UK Supermarkets Competitive Strategy

UK Super markets war-ridden St pointgyEvaluate how UK supermarkets use market segmentation, targeting and positioning to gain a agonistical advantage.1. IntroductionThis paper sets kayoed to apply basic segmentation, targeting and positioning concepts to the UK supermarket sector and provide evaluate the extent to which the use of these concepts is leading to the achievement of sustainable private-enterprise(a) advantage with any or all of the supermarkets selected.The focus will be on the three major supermarkets Tesco, Asda and Sainsbury.The paper will begin with an explanation of the concepts and will move on to a description of the strategic positioning of each of the major supermarkets in the current marketplace. Chapter 4 will evaluate the relative succeeder of the three companies chosen and assess the extent to which their procession to segmentation and positioning has enabled them to achieve some measure of war-ridden advantage.Sources of information ar recognised t rade textbookbooks, articles from learned journals, newfoundspapers and periodicals and social club annual reports and websites.2. Definitions, explanations and questions2.1 Definitions of the basic concepts interlocutor defines segmentation as the identification of individuals or organisations with similar characteristics which have significant implications for the determination of market schema. 1 It is a process which results in the clustering of people with supposedly similar buying behaviour, such that marketing mixes can be designed to meet the specific get and wants of peoplewithin the cluster.Once the market has been described in terms of an amalgam of homogeneous segments, companies need to decide which, if any, segments to target. Should they adopt a niche approach (like Morgan in the automobile sector), where only wiz type of vehicle is produced for a specific segment of the market, or should they adopt a mass market reporting approach (like Ford or GM), where v ehicles argon produced to attract to the self-colored range of different requirements across the different segments?Positioning describes the manner by which a company differentiates its products/ portions from the competition within each target market. Sometimes these differences be very fine. Mercedes and BMW both have, for example, prime(prenominal) images and are valued high relative to most competitors exactly Mercedes has historically had a with child(p)er appeal among older, to a heavy(p)er extent conservative drivers and BMW has appealed more to those who see themselves as dynamic and thrusting.22.2 Segmentation rationaleAt one take the segmentation process enables companies to tailor their products or services to meet the of necessity of the market better than competitors and to choose segments which are aligned with their capabilities as a company. They are in addition able to select segments which are large enough for them to supply efficiently. Segmentation th erefore facilitates differentiation, which should improve competitiveness, which should, in turn, lead to higher profitability.Barwise and Meehan draw direction to a possible fallacy in this form of reasoning. They cite the example of the different positioning strategies of One2One (now T-Mobile) and Orange in the battle for market share in the UK mobile telecoms market.3 Orange offered to provide a reliable, high quality all overall node experience with good foster for money(they) targeted the whole market, not merely a specific segment. 4 One2One, on the other hand, adopted a strongly focused, segmentation strategy. it positioned itself as a low-cost, friendly ne iirk suitable for people wanting to chat with friendspriority on big citiesfree off-peak local calls. 5By far the most successful company (Orange) was the one which offered generic category benefits to the whole market, not a highly segmented approach. This is germane(predicate) to an understanding of success in th e supermarket sector and will be referred to later.2.3 Different forms of segmentationMarketing text books describe three basic types of segmentationBehaviouralPsychographicProfileThe behavioural category covers benefits sought, purchasing behaviour and product usage and perceptions and beliefs.The psychographic category covers lifestyles and personality breakdownsThe across-the-board profile category covers age, gender, stage in the life cycle, social class, geographic location, income.6Often a combination of variables across the categories is used. Research Services Ltd, a UK marketing research company, has highly-developed SAGACITY, a segmentation scheme based on a combination of life cycle, occupation and income. They form 12 distinct consumer groupings with differing aspirations and behaviour patterns.7A.C. Nielsen, the international marketing research agency, uses a combination of all segmentation categories to describe types of shoppers in supermarkets. They break the market down into 6 distinct groupingsHabit-bound Diehards homey and ContentedsMercenariesStruggling IdealistsFrenzied CopersSelf-indulgents 8The purpose of this breakdown appears to be tomatch product and service delivery to the needs and wants of the different segmentsto identify the potentially most paying segmentsOne interesting point which emerged from this course was that segments such as the Struggling Idealists were, at the time the TV programme was made in 2002, not of great interest to supermarkets as they did not fade a lot and insisted on organic and eco-friendly products, which did not seem to be of interest to the mass market . In just 4 years the market has changed dramatically and supermarkets are allocating significantly more shelf-space to such products and aim to thread shoppers with grand values.9 The segment has grown in terms of its potential value to supermarkets.This highlights the need for a creative and dynamic approach to segmentation. Orange now uses data-m ining software within a sophisticated CRM (Customer human relationship Management) system to monitor segments on a day-to-day basis and to adjust its service approach accordingly. It will, for example adjust its pricing and service delivery to the value of the customer. Premium customers are immediately recognised by call-centres and accorded priority in the queuing system.10 This keen focus on the most profitable customers contrasts with most supermarkets, which offer crash tills for customers who have not bought much, allowing them to move more quickly through the checkouts than the customers with laden trolleys. This will again be referred to in later sections.2.4 Competitive AdvantageFinally, in this chapter, a few clarifying words on the meaning, and sources, of competitive advantage, with specific reference to the supermarket sector.Grant defines the concept as followsWhen two firmlys competeone firm possesses a competitive advantage over the other when it earns a higher ra te of profit or has the potential to earn a higher rate of profit.11It is important to note the main point here competitive advantage relates to profitability or potential profitability, not to revenue, market share or more qualitative measures such as image or reputation. This is the definition which will be applied in this paper.The international consulting company, Accenture, published last year a paper called Consuming Passions, a study of the six leading global retailers. One of its aims was to identify the common factors which led to their high performance in the market over a long period of time.12 It identified six core competencies which underpin high performance in the retail sectorstrategic aimcustomer focusinnovation and commercialisationoperational excellencealliances and collaborationtalent management13In the introduction to the paper the authors stateThe name of the winning secret plan is differentiation that is meaningful and relevant to the customer base. But this isnt just a matter of offering new products and services those products and services must also be highly distinctive, relevant to target customers and in the right stores, with the right damage and promotion combination and at the right time.14These ideas will be developed further in the next chapter when examining the individual supermarket companies.3. The Major Supermarkets3.1 OverviewThe UK supermarket sector is highly concentrated. The five leading companies together have 73% of the total market. Only France has a more concentrated market, with 78% being taken up by the top five.15 Until the mid 1990s Sainsburys was market leader but the number one position was taken by Tesco in 1996 and they have since grown market share to 30% plus of the UK market. Sainsbury is now in third position privy Asda, which was bought by Walmart in 1999. The paragraphs below briefly describe the current financial situation of each company, their strategic marketing focus and the extent to which each appears to be applying segmentation approaches. Most of the information comes from the respective company websites.3.2 Tesco16In 2005 Tesco achieved sales turnover of 37.1 bill. and profits of 2,029m. Profits and sales have grown consistently over the past 5 years. Profits from 2004-5 grew by 20.5% on sales harvest-time of 12.4%. The company employs 360,000 people worldwide and has 2,000 stores. 111 new stores are planned for 2006.Its long-term strategy is based on four partsgrowth in the core UK businessexpansion from international growthto be as strong in non-food as in foodto follow customers into new retailing servicesTesco appears to take customer focus and staff focus very seriously. An ongoing figure entitled Every Little Helps is in process which has used question times with more than 9,000 customers to help them to understand how they can best improve service to customers on a day-to-day basis. This has resulted in parking bays for trolleys (to stop annoying customer s), extra staff on checkouts (to reduce waiting times) and fresh food counters and self-service cafes for customers in a hurry.Using their Club loosen as the data source Tesco send out mailings every quarter to 11million customers. The mailings have an annualised value to customers (if they use them) of 250m. and can be adjusted to take account of individual customer buying behaviour.Tesco has a range of different stores in line with its belief thatCustomers have different needs at different times so we tailor our stores as well as our products. From Value to Finest and from get to Extra, theres something for everyone at Tesco.17Value products are low- setd basics for customers on a tight budget. Finest are products with the finest ingredients for customers who appreciate fine food and are prepared to pay higher tolls for higher quality. Express are littler stores in local communities for people who would find it difficult to get to a large Tesco store. Metro are stores in town an d metropolis centres for the devisal of customers who prefer to shop in town rather than in the Superstores out of town. These Superstores are particularly for one-stop shoppers who can find everything they need for their weekly shop18. They carry not only a wide range of food lines but also the most popular Tesco non-food lines. Tesco Extra is a major new development focusing on non-.food lines, but with extensive food and convenience lines. As only 20% of the UK population has access to such stores Tesco intends opening 20 more this year.For all health-conscious customers (viz. the struggling idealists in 2.3) Tesco has introduced better labelling, diet guides and Free-from and organic ranges.For bell-conscious customers who also like good service they have introduced the Step Change programme and Everyday Low Pricing.For the growing number of customers who prefer to order from home and get home deliveries Tesco provides an on-line service which now supplies 150,000 customers/da y.3.3 AsdaIt is difficult to vex separate financial results for Asda Wal-Mart as the figures are hidden away in Wal-Marts consolidated accounts. The corporate website in the UK is also not nearly as transparent close strategic and marketing issues as Tesco, Sainsbury, Waitrose and Morrisons. Figures therefore, for the most part, need to be gleaned from outside sources or estimated. Figures quoted below are taken, for the most part, from Datamonitor.19In 2005 Asda had a sales turnover of 16.25bill., a growth of 19.8% over the previous year. Since Wal-Mart bought the company in 1999 market share in the UK has risen from 13% to 16%, pose them in second position ahead of Sainsbury.The company has 265 Asda stores, 19 superstores, 1 pilot store in General Merchandising and 6 trial George stores specialising in fashion clothing. The company plans to open 10-12 new stores each year.60% of Asdas sales are currently in grocery items, although it intends to build on the growth of non-food p roducts in store, which may well change this balance. Asda sells six own-brand labels Asda Smartprice, Asda, Good for You, Asda Organic, Asda Extra Special and More for Kids.20Asda management appears to plan to grow in the future via more stores, a focus on clothing (via its George fashion range Asda has now overtaken Marks and Spencer as the UKs largest clothing retailer21)and non-food, growth from specialist outlets within the stores opticians, jewellers and photographic and possibly a greater push into the childrens market.Their main marketing thrust in-line with the Wal-Mart reputation is to be seen by the mass market as the price leader. They in fact claimed to be the official lowest price supermarket in the UK but this was based on a survey of just 33 lines and, by and by complaints from Tesco, the claim had to be lifted.22 Since Wal-Marts takeover of Asda there has been an ongoing price war with Sainsbury and Tesco, which has raised Asdas profile as a low-price store. Apar t from price the main differentiators are the twin focuses on non-food and clothing and the particular focus on the kids market. Like Tesco and Sainsburys they are also trying to attract higher income and green customers with its Good for You, Organics and Asda Extra Special brands. They also have an on-line ordering and delivery service.Asda undoubtedly has an image problem because of its association with Wal-Mart.Asda has been criticised for misleading advertising, using suppliers who are known to have illegal employment practices, ignoring planning regulations and destroying greenbelt land, lack of serious environmental policy and blatant greenwash. With its strategy of consolidation, copied directly from Wal-Mart, Asda pursues an competitive takeover policy of small towns, wiping out local competition and local jobs. False claims by the company about value and convenience, have been challenged, along with the growth of every opportunity to push impulse buying.23No specific evi dence was found, but negative information, such as the above about Wal-Mart, abounds on the internet and it is probable that this will make it more difficult for Asda to position itself such that it attracts the more educated, aware customers.3.4 J SainsburySainsbury achieved total sales in 2005 of 16.36bill. and profits after tax of 65m. This compared with fairly lower sales in the previous year and a significantly larger profit then of 404m.24 Sainsbury appears to be struggling. It has suffered from severe price competition from Asda and Tesco and also failed to implement effectively a new logistics system, which resulted in severe out-of-stock problems which alienated customers.The company has 727 stores in all, 465 of which are supermarkets and 262 are the smaller convenience stores. It employs 153,000 people.Sainsbury is currently undergoing a change programme entitled Making Sainsburys Great Again 2007/825. Some elements of this programme are very relevant to its positioning in the market. In line with Barwise and Meehans thinking on generic category benefits26 Sainsbury wish to restore the universal appeal of the brand. This comprises four elementsbe all inclusive (appeal to all segments of the market)have a clear product hierarchy GOOD, BETTER, BEST (not assuming that certain segments go for a defined quality of product but that all customers chop and change).invest in price and quality (400m in 2006)scale to succeed (ensure that there is sufficient overall demand in the chosen products/markets to get costs down to a manageable level)This all translates into a customer proposition which their annual report describes as followsgreat food/fair pricesmarket leaders in quality and innovationcomplementary non-foodstraightforward formats supermarkets, convenience and Sainsburys to You(on-line)bankSainsbury advertising focuses on two messageswe have reduced price on 4000 linesTry something new todayThe former has clear universal appeal and aims to enable Sa insbury to compete on price with Asda and Tesco. The former appears to be focused more on higher income categories (the Self-indulgents and Comfortable and Contenteds mentioned in 2.3.4. Conclusions and final thoughtsIn a 1994 article on segmentation in the retail sector the following statement is madeany strategic option depends on clear positioning against competitors and customer groups (and the ) approach of integrating competitive analysis with market segmentation is a necessary first step to achieving a better understanding of the retailing environment and formulating effective marketing strategiessupermarket retailers must attract customers from different and often incompatible market segments. 27This statement still appears to have validity to-day. All three supermarkets mentioned in this paper wish to attract customers from the higher income AB socio-economic category by offering them better service, high quality and tasty foods, organic foods and a clean and welcoming atmo sphere. These customers will spend more and will buy products which offer the retailer higher margins. At the same time all supermarkets seek to position themselves as low price operators, thus appealing to lower income groups and those across all income groups who seek bargains (the mercenaries in 2.3). It is the observation of the writer that Tesco is clearly the most successful at positioning itself to appeal to both ends of the spectrum.According to data in Morrisons 2005 annual report about 25% of Sainsburys customers fall into the AB category whereas with Tesco it is only 20% and with Asda it is about 17%. Asda on the other hand (from the same annual report) rates very highly in terms of customer perception of value for money, Tesco is slightly lower and Sainsbury is even below Waitrose, a store which is traditionally associated with high prices.All realise that location is vital and that even to-days motorised customer will not put herself about too much to go to stores too f ar away. Hence all are moving towards the development of smaller stores to attract local communities. All use brand loyalty cards, but Tesco appears to be the most successful at using data on the card to enable it to adjust offerings to individual customer requirements.There are great similarities between the companies and their marketing approaches. Each follows the other very closely. What appears to make Tesco stand out is not so much a more sophisticated approach to segmentation and differentiation, but one of the key competencies in the Accenture report, Consuming Passions28 its ability to liquify a clear strategy with operational excellence. At the time of writing (April 25, 2006) Tesco has just released performance figures for the past 12 months. They indicate a 13.2% growth in sales and a 16.7% growth in before tax profit. 29BIBLIOGRAPHYBooksBarwise B. and Meehan S (2004), Simply Better, Harvard Business School PressGrant RM (1997), Contemporary Strategic Analysis, Blackw ell contact D. (2004), Principles and Practice of Marketing, McGraw HillKotler P. and Armstrong G.(2004), Principles of Marketing, Prentice HallJournals/ReportsAnonymous author of Asda Group Limited in Datamonitor, June, 2005Anonymous author of Organics UK in Mintel Report, November 2005Mann S., Smith J. and Trouv O. (2006), Consuming Passions, Accenture patience report in Outlook 2005Segal M. and Giacobbe R. (1994), Market Segmentation and CompetitiveAnalysis for Supermarket Retailing, International Journal of Retail Distribution Management, Vol.22, No.1, pp.38-48Internet sourceswww.asda.co.ukwww.corporatewatch.org.ukwww.guardian.co.ukwww.mcgraw-hill.co.uk/textbooks/jobberwww.morrisons.co.ukwww.npr.orgwww.sainsbury.co.ukwww.tesco.comFootnotes1 Jobber (2004), Principles and Practice of Marketing, p. 2102 From A to B, Channel 4, 19983 Barwise and Meehan (2004), Simply Better, p. 44 Barwise and Meehan, pp. 3-45 Barwise and Meehan, pp. 4-56 Jobber, p. 2147 Jobber, p. 2248 Shop till you drop, Channel 4, 20029 Organics UK, November, 2005, Mintel Report10 Orange a Fruitful Passion, supplementary case on the Jobber website, www.mcgraw-hill.co.uk/textbooks/jobber11 Grant R.M., Contemporary Strategic Analysis, p.15112 Mann S., Smith J. and Trouv O., Consuming Passions, Accenture, 200513 Mann et al, p. 914 Mann et al, p.315 Mann et al, p.716 www.tesco.com17 www.tesco.com18 www.tesco.,com19 Asda Group Limited, Datamonitor, June, 200520 Asda Wal-Mart a Corporate Profile, www.corporatewatch.org.uk, Nov. 200421 www.guardian.co.uk/business/story/0,1288594,00.html22 Th e Marketplace Report Wal-Marts UK Strategy, www.npr.org, August 17, 200523 www.corporatewatch.org.uk, November 200424 www.sainsbury.co.uk Annual Report 200525www.sainsbury.co.uk Annual Report 200526 Barwise and Meehan(2004), Simply Better27 Segal M and Giacobbe R (1994), Market Segmentation and Competitive Analysis for Supermarket Retailing, International Journal of Retail and Distribution Management, p. 4528 M ann, Smith and Trouv, Consuming Passions29 tesco.com, press release on April 25, 2006