Managerial economics
The business markets consists of all the organizations that acquire goods and services used in the production of other products or services that are sold and supplied to others. The major industries making up the business markets are agriculture, manufacturing, constructions, communication, banking, finance and the most important is the Retail store industry.
UK RETAIL INDUSTRY
According to one survey, the UK retail industry has an average turnover of almost £300 Billion. Market leader Tesco covers 30% of the total market share. Many retailers have tried and failed to establish themselves outside their home markets. Likewise, some retailers have gone astray trying to exploit Internet shopping. As a result, Tesco, the United Kingdom’s biggest grocer, has attracted considerable attention because of its ambitious overseas strategy and its successful on-line home delivery service. Relying on sales of nonfood items and on international sales–particularly in emerging markets–for an important part of the company’s future expansion, Tesco has delivered one of the fastest organic growth rates of any major retailer in the world. Its nonfood business rose by 18 percent in 2000-01, and its international business, which began with a launch in Hungary in 1994, now accounts for more than 40 percent of the group’s floor space. Tesco also happens to be the undisputed world leader in Internet grocery sales (www.tesco.com). Its on-line home delivery service is now profitable, Tesco says, and it has struck a deal in the United States with Safeway, which will use Tesco’s system for a home-shopping service. Underpinning Tesco’s success is excellent management and an obsession with operational efficiency and productivity gains, which the company uses to keep prices low or to improve service rather than to increase its operating margins. Despite this impressive record, Tesco is still relatively small compared with the likes of Carrefour and Wal-Mart, but it is growing faster. In one interview, Tesco deputy chairman David Reid discusses the role of international expansion, Internet shopping, and nonfood sales in the company’s ongoing quest for growth.
“First and foremost, cash–which means a strong core business. It’s expensive to grow abroad. If you’re going to be a serious international player, you have to be one of the top two companies in a number of countries, which has sizable cash implications. Yes, you could grow on a more gradual basis; you don’t have to start up in several countries simultaneously. But it still adds up to a huge cash investment, particularly if you choose to grow, as we have done recently, on an organic basis. If you’re spending, you also need the support of shareholders. They need to know what you’re doing and why, what the returns might be, what it is you’re after. International expansion is a key part of our growth strategy, and it was important for our shareholders to understand that it would take time to show returns. Indeed, such a strategy inevitably dilutes returns for a while. But it’s also an attractive strategy given the growth rates in many overseas markets and the fact that it’s difficult to grow in many Western markets because you can’t open stores, or there are union issues, or there are no sites available. We had the support of our shareholders, and our stores in the Republic of Ireland are now cash neutral. Our stores in six of the Central European and Asian markets where we operate are now profitable. In a seventh, Taiwan, we’ll be profitable in a couple of years. But initially, it was all driven by our UK cash flow.”
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NATURE OF DEMAND
Manufacturers are expected to follow with their own, more differentiated product lines, but these manufacturers suffer by distance from the ultimate consumer. A similar change is occurring in Europe. Retail companies are claiming channel captain status, and are embarking on their own private sourcing campaign. Activities conducted within market structures of Western economies account for only a portion of the economic exchange activity with a significant amount of economic activity occurring outside of these structures ( Herzog et al., 1989; Smith, 1987). Taken together, the financial services and business services sectors are amongst the most successful sectors in the UK economy in terms of employment creation, output, growth and profitability. Since 1980, the number of jobs in the sector has risen from 1.6 million to 2.8 million; the real output has doubled from 11 to 20 per cent of current-price GDP, and gross profits to almost £90 billion (CSO, 1995). This expansion was due to several factors, including growing consumer wealth, deregulation and demographic changes, as well as the trend in advanced economies towards services. Financial services output, as measured by percentage of GDP, was predicted to overtake that of manufacturing sometime in 1996 (McRae, 1995).
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CUSTOMER LOYALTY
“Does customer loyalty still exist?” Many think it has forever vanished and that lowest price is the only thing that keeps a customer returning. But, take heart. Customer loyalty is alive and well. Look no further than computer systems manufacturer Dell Computer, affinity credit card issuer MBNA, or home improvement retailer Home Depot and you’ll find companies that are consistently earning customer loyalty while their competitors struggle. But each of these companies would also tell you that in today’s unforgiving marketplace, creating and maintaining customer loyalty is more complex than ever. Retailing in Great Britain is significantly different from retailing in other parts of the Continent. Department stores in other parts of Europe have engaged in significant diversification strategies; those in Britain have largely retained their traditional department store format. During a period of economic stagnation ( 1925-1933), department stores in other parts of Europe diversified into the variety chain store format, sometimes referred to as the “poor man’s department stores” ( Jefferys and Knee 1988). In other European countries, the massive expansion into variety store formats in areas away from the center city prompted small and medium-sized retailers to press for legislation restricting the expansion of large retailers. Department stores in Great Britain resisted the temptation to expand into this format, citing the lack of consistency with their traditional image and the potential for variety stores to ultimately present a competitive threat to the traditional store format ( Jefferys and Knee 1988). As a result, the department store industry has not been as regulated in Great Britain as in other European countries.
While there is a major movement toward specialization in hard and soft lines, in food retailing there is definite movement away from specialty retailers ( EIU Retail Business Quarterly Trade Reviews 1992e). Major retailers are expanding with larger stores and consumers are becoming adjusted to one-stop shopping. This is facilitated by the fact that 60% of the population have a private automobile ( Reddish and Aston 1985). There is a strong trend toward consolidation with growth mainly in chain stores. Private label food products are very popular. The top four companies in food retailing control over 50% of sales are shown in the table below. These five firms are responsible for about 62% of total sales: in 1985 their share was around 47%.
Ten years ago the food retail trade was dominated by the appeal of low prices. Today the emphasis is on quality. Grocery retailers had a 9% increase in sales in 1991; this was one of the few healthy sectors of the U.K. retailing environment ( EIU Retail Business Quarterly Trade Review 1992d). Larger businesses outperformed small grocery businesses, having a sales increase of 9% as compared to 2%. Consumer expenditure on food increased .2% in 1990 in real terms; the share of total consumer expenditure devoted to food accounted for 11.6%; this is a decrease in total food expenditures (in 1985 dollars) from 15.5% in 1980 (Central Statistics Office 1991)
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Great Britain(FIRMS)
Concentration in the Food Trades(SHARE %)
Sainsbury
Tesco
Argyll
Asda
Gateway
16.3
15.7
11.2
10.4
7.8
MAJOR UK RETAIL INDUSTRY GIANTS
The six major multiples –Tesco, Sainsbury, Argyll ( Safeway, Presto, and Lo-Cost), Asda, Kwik Save, and Isosceles ( Gateway, Somerfield et al.) — in addition to the cooperatives, dominate the grocery retailing industry. Tesco, Sainsbury, and Argyll are gaining market share; Co-op is holding steady, and Isosceles and Asda are losing market share. Tesco has been the most aggressive, opening twenty-four new stores during 1991-1992. One trend in the food retailing industry is a trend toward central distribution systems and the elimination of the traditional merchant wholesalers ( Shaw et al. 1992). For the seven largest multiples, 80% of their sales volume goes through consolidation warehouses and distribution services, which are under their direct control (IGD 1990). Paralleling the decline of the traditional wholesaler is an increase in the importance of integrated logistics companies ( Shaw et al. 1992).
Retail buying is centralized for three reasons:
To achieve economies of scale in buying
To be able to employ specialized, high caliber staff in buying positions
To enjoy greater bargaining power with suppliers ( Dawson et al. 1986). Private label products account for 30% of packaged grocery turnover (IGD 1990), and a large volume is needed to support this private label program.
The UK is often cited as an attractive market for discount food stores, particularly from Germany. The margin for food is higher in the UK, although the reason for this difference with the continent is not necessarily greater profits for the owners. UK has been a leader in private label development. Food and beverage suppliers in the UK have become accustomed to dealing with the concentration of power in the supermarket distribution channel. UK retailers have shown extreme skills in category development. Once suppliers dismissed retailers as only knowing what sold yesterday, today the leading edge retailers have become very professional in their understanding of what will sell tomorrow. Control of store brands provides the retailer with additional market information which they can control to their advantage ( Pugh 1993).
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CONCLUSION
Strategic alliance refers to a loose partnership or grouping among competing business firms in a given industry. The main purpose of forming such a partnership is to complement individual resources or exclusive strengths in order to exploit an existing market opportunity rather than lose time in building new strengths individually. Thus, a group of international retailers may agree to form an alliance to perform jointly one or more functions such as procurement and buying of merchandise, development and promotion of private labels, and so on. Even in retail markets where consumers have seemingly endless choice, the product range retains its role as a means by which one competitor can differentiate itself from another. A retailer’s product differentiation may be great, as in the case of a specialist retailer where no other outlet matches the depth of choice within a particular category of merchandise. On the other hand, the product differentiation may be slight, for example in a supermarket, with the difference between one competitor and another being largely a perceived one, and may rely on the contribution of a handful of key items to make the difference.
Alternatively, the product range may provide the link into other means by which retailers can position themselves away from competitors, for example by using price or service differentiation. The relationship between the product range and the position that a retailer carves out, not only in the market place but also in the mind of the customer. However, the operational support mechanisms are tangible and measurable, and in order to fill a resource gap this book concentrates on these. As such, this retail textbook brings together subjects from a number of different academic subject areas in order to reflect the multi-faceted role that retail product management plays. Logistic principles, accounting principles and design principles are all part of the product management process, yet the overriding principles are marketing ones, concerning consumer knowledge and understanding.
REFERENCES
Taking Tesco Global: David Reid, Deputy Chairman of the United Kingdom’s Largest Grocer, Explains the Company’s International Strategy , Journal article by Peter N. Child; The McKinsey Quarterly, 2002.
European Retailing’s Vanishing Borders, Book by Madhav Kacker, Brenda Sternquist; Quorum Books, 1994. 232 pgs
Customer Loyalty: How to Earn It, How to Keep It, Book by Jill Griffin, Robert T. Herres; Jossey-Bass, 2002. 254 pgs.
Retail Product Management: Buying and Merchandising, Book by David Gillooley, Rosemary Varley; Routledge, 2001. 248 pgs.
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