MANAGEMENT ENVIRONMENT

ENVIRONMENTAL ANALYSIS OF RETAIL INDUSTRY

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TABLE OF CONTENTS

TABLE OF CONTENTS ................................ ................................ ................................ ....... 2 LIST OF FIGURES ................................ ................................ ................................ ................ 3 1. 2. 3. 4. INTRODUCTION ................................ ................................ ................................ .......... 4 COMPANY OVERVIEW: MARKS & SPENCER ................................ ......................... 5 INDUSTRY OVERVIEW: RETAIL INDUSTRY................................ ........................... 6 PESTEL ANALYSIS ................................ ................................ ................................ ...... 9 4.1 4.2 4.3 4.4 4.5 4.6 5. 5.1 5.2 5.3 5.4 5.5 6. Political Factors ................................ ................................ ................................ ....... 9 Economical Factors ................................ ................................ ................................ 10 Social Factors................................ ................................ ................................ ......... 11 Technological Factors ................................ ................................ ............................ 12 Environmental Factors ................................ ................................ ........................... 12 Legal Factors................................ ................................ ................................ .......... 13 Threat of New Entrants ................................ ................................ .......................... 14 Bargaining Power of Suppliers ................................ ................................ ............... 14 Bargaining Power of Buyers................................ ................................ ................... 14 Threat of Substitutes ................................ ................................ .............................. 14 Bargaining Power of Competitors................................ ................................ ........... 15

PORTERS FIVE FORCES ................................ ................................ .......................... 14

CONCLUSIONS ................................ ................................ ................................ ........... 16

REFERENCES ................................ ................................ ................................ .................... 18

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LIST OF FIGURES

Figure 3.1 Top Ten Retail Companies (Keynote,2010a) ................................ ......................... 6 Figure 3.2 Subsectors in Retail Industry in UK (Keynote,2010a) ................................ ............ 7 Figure 3.3Growth in Retail Sector in UK( Keynote 2010a) ................................ ..................... 7 Figure 3.4Sales and Pre-TAX Profits of an Average Retail Company in UK (Keynote, 2010a) ................................ ................................ ................................ ................................ ............... 8 Figure 4.1 Inflation Rate in UK between 2008-2010 (National Stat,2010) ............................ 10

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1. INTRODUCTION

This report is aimed at critically analysing the macro and micro business environment of retail industry. Marks and Spencer, which is one of the UKs leading retailers is taken as the sample company from the industry. In analyzing the macro-environment, a scan of the external events outside of the company is conducted to identify the factors which influence the industry. Micro-environment analysis focuses on competitive advantage and enables a business to understand the dynamics of its industries and markets to compete effectively in the market place. In the first section, information about Marks and Spencer and retail industry in UK is presented. To find out the possible issues that might affect the industry, PESTEL analysis is performed in the next section by categorizing environmental influences as political, economic, social, technological, environmental and legal. In the last section, the attractiveness and competitiveness of the retailing industry in the United Kingdom is investigated by performing Porter's Five Forces Analysis.

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2. COMPANY OVERVIEW: MARKS & SPENCER

Marks& Spencer is one of the leading retailers in UK sited and it is visited by over 21 million customers every week. It has an annual turnover of 8.4 bn. It has 690 stores across the UK operating at various convenient locations. (Marks & Spencer, 2010) Marks and Spencer in UK is included in the group of variety stores, because its product range includes both general merchandise (clothing and home products) and food. (Keynote, 2010a). With 4.1bn of sales in general merchandise, M&S has the 11.2 % of the market share and it is the UKs largest clothing retailer. The sales in food sector are 4.3bn and with this number, M&S possess 3.8% of UK market share. (Marks & Spencer, 2010). M&S is a well-structured multi-channel retailer. Customers have the opportunity to shop from M&S in many ways in stores, online or over the phone. (Marks & Spencer, 2010). M&S operates on a growing international business. It has 327 owned and franchised stores operating in 41 territories all over the world. Its products are sourced from 2,000 suppliers around the world. Over 76,000 people work for M&S both in the UK and in overseas territories. (Marks & Spencer, 2010)

6 3. I S Y VE VIE E I I S Y

All busi sses t t sell goods and servi es to consumers can be included in retail industry. Department stores, specialty stores, discount sto and seasonal retailers are included in t is res sector. In 2009, UK retail sales were over 285 billion. Over 2.9 million people were employed in retail industry in 2009, which equates to 11% of the total UK workforce. (British Retail Consortium, 2010) In 2010, there were 286,680 retail outlets in the UK which is equal to 8% of the Gross Domestic Product of the UK. (British Retail Consortium, 2010) Top ten retail companies in UK with highest turnover for 2008/2009 are presented in Figure 3.1. Tesco PLC has the first place with sales of 53.3 billion, followed by J Sainsbury PLC with revenue of 18.9 billion. (Keynote, 2010a)

Figure 3.1 Top Ten Retail Companies (Keynote,2010a)

The retail industry is mainly divided in the following subsectors:

Fi

3.2 Subsect rs i Retail Industry in UK (Keyn te,2010a)

The growth of retail industry from 2006 to 2009 can be seen in the following figure.

Fi ure 3.3Gr wth in Retail Sect r in UK( Keyn te 2010a)

Sales growth stood at 9 percent over the three years, while pre-tax profit growth deteriorated. Total assets growth improved. Growth in number of employees followed a similar positive trend, increasing from 4 percent between 2006/07 and 2007/08 to 5 percent between 2007/08 and 2008/09.

Figure 3.4Sales and Pre-T X Profits of an Average Retail Company in UK (Keynote, 2010a)

Sales of an average retail company in UK increased by 18.3%from 1.4bn in 2006/07 to 1.7bn in 2008/09. Similar increase is observed in pre -tax profits from 80.6 million to 85.6 million.

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4. PESTEL ANALYSIS

4.1

P litical Fact rs

Tax policy: The decrease in corporation tax in the last year, from 30 % to 28% helped the retailers to save money (HM Revenue & Customs, 2010) however the expected increase in the Value Added Tax (VAT) seems to lead to serious problems. The VAT has an essential effect of consumer spending. It was 15% in 2009, and it increased to 17.5 % at the beginning of 2010. During the year, the government reduced it back to 15% as an emergency measure to encourage consumer spending. (The Guardian, 2010) In order to reverse this cut, the government plans to increase the VAT to 20% during 2011, (HM Revenue & Customs, 2010a) which is the main concern of the retailers since it would lead to a drop in sales. Although the increase in VAT would cause a spike of inflation, the government wants the money, it would bring, to compensate the deficit of 175bn, it has been facing. (The Guardian, 2010) Trade Restrictions in Food Sector: Since all European Union (EU) Member States are operating to the same food safety controls, all trade between EU countries, including food products for human consumption is in free circulation. The same applies for food from non-EU countries which is in free circulation within the EU. In other words, products circulating in EU are not considered as import products. (Food Standards Agency, 2010) The FSA does not issue export certificates for any food items. Certain non-EU countries may require food items to be certified by a UK government authority before being exported as they are concerned about the implications on consumer health. (Food Standards Agency, 2010)

10 4.2 E onomical Factors

Infl ti n rat : According to National

Statistics (2010), CPI annual inflation in UK is 3.3%. The upwards trend of inflation rate from 2009 and 2010 can be seen Figure 4.1 . The main reasons for the upwards change in inflation rate is the rise in the prices of food and alcoholic drinks, most significantly of bread, cereal and meat. Estimated food-price inflation of 2.2 per cent (Financial Times, 2010) caused a price increase which in turn lead to a fall on spending on food and drink by nearly 0.4% in the second quarter of 2009. (Keynote, 2010b) Moreover, the retail consultancys forecast of 4.7 per cent inflation in clothing and footwear led to a rise in commodity prices of 60 %. (Financial Times, 2010) The price rise affects the customers purchase power which leads to a drop in sales of all consumer goods, which in turn affects the whole retail industry. Moreover, an inflation rise is expected in 2011, since three-quarters of top retailers announced their plan to raise prices on top of January's VAT increase mentioned in Section 4.1Political Factors(The Guardian, , 2010a) Int rest Rates: UK interest rates are held at 0.5% by Bank of England for 21 months in a row. The Bank Monetary Policy Committee (MPC) decided to leave the rates as they currently are in order to avoid the serious concerns over the health of the UK economy. (The Guardian, 2010b).The steady interest enables companies to expand. For example; Marks& Spencer will increase its

Figure 4.1 Inflation Rate in UK between 2008 -2010 (National Stat,2010)

11 floor space within the UK and redesign existing outlets for higher consumer satisfaction. (The Guardian, 2010c) Effect of Recession on Retail Industry: After convenient economic conditions in UK between 1992 and early 2008, the recession and rising unemployment had an impact on consumer spending in many areas, including food. Several retailers closed stores in 2009. However, the positive aspect of recession is that the customers eat out less and eat more at home which provides opportunities for grocery retailers like Tesco or Sainsburys to increase their output (Guardian, 2010). 4.3 S cial Fact rs

Increase in demand for convenience food: For the past 30 years, the profile of the society changed. Based on National Statistics (2010), the number of employee jobs performed by women and the number of single-person households in UK increased drastically. With increasing presence of freezers and microwaves in kitchens, consumers tend to spend less time preparing meal, (Keynote, 2010b) which, in turn, leads to an increase in demand for convenience food. Eating Habits: The main driving force of food market for the past 30 years is the rising level of obesity. Based on the report of the Governments Scientific Advisory Committee on Nutrition, 24% of men and women in UK were obese in 2007. In 1993, this number was 15 %. (Keynote, 2010b) As health and diet are the main considerations of consumers, suppliers focused on reducing salt, sugar and fat content and have prompted health benefits of their products. Most retailers with food in their product range introduced new products with improved health profiles. (Keynote, 2010b) Consumer Loyalty: The common UK consumer tends to be loyal to a particular brand since they place high value on their money. They care about quality but they can be gained back from a competing brand using a fairly competitive pricing strategy. This is proved by the survival of the well-known brands in UK despite recession.

12 4.4 Techn lo ical Factors

The Internet: Increasing Internet use encourages retailers to improve their methods of selling. Retailers that can integrate an online offer with other shopping channels, such as stores and call centres, to provide a multi-channel service have the competitive advantage. (Marks & Spencer, 2010) Moreover, the recession encouraged consumers to seek the most cost-effective purchase using Internet. (Keynote, 2010b) Based on National Statistics (2010) the average weekly value of internet sales in the past 12 months grew by 36.6%, compared with an average weekly rise of 3.4% for all retailing . Internet shopping has grown rapidly over the past 12 months, rising from 7.9% of sales a year ago to 10.5% in November. Online sales in retailing accounted for more than 10% of the total for the first time. (The Guardian, 2010d) Based on ForeSee Results latest Christmas customer satisfaction index, Marks & Spencer made the biggest improvement among UK's top 40 online retailers in 2009. (The Grocer, 2010) 4.5 Environ ental Factors

Environmental issues have lost their importance during recession in UK, however an increase in its prominence is expected as soon as the economy starts to recover. (Keynote,2010b) Energy Saving: According to the Carbon Trust, UK retailers are responsible for 7% of UK carbon emissions. Being a part of the Carbon Reduction Commitment Energy Efficiency Scheme (CRC) (a CO2 emissions trading programme), the aim of retailers is to cut the CO2 by 1.3 million T by 2020 (0.2% of the annual total). (Centre for Retail Research, 2010) Moreover, based on the report published by engineers of Cambridge University, shops that shut their doors while the heating is on could save up to 10 tonnes of CO2 and cut their energy bills in half. It contributes the target of 34 per cent reduction in carbon emissions by 2020, but also slashes a shop's energy usage in half. If all retailers followed the advice UK energy usage could drop by 2.5 per cent. (The Guardian, 2010e)

13 Waste Reduction: Retailers are supporting their customers to reduce the use of carrier bags in order to reduce packaging and waste. The aim was to reduce the environmental impact of carrier bags by 25% by the end of 2008 and 50% by the end of 2009. (British Retail Consortium, 2010b) It has been found by the Office for National Statistics (2010) that the percentage of consumers using reusable bags has risen from 71% to 74%. UKs retailers have voluntarily halved the amount of waste they send to landfill compared with five years ago by reusing materials or finding partners who could reuse them, and by recycling and adopting alternative technologies for organic waste. (The Guardian, 2010f) Moreover, the landfill tax will increasingly force retailers to use other methods of disposing of their waste. (Centre of Retail Research, 2010) 4.6 Legal Factors  Drawing upon the Low Pay Commission Report the 2008 and 2009 combined upratings have resulted in an increase in the minimum wage of 15.5%. This will result in an increase of operating costs of supermarkets. (National Minimum Wage, 2009)  The primary employee threshold for national insurance contributions increases by 570. National insurance contributions increase by 1% for employees. The personal allowance for income tax for basic rate tax payers under the age of 65 is increased by 1,000.(Personnel Today, 2010)  The Government has announced that a new system of flexible parental leave for 2011 by which pregnant employees are entitled to take a total period of 52 weeks' maternity leave. (Online HR Intelligence,2010)  There is also a new version of Energy Performance Certificates, the EU's Energy Performance of Buildings Directive and the UK's zero carbon pledge for new buildings by 2019, with which retailers have to comply. (Centre for Retail Research, 2010)

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5. PORTERS FIVE FORCES

5.1

Threat of New Entrants

In UK market; there are two types of retailers; dominant independent retailers and the large corporate chain stores. Number of independent retailers has been numerically decreasing for some decades since they cannot compete highly developed supply/distribution chains, inventory management systems, financing pacts and wide scale marketing plans of large retailers like Tesco or J Sainsburys. Moreover, it requires huge capital investments to establish a brand name. Even if the barrier of the high capital investment has been overcome, the competitive advantage created by style of operation, scale and general efficiency of large retailers makes it impossible for new rivals to enter the market. 5.2 Bargaining Power of Su liers

The bargaining power of suppliers is low since suppliers make their most profit by their business contracts with large retailers. Besides, these retailers negotiate in order to get the lowest possible price from the suppliers which increases their power over suppliers. 5.3 Bargaining Power of Buyers

The bargaining power of buyers is high, as the switching cost to an alternative is very low. If customers realize that products have a slight differentiation or are more standardised in another retailer, they can easily switch from one brand to another one. 5.4 Threat of Substitutes

By retailing, the cost of switching to a substitute is low, since usually what one store offers can be found easily at another store. Retailers offering unique products have an advantage over their competitors. The threat is high for food items, since consumer would go to the substitute retail store as soon as they feel any differentiation. The threat of substitutes for non-food items, like clothing, is higher as higher quality clothes can be found at specialized clothing retailers.

15 5.5 Bargaining Power of Competitors

The competition in retail industry is high since the rivals are competing over price, products and promotions at the same time. Main competitors in retail industry are Sainsbury, Tesco, ASDA and Morrisons based on Figure 3.1 and they all fight for market share. Since buyers switching cost to a competitor is low, they can bargain for higher quality products and services at lower prices. It results in high bargaining power of competitors.

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6. CONCLUSIONS

This report analyzed macro and micro business environment of retail industry. By investigation of retail industry, it is seen that the amount of retailers is equal to 8% of GDP of UK and that employment in retail industry equates 11% of UK workforce. An increasing trend is observed in both sales and pre-tax profits of an average retail company in Figure 3.4Sales and Pre-TAX Profits of an Average Retail Company in UK (Keynote, 2010a)Figure 3.4. Moreover main competitors of industry are identified as Tesco, J Sainsbury and ASDA based on their turnovers. To study the impact of each of external factors (and their interplay with each other) on the business, PESTEL analysis is performed. The following factors are considered to be main drivers for change in the environment which in turn affects the retail industry:

SUMMARY OF PESTEL ANALYSIS Political Factors  Tax Policy  Trade Restrictions  Inflation Rate Economical Factors  Interest Rate  Recession  Increase in demand for convenience food Social Factors  Eating Habits  Consumer Loyalty Technological Factors Environmental Factors  The Internet  Energy Saving  Waste Reduction  Employment Law  Environmental Law

Legal Factors

In the next section, an overview to the competitive market is provided by Porters 5 Forces Analysis.

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SUMMARY OF PORTERS 5 FORCES ANALYSIS Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitutes Bargaining Power of Competitors  LOW  LOW  HIGH  HIGH  HIGH

It is concluded that the dynamic and unpredictable environment in which Marks& Spencer, and the market leaders Tesco, Sainsburys and ASDA operate, is unpredictable because of the continuously changing factors. Instead of the low threat of new entrants to the sector, high bargaining power of buyers and competitors makes the survival in the industry harder for all companies.

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REFERENCES

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19 Online HR Intelligence (2010) Flexible parental leave Available online at URL: http://www.xperthr.co.uk/article/106536/flexible-parental-leave.aspx [Accessed 23 December 2010] Personnel Today (2010) Available online at URL: http://www.personneltoday.com/events/list.aspx?navigationid=10&type=10026 [Accessed 23 December 2010] The Grocer, 2010 Online Retailers Deliver Marginal Improvement In Service Available online at URL: http://www.thegrocer.co.uk/articles.aspx?page=articles&ID=214844 [Accessed 20 December 2010] The Guardian (2010), Retail Industry- High Streets fears VAT could rise to 20% Available online at URL:http://www.guardian.co.uk/business/2009/nov/08/high-street-retail-vat-20 [Accessed 15 December 2010] The Guardian (2010a), Retail Industry- Tough year ahead for shops and shoppers Available online at URL:http://www.guardian.co.uk/business/2010/dec/27/tough-times-on-highstreet?INTCMP=SRCH [Accessed 15 December 2010] The Guardian (2010b), Interest Rates- UK Interest Rates are held at 0.5% Available online at URL: http://www.guardian.co.uk/business/2010/dec/09/uk-interest-rates-held-again [Accessed 15 December 2010] The Guardian (2010c), Marks & Spencer to revamp stores and push own brand Available online at URL: http://www.guardian.co.uk/business/2010/nov/09/marks-and-spencer-foreignexpansion [Accessed 15 December 2010] The Guardian (2010d), Retail Industry- Cash-strapped UK shoppers go online Available online at URL: http://www.guardian.co.uk/business/2010/dec/16/weaker-retail-sales-internetinflation [Accessed 15 December 2010] The Guardian (2010e), Shut that door, warns new report from Cambridge University Available online at URL: http://www.guardian.co.uk/sustainable-business/close-the-doorcambridge-university?INTCMP=SRCH [Accessed 15 December 2010] The Guardian (2010f) UK Retailers cut waste by half, Available online at URL: http://www.guardian.co.uk/environment/2010/sep/17/uk-retailers-cut-waste-half [Accessed 15 December 2010]