StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Analysis of Supermarket Industry Structure in UK - Essay Example

Cite this document
Summary
The focus of the paper "Analysis of Supermarket Industry Structure in the UK" is on the style of rival interactions, the oligopoly nature of the industry, the level of government intervention, UK supermarket industry, strong oligopoly, number of companies dominating and controlling the market…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER94.6% of users find it useful
Analysis of Supermarket Industry Structure in UK
Read Text Preview

Extract of sample "Analysis of Supermarket Industry Structure in UK"

Running Header UK supermarket Industry Analysis of Supermarket Industry Structure in UK Collage Analysis of SupermarketIndustry Structure in UK Markets vary in terms of their structures, and can operate under perfect or imperfect competition. An industry which operates under perfect competition, “there are large number of firms and none of them are large enough to hold and economic power over the industry” (Anderton 2003). Industries such as Farming fall under this category of market structures. In such markets, buyers have perfect knowledge of the products and there are no barriers to entry where firms can enter and set up new businesses or expand existing business. Products are homogeneous and undifferentiated. Those industries, which operate under imperfect competition, can be either monopolies or oligopolies. In such market scenarios, few or one supplier dominates the industry. The products are highly differentiated through branding and the market is further protected through barriers to entry, which can be either legal or natural. In case of monopolies such barriers can be imposed by government or by the economic realities such as high costs of capital and optimum supplier volume, which the market can absorb (Hall et al 2004). Figure 1 below illustrates the differences between markets, which are perfect and imperfect in competition. Figure 1 – Markets differing along the continuum of market control & competition None Greater Total Perfect Monopolistic Oligopoly Monopoly Competition Competition Many More None The supply and demand conditions in an oligopoly market are differentiated from that of perfect competition conditions. The difference is created by the demand inelasticity for below market prices and elasticity for above market prices, which results in a “kinked demand curve” as illustrated in figure 2. In the diagram below, the demand above the kink point of E is inelastic as prices of all firms in the oligopoly market remains unchained. Demand below the kinked point is elastic because such low prices will result in price cuts by fellow suppliers (Vives 1999). Figure 2 – Demand Conditions in Oligopoly Market The UK grocery retail business is one of the most dynamic sectors of growth in Europe with approximately 6% growth maintained over the years since 2002. The market value is in the region of £120 billion and the grocery industry is largely dominated by large-scale supermarket chains accounting for over 80% share of the value of sales. Supermarket sector of the retail grocery market comprise of the so-called “Big 4: chains, namely Tesco, ASDA, Morrison & Sainsbury followed by Summerfield, Marks & Spenser and Waitrose (Supermarkets in the United Kingdom 2006). Almost 75% of the UK grocery market is made up of the combined sales of the top four retailers and the market leader Tesco accounts for over 30% while ASDA raking second in terms of market share holds only half of the share of the market leader. Figure 2 & 3 in Appendix I provides an overview of the market shares of the key operators prior to and after the Safeway Takeover. With the industry being dominated by few suppliers, the UK supermarket industry operates under imperfect competition conditions, which is skewed towards an almost perfect oligapolistic market. Within the current oligopolistic market conditions, the pricing parity is closely maintained by the key players with an informal and implicit understanding of the need to do so for the benefit of all suppliers. Unlike in perfectly competitive markets where price wars erode the profitability, the oligopolistic conditions allow the retail chain operators enjoy above average profitability, which are termed as “abnormal profits” in economic sense. These market situations have led to “follow-the-leader” style of rival interactions where, other players are closely adopting the market leader’s positioning and pricing strategies. While Tesco and ASDA has already established themselves for their deep discounting practices, Morrison, too plan to follow suit by allocating over 500 million for the purpose of price reductions which will place them competitively against their two key rivals. With the new acquisition of Safeway, Morrison too now carries the required volume advantage to bargain lower costs in the supply chain (Safeway takeover 2003). With the oligopoly nature of the industry, the barriers to entry in the industry are high due to high investment costs preventing new entrants in to the market. The strong hold position of the existing players is also discouraging new entrants who would be unable to sustain head on price wars with companies as ASDA and Tesco who can practice below the cost pricing if necessary. Another natural barrier to entry in the industry is the long established brand names with strong marketing support. The industry operates on a highly differentiated platform which is evident in the total expenditure of approximately £150 million on advertising by key players. Such heavy advertising and promotional spend which the existing players are incurring in protecting and developing their brands further increases the entry costs and act as an entry barrier. The massive scale of operations of these key retail giants and the resulting imperfect competition in the industry have lead the authorities to intervene and curtail further expansions though Mergers & Takeover legislature as well as strict building laws. As per Office of Fair Trade regulations, companies are only allowed to expand through acquisitions only if they hold less than 25% of the industry and controversies were sparked when Tesco reported their expansion plans in the convenience stores category instead of the grocery stores sector in which they hold more than the 25% prescribed share. The level of government intervention in trying to control further expansions of the UK’s top retailers through acquisitions was further evident in its decision to block Tesco, ASDA and Sainsburry from taking over the Safeway chain while approving the bid of Morrison group which was ranking in fifth place prior to its takeover of Safeway. Morrison’s approval came with an attached condition of having to sell 50 outlets from its chain. (Morrison gets Safeway green light 2003). Another contender in this bidding rivelery, the Bhs stores owner Phillp Green pulled out of his own accord during the course of take over. With the completion of the takeover of Safeway the UK supermarket industry strcutre will come under renewed pressure with another larger scale operator in Morrisons coming in to rivelary with the top two players. The impact of the takeover is most likely to affect Sainsburry adversely, pressurising it for higher performance. With its smaller volumes, Sainsburry will face difficulties in tallying up to price competition being offered by Tesco, ASDA and newly enlarged Mrriosons. Sainburry purchased 14 of the 50 Morrison outlets which were offered on sale as a condition in the acquisition approval by Office of Fair Trade (Safeway (UK 2006). The take over of Safeway by Morrison is unlikely to affect the number one retailer Tesco, which is almost twice in size of its trading volume and with very strong, profit records registered continuously over the past years. However the forecasted price discounting of Morrison will place shorter price and profit pressures on Tesco if they choose to retaliate with further discounting of their own pricing. Tesco benefited from the Safeway deal of Morrison by purchasing 10 of the 50 Morrison outlets offered for sale. The takeover will also carry implications for UK suppliers to the supermarket industry where by, its most likely that Morrison too will now expand its global sourcing to keep costs competitive while bypassing the UK suppliers who are already finding it difficult to keep abreast with demands of low costs placed upon by them by retail giants such as Tesco and ASDA. Thus in conclusion it can be predicted that the UK supermarket industry will continue to operate as a strong oligopoly with a limited number of companies dominating and controlling over 80% of the market share. Pressure for growth may prompt further takeovers such as the likes of takeover of Safeway chain by Morrison, which will further consolidate the market power of key players. In future, the legislature on Fair Trade may have to become even more stringent to curtail industry leaders such as Tesco becoming a monopolistic behemoth, which will wield too much power over the industry and even hold power to drive out its key competitors such as ASDA and Morrison which hold less than half its’ market share. Bibliography Anderton, A (2003) Economics. 3rd ed. London: Causeway Press Limited. Hall, D., Jones, R. & Raffo, C. (2004). Business Studies. 3rd ed. London: Causeway Press Limited. Vives, X. (1999). Oligopoly pricing. London: MIT Press. “Safeway takeover: good news and bad” (2003) Food Navigator . com Retrieved November 29, 2006. from “Watchdog sets out Safeway fears.” (2005) CNN News. Retrieved November 28, 2006 from Supermarkets in the United Kingdom. (2006, November 26). In Wikipedia, The Free Encyclopedia. Retrieved November 30, 2006, from Safeway (UK). (2006, November 26). In Wikipedia, The Free Encyclopedia. Retrieved, November 30, 2006, from “Morrison seals Safeway takeover” (2004) BBC.Co.UK Retrieved November 29 2006 from “Morrison gets Safeway green light” (2003) BBC.Co.UK Retrieved November 29 2006 from Appendix I Figure 2 – UK Supermarket Industry Market Share (Prior to Safeway Take Over) Figure 3 - UK Supermarket Industry Market Share (After the Safeway Take Over) Read More
Tags
Cite this document
  • APA
  • MLA
  • CHICAGO
(Analysis of Supermarket Industry Structure in UK Essay Example | Topics and Well Written Essays - 1750 words, n.d.)
Analysis of Supermarket Industry Structure in UK Essay Example | Topics and Well Written Essays - 1750 words. https://studentshare.org/business/1705538-analyse-the-market-structure-of-the-supermarket-industry-and-discuss-the-implications-of-the-recent-take-over-of-safeway-for-competition-in-the-uk-supermarket-i
(Analysis of Supermarket Industry Structure in UK Essay Example | Topics and Well Written Essays - 1750 Words)
Analysis of Supermarket Industry Structure in UK Essay Example | Topics and Well Written Essays - 1750 Words. https://studentshare.org/business/1705538-analyse-the-market-structure-of-the-supermarket-industry-and-discuss-the-implications-of-the-recent-take-over-of-safeway-for-competition-in-the-uk-supermarket-i.
“Analysis of Supermarket Industry Structure in UK Essay Example | Topics and Well Written Essays - 1750 Words”. https://studentshare.org/business/1705538-analyse-the-market-structure-of-the-supermarket-industry-and-discuss-the-implications-of-the-recent-take-over-of-safeway-for-competition-in-the-uk-supermarket-i.
  • Cited: 0 times

CHECK THESE SAMPLES OF Analysis of Supermarket Industry Structure in UK

The UK Supermarket Sector is an Oligopoly

This paper ''The uk Supermarket Sector is an Oligopoly'' tells us that the uk supermarket is most definitely properly defined as an oligopoly based on the market structure that guides its business principles, the relevance of the consumer in building business, the level of interdependence between competing supermarket companies.... This paper describes the market characteristics of the supermarket sector in the uk that label these businesses as part of an oligopoly....
10 Pages (2500 words) Essay

STEEPLE Analysis of UK Supermarket

In the paper 'STEEPLE Analysis of UK Supermarket' the author analyses activity of Morrison PLC, a dominant brand in the United Kindom supermarket industry as it derives its competitive edge by doing STEEPLE analysis frequently.... STEEPLE (Social, Technological, Environmental, Economic, Political, Legal and Ethical) analysis is amongst the most effective tools that are used to monitor changes taking place in the environment of the business (Brown, 2007; Griffith & Harmgart, 2008); the analysis is done to identify all important factors that can have a significant impact on any organisation operating in the UK supermarket industry....
10 Pages (2500 words) Term Paper

Analysis of the Main Cross-Cultural in Star Supermarket

This essay "analysis of the Main Cross-Cultural in Star Supermarket" discusses the cooperation of a local supermarket in Shanghai and the Star supermarket in assorted operations, share the profits, losses, and get involved in joint control.... Star supermarket is a proposed British supermarket.... The supermarket's management considers exploiting the Chinese markets.... Tang and Ward suggest that management practices would help such organizations as Star supermarket to enjoy individual freedom, equal contribution, and division of labor....
9 Pages (2250 words) Essay

The Form of Market Structure which Describes the Supermarket Chain in the UK

The uk supermarket market structure is best described as oligopolistic, whereby a small cluster of heavily capitalized stores controls a significant share of the market sales.... he total uk grocery stores sales in 2005 generated total sales volume of approximately £120 billion, which was an increment of 4.... The OFT reports that the expansion of the large supermarket chains into the convenience store sector (those below 280 sq metres) had considerably expanded this market segment, from 54 stores in 2000 to 1306 by 2005 within the uk market....
5 Pages (1250 words) Essay

Structure of the UK Supermarket Industry

Discount retailing has become a growing division of the grocery retailing in uk and Tesco ad Asda contest a strong competition in this field.... This essay explores the supermarket industry of the United Kingdom that is an extremely profitable and lucrative industry.... The market structure exhibited by the supermarket industry in the UK is oligopolistic in nature.... The worth of the uk's grocery retail industry, which operates through almost 96000 stores, is evaluated to be around 135 billion pounds....
13 Pages (3250 words) Term Paper

Introduction to UK Supermarket

Reportedly, the supermarket industry employs more than 1.... Li (2008) and Vasquez-Nicholson (2011) emphasized that Morrison PLC is a dominant brand in the UK supermarket industry as it derives its competitive edge by doing STEEPLE analysis frequently.... Each factor of STEEPLE analysis with its relation to the UK supermarket industry is discussed below:The current trends of consumers in the UK market depict that they are moving from one stop shopping to a bulk buying mode as there are various social changes happening in the country....
9 Pages (2250 words) Term Paper

The Market of UK Supermarkets

From this study, it is evident that the UK supermarket industry is explained as an oligopoly market.... The paper "The Market of UK Supermarkets" has discussed the theory of contestability followed by a primary analysis of the UK's big four supermarkets.... In the uk, the 'big four' supermarkets dominate nearly 75% of the whole market.... This paper aims to investigate the contestability of the uk supermarkets, focusing on Tesco, Sainsbury, Morrison's, and Asda supermarkets A study by Baumol noted the importance of defining terms before analyzing them....
10 Pages (2500 words) Essay

Supermarket Industry in the UK

This case study "supermarket industry in the UK" analyzes the supermarket industry critically by focusing on its external environment that is affecting the industry.... The supermarket industry in the United Kingdom is among the largest industries in the country.... Some of the key economic issues facing the supermarket industry in the UK include the high level of inflation, which has led to a reduction of the purchasing power of the citizens a factor that has significantly affected the overall performance of the industry....
7 Pages (1750 words) Case Study
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us