Sainsbury’s Strategic Analysis

Question 1

As of the year 2017, Sainsbury’s (LSE: SBRY) was the third-largest supermarket chain in the United Kingdom, with a total market share of 15.8 percent. In 2018, the company merged with Asda, whose market share was 15.6 percent. combined, the firm gained the largest market share, surpassing its biggest competitor, Tesco, by a market share of 3.8 percent. Sainsbury’s was founded in 1869 in Drury Lane, London, and grew to become the largest grocery retailer in 1922. The United Kingdom’s grocery retail industry has been highly competitive since the 1980s, with Sainsbury’s fluctuating between the second and third positions over the years. J. Sainsbury PLC, the holding company, is divided into three distinct divisions, including Sainsbury’s Supermarkets LTD, Sainsbury’s Argos, and Sainsbury’s Bank.

Threats and Opportunities

Prior to the Sainsbury’s – Asda merger proposal, the company had 1,415 retail locations across the nation, and a revenue of 28.456 billion pounds as of the year 2018. The company’s executive leaders claimed that the merger would ultimately benefit customers through price reductions and a greater range of products. However, the UK’s competition watchdog, Competition and Markets Authority blocked the proposal in April 2019, citing potential adverse effects on shoppers and motorists. Specifically, the authority argued that the year-long investigation found that the deal would lead to increased prices, a poor shopping experience, and reduced choice and quality of products (Wood, 2019). The merger was supposed to enable the company navigate a tough external environment, which is partly responsible for its plummeting share prices during the past several years.

Increased competition is perhaps the largest threat to Sainsbury’s. Over the years, the United Kingdom’s retail industry has experienced a massive entry of large entities, which have reduced the firm’s market share. Specifically, Tesco acquired Booker at a cost of 3.7 billion pounds in 2017. This deal culminated in the merger of the U.K.’s largest retailer and grocery wholesaler. Further, two of the most common discount supermarkets, Lidl and Aldi, have experienced immense growth in the recent past. Sainsbury’s also faces intense competition from firms such as Co-op, M&S, Morrisons, and Waitrose (Sainsbury’s, 2018). Indeed, the company reiterated that the proposed Sainsbury’s – Asda merger was meant to combine forces to respond to these market changes. However, in its submissions, the Competition and Markets Authority explicitly stated its decision was based on the belief that the union would substantially reduce competition across the country and cause price increments. Therefore, increased competition is a considerable threat to Sainsbury’s operations in the U.K.

The rampant uncertainty concerning Brexit poses a significant threat to Sainsbury’s and the entire retail industry in the U.K. According to (Marsh, 2016), the region reported weaker sales in the period between January and April as uncertainty increased among shoppers, many of whom were wary of making big purchases before Brexit. This reluctance mainly affected discretionary and non-food goods. Specifically, sales growth declined to 0.5 percent in the period ended February 2019. Brexit presents a unique threat to Sainsbury’s operations. Firstly, Britain’s complete departure from the European Union could increase the price of imports from the E.U. and increase delivery times. Secondly, Brexit would compel the company to reassess its entire supply chain and sourcing agreements, which would increase complexity throughout the chain. Thirdly, obtaining unskilled labor beyond the country’s boundaries may become more difficult due to the potential restrictions on the freedom of movement, thereby increasing labor costs for the retailer. Finally, companies operating in the United Kingdom will still be subject to the E.U.’s quality standards on all exported products. As a result, Sainsbury’s may have to invest more in quality assurance and legal compliance, thereby increasing its overall costs.

Nevertheless, Sainsbury’s can exploit a number of opportunities present in the nation’s retail industry to improve its position and increase revenues, especially after the sharp decline in its share prices following the rejection of the merger proposal. The global growth of the retail industry presents a lucrative opportunity for the firm to propel itself from its current slump. Specifically, the company can expand into emerging markets in Asia and Africa. According to (Signé, 2019), improving business environments and changing demographics are the primary factors behind the growing household consumption in these regions. Household spending in Africa is estimate to reach 2.5 trillion U.S. dollars by 2030, while 43 percent of the population will belong to the upper and middle classes. Data also shows a consistent rise in income levels and demand for goods and services among all socioeconomic groups. Accordingly, Sainsbury’s can capitalize on this opportunity by introducing fast-moving consumer goods, luxury products, and online retail. Despite the recent entry of multinational firms such as Walmart in both Asia and Africa, Sainsbury’s can still leverage the region’s potential due to the limited saturation in virtually all consumer markets.

Sainsbury’s could also focus on encouraging healthy eating within the country. The United Kingdom continues to record significant increases in the prevalence of lifestyle diseases such as obesity. In 2006, 24 percent of all adults in the U.K. were obese, while 34 percent of women and 44 percent of men were overweight. This is a sharp increase from the 1980s when only six percent of men and eight percent of women were obese. According to the World Health Organization, 27.8 percent of the adult population in the U.K. was clinically obese. These figures are expected to rise to about 48 percent and 43 percent in men and women respectively by 2030 (N.H.S., 2019). This situation provides a unique opportunity for Sainsbury’s to promote the consumption of healthy foods. This strategy would not only increase revenues but customer loyalty as well since customers would perceive the firm as a responsible entity that cares for the population’s wellbeing. Ultimately, this approach could generate the numerous advantages associated with corporate social responsibility, including improved brand recognition, organizational growth, positive reputation, between employee attraction and retention, and operational costs savings.

Moreover, the company can leverage technological advancements to boost sales and acquire new customers. Over the years, virtually all brick-and-mortar businesses, including Sainsbury’s, have created an online presence to increase market share. Nevertheless, the mere creation of an e-commerce site is insufficient in today’s highly competitive world. The company could utilize addition functionalities, such Big Data, to capture additional insights from their customers to facilitate marketing efforts. Finally, Sainsbury’s can make use of its high liquidity to invest in emerging markets in the U.K. Demographic changes within the country have altered the traditional customer profile. Today, millennials have become an important customer segment while the proportion of baby boomers continues to decrease. This change presents an opportunity for the company to attract as many young people as possible by providing a comfortable and flexible shopping experience as well as youth-friendly products.

Porter’s Five Forces

Competitive rivalry refers to the number of rival firms within an industry. Sainsbury’s operates in a highly competitive industry. The high number of competitors typically decreases both prices and profitability. However, the company can navigate this hurdle by increasing product differentiation, collaborating with competing firms, and emphasizing economies of scale.

Typically, the threat of substitute products and services increases if its value proposition is substantially different from other offerings in the market. Sainsbury’s faces a rather high threat of substitutes, particularly due to the growth in alternative outlets, such as discount supermarkets and online stores. The company can tackle this threat by increasing switching costs, becoming service-oriented, and understanding customers’ core needs.

Sainsbury’s customers have a high bargaining power, particularly due to increased competition and the availability of substitutes. As a result, they put pressure on the company to provide superior goods and services, minimal prices, and increasing offers and discounts, which adversely affects its profitability. The firm can increase its range of products, introduce new products lines, or enhance the shopping experience to prevent customers from defecting to its competitors.

On the contrary, Sainsbury’s suppliers have a low bargaining power since the firms obtains its raw materials from multiple entities. As a result, they cannot increase their margins or risk losing considerable sales revenues. The company has also built an efficient supply chain and frequently experiments with different products to make it easy to shift to other goods should the prices of current offerings increase. However, the company can create exclusive partnerships with third-party manufacturers to reduce their bargaining power.

The U.K.’s retain industry is highly competitive, with oversized dominant players. As such, the threat of new entrants remains moderate as new players have to invest large sums of money to become relevant in the market. However, opportunities still abound. Companies that introduce new operational strategies, such as Lidl and Aldi, those that adhere to lower pricing approaches, or those that provide innovative value propositions may penetrate the market rather easily. Based on this analysis, the U.K.’s retail industry is not attractive since most of the factors are inclined towards minimizing profitability and maximizing costs.

Question 2

Resources and unique capabilities are mainly within a firm’s micro environment. This comprises the industry and the immediate surroundings of the business which is further sub-divided into sectors or markets. While an industry is made up of business organizations offering similar products or services, market is a group of customers demanding for a related goods and services.

Sainsbury’s has positioned itself in a manner that it is able to compete with UK’s major retailers including Tesco, Wal-mart and Morrison’s. The company has a strategic advantage as a market leader in impacting people’s lives by enabling people to live better lives for less through selling tasty and quality foodstuff a relatively lower price in comparison to its competitors. Lower prices are currently UK customers’ perception regarding Sainsbury’s since the 2007 recession. In 2011, during horse meat scandal, the company’s position was strengthened since it was declared as the sole store offering meat products that were horse free (Zentes, Morschett, and Schramm-Klein, 2012).

A firm’s growth and sustainability are dependent on offering goods and services that attract the target market and also by creating a differentiation advantage. Sainsbury’s implemented differentiation strategies that are driven by quality, taste, freshness and fair prices. In addition, these strategies are reinforced by selling a wide range of products and different prices depending on the target market. Apart from private brands, there are also other products owned by the retailer including Taste the Difference, Sainsbury’s’s organic and Sainsbury’s’s basic that target different customer segments.

Sainsbury’s also boasts of a reliable logistics capacity that is enhanced by its strong distribution networks made of regional hubs, distribution hubs and warehouses. The company also outsources logistics services from renowned companies such as Wincanton logistics, Allport DHL, CEVA logistics and Unipart (Johnson, Whittington, Scholes, Angwin, and Regnér, 2011). Although outsourcing costs Sainsbury’s more expenses compared to its competitors, the higher costs bring in more value to the company’s customers. Some desirable services such as sourcing fresh meat, DNA testing and sourcing food with lower carbon foot print earns the company a better reputation. The company also uses electric vans to make home deliveries and uses spacious and empty Lorries for picking up products to reduce traffic congestion is a plus to the company. This offers the company a competitive advantage compared to other players in the industry. In 2012, the company won The Grocer Award for the Greenest Supermarket in the UK which increased its sales. Introduction of RFID and Paragon software coupled with integration of all distribution hubs led to 8% increase in drivers’ productivity (zentes, Morschett, and Schramm-Klein, 2012).

Weaknesses are some the areas that company needs to look into and make some changes. Sainsbury’s’s investment on research and development is lower compared to that of competitors making the company lag behind in adoption of innovative strategies.

The firm is also not good at forecasting products making it miss opportunities for making huge in comparison to other players in the industry. The company is the market leader in its industry but has not been able to face challenges related to moving to new product segments due to its current culture. New entrants challenge is also affecting the company making it lose some of the niches in the market share. As a result, it is important for the company to build an aggressive sales team that will enable it to tackle the problems on the ground.

To understand the Sainsbury’s’s internal resources, we will use VRIO analysis for determining whether they offer a competitive advantage. VRIO analysis is a framework developed for evaluation of a firm’s resources that are within the micro environment. VRIO stands for value, rare, imitable and organization (Johnson, Whittington, Scholes, Angwin, and Regnér, 2011).

Valuable

In regards to VRIO analysis, the Sainsbury’s’s financial resources are valuable as the enable the company to invest whenever opportunities arise in the macro environment thus enabling it to combat threats. The company’s food line is highly differentiated making the customers to perceive it to be high value. Customers value the products compared to those of competitors. Employees are also a valuable resource for the company. The firm boasts of highly skilled staff that is productive, loyal and motivated. The organization has a high retention rate translating to greater value for Sainsbury’s customers. The company’s patents are also valuable since they enable the supermarket to sell its goods with limited competition earning it greater revenues. The patents earn the company revenues when licensed to manufacturers. Sainsbury’s distribution network makes it easy to reach more clients and offer promotions that translate to higher sales. Products costs cannot be considered as valuable because productions methods expose the firm to higher costs consequently affecting profits. Low pricing is therefore a competitive disadvantage. In addition, research and development is costly and brings fewer benefits, accordingly, it is not valuable to the organization.

Rare

Financial resources for the company can be considered as rare since fewer companies in the industry have such high access to finances. Local food is not a rare commodity since it is readily available in the farmers’ market and can be provided by competitors. Food stuff brings in competitive parity but since they are valuable, the company can use it to its advantage. Highly skilled and trained employees are rare resource that is not common in other firms. Therefore, Sainsbury’s should come with methods for employee motivation and retention. Patents are a resource that is not common to competitors as seen in VRIO analysis. Competitors cannot easily access the patents thus the company is able to use them without competitor meddling. In addition, it will take time and investment for competitors to come up with a similar distribution network to that of Sainsbury’s.

Imitable

It would be costly for competitors to imitate Sainsbury’s financial resources since the company has accumulated them for many years. New entrants would take a lot of time to acquire enough profits that can be saved for such a long period. On the other hand, it is not costly to imitate local foods especially for competitors who invest a considerable amount of time research on consumer tastes and preferences. Consequently, local foods provide temporary competitive advantage and competitors would easily catch up. It is also easy to imitate Sainsbury’s employees by providing greater benefits, benefits, and environment and growth opportunities. Employees provide temporary competitive advantage. It is illegal to imitate patents and is also an expensive therefore they provide a competitive advantage.

Organization

VRIO analysis identifies that financial resources are valuable to the organization. If organized correctly, they can be invested in vital areas. These resources provide a competitive advantage to Sainsbury’s.  Patent’s full potential is not fully utilized but can provide a competitive advantage if sold before expiry. The company’s distribution network is organized and useful in reaching the customers and ensuring that products are available in all stores. The resource offers a competitive advantage to the company.

Conclusively, VRIO analysis shows that logistics network and financial resources are the firm’s vital strengths for realizing a sustainable competitive advantage. Untapped potential is on the firm’s patents since they are never utilized to earn it more revenue.  Employees offer a temporary competitive advantage while there is parity on the local foodstuff. Research and development and cost structures contribute to Sainsbury’s competitive disadvantage.

Question 3

When Sainsbury’s announced its proposed merger with Asda, the company’s management cited the intention to reduce competitive pressure and gain substantial cost savings. As a result, the company argued that the union would allow it to reduce the prices of selected goods by up to 10 percent. According to Sainsbury’s (2018), the merger would have allowed the firm to maneuver through the highly competitive retail industry in the United Kingdom, especially given the threat posed by the retail giant, Amazon, and its acquisition of Whole Foods in 2017 (Butler, 2018).

This strategy can be said to be suitable because it could have enabled Sainsbury’s to beat competition. The retail industry has experienced significant shifts in the recent past. The increase in the number of competing firms has reduced overall profitability by shrinking market shares. The union would have increased the company’s number of customers and market share to about 30 percent. This move would have created opportunities for the firm to create economies of scale and bargain better with its suppliers, thereby reducing total costs. Further, both firms possess adequate resources to enable them manage the increased strategic and managerial requirements of the new firm. However, going by the Competition and Markets Authority’s statement, the merger was not environmentally suitable due its potentially adverse effects on the market.

A particular strategy’s acceptability depends on its risk and return levels, as well as effects on stakeholders. Both financial and non-financial benefits are factored into the assessment using various methods, such as profitability, cost-benefit, shareholder value, or real options analyses. Regarding the proposed Sainsbury’s – Asda merger, the strategy was intended to create value for customers by reducing costs. Nevertheless, the investigation by the Competition and Markets Authority revealed that the union would reduce competition in the country, and ultimately increase costs (Wood, 2019). The strategy was too risky for the authority to ratify. Therefore, the merger cannot be said to have been acceptable.

The feasibility of a project denotes the sponsoring entity’s capacity to implement it. This aspect considers an organization’s aptitude, resources, and ability to see a particular strategy through to completion and success. Financially, feasibility is determined through cash flow or break-even analyses. Both Sainsbury’s and Asda have the capacity to implement the merger successfully. As such, the strategy can be considered to be feasible.

References

Butler, S. (2018). Why Amazon is driving force behind Asda-Sainsbury’s merger. [online] The Guardian. Available at: https://www.theguardian.com/business/2018/apr/30/why-amazon-is-driving-force-behind-asda-sainsburys-merger [Accessed 26 Jun. 2019].

Johnson, G., Whittington, R., Scholes, K., Angwin, D. and Regnér, P., 2011. Exploring strategy. Financial Times Prentice Hall.

Marsh (2016). The U.K. retail industry and life after brexit – where to next?. [ebook] Available at: https://www.marsh.com/uk/insights/research/brexit-and-the-retail-industry.html [Accessed 26 Jun. 2019].

Sainsbury’s (2018). Proposed Sainsbury’s Asda Merger. [ebook] Available at: (https://www.about.sainsburys.co.uk/~/media/Files/S/Sainsburys/Sainsburys_Asda_rationale_FINAL.pdf) [Accessed 26 Jun. 2019].

Signé, L. (2019). Africa’s emerging economies to take the lead in consumer market growth. [online] Brookings. Available at: https://www.brookings.edu/blog/africa-in-focus/2019/04/03/africas-emerging-economies-to-take-the-lead-in-consumer-market-growth/ [Accessed 26 Jun. 2019].

Wood, Z. (2019). Sainsbury’s-Asda merger blocked by competition watchdog. [online] The Guardian. Available at: https://www.theguardian.com/business/2019/apr/25/sainsburys-asda-merger-blocked-by-competition-watchdog [Accessed 26 Jun. 2019].

Zentes, J., Morschett, D. and Schramm-Klein, H. (2012). Strategic Retail Management. Wiesbaden: Gabler Verlag.