Evaluate the strategy: Sainsbury Asda merger
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Evaluate the strategy: Sainsbury Asda merger
The retail industry has been shaped and influenced by the advancement in technology. Entrepreneurs and business owners are tasked with the need to continuously access the market and respond appropriately failure to do so is guaranteed for possible closure of the business. In response to this smaller businesses are opting for mergers.
Sainsbury and Asda are retail outlets focused on groceries. These industries are facing competition from Aldi and Lidl locally. However, Amazon is the biggest fear for the industry. In response,Sainsbury and Asda have opted for a merger. This report will evaluate the strategy with a focus on PESTLEanalysis, SWOT analysis and Feasibility.
The retail industry has developed over the years from general stores to present time online outlets. Retail is vast covering the sale of all types of physical goods from automobile parts, clothing rug cleaning, pharmaceuticals, books, health care products, and food. Retail involves wholesalers and retailers. However, this report will focus on retailers such as supermarkets, chain stores, and department stores. In recent times there has been a growth of retail business entrepreneurs who are responsible for all aspects of the business process from planning and ordering products to overseeing day-to-day operations. This has heralded the growth of online retailers such as Amazon (Marmol, Feys and Probert, 2015). Amazon is currently the world’s second-biggest company with a value of $740bn.The growth of online retailers has impacted traditional retailers such as supermarkets. More so by the move of online retailers shifting to the grocery. However, the biggest threat to traditional retailers and supermarkets is Amazon, and Mike Coupe, Sainsbury’s boss, has acknowledged its threat. Amazon has actively focused its sights onto the grocery business with its takeover of US grocer Whole Foods Market (Neal, 2019). In addition, the company has also opened Amazon Go a food store, where shoppers do need to go through checkout as they can pay for their Goods online. These moves by Amazon has impacted the share prices of UK supermarket groups. Amazon is actively involved in growing its presence in the grocery industry aside from the moves mentioned above. The company has started a collaboration with Morrisons to use its chief and storeroom services to provide groceries for UK customers. Industry experts have opined Sainsbury and Morrisons as possible takeover targets by Amazon. The proposed Sainsbury Asda merger is seen as a move to combat the growth of Amazon and low-cost German supermarkets (Vault, 2019). Uk grocers are aware of the ability of Amazon to get the better of them.
Both Asda and Sainsbury’s are working in response to these dynamics through a merger this move will potentially lower prices, reduce cost bases in the same case preserving what buyer’s value from each brand. Both Asda and Sainsbury have a substantial online presence, and a merger would place them in a better position to rival Amazon. The merger will potentially unlock cost savings, leading to lower prices for the customers. This cost-saving will not just induce the company to be more competitive on price, but also translate to more, range, value and service, convenience, and quality for our customers.
The macro-environment entails political, sociological, economic, legal and environmental factors. They are analysed using PESTEL analysis. These are factors that affect the business environment in general so the company has no control over them but it can adapt or adjust to cope with them and remain competitive. At the same time, they can be sources of opportunities and threats to the company.
Opportunities
From the PESTLE analysis, it has been shown that the political climate in the area that Sainsbury’s and ASDA operates is stable. This is because their operations are mainly in the UK and Europe in general. The stable political environment allows the company to expand. Furthermore, the European Union political-economic bloc creates an opportunity for the merger to thrive in the region with few restrictions.
Regarding technology, the technology the growth of online shopping has enabled shoppers to shop at the comfort of their homes. However, it influences and growth in the food industry is still in its early stages (Bush, 2019). Online shopping offers significant growth, and it enables expansion in areas of growing demands. Online shopping has also enabled the collection of personalised consumer data. Artificial intelligence and big data are enabling companies to know consumer habits and improve operations (Butler, 2019). Use of big data and analytics can be used to improve efficient and accurate inventory. As such this calls for the merge to develop and implement these models to ensure they are ahead of the competition. In addition, the internet technology advancement creates an opportunity for the Sainsbury’s – ASDA merger to maximise on online store hence reducing the cost of the physical store and consequently maximising the profit margins.
Concerning sociocultural factors, the customers’ preferences and tastes are changing. There is an upsurge of lifestyle diseases has led to a population that is conscious of what they consume. Healthy eating has been advocated by doctors, nutritionists, and health experts. This is an opportunity for the Sainsbury’s and ASDA to develop own brand “healthy” products to meet this demand.
Threats
The political factors influencing the merger negatively are the political factors in the United Kingdom, such as government debts, consumer debts, government policies and currently Brexit uncertainties (Bush, 2019). The current Brexit phenomenon has made UK retailers such as Sainsbury remain speculating what would happen next, mostly indicating that operation costs may go up since significant quantities of materials are obtained from the EU. In addition, the laws governing trade within Europe will impact import prices. This will have a trickledown effect on consumers as the companies try to maintain competitive prices. The government has been actively involved in controlling online trade with the development of policies to protect consumer practically consumer data. A consideration of these factors is the principal to ensure a smooth and profitable merger.
Technology can have a detrimental effect on the market, especially where it favours some companies than others. For example, internet technology has allowed online retailers such as Amazon to penetrate the UK market and take up a significant share of the market.
The Economic factors affecting the merger strategy are rising salaries, fierce competition, and increasing fuel costs and inflation. The global recession of 2008 dented the economy, and it has taken a while for countries to recover. With a tight economy, workers are demanding increased salaries to cope (Bush, 2019). The salary expectations have been rising over the years. The merger will increase employees translating to increased operational cost. The merger has to consider how it will motivate its employees but also ensuring the number of employees is sustainable for the business. Competition in the retail sector has spiked with consideration of famous names such as Morrisons, Lidl, Tesco, Waitrose, and Amazon (Butler, 2019). Furthermore, there are independent and specialist stores with significant competition. Over the decade, competition has been growing with no signs of subsiding. As such the merger should factor the impact of competition and how to counter. The Brexit uncertainties have led to inflation over different sectors including food prices. Inflation coupled with the growth of unemployment levels will affect demand.as such, the merger should also consider penetration to new markets to sustain demand.
The legal factors affecting the merger are government policies and legislations. Legislations on minimum wages and consumer protections are important (Bush, 2019). Employees might challenge the merger process due to the potential loss of jobs. As such the merger should ensure employees are adequately protected and in case of job loss they are reasonably compensated. Legislation and policies on taxes and wages should also be adopted.
The Environmental factors affecting the merger are plastic waste and carbon footprint. There has been prodigious pressure for companies to act responsibly in keeping the environment safe. The plastic waste crisis affects various industry but retail stores are the contributor (Bush, 2019). The natural disasters such as the current COVID-19 pandemic are also threats to the business including the proposed Sainsbury’s ASDA merger.
Microenvironment (industry-specific)
The merger evaluation will use Porter Five Forces to understand how the five competitive forces influence profitability and grow a strategy for enhancing competitive gain and long term profitability (Michaux, Cadiat and Probert, 2015). This analysis will look at the threat of new entrants, bargaining power of suppliers, bargaining power of buyers, the threat of substitute products or services, rivalry among existing competitors.
The threat of new entrant in the UK retail sector is low since there are no many restrictions in starting a business in the country. The retail industry has been disrupted by new players especially Amazon ( Czechitsite, 2019). Nevertheless, it is can be a daunting task to compete with the top four players (Tesco, Sainsbury’s, Morrisons, and ASDA). The Merger must manage all these challenges and safeguard its competitive edge. The merger can handle this threat by innovating new services and products, thereby bringing new customers to the fold and give old customers a reason to buy products. Another way of responding to this threat is by building economies of scale to lower the fixed cost per unit. The final way of tackling this threat us by defining the standards regularly through research and development.
The bargaining power of suppliers in the retail sector is low. This is because the market has strong retailers that take advantage of their position to control the suppliers. For example, Tesco uses its market muscle to make the suppliers accede to its demands.
The bargaining power of buyers is medium in the retail sector. Some years back, buyers, particularly in the UK retail market, were limited to a few dominant retailers but in recent years, their bargaining power has been increasing. This has been contributed much by the increased internet use and online retailing which is gaining popularity. Consumers want the best at the least price possible and they have an opportunity to compare what different retailers are offering online. If the customer base is smaller and powerful, their bargaining power is high and can lead to demand for offers and discounts (Vault, 2019). The merger must build a large customer base to mitigate this force while at the same time helping the companies to streamline their production and sale process. As such the merger should innovate new products to limit the bargaining power of buyers and this includes investing in its online presence.
The threats of Substitute is medium. The online retailing is becoming a substitute for the traditional in-store retailing. Though Amazon has disrupted the retail industry with its use of internet in service provision, other retailers including Sainsbury’s and ASDA have invested in online retailing and thus the merger will not be significantly affected by the threat of substitute.
Competitive rivalry in the retail industry is high. In the UK four retailers, which are also referred to as “big four” control the largest share of the market. These are Tesco, Sainsbury’s, Morrisons and ASDA. In addition, there are discounters such as Lidl and Aldi. The Sainsbury’s- ASDA merger will not be negatively affected by the rivalry since the two retailers are already among the main players in the UK market.
Figure 1: Porter’s Five Force for UK retail industry
The effectiveness of any business strategy is also backed by an internal analysis of the organisation (Vaněk, Mikoláš and Žváková, 2012). This report will evaluate Sainsbury Swot analysis.
Swot analysis of Sainsbury’s
The store’s strengths are as follows: Sainsbury has built a strong online platform accounting for 18 % of the store’s sales. The acquisition of Argos has father boosted the company operation due to its efficient delivery services. This has placed the company at a competitive advantage over its competition. The company has capitalised on its strategic location of channels, and this has made it convenient for customers coupled with its variety of products (Wood and Goodley, 2019). The company is better placed to compete with the likes of Amazon due to its acquisition of Argos, previously the company was focused on the food market, but now it has the diversity non -food market through Argos. Argos has also offered a robust delivery platform, as well as reliable digital channels. Argos’s unique hub and personalised supply chain and first truck delivery and collection services have also given the supermarket a competitive advantage, particularly in the shifting market.
The store’s weaknesses are as follows: Sainsbury focus on the UK limits its customer base. This exposes the store to severe risk against inflation. In response to coemption, the store has been lowering prices constantly, and this has impacted customer perception on value and quality(Marmol, Feys and Probert, 2015). This has resulted in loss of customer trust. The acquisition of Argos has exposed the company to loses as it is forced to cover operation and losses of Argos; this means Argos is consuming the store’s profits. The company has been experiencing a downturn in sales over the last four years due to o inflation and a combination of other factors such as Brexit.
The store’s opportunities are as follows: Healthy lifestyle is a growing trend having in mind this information on the backdrop of UKs growing obese population(Marmol, Feys and Probert, 2015). The store should focus on providing healthy foods. Companies have focused on the young population neglecting the aging population. UK growing aging population offers more consumer base.as such, the store should focus on providing products and services tailored for this population.
The store’s threats are as follows: The uncertainties around Brexit has affected the overall economic performance. Brexit has led to the pound losing its value against major currencies such as the dollar (Wood and Goodley, 2019). This, in turn, has led to high consumer inflation. In response to the inflation, consumers are opting for discounts and low prices. This has led to the growth of discounters such as lidi and Aldi which offer their products at steeply discounted prices has negatively impacted the company’s profits.
Figure 2:Sansbury SWOT analysis
To maximise on SWOT analysis, the company has to conduct TWOS analysis to better understand and interpret information from the SWOT analysis (Oxford College of Marketing Blog, 2019).
VRIO analysis of Sainsbury’s
| Attribute | Valuable | Rare | Costly to imitate | Firm Organised to capture value | Implications |
| Financial resources | Yes | yes | yes | Yes | Temporary competitive advantage |
| Distribution network | Yes | No | Yes | Yes | Temporary competitive advantage |
| Brand variety | Yes | no | no | Yes | Competitive parity |
| Reputation | Yes | No | Yes | Yes | Sustained advantage |
| Market size | Yes | No | No | Yes | Competitive parity |
| Leadership | Yes | no | no | Yes | Temporary competitive advantage |
The Sainsbury’s ASDA merger strategy was envisioned to solve an insistent strategic problem in the British retail market. A market that is characterized by intense competition where aggressive discounters (e,g Lidl and Aldi) take the day and premium niche players such as M&S and Waitrose (Angwin, 2019). On the other hand, market leaders, Tesco, Sainsbury’s, Asda, and Morrisons have been struggling to maintain their profitability and achieve growth in a rather flattening marke (Angwin, 2019) t. The Sainsbury’s Asda had met the three SAFe parameters; it identified an opportunity in the competitive UK retail industry (suitability) the returns would have been much higher and high market share (acceptability) and it was feasible because it was the best way for the two retailer to achieve a leading position in the market.
The merger will benefit both companies. The two companies have different strengths and weaknesses. However, a combination of effort will be to advantage of both companies. Sainsbury’s primary market is the United Kingdom by merging it has access to markets such as the United States. This will also benefit Asda as it will open up its UK customer base. Despite all the positives of the merger, there is fear of monopoly. However, if we factor competition and Amazon, it can be safe to conclude the merger will not create a monopoly. In conclusion, the merger will benefit not only both companies but also the consumer due to the offer of competitive prices.
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