John Sainsbury STRATEGIC ANALYSIS REPORT - Essay Prowess

John Sainsbury STRATEGIC ANALYSIS REPORT

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John Sainsbury STRATEGIC ANALYSIS REPORT

John Sainsbury founded Sainsbury’s in 1869. The first shop was in London, the current headquarters. At first, the store only sold fresh foods then later expanded to other groceries.. The Sainsbury’s chain of supermarkets is now the second-largest in the market boasting of 16% of the market share. However, there is a wide margin between Sainsbury’s and Tesco, which has 28% of the market share (Economic Research Council, 2020). There are several factors, both internal and external, that affect the success of this company.           

External Analysis

External environmental factors that affect Sainsbury’s include; political, legal, economic, social, environmental, and technological factors. Volatility of the political landscape is a big threat to Sainsbury’s. The Sovereign Wealth Fund of Qatar is the biggest shareholder in the company. If the relationship between Britain and Qatar were to go sour, Sainsbury’s would contend with the possible withdrawal of their shareholder. The exit of Britain from the European Union is detrimental to the supermarket. Sainsbury’s is a multinational company with both suppliers and consumers from various European countries. Withdrawal of Britain from the EU means a loss of both suppliers and customers.

The social and cultural environment is a big determinant of the success of a business. This environment caters to the attitudes and beliefs of the society in which a business operates, the effects of education, and other norms (Akpoviroro and Owotutu, 2018). Customer behaviours evolve, and businesses must keep up. The social environment is currently one of Sainsbury’s threats. People are shifting to smaller grocery stores within their neighbourhoods.   The traditional once-a-week grocery shopping at supermarkets has been replaced by three grocery shopping rounds at local stores (Sainsbury’s, 2019). Moreover, people are more conscious of what they eat and would rather buy from farmers directly or from the organic stores that promise them fresh farm produce.

            The legal environment can be enabling or crippling for a business. The legal environment consists of the laws and regulations the government and other governing bodies pass (Akpoviroro and Owotutu, 2018). In the UK, the laws favour businesses and give them room to operate. There haven’t been any major action suits brought against Sainsbury’s, which gives it a chance to operate freely without the constraints of a legal system. Adherence to the law on such issues as tax remittance has made the legal environment friendly for Sainsbury’s.

The economic environment in which a business operates determines its success. An expanding economy gives organizations to expand their operations and venture into new areas (Akpoviroro and Owotutu, 2018). The current UK economy gives Sainsbury’s an opportunity. The supermarket can expand its activities into new, previously untapped markets. It can explore new strategies such as online shopping and the use of delivery drivers as salespeople to spread the word about the company. The entry of new supermarkets, stores, and other competitors should also spur the supermarket to be innovative.

Environmental factors are both a threat and an opportunity for Sainsbury’s. There has been a global uproar against big companies for their significant contribution to environmental degradation (Akpoviroro and Owotutu, 2018). Companies like Sainsbury’s no doubt contribute significantly to the increased carbon emissions. However, Sainsbury has taken this up as an opportunity and has committed itself to preserve the environment. Sainsbury’s hopes to be carbon neutral by 2050.

The technological environment is another opportunity that Sainsbury’s can explore. Over the past two decades, technology has revolutionized how business is done (Akpoviroro and Owotutu, 2018). Inquiries and deals are now made over devices. Sainsbury’s has kept up by developing a comprehensive website. A visit to their website www.sainsburys.co.uk provides a one-stop for all information regarding the company. The customer care at the website is also efficient, answering clients’ questions promptly. Their venture into the world of online shopping is another to exploit the technology opportunity. 

Michael Porter came up with a model of five forces that determine competitiveness in industries. This model provides a useful framework for analysing industry attractiveness. The power of the consumers over Sainsbury’s supermarket chains is a weak force. Consumers drive down the prices of a company by switching to a cheaper competitor (HBR, 2019). However, the prices in UK supermarkets are somewhat homogenous, thus no supermarket chain has an advantage over the other. Moreover, they sell nearly similar products, further discouraging consumers from switching to different supermarkets. Consumers’ bargaining power is low, making the supermarket business attractive and profitable for supermarket chains.

Suppliers have low bargaining power too. Powerful suppliers can leverage their position to demand a higher price for their goods and services (HBR, 2019). They can also negotiate better payment terms from their clients. However, there are several suppliers, both local and international, for the goods sold in supermarkets. Supermarkets are thus able to bargain for good deals and favourable payment plans for the goods supplied. The low power of the suppliers makes the supermarket industry attractive and profitable for supermarket chains.

The threat of substitutes is low. Supermarkets provide basic commodities that people need in their daily lives. Groceries are used daily in almost all households. It is, therefore, unlikely that consumers will ever stop purchasing supermarket products. While convenience stores, grocery stores, or stores selling organic products may supply some of the consumers’ needs, they are no match for the supermarket chains (Xu, 2006). Established chains provide a wide variety of goods and at the best market prices. These are goods that consumers need and will continue to buy them for a long time to come. The low threat of substitutes increases the attractiveness of this industry.

The existing supermarket chains in the UK have formed an oligarchy. It is difficult for a new player to enter the market because the already existing chains have already captured it. Aside from Sainsbury’s, other household names are Tesco, Asda, and Morrisons. These four controlled 71% of the UK market in 2019 (Economic Research Council, 2020). To establish a chain that can compete with these, one would need millions of Euros, further discouraging anyone who would want to venture into this industry. The difficulty for competitors to join the industry makes it attractive and profitable for the already existing players.

Pie chart of UK supermarkets market share

The one strong force that makes the industry unattractive for chains like Sainsbury’s is the fierce rivalry among the chains. Before 1995, Sainsbury’s was the leading grocery retailer (Xu, 2006). However, in 1995, Tesco took over the lead and is now ranked as the leading supermarket chain in the UK. In 2003, Sainsbury’s was once again overtaken by Asda, relegating it to the third position. Sainsbury’s was the third-largest supermarket chain until 2014, when it retook its position as the second in the market. However, up to date, the competition is still stiff between Sainsbury’s and Asda. Sainsbury’s retains the lead only by a small margin. The rivalry between competitors is a high force that makes the industry unattractive and less profitable for Sainsbury’s.

Four of Porter’s forces rank low in the supermarket chain industry. These are consumer bargaining power, supplier bargaining power, the threat of new entrants, and substitutes. The only force making the industry unattractive is the rivalry between the supermarket chains. The supermarket industry is, therefore, an attractive one. Sainsbury’s is likely to thrive and enjoy profitability.

Internal analysis

No matter how hard you work in a business, the business may still fail. This is the sad reality that every entrepreneur must contend with. The VRIO business framework allows a company to identify its resources, their potential usefulness, and determine if it will be profitable in the long run (Knott, 2015). VRIO analysis has four tenets; value, rarity, imitability, and organization. Sainsbury’s is a giant in the supermarket industry. However, a deeper look into its resources reveals not just strengths but also weaknesses.

Sainsbury’s financial resources are valuable and give the business a competitive advantage. In the2019/2020 financial year, the company made group sales of £32,394m and realized a profit of £586 million (J Sainsbury plc., 2020). The financial resources enable the company to invest in more services and products, thus competing favourably (Knott, 2015). Moreover, with finances at their disposal, the company can quickly take advantage of any arising opportunities. The financial resources of Sainsbury’s are also rare. Only a few powerful companies have the same financial resources at their disposal.

Moreover, the financial resources are difficult to imitate. Sainsbury’s has accumulated its financial resources since 1869. The profits and new investors over the years have enabled the company to reach its current position. Any competitors will find it very hard to replicate this kind of financial resources. Sainsbury’s has over the years invested their finances strategically, taking up opportunities and offsetting threats. This proves a high level of organization of financial resources, which keeps them at a competitive advantage. Its financial resources are one of Sainsbury’s strengths.

Sainsbury’s employs more than 170,000 employees. The employees are valuable and continue to generate income for Sainsbury’s daily. The employees are loyal, and there is a low turnover for employees at Sainsbury’s. The employees are a rare resource. As an employer, Sainsbury’s has trained and developed an employee force tailored for their work. Unlike other supermarkets, the employees at Sainsbury’s are trained for their work, and most have worked at Sainsbury’s for many years.

Sainsbury’s respects the rights of its employees and is inclusive of race and gender minorities and the disabled. It also provides training to propel the employees’ careers to higher ranks (J Sainsbury plc., 2020). Such a set of employees is difficult to imitate. Any company hoping to establish a workforce like this needs to dedicate a lot of resources and goodwill. Sainsbury’s, therefore, maintains a competitive advantage. The employees are highly organized. The company has a clear structure of employees from the top management to branch managers, supermarket workers, and drivers. Such organization is valuable since it makes service delivery efficient. Overall, the employees are one of Sainsbury’s strengths.

Even though Sainsbury’s now deals in a variety of products, its original and popular product is local fresh food. The local food products are a valuable resource. Adding value to these products is the wide differentiation and variety provided by Sainsbury’s. However, these food products are not rare. There are many suppliers of similar food products. Competitors have easy access to the same food products as Sainsbury’s, reducing its competitive advantage.

The food products sold by Sainsbury’s are not difficult to imitate. The company has invested in biotechnology, Genetically Modified Organisms (GMO) engineering, and food processing technology. However, competitors can also invest in such skills and technology. It may not be immediate, but eventually, others will catch up. The company has a competitive advantage temporarily but will eventually lose it.

The distribution network of Sainsbury’s is a valuable resource. The supermarket offers both physical stores and online shopping. In the current COVID-19 pandemic, online sales have proven to be a necessary distribution path (J Sainsbury plc., 2020). The distribution network of Sainsbury’s enables the store to sell its products thus valuable. A good network takes a long time and a lot of resources to build. It is, therefore, not easily imitable. This gives the supermarket chain a competitive advantage over its competitors. The distribution network is also highly organized. The supermarket stores are located strategically in various towns and cities, well equipped with personnel and equipment to facilitate sales. The online delivery system is efficient, making the supermarket competitive. The distribution network is one of Sainsbury’s strengths.

Sainsbury’s investment in research and development is not a valuable resource.  Sainsbury’s has tried to improve the production of farm produce through technology. Sainsbury’s has invested more than £30 million in their partnership with farmers since 2006. This investment aims to improve the quality of produce and to make production cheaper, hence reducing market prices. Since 2012, Sainsbury’s has also been involved in agriculture research and development, the project costing the supermarket chain £18 million. The aim is to improve efficiencies and cost-effectiveness. However, all these investment projects have not borne fruit. There is no difference between the products bought in Sainsbury’s and those from their competitors. Moreover, their prices for these products are not much lower than the prices of their competitors. This is one weakness of the company that they should re-evaluate.

The cost structure at Sainsbury’s is not valuable. The company incurs high costs of production. The company invests in farming research and technology to improve the quality of their products. By selling the final goods at a competitive market price, they reduce the potential profit. This model does not give Sainsbury’s value for its money. Moreover, the products are neither rare nor inimitable. The cost structure puts it at a competitive disadvantage and is a weakness.

Strategy evaluation

In 2019, Asda and Sainsbury’s decided to merge. A host of factors necessitated the merger. The stiff competition they faced from other supermarket chains made it desirable to join forces. The biggest threat for both Asda and Sainsbury’s was Tesco. Aside from Tesco, other household names such as Morrisons, Waitrose, M&S, etc., made it difficult for them to continue operating profitably. The growth of stores with nontraditional models also made Asda and Sainsbury’s reconsider their position in the market. ‘Top-up’ shops in neighbourhoods have become popular (Sainsbury’s, 2019.). Clients now choose to shop in these shops an average of 3.9 times a week instead of the supermarket (Sainsbury’s, 2019). The emergence of discounters, Aldi and Lidl, who offer the same variety of goods but at much lower prices, further reduced the amount of business the older chains got.

The table below shows the new market distribution:

         % change from
Brand20112012201320142015201620172018*2011 to 2018
          
Tesco27.3%27.3%26.8%25.8%25.3%25.2%24.6%24.5%-2.8
          
Sainsbury’s15.0%15.0%15.0%14.7%14.6%14.2%13.6%13.5%-1.5
          
Asda14.9%14.7%14.5%14.5%14.0%13.2%12.7%12.7%-2.2
          
Morrisons11.5%11.2%10.8%10.4%10.2%10.0%9.6%9.6%-1.9
          
Aldi2.0%2.5%3.1%4.0%4.7%5.3%6.0%6.3%+4.3
          
Co-op5.9%5.6%5.4%5.2%5.1%5.2%5.0%5.0%-0.9
          
Waitrose4.1%4.3%4.5%4.7%4.9%5.0%4.9%4.8%+0.7
          
Lidl2.3%2.4%2.6%3.1%3.6%3.9%4.4%4.6%+2.3
          
M&S3.1%3.1%3.2%3.2%3.3%3.5%3.5%3.5%+0.4
          
Iceland2.0%2.1%2.1%2.1%2.1%2.2%2.2%2.1%+0.1
          
Others12.0%11.6%11.8%12.1%12.0%12.2%13.4%13.4%+1.4

Source: Kantar World Panel Total Grocery Share.

The demands of the consumers also made Asda and Sainsbury’s merge. The consumers demand high quality, wide range of goods conveniently and at low costs (Sainsbury’s. 2019). Because of the increased number of grocery stores and traders, customers almost always find someone willing to sell their products at a lower price or serve them more conveniently. This makes it difficult for traditional large chain supermarkets to stay in business. Customers also find online shopping more and more convenient. Online shopping promotes newer models of business, such as Amazon (Butler, 2018). Creating an online business increases the cost of doing business for traditional stores. However, if Asda and Sainsbury’s could join efforts, it would help cut down the costs and have wider coverage for the online business.

The plan to merge Sainsbury’s with Asda was suitable. The suitability of a strategy is determined by its ability to address opportunities while avoiding threats (Johnson, Whittington, and Scholes, 2011). Sainsbury’s saw a chance to get back the market they lost because of competition and lower their prices. The two would enjoy a 31% market share under the merger, ahead of Tesco (Neal, 2018). While planning the merger, the two stores were hopeful that they would reduce the prices of basic items in their stores by 10% (Neal, 2018). Such a reduction in prices would enable them to compete with Aldi and Lidl, who now claim 13% of the market.

Moreover, the two would have wider distribution coverage to rival that of Amazon. People are shifting to online shopping as a more convenient way of shopping (Sainsbury, 2019). Merging the two stores would significantly reduce transportation costs since they supply nearly similar routes. The reduced costs would transfer to the customer, making Sainsbury’s and Asda sought-after sellers. The increased reach would also bring new customers previously not included in the delivery routes.

The strategy to merge Asda and Sainsbury was acceptable to the shareholders. The acceptability of a strategy depends on whether it will live up to the expectations of shareholders (Johnson, Whittington, and Scholes, 2011). Upon the announcement of the merger, the value of Sainsbury shares increased by 20%. Sainsbury’s hoped to create value for shareholders within two years of the merger (Neal, 2018). Such prospects appeal to shareholders.

The risk in merging the two supermarket chains was the possible closure of some branches. The Competition and Markets Authority (CMA) had recommended that 463 stores be closed before proceeding into phase 2 of the merger (Butler, 2018). This would cause a potential loss to the shareholders. The management was quick to dismiss these claims, but eventually, the CMA prevailed thwarting the merger efforts. The managers and CEOs of both supermarkets expressed hopes that the merger would be a success and would revitalize their stores (Neal, 2018). They especially hoped that the merger would relieve some of the competitive pressure and attract customers back.

The reaction among the stakeholders to the merger was varied. The shareholders were happy with the merger since it promised increased value of their shares. The merger was expected to be profitable within two years (Neal, 2018). The top management of the giant stores was also happy with the merger. They felt that they could no longer compete with each other and with the other players and stay profitable (Sainsbury’s, 2019). The merger was a chance for the two stores to rebrand and reclaim the lion’s share of the market.

At first, the employees were also happy with the merger since they were promised they would keep their jobs. Asda CEO claimed that they had the best employees and intended to keep all of them (Neal, 2018). Moreover, even when the CMA expressed their desire for more than 460 branches, the management promised that they would only let the stores go if they were assured that the new owner would the existing employees and keep the stores as a going concern (Butler, 2018). However, when CMA insisted that some stores would be closed, employees realized that the merger would be bad and went against it.

The suppliers were another unhappy lot. The management of the two supermarket chains admitted that its large suppliers would lose some of their business ((Neal, 2018).). However, even those who would be retained felt unsure of their position. The 10% reduction in prices would probably be transmitted to them, reducing their income. The prospects of reduced costs for everyday household items probably made consumers the happiest lot. The merger intended to make shopping convenient and cheaper for them, making them big winners if the merger went through.

The merger was feasible in theory. However, feasibility is determined by whether the strategy actually works in practice (Johnson, Whittington, and Scholes, 2011). The two supermarkets envisioned a broader market with cheaper prices for the consumers. However, the CMA shut down the merger because, after analysis, they discovered the merger was not feasible. Instead, the CMA said the merger would cause an increase in prices of commodities and a reduced range of products sold.  (CMA, 2019). The CMA also warned consumers of a worse ‘overall shopping experience’ in the merged stores compared to the experience in the stores independently. The merger was thus shut down, making it a failed strategy.

References

Akpoviroro, K.S. and Owotutu, S.O., 2018. Impact of external business environment on organizational performance. IJARIIE, 4(3), pp.498-506.

Butler, S. 2018, September 27. Sainsbury’s and Asda may have to offload 460 stores to seal merger. The Guardian [International Edition]. Retrieved from https://www.theguardian.com/business/2018/sep/27/sainsburys-and-asda-could-close-400-stores-to-complete-merger. Accessed 6 Aug. 2020.

Cardeal, N. and Antonio, N.S., 2012. Valuable, rare, inimitable resources and organization (VRIO) resources or valuable, rare, inimitable resources (VRI) capabilities: What leads to competitive advantage?. Cardeal, N., António, (2012), pp.10159-10170.

Competition and Markets Authority. 2019, April 25. CMA blocks merger between Sainsbury’s and Asda. Retrieved from https://www.gov.uk/government/news/cma-blocks-merger-between-sainsburys-and-asda. Accessed 6 Aug. 2020.

Economic Research Council. 2020, June 11. UK supermarkets market share. Retrieved from https://ercouncil.org/2019/chart-of-the-week-week-12-2019/. Accessed 6 Aug. 2020.

HBR. 2019. The five forces. Retrieved from https://www.isc.hbs.edu/strategy/business-strategy/Pages/the-five-forces.aspx. Accessed 6 Aug. 2020.

Knott, P.J., 2015. Does VRIO help managers evaluate a firm’s resources?. Management Decision.

Johnson, G. and Whittington, R., Scholes,(2011). Exploring Strategy: Text & cases, 9th edition. Pearson education

J Sainsbury plc. 2020. Annual report and financial statements 2020. Retrieved from https://www.about.sainsburys.co.uk/~/media/Files/S/Sainsburys/documents/reports-and-presentations/annual-reports/sainsburys-ar2020.pdf

Neal, C. 2018, April 30. What the £12billion Sainsbury’s, Asda and Argos merger means for you including 10% price drops. Mirror [UK]. Retrieved from https://www.mirror.co.uk/news/uk-news/what-12billion-sainsburys-asda-argos-12452882. Accessed 6 Aug. 2020.

Sainsbury’s. 2019. Proposed Sainsbury’s and Asda merger. https://www.about.sainsburys.co.uk/~/media/Files/S/Sainsburys/Sainsburys_Asda_rationale_FINAL.pdf

Xu, X., 2006. To be lean or agile in supermarket retail industry: A case study on Sainsburys (Doctoral dissertation, University of Nottingham).

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