. This weakens the bargaining power of suppliers, since these products are usually sold at lower prices.
Bargaining Power of Buyers
In the retail industry, the buyers are regarded as the consumers, who buy goods in small quantities, thereby lowering their switching costs. This puts pressure on the supermarkets, while giving consumers a stronger bargaining power, which have strong consumer consciousness (Industry Report Consumer goods and retail: UK, 2012). Price sensitivity of products is due to their homogeneity, and consumers tend to buy those products with the lowest prices.
Threat of Substitutes
It would not be valid to state the retail industry has substitutes, but it has alternatives. This segment of analysis relates to competition, where the supermarkets compete with specialized outlets, for example Curry’s in the electrical section. This situation creates a complex condition for supermarkets, which have to lower prices to capture customers (Mass Grocery Retail, 2012). Sometimes, this competition becomes biases, as supermarkets cannot expand into some areas, while specialized outlets are flexible.
Conclusion
The UK retail sector remains a major player in the national economy, employing over 3 million citizens, and playing a key role in linking producers and consumers. Forces driving change in the sector include both internal and external factors, which have all contributed significantly to changing the mode of operation in the sector. Today, the UK retail industry is well organized, representing the diverse and ever changing needs of consumers.
Recommendations
With regards to the findings of this report, it suffices to recommend that retailing as an economic practice needs to be accorded a slightly higher status by various government departments, so as to recognize its contribution. Moreover, to enhance competiveness, the government should not focus so much on restricting mergers and development. Instead, more relaxed policies on amalgamation should be enacted to give way to a more competitive sector that will focus on the needs of the consumers.
References
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Appendix
Appendix I: Table 1
| Retail Sector | Whole Economy* | as % of Whole Economy | |
| Number of Enterprises | 215373 | 1 735386 | 12.4 |
| Turnover £ m (exc VAT) | 218 936 | 1 960 686 | 11.2 |
| Total Employment‘000 | 3 050 | 24 693 | 12.4 |
| Approximate Gross Added Value at basic prices £ m | 49 275 | 606 228 | 8.1 |
Table 1 : Retailing in the UK Economy, 2000
* Whole economy defined as SIC sections C-O – Production, Construction, Distribution and Services (excludes Agriculture, Forestry and Fisheries etc) Source : ONS Annual Business Inquiry.
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