Sainsbury Company’s Marketing Planning

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Table of Contents

Introduction
Company Profile
Financial Analysis
Porter’s Value Chain Analysis
Reference List

Introduction

Sainsbury PLC owns the Sainsbury’s supermarkets Ltd (Sainsbury’s), which is ranked the second largest retail store in the UK supermarket sector, with a market share of 17.7%, behind leaders Tesco, which enjoys a market share of 29.2% (Ruddick 2014). Since establishing its supermarket store in 1869 in London, the company has expanded to 455 stores serving an estimated 18 million shoppers weekly and employing 148,000 workers (Ruddick 2014). As competition is stiff, recently, Sainsbury implemented a diversification strategy, which has seen the company invest in the textile, banking, and insurance sectors. Besides Tesco, other competitors in the UK supermarket sector include Asda, with a market share of 17.5%, Aldi, Morrison’s, and Co-op, among others (Ruddick 2014).

The recent global recession did not have a huge impact on Sainsbury’s performance (Telegraph 2009). Its market share continues to grow, even overtaking Asda, which had the second-largest market share in 2003 (Ruddick 2014). However, in the recent past, Sainsbury’s reportedly lost some of its customers as shoppers switched to other supermarkets such as Waitrose and Aldi (Sandler 2009). Nevertheless, Sainsbury PLC is one of the leading players in the retail (food) industry with interests in the financial sector.

Besides the supermarket, the parent company runs the Sainsbury’s Bank, the Sainsbury’s Online, the Jacksons and Bell stores, and the Sainsbury’s Local (Sandler 2009). Through its different business categories, Sainsbury’s aims to enhance its competitiveness, increase its profits, and expand into new markets. This paper analyzes Sainsbury’s market share and market position within the UK in the current economic climate. The paper also discusses Sainsbury’s competitiveness based on Porter’s Value Chain and Resource-Based View analyses.

Company Profile

Sainsbury PLC specializes in grocery (food products) and related services. Its business portfolio comprises of three main segments: (1) retail, which consists of online, supermarkets, and convenience stores; (2) banking services (50% stake in Sainsbury’s bank); and (3) property investments. The company has 440 convenience stores and 570 supermarkets spread across the UK (Sandler, 2009). Sainsbury’s has invested in the banking industry (Sainsbury’s Bank) and the property sector. The firm also earns revenue from its expansion to overseas markets.

Financial Analysis

Operational Analysis

Sainsbury’s has performed exceptionally well during the recovery phase and the economic recession. Since 2007, Sainsbury’s sales revenues have continued to grow and currently stand at £20,383m compared to M&S’s net sales of £9,062.10m (Wrigley 1998). The last two decades have been turbulent for players in this industry, but Salisbury showed improved performance over the last few years. In 2013, Salisbury posted an 11.3% increase in profits compared to the previous year (Wrigley 1998). However, these profits are moderate compared to Tesco’s 28% increase, Morrison’s 7%, and M&S’s 29.4% decrease in profits (Wrigley 1998). In 2012/13, its pre-tax profit grew by 11.3%, while the sales grew by 4.5% (Wrigley 1998). The Sainsbury’s Bank generated £4m over the same period, compared to the £3m obtained in the 2010/11 period (Wrigley 1998). The two joint investments in the property market added a total of £12m in profits for the company compared to M&S’s £6.4m over the same period.

Profitability Analysis

Sainsbury’s grocery and convenience stores have greatly contributed to the firm’s growth and expansion. It was operating profit increased by 15.1% in 2006, and, over the past three years, its profits have grown at a steady rate of 5.98% per year (J Sainsbury’s PLC 2014). In 2006, a rise in food prices increased Sainsbury’s sales, but an inflation rate of 1.6% in food prices affected this growth (J Sainsbury’s PLC 2014). It’s profit margin grew to 3.26% compared to Tesco’s 6.2% due to the large volume of frozen food products (eggs and peas) and non-food products (T-shirts) sold by Sainsbury’s. Sainsbury’s profits from overseas sales last year were £540m compared to Tesco’s £709m, but Sainsbury’s profits in this segment are expected to grow over time (Ruddick 2014).

Porter’s Value Chain Analysis

Porter’s value chain provides a framework for analyzing a firm’s competitiveness in the market. The framework is based on five forces that influence the profit potential of a firm operating in a given industry. According to Ghoshal, Mintzberg, and Quinn (1999), competitive forces determine the nature of competition in a given industry. These forces include; new industry players, suppliers, buyers, product substitutes, and business rivalry (Ghoshal, Mintzberg, Quinn 1999). Firms utilize these forces to create sustainable competitive advantages in a specific market segment.

Competition is stiff in the UK supermarket sector (food retail industry). Although Sainsbury’s commands a strong position in the industry, it faces stiff competition from other supermarkets like Tesco, Asda, and Morrison’s, among others. In this section, the financial position and performance of the major players in the supermarket sector will be analyzed to identify Sainsbury’s strategic options in the future. The analysis will cover the industry players, the market concentration and structure, the pricing and non-price competition, and the current strategies employed by the players.

The Main Players in the Sector

The major supermarkets that specialize in the UK’s grocery market include; Tesco, Sainsbury’s, Morrison’s, and Asda (Creedy 2009). Currently, of the ‘Big Four,’ Tesco enjoys the largest market share of 29.2% compared to Sainsbury’s 17.7%, Asda’s 17.5%, and Morrison’s 9.6% market share (Creedy 2009). Sainsbury’s overtook Asda, whose market share shrunk from 17.9% in December 2013 to the current 17.5% (Creedy 2009). Thus, currently, Sainsbury’s are the second-largest supermarket in the UK while Asda comes third. WM Morrison’s takes fourth place completing the list of UK’s ‘Big Four’ supermarkets. Previously, Morrison’s commanded a small market share, but the acquisition of Safeway, another industry player, contributed to its growth. In the 1990s, both Sainsbury’s and Tesco controlled an equal market share. Sainsbury’s lost some of its customers to other players such as Waitrose and Aldi (DEFRA 2006). However, in recent years, Sainsbury’s has grown to become a competitive player in the sector.

Other firms that operate in the UK supermarket sector are Aldi and Lidl. Unlike the ‘Big Four,’ these two firms sell their products at a discounted price to customers. Currently, these firms control 1.6% and 1.3% of the UK market for Lidl and Aldi, respectively (Mintel 2009). Because competition is stiff in the food retail sector, some players such as Marks & Spencer (M&S) and Waitrose have specialized in the “quality market sector” (Mintel 2009, Para. 6). These premium-positioned supermarkets are currently ranked sixth and seventh behind the ‘Big Four’. They both control about 3% of the UK market, which is comparatively less than the total market share controlled by the ‘Big Four’ (Mintel 2009).

Business Rivalry

Over the past two decades, the concentration of players in the supermarket sector has grown significantly. The number of retail stores in the UK compared is higher to other European countries (DEFRA 2006). A large number of grocery stores in the UK was caused by various mergers involving the ‘Big Four’ industry players. The leading supermarkets also established new stores (convenience stores) in the market, which increased the concentration. In the 1990s, there was a marked growth in the number of stores in the UK, as each player sought to expand its market coverage (DEFRA 2006).

The high market concentration can also be attributed to the regulatory policies. The 2013 Competition Commission (CC) legislation established a distinction between the convenience stores and the retail sector. This allowed the ‘Big Four’ to invest in the convenience store market with Sainsbury’s establishing the Sainsbury Local. This practice further increased the number of convenience stores in the UK retail industry.

The UK food retail market is segmented into various categories. The major categories include; “convenience stores, large grocery retailers, hard discounters or Limited Assortment Discounters (LADs), and the specialist grocery retailers” (CC 2013, Para. 4). The grocery retail sector is structured in terms of the number of stores (convenience and retail stores). Overall, convenience stores in the UK market outnumber the supermarkets, but their sales volume is comparatively less than the sales made by the supermarkets (DEFRA 2006). The large grocery supermarkets make up 5% of all outlets and account for over 70% of grocery sales in the UK (CC 2013). Sales via the internet account for only 2% of sales (DEFRA 2006).

Entry of New Players

One of the porter’s competitive forces is the entry of new players. New entrants into the UK supermarket industry present a threat to current firms in this market. Three factors influence the entry of new players in the UK retail market. These are; the land-use restrictions, the economies of scale, and strong brands. In the UK, the government restricts the construction and development of retail stores and supermarkets through the Department of Environment (Wrigley 1998). This affects the capacity of new entrants to expand to new areas or establish new developments. Moreover, in the UK, large firms take advantage of the economies scale to expand their operations by reducing costs and enhancing their distribution channels. The ‘Big Four’ create and sustain competitive advantages through economies of scale. Thus, economies of scale hinder the entry of new firms into the UK market. Besides, the supermarkets have created strong brands through aggressive marketing campaigns. Thus, a new entrant will have to invest more on brand development.

The major players in the UK food retail industry also use price as an incentive to attract more customers. The pricing practices may affect the performance of new entrants who may not use price to win over customers. Thus, the pricing practices of the ‘Big Four’ can prevent a new entrant from competing effectively in this market. Besides price competition, the distribution channels can also prevent new entrants into this market.

The complex distribution channels employed by the UK firms, such as Morrison’s, which has an integrated supply chain, enhance their economies of scale and give them cost advantages over new entrants (CC 2013). The distribution chain helps reduce the supply and distribution costs, which gives a firm a competitive advantage. Tesco enjoys a more significant cost advantage than Sainsbury’s, Morrison’s and Asda. On the other hand, the small retailers have higher purchasing costs, which affect their competitiveness in this market (CC 2013).

Suppliers and Distributors

The large supermarkets have entered into agreements with suppliers, which allow the retail stores to exercise greater control over them (Lynch 2003). For instance, much of Tesco’s turnover in 2002 was attributed to favorable purchase terms given by Today group (a supplier) (Lynch 2003). As the number of players in the supermarket sector continues to grow, large firms will have the power to influence the suppliers’ purchase terms and thus, improve the profit margins without increasing the prices.

Moreover, the ‘Big Four’ have developed their own brands, which has accorded them greater bargaining power over suppliers (Mintel 2009). However, this has created anti-competitive practices with some firms dictating unreasonable terms, which suppliers are compelled to agree with (Lynch 2003). All major retailers, including Sainsbury’s, have control over supplier pricing because of the large size of the retailers.

Buyers

The customers have less bargaining power against the ‘Big Four’ as they lack a collective bargaining capacity. Moreover, consumers have a limited control over food prices while the retailers have a greater influence on consumer prices. Nevertheless, low costs associated with switching between retailers means that customers can choose from a broad range of options. Sainsbury’s and other supermarkets use loyalty cards to loyal customers, as a way of retaining them.

The buyer’s bargaining power influences prices of common consumer products. The economic conditions have made customers to be increasingly price sensitive. According to Desmond and Stone (2007) grocery retail customers fall into two categories; price sensitive buyers and time-constrained buyers. However, on average, purchase decisions are more influenced by time constraints than price. Individually, buyers have less buying power, but the media channels give buyers a strong bargaining power (Mintel 2009). On their part, firms use corporate social responsibility to counteract this collective power and enhance their reputation.

Product Substitutes

Product substitution allows consumers to purchase goods at a low price. In the UK context, the switching costs result in loss of customers, as buyers switch to products sold by a competitor firm. Mintel (2009) observes that customers are switching from grocery shopping to online ordering of products. In light of this, Sainsbury’s has invested in websites and Sainsbury’s Online to enhance their competitiveness.

Based on Porter’s Five Forces, competition in the UK grocery market is very high. Firms compete through provision of product substitutes, control of supplier and buyer bargaining power, mergers and acquisitions, and anti-competitive practices. Sainsbury’s loyalty cards, online segment, supplier partnerships, and economies of scale are the sources of competitive advantage for Sainsbury’s.

Resource-Based View (RBV) Analysis

The resource-based view framework evaluates a firm’s resources as a basis for determining its competitive advantage. The RBV model holds that firms should exploit internal resources to gain a competitive advantage and achieve improved organizational performance. A firm’s internal resources are of two types: tangible and intangible (Hooley, Broderick, Moller 1998). The tangible assets comprise of assets like buildings, equipment, and other physical resources while intangible assets comprise of brand reputation, which give a firm a sustainable competitive advantage.

As aforementioned, Sainsbury’s products comprise of three categories; the retail outlets (convenience stores, Sainsbury’s supermarkets, and convenience stores), Sainsbury bank, and the property investments. Currently, Sainsbury has about 440 convenience stores and 570 supermarkets (Creedy 2009). These are tangible assets that can give the firm a competitive advantage, as they increase the supermarket’s market presence.

Moreover, Sainsbury’s plans to open 100 convenience stores yearly for the next five years to bring the total to 800 stores. In 2009, Sainsbury’s opened 13 new retail stores, two replacement stores and 20 supermarket extensions (Creedy 2009). It also acquired 24 stores, two from Co-operative and 22 from Somerfield stores. Also, in 2013, Sainsbury completed the acquisition of Bisector Ltd (Town Center stores), HMV Group PLC, and Global Media Vault Ltd (Creedy 2009). The new acquisitions are another source of competitive advantage for Sainsbury’s.

Sainsbury’s PLC has investments in various sectors. It has invested in the property, financial, and non-food products sectors, through joint ventures. The property investments help Sainsbury PLC to generate more profit, which supplement its sales revenue. As indicated, the firm’s joint venture investments in the property earned the company £12m in profits in the 2011/12 financial period, which is comparatively higher than the £6.4m earned by M&S in the same period. Another source of Sainsbury’s competitive advantage is the Sainsbury’s Bank. In January 2014, Sainsbury PLC completed the acquisition of Sainsbury’s Bank PLC by purchasing the 50% stake that was owned by other companies. During the 2010/11 period, Sainsbury’s Bank generated £4m compared to the £3m obtained the previous year (CC 2013).

Besides assets, Salisbury’s strong brands are another source of competitive advantage. Sainsbury’s product categories including the “Sainsbury’s basic, Sainsbury’s organic (SO), Sainsbury’s be good to yourself, and Sainsbury’s taste the difference” are popular with the customers (Creedy 2009). Moreover, its products are highly rated compared to those sold by its competitors. For example, Sainsbury’s yoghurt (0% fat) costs £0.49 compared to Tesco’s yoghurt (2% fat), which costs £0.79. Health conscious customers would purchase Sainsbury’s milk products. Thus, strong brands give the company a competitive advantage over its rivals in the food retail sector.

Another source of competitive advantage for Sainsbury’s is its location. Currently, Sainsbury serves over 18 million shoppers through its convenience stores and supermarkets that house over 32,000 products (Creedy 2009). The convenience stores are concentrated in London, which makes Sainsbury’s a supermarket of choice for many. Moreover, the design of each store both convenient and similar in all stores, which allows shoppers to locate items with ease.

Sainsbury’s reputation and strong brand give it a competitive advantage over its rivals. In the 1990’s Sainsbury’s market share dropped significantly because the firm priced its products higher than those of its main rivals (Mintel 2009). However, beginning in 2007, a recovery strategy was implemented, which emphasized on quality. This has helped the firm create a good reputation among customers. This strategy was meant to expand its demographic coverage. Salisbury’s also implemented a differentiation strategy, which saw it invest in non-food products, including clothing, and online marketing. Its overseas market also performs well with profits of £540m recorded in 2013. These approaches (online selling, product differentiation and expansion to overseas markets) have ensured that Salisbury’s improves its competitiveness in the UK food retail sector. They have also contributed to Sainsbury’s market share of 17.7% and its current market position (second largest).

Reference List

Creedy, J 2009, Sainsbury’s losses market share to rivals. Web.

Competition Commission [CC] 2013, Inquiry into the UK Grocery Market. Web.

DEFRA 2006, Economic Note on Grocery retailing, Department of Environment, Food and Rural Affairs, London. Web.

Desmond, J & Stone, M 2007, Fundamentals of marketing, Routledge, London. Web.

Ghoshal, S, Mintzberg, H, & Quinn, J 1999, The Strategy process, Prentice Hall, New York. Web.

Hooley, G, Broderick, A & Moller, K 1998, ‘Competitive positioning and the resource-based view of the firm’, Journal of Strategic Marketing, Vol. 6, no. 7, pp. 97 – 115 Web.

J Sainsbury’s PLC 2014, Sainsbury’s About us. Web.

Lynch, R 2003, Corporate Strategy, Prentice Hall, New York. Web.

Mintel 2009, Reality bites: British shoppers bid farewell to posh nosh. Web.

Ruddick, G 2014, Sainsbury’s overtakes Asda for the first time in a decade. Web.

Sandler, K 2009, Sainsbury’s to push into non food products. Web.

Telegraph 2009, Sainsbury’s enjoys profit growth. Web.

Wrigley, N 1998, ‘PPG6 and the contemporary UK food store development dynamic’ British Food Journal, vol. 100, no. 3, pp. 154-161. Web.

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