The Strategic Marketing Management of Supermarket (UK)

Executive summary

The following report presents an overview of Supermarket Retailing to understand how each company stand in the current market. Furthermore, this document uses customer segmentation as a key element of study for the supermarket retailers marketing strategy and analyses the industry using the “Porter's five forces” model and the PESTLE marketing tool describing their behaviour and standing.

Introduction

 Retail is understood as the economic sector containing companies that specifically conduct mass marketing of products or services, to a large number of customers (Hollander, 1960). Supermarkets –being retailers- have exceptional importance in the market as they provide grocery and general goods to customers daily.

Furthermore, UK retailers represent one of the pillars of the UK’s economy and society. This report will analyse supermarkets in the UK for which aspects such as size and scope, brand, type of costumers, and scope of the industry, among others, will be addressed to clarify the current situation and position of retailers for the supermarket industry.

Size and Scope of the Supermarket Retailing Industry

 According to MINTEL data from 2015, the supermarket retailing sector in the United Kingdom has generated over ￡157.7 billion becoming the third-largest supermarket retail market of EU member states. Moreover, food expenditure will increase by 17.7 billion euros between 2015 and 2020 (MINTEL, 2015).

There are 86,332 approx. grocery stores in the UK and are split into four sectors: supermarket chains, convenience stores, traditional retail and developing convenience stores and alternative channels (Institute of Grocery Distribution, 2016). Details on the sector below:

The food sector in the United Kingdom (Hereinafter “UK”) is dominated by four companies: Tesco, ASDA, Sainsbury’s and Morrison’s. In 2014 they accounted for over the 75% of retail grocery sales in the UK (Grocery News, 2014). 

Source: Graphic extracted from Mintel 2015 Report.

Other supermarkets such as Waitrose, Aldi and Lidl are developing considerably fast due to their business strategy and segmentation focusing on costumer preference (targeted by income- high for Waitrose and low for Aldi and Lidl) and clear brand image (Haddock-Millar et al., 2015).

In order to illustrate the size and scope of the supermarket retail industry the following perceptual map illustrates the most influential supermarkets standings in regard to price and quality.

Source: Author.

General segmentation of the supermarket retailers

Market segmentation is the process of dividing a market into smaller, uniform groups that have similar characteristics and needs.

Types of Segmentations: Supermarket retailers.

It is understood that the segments are homogeneous groups and members of each segment will most likely have the same reactions about the marketing mix of a certain product, sold at a certain price, distributed in a certain way and promoted in a given way (M.N. & R.W., 1994)

Taking the demographic income factor as a sample segment for this report a classification of supermarket retailers (graphic below) explains which supermarkets target Segment 1: Established wealthy, Segment 2: Average middle class and Segment 3: Disadvantaged families. Furthermore, the graphic allows the reader to understand the key players for each segments and the share in each segment (M.N. & R.W., 1994).

Source: (Office for National Statistics, 2016)

Source: (MINTEL, 2015) Graphic: Author

Source: (MINTEL, 2015) Graphic: Author

Source: (MINTEL, 2015) Graphic: Author

Specific Segment Analysis

To further understand the supermarket retail sector the Socio-economic level of income segment –middle class- will be selected and analysed using strategic marketing theories and models developing an overall view on how different supermarkets stand and behave in regard to a specific segment.

Segment 2: Average middle class

Source: (MINTEL, 2015) Graphic: Author

Using TESCO as a sample for average-middle-class segment, we observed that supermarkets use a multi-segment positioning that allows retailers to target several segments at the same time with different products. In comparison with its competitors ASDA and Sainsbury’s, TESCO makes an extensive use of multi-segment positioning by approaching different segments in the same sector for which it creates different categories of store under the Tesco brand (Tesco PLC, 2017)

Looking into Tesco Segmentation one can clearly observe that this tendency of new store types is part of a branding strategy that allows them to have a greater market share, better image and greater customer loyalty.

Tesco PLC “Customers have different needs at different times so we tailor our stores as well as our products. From Value to Finest and from Express to Extra, there's something for everyone at Tesco.” (TESCO website, 2017)

Porter’s Five Forces Analysis for the Segment 2: Average middle class

 Threat of new entrants

 Threat of potential new entrants in the supermarket industry is low. The last 30 years has seen a change in dominance of the grocery market. Supermarkets have taken a dominant position over all other form of grocery retailing according to Ritz (2005). This level of dominance has been acquired by having operational efficiency, one-stop shopping and major marketing-mix expenditure creating a strong barrier for new entrants.

 In order to represent any threat, new entrants need to raise high amount of capital to compete with large fixed costs and the highly developed supply chains of stablished supermarket retailers dominating the market, in this segment Tesco, Asda, Sainsbury’s (MINTEL, 2010). Economies of scale and differentiation achieved by Tesco and Asda as part of their intense operational strategies also contribute to the low threat of new entrants. Substitutes may introduce new technology that allows the production of the same products at lower cost.

Furthermore, investment and time is required to obtain planning authorisation from the government in order to establish new supermarkets which is yet another barrier to new entrants.

 Threat of substitutes of products or services

 Substitution of a product or service could potentially reduce demand the segment has for a particular product, as there is a threat of consumers switching to alternatives (Porter, 2007). In this case, Tesco, Asda and Sainsbury’s are acquiring existing small-scale operations stores with the intent of opening stores in local towns and city centres Ritz (2005).

Industry rivalry

 Competitive rivalry is a high threat in the UK supermarket industry. Factors such as: advertising, product and service investment are the key elements of differentiation impacting the competitiveness of supermarkets retailers. Moreover, there are no cast for switching for consumers, a fact that creates competitive pressure through the industry.

The graphic below shows that although there are many players in the UK’s food retail market, TESCO maintains a clear leadership over others in the Segment 2: Average middle class segment.

Graphic: Market share of grocery retail chains in the UK from January 2015 to April 2016 Source: Statista (2016) Available at: https://www.statista.com/statistics/280208/grocery-market-share-in-the-united-kingdom-uk/

Competitors have responded by refocusing on price and value, whilst reinforcing the added value elements of their service.

Bargaining power of customers

The customer is a major actor of keeping price under control and products available. As an example, there is a customer looking for onions and finds out they are too expensive in ASDA, the customer will empower itself and purchase form Sainsbury or TESCO. Furthermore, In order to attract customers and retain their loyalty club cards are used to provide the consumer with additional benefits that may contribute to the selection of a specific retailer. Through these strategies and tools retailers obtain information on customer’s needs in order to customize service, ensure low prices, better choices tilting the balance of the bargaining power of consumer in favour of the retailer.

Crucial changes have occurred in recent years by the implementation of online services and the fact that the average middle class segment is a heavy user of digital technology and services. The supermarket retailing industry has been greatly affected by the usage of technology in order to obtain and use products and services making greater the bargaining power of customer.

Bargaining power of suppliers

Bargaining power for this sector is low for Tesco and moderate for ASDA and Sainsbury’s. All 3 retailers have hundreds of suppliers with a minimum cost of switching from one to another. Supermarket retailers have the tendency of delaying payments and getting a better deal by using bargaining power improving operational profit (Simpson, 2016). The result of using tactics of ill repute and low morality can become a problem for the brand and its image. TESCO attracted an extensive media coverage after delaying payments damaging its brand image. 

The power of the supplier can be use as a strategy to eliminate new supermarkets, control and prevent little stores from obtaining advantage in the market by going back on the supply chain. The best example for this strategy is the acquisition of BOOKERS by TESCO. According to the newspaper The Telegraph: “Booker is a cash-and-carry wholesaler that supplies food to 120,000 independent retailers nationwide. It has 172 depots, plus 30 under the Makro brand, where small business owners can buy goods in bulk” (Yeomans, 2017).

PESTLE Analysis

Political

Politics conducted in the UK generate significant issues that affect industries throughout the market. According to Peter Foster’s video “How will Brexit affect Scotland and Northern Ireland?” One of the biggest issues for supermarket retailers in the UK is the disassociation of the UK with others EU nation through the BREXIT which also create tension inside the Common Wealth as members such as Scotland and Northern Ireland are in disagreement with the parliament’s decision and the PM’s approach to BREXIT (Foster, 2017). This would impact the industry as leaving EU means leaving the trade zone. Countries importing goods into the UK for supermarket retailers would back away from selling their goods in the UK due to the tariff. In addition, BREXIT would increase cost for every purchase from EU countries.

Economic

Economy factors affecting the UK supermarket retail industry arises as a result of weak pound. UK economy is still recovering from the Late 2000s financial crisis that caused the raising of global commodity prices, in addition the subprime mortgage crisis infiltrated the British banking sector, and created a significant credit crunch. While still in recession, banks are recovering and stabilizing to a point of social trust returning to the banks there still has been noticeable food price inflation since 2013 (Mintel, 2013).

Unemployment rate being measured at 4.8% during October 2016 has also been steadily decreasing in the last 2-3 years positively affecting the supermarket industry as more jobs equal more income and translate to more money for groceries (Eurostats , Octuber 2016 ).

Social

Tradition is an important factor for customer buying habits and the supermarket retail selection. If a family gets grocery every month from Sainsbury’s it is more likely that they will continue to do so at the same place. On the other hand, some people believe that where you shop reflects on your acquisition power and persona, thus they select stores as a social symbol. People shopping at M&S are less incline to shop at Aldi and Lidl.

Due to economic factors and convenience online food shopping has become a popular way of shopping (Mintel, 2015). Delivery services and pick up stores facilitate shopping for customers who are price conscious and prefer to save time and money by having the product delivered to their homes or picking up the already packed groceries from a pick up store.

Technological

Innovation is a considerable factor affecting the UK supermarket customer and, as a result, the industry. Furthermore, supermarkets feel the need to keep up with digital tendencies in order to provide the customer with the best service increasing customers’ satisfaction and loyalty that translates into revenue (Nielsen, 2015).

Social media such as Facebook, Twitter, Instagram etc. gave the industry the opportunity of advertising for free through corporate accounts. In addition, it gives the supermarkets the opportunity to acquire feedback which can benefit retailers’ strategy and marketing mix (Butler & Wood, December 2014)

Self-checkout is another technological innovation introduce in the market of supermarket retailers in recent years. By allowing the customer to do their own checkout long queues are avoided saving time and money while increasing customers’ satisfaction (Jarrett, 2014, www.businessbee.com accessed 14.06.2017).

Loyalty cards are one of the technological advances that greatly impacted the whole industry by offering incentives to customers; then, the customer rewards the supermarket with loyalty. Moreover, supermarkets use data provided by loyalty cards (demographics, behaviour, preferences, etc.) in order to adapt and create new offers to maintain and expand clientele (Bellizzi & Bristol, 2004).

Environmental

Weather is the most influential factor that affects the UK supermarket retailer. Weather can destroy fruit, vegetables, and harvest of crops leading to issues in supplying the supermarkets inventory while it influences pricing in stores. On the other hand, favourable weather will affect pricing on a positive way as products will be easily available for customers (Business insurance quotes, n.d.). On the other hand deliveries and supplying trucks can be affected by weather. Pricing relates to offer and demand.

Legal

Regulations and laws given by the UK government to supermarkets retailers influence the market greatly. Competition law provides guidelines that businesses need to comply in order to conduct trade in the UK market avoiding price-fixing, abuse of dominant position and preventing anti-competitive conduct by retailers in this industry (Office of Fair Trading, September 2014).

Consumers’ rights are also factors influencing the UK supermarket industry. The Consumer Rights Bill gives policies to “clarify the standards a consumer can expect when they buy something” (JMW, March 2015), “set out what to do when goods, services or digital content don’t meet those standards” (JMW, March 2015) and “clarify when terms and conditions can be considered unfair” (Department for business innovation and skills, May 2015). The aforementioned policies are to be followed and abided by businesses affecting supermarkets in the UK.

Conclusion and recommendations

Supermarket Retailers in UK represent a major provider of income, revenue and jobs nationwide. Furthermore, by segmenting the industry they are able to create a strategy that allows them to convince and persuade customers into shopping within their walls. Moreover, Demographic segmentation allows the supermarkets to dive and categorize types of customers as a way to analyze their needs and characteristics as a group with the intention of providing services and product that fully satisfy them.

Moreover, the Average Middle Class Segment is a difficult one to satisfy since they are budget conscience individuals with education that allows them to perceive differences between the companies. In addition, this segment uses digital technology extensively allowing supermarket to attract their attention through social media.

By overcoming PESTLE problems and situations supermarket retailers are able to supply the needs of the Average Middle Class Segment customers. With TESCO dominating the supply line by the acquisition of BOOKERS, small retailers find it hard to escalate to a size that can fulfil average middle class customers allowing giants like Sainsbury’s, ASDA and TESCO –market leader- control on the segment.

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