Control_of_the_Supply_Chain_Networks_by_Supermarket_Chains.

Area of Study: Retail-Supermarkets in UK Title: Investigation into control of the supply chain networks by supermarket chains. Acknowledgments Many thanks to Kofi Narh-Saam for your clear guidance and to colleagues in my group for your kind support, all without which this report would not have materialised. To my wife Shamie- thanks for putting up with the long hours of silence during my research and for the enduring isolation from your favourite TV programmes. Contents Item Page Number Executive Summary 4 Introduction 5 Objectives 5 Literature review 5 Methodology 6 Findings 6 Analysis 6-10 Conclusion 10 References 11-12 Abstract or summary The focus of the following analysis is to investigate the various means by which superstores control the value chain to gain competitive advantage over rivals. It is an examination of the supply chain network covering manufacturing, warehousing, logistics and distribution functions and based on the big four supermarket chains(Tesco, ASDA, Sainsbury’s, and Morrison’s). Introduction This report is premised on the fact that competition at the till, coupled with changing consumer demands particularly during economic down turn, push supermarkets to adopt cost leadership strategies which involve sourcing products at increasingly low cost in order to offer value to customers at competitive prices. Discount retailers such as Lidl use value pricing strategies to attract brand switching consumers at the expense of supermarket chains. Consequently, the big 5 supermarket chains have repositioned their offering by focusing on cost leadership Supermarket chains focus on the efficiency of their supply chains to deliver value to the customer at minimum cost often at the expense of manufacturers, farmers and third-party logistics companies. They leverage the scale and scope of their massive distribution capabilities to tilt the balance of power within the supply chain network in their favour. It is therefore paramount that more weight is given to store formats and expansion of stores in this analysis. To limit the scope, the analysis will be confined to mainly the big five supermarkets (Tesco, Sainsbury’s, ASDA, Morrison’s) “who together account for over two-thirds of UK retail food sales” Fearne (2005, p.570) Objectives This report aims to: a) Examine the reasons for the supermarkets’ focus on controlling their supply chains b) Explore the various strategies employed by supermarkets to enhance their control on their supply chains such as multi format distribution channels, global sourcing, pressure on suppliers, and the use of own labels. c) Discuss the effects of supermarket control on competitors, suppliers and other supply chain partners d) Shade light into the future competitive structure in supermarket supply chains in respect of internet retailing. Literature Review Michael Porter’s five forces of competition and the Resource-based view of the firm are applied in this report to explain how both industrial level and firm-specific factors affect the supermarket chains’ competitiveness. Supermarket chains use their internal resources such as distribution stores as competitive advantage to counter the forces of competition in the industry. The supply chain or value chain networks are discussed as areas where, in the context of the theories, supermarket chains seek competitive advantage Cost leadership is a strategy adopted many of the supermarket chains to meet consumer demand for cheap products. It involves competing on price by using economies of scale to source products at low prices. Total logistics concept is applied in the context of movement and warehousing of goods to achieve efficiency and cost reduction by treating the entire process as one rather than fragmented. Methodology The following resources were used: books, newspaper articles, journals and websites. While books were used to explain the market structure, they are less significant compared to journals (particularly trade journals) and newspapers in providing up-to -date information. Findings Supermarket chains leverage their floor and shelf space to control their supply chains. Supermarkets are under pressure to sell products at cheaper prices and therefore they exercise buying power against the interest of partners in the supply chain. Analysis Pricing strategies and Brand positioning A supermarket’s pricing strategy relates directly to the way it manages its supply chains. As the global recession hit disposable incomes, consumers are trading down and increasingly demand lower prices. The recession has forced customers to seek value over brand loyalty. In response supermarkets have adopted the discount concept followed by discounter chains like Aldi and Lidl (Euromonitor 2009). Faced with tighter margins as a result of consumer demand for cheaper products and of cut-throat competition at the till, supermarkets have turned to the supply chains to reduce their costs and therefore to fatten their margins. By buying in bulk, supermarkets can squeeze suppliers’ prices and then sell discounted goods to the consumer. Endless promotions such as buy-one-get-one-free (BOGOF) compliment loyalty cards and other promotional activities designed to drive sales. Discount concept could be counter-productive to the long-term benefit of supermarkets in that it leads to commoditisation of consumer goods and reduce margins to wafer-thin levels. Euromonitor (2009 p.16) point out that “major grocery retailers are increasingly focusing on private label in order to boost their low-price credentials, with an emphasis on value private label ranges.” The private label strategy puts supermarkets in competition with manufacturer products and therefore it drives down prices of goods. Supermarkets are also beginning to act like brands giving them the option to segment the market and position some of their brands on premium platform just like the manufacturers. Euromonitor (2009, p.16) highlight the fact that whereas manufacturer “sub-brands like Flora Pro-Active and Flora No Salt are targeted at distinct customer segments,...retailers can bring out a brand and span it across all categories.” For example, “Tesco's Organics range is extended across many products – baked beans, fruit and vegetables, bread and so on”- something beyond the means of a manufacturer ( Euromonitor (2009, p.16). According to Mintel (2008), analysis across product categories shows that “the more local it goes, the more expensive a product becomes regardless of retail channel.” Supermarkets chains therefore emphasise in their marketing communication on the local sourcing of farm products to enhance customer value perception. However, consumers have objected to the over bearing power supermarkets chains have over farmers when negotiating prices for fresh produce. In the same vein, having the brand associated with ethical organisations or with supply chains endorsed by ethical organisations as environmentally friendly can give supermarkets competitive edge. West (2007) explained that increasing “consumer sensitivity to corporate social responsibility has resulted in shoppers demanding more information about what's behind the price and that means being able to scrutinise every aspect of production and supply.” King (2010) as cited by Mortimer and Baker (2010, p. 5) explained that being associated with Fair-trade increased Sainsbury’s market share of Fair-trade products to the extent that Sainsbury’s overtook “Wal-Mart as the world's biggest retailer of Fair-trade products with one in every four pounds spent on Fair-trade products in the UK spent at Sainsbury's.” Positioning of UK retailers Kwiksave Lidl Aldi Sainsbury Tesco Asda Cullens Marks & Spencer High Low High Low Perceived price level Perceived quality of store offering Discount sector Middle market sector Premium sector Based on Mintel data Economies of scale Superstores give large retailers competitive advantage by allowing them to house multiple brands and categories under one roof, hence providing a one-stop choice for the customer. The retailers leverage their floor and shelf space to pursue a cost leadership strategy by sourcing products from suppliers at lower cost than competitors and then sell them at low prices to drive high revenue. In fact, the strategy depends on the optimisation of the supply chain, which (by definition) implies treating the supply chain as a whole in order to “synchronise and converge intrafirm and interfirm operational and strategic capabilities” (Lysons and Farrington 2006, p.95) Furthermore, total logistics cost concept is employed based on the notion that “decision –making concerning the movement and storage of materials should be done as a whole rather in discrete parts” (Brassington and Pettit 2006, p.556.). The key objective of total logistics is to achieve efficiency and cost reduction in the process of warehousing, transportation and distribution of goods for the mutual benefit of all partners in the value chain. In reality, as competition increases at the till, supermarkets seek to increasingly exploit the supply chain networks to deliver value to the customers at lower prices than the competition. A tight control of the supply chain not only enables supermarkets to deliver value at cheap prices, it also ensures availability of products at all times. West (2007) points out that Sainsbury’s lost customers in 2007 because of “stock-outs.” In the UK it is now common practice for supermarket chains to vertically integrate their transport, warehousing and logistics functions in the supply chain by getting rid of third party operators in order to improve efficiency and to cut costs. Morrison’s, for example, runs its own supply chain in order “to offer fresh food at cheaper prices than would otherwise be possible;” baking bread in stores and operating its own abattoirs (Bates 2009; cited in Marketing Week 2009, p.30). Ryan (2010), states that Wal-mart intends to pursue a new global sourcing strategy to squeeze out middlemen and save about $12bn in costs. Reverse logistics, which involves “removing slow moving, damaged or spoiled goods from stores and shipping them back to suppliers to make room for products that will sell” is applied across the industry where “non-perishable non-food items are concerned (Kumar 2008, p.205). New trends in reverse logistics involve returning damaged and out-of-date stock first to a central processing center for sorting, and then to suppliers, a process which has added costs to suppliers while freeing supermarkets shelves of unwanted stock (Kumar 2008, p.205). Technology and innovation Technology and innovation are fundamental to the overall efficiency of the supply chain as this ensures that shelves are kept stocked at low costs. Wal-Mart which owns ASDA in the UK monitors, in real time, the movement of each of its products through the supply chain anywhere in the world through internet-based networks. In 2003 Wal-Mart “forced its top 100 suppliers to implement and deploy RFID tagging at the case and pallet level by January of 2005” in pursuit of its cost-leadership strategy (Woods 2005 as cited by Liu et al. 2008, p.7). The technology enables the supermarket to: “automate data capture” (for example, automated discounting to sale perishable food before expiry dates), make ordering decisions, and gain “product item visibility,” all of which are critical in the management of perishable food. According to Market Weekly (2007), Tesco has applied Toyota- style lean thinking to its operations to “cut costs, improve customer service and fatten margins all at the same time.” West (2007) notes that “supply chains have become very sophisticated, especially in the chilled products and fresh food areas where retailers are increasingly using just-in-time deliveries.” Furthermore, with growing consumer interest in ethical and green issues, technology enables ethically-conscious consumers to gain visibility of the value chain so that they can trace products back to their origins which can cement customer loyalty to the brand. Euromonitor (2009, p.23) point out that “online sales are now so key that almost all store-based retailers have evolved a web-based strategy in parallel with bricks-and-mortar operations.” Store-based retailers take advantage of “multi-channel retail, such as collect-in-store options” (Euromonitor 2009, p.23) to add value to the distribution of on-line products. On the other hand, the power dynamics in the supply chains could be changed by internet shopping. In fact, many suppliers now look to the internet as alternative to supermarket supply chains. According to Euromonitor (2009) the economic down turn gives opportunity to internet retailers to undercut store-based players on price and therefore increase alternative supply chain networks for suppliers and third-party logistics companies. Multiple distribution formats The balance of power within supermarket supply chains is a factor of the retail floor and shelf space that the supermarkets have. Fearne et al. (2005, p.507) points out that because “only a handful of supermarkets control access to consumers means that they are increasingly in a position to exercise buyer power.” Evidence of retailer excessive power has been highlighted in the press on several occasions. In 1999 Tesco was exposed for “attempting to pass the costs of an in-store promotion to farmers” (Fearne et al. 2005, p.507). The suppliers and manufacturers have inherent vulnerability since they have “no other viable means of setting up distribution channels that offer the same scale and economic benefit” as alternative to existing supermarket channels (Fearne et al. 2005, p.507).. Suppliers compete fiercely to get supermarket shelf space for their products and in the process suppliers have less bargaining power in negotiating higher prices for their goods with supermarkets. The superstore model (the relocation to larger, out-of-town sites) in the 1980s allowed supermarkets to utilise additional space by extending their offering to include non-food products. According to Mintel (2009), sales of non-foods by grocers have increased “by 52% since 2003 to reach £20.4 billion annually.” Key Note (2008, p. 4.) points out that supermarket are also “selling services and utilities, capitalising on their trusted brands, and forging partnerships with other companies.” Supermarkets continue to innovate in terms of formats, and “grocery retailers are attempting to become less reliant on large out-of-town stores in developed markets” (Euromonitor 2009, p.3). The major supermarket chains are aggressively expanding by acquiring convenience stores (c-store), which include forecourt stores. According to Mintel (2009), a c-store is “any store which is complementary to a superstore, which is geared to top-up shopping and which gains only a small part of its business from primary shoppers.” The expansion into c-stores is a strategy by supermarket chains to circumvent planning laws restricting the construction of the preferred large, one-stop and “out-of-town formats” by forcing the retailers to prioritise town centres, “through the so-called sequential test” (Wood and Browne 2007, p.235). Acquiring smaller stores brings large retailers into competition with “neighboured retailers” allowing supermarket chains to leverage their experience, “complex, efficient supply chains and buying infrastructures” to outperform smaller players (Wood and Browne 2007, p.235). According to The Grocer (2010, p.44), Tesco Express, dominates the convenience store format in terms of sales, “number of stores, standards, value and range.” Tesco convenience store numbers are expanding so rapidly that in 2009 the stores “increased by 21.7% from 938 t0 1,142 stores” beating their target of 150 stores a year (The Grocer 2010, p.44). In future sustaining competitive advantage will be achieved by integrating a retailer’s offerings in order to optimise service to its consumers. Hough (2010) reported that Tesco plans to develop “mini-villages” which include “a series of smaller mixed homes, shops and leisure developments in Ipswich and the North East.” The advantages of such a strategy is that Tesco would no longer depend on property developers for expansion and, by creating communities; Tesco would create demand and therefore justify the need for supermarket stores as required by the planning regulation. Furthermore, Tesco could create barriers to entry against competition and therefore further entrench its control of the supply chains. The retailer would have more personal data than the government giving it formidable power to eclipse that of the government (Hough 2010). For the customer, life would revolve around the retailer: it would mean “buying or renting a home through its estate agent services, securing mortgages through its banking arm and purchasing products on its credit cards through stores” (Hough 2010) Conclusion and recommendations The above analysis highlighted the multiple distribution formats of the major supermarkets as the single most potent competitive advantage upon which supermarket chain rely to control their supply chains. It is equally persuasive to argue that internet retailing offers alternative supply channels for manufacturers and third-party logistics companies to sell and supply directly to the consumer avoiding the supermarket supply chains. In addition to planning and competition laws as well as consumer demand for ethical trading, internet retailing could reduce the dominance of supermarket chains in the supply and distribution of products in the future. This perhaps explains why supermarket chains have entered new markets such as property, finance, and internet retailing to diversify from consumer goods retailing. References Euromonitor (July 2009): Global Retailing: New Concepts in Retailing – The thin line between Success and Failure: Euromonitor International. July 2009. London: Euromonitor International Euromonitor (2009) Global Retailing: Expansion Strategies of the World's Leading Retailers: Euromonitor International. July 2009. London: Euromonitor International The Grocer (2010) Convenience power player The Grocer, 22nd May, p.44. Ryan (2010), Think our sourcing’s global' You ain’t seen nothing yet...The Grocer, 6th February, p.14. Mintel (2009) Convenience Stores: Mintel marketing report. September 2009. London: Mintel International. Mintel (2008) Locally Sourced Foods: Mintel marketing report. September 2008. London: Mintel International. Mintel (2009) Non-foods in Grocery Multiples: Mintel marketing report. March 2009. London: Mintel International. Key Note (2008) Non-Food Sales in Supermarkets: Key Note Market Assessment. January 2008. Hampton: Key Note Ltd Wood, S. and Browne, S. (2007) Convenience store location and forecasting-a practical research agenda International Journal of Retail and Distribution Management, 35(4), pp.233-255 Hough, A (2010) Tesco 'mini village' building plans 'will make it more powerful than government' [Online] Available from: www.telegraph.co.uk/.../Tesco-mini-village-building-plans-will-make-it-more-powerful-than-government.html. Accessed on: 20/05/10 Lysons, K. and Farrington, B. (2006) Purchasing and supply chain management 7th ed. London: FT Brassington, F. and Pettit, S. (2006) Principles of Marketing 5th ed. 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