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The Cooperative Food Businesses Group

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Introduction

The Cooperative Food Businesses Group is a consumer owned company that presently dominates the convenience food market segment of the food retail industry in UK. As the economic conditions in the country seize to improve, the company is faced with immense challenges. The report analyses these challenges together with the company’s ability to utilize its internal capabilities to counter them and move towards a profitable future. The tools such as PESTEL Analysis, Porter’s Five Forces Analysis, SWOT Analysis and Competitor Profile Matrix are made of use of in the strategic analysis.

External Environment

PESTEL Analysis

Political

  • The government has increased the Value Added Tax to VAT 20 per cent that has increased retail prices of food products tremendously. This has pushed away consumers from heavy spending in food shopping.
  • The Increase in fuel costs by the government has forced producers to charge more for their products that cost more to produce now (BBC 2007).
  • The economic turmoil in UK has produced a drastic fall in the consumers’ disposable incomes. The wage has increased by only 5 per cent.
  • The Customers have become more price sensitive as a result and have shifted towards cheaper food brands and cheaper food retailers (Clark et al 1994).
  • Customers have also shifted to less expensive restaurants. Retailers are trying to steal the restaurant spend by offering “Dine in for two” deals.
  • The convenience segment of food retailing is comparatively flaring well. The sales value of the convenience market segment is expected to grow by 2 per cent per annum in the next 4 years.
  • The market is expected to grow in size as the population continues to grow to 67 million by 2020. This will produce an increase in single occupancy rate, and thus, increases spend her head.
  • On the other hand the trend of aging population which is reliant on a smaller number of employed workers will move the customers further towards price sensitivity. 
  • However, cultural diversity in UK is increasing which has allowed retailers to enter into specialist segments, such as ethnic food.
  • The Internet has become a powerful selling channel in the West. It is predicted that by 2011 online retail sales in Europe will have reached Euro263bn, with British shoppers accounting for more than a third of all revenue (Myers 2004).
  • The Internet accounts for 8 per cent of the amount spent in advertising globally. This percentage is growing rapidly. Around 70 per cent of the households have PCs and internet which has given rise to online shopping (Graiser & Scott 2004).
  • At present 4 per cent of the food sales are made online. Customers still choose to physically see products before they purchase. However, the trend towards online shopping for grocery is expected to increase, forcing the retailers to equip their supply chain to meet the changes in the industry.
  • Where at present, consumers are concerned with price sensitivity, in future, their concerns for wealth, sustainability of food and well being will grow and retailers will have to address these.
  • Waste management presents another dilemma for companies as well as criticism in adding to CO2 pollution.
  • Environmental protection, child labour and consumer protection laws are the main legal forces acting on retailers.
  • As consumers get more aware of their rights and litigious, the risk of being sued increases.
  • Owing to the intense rivalry in the industry, and a large number of players continuously engaged in battling with each other for higher customer and market share, the industry has been the attention of competition commission which closely monitors their competitive strategies.
  • Competition in the retailing sector is extremely fierce. The problem is exacerbated by the fact that companies are trying to diversify into non-core fields thus creating additional competition.
  • In the mainstream food retailing segment that constitutes super markets and hypermarkets, there are four major retailers in the industry that have fortified market positions. These are Tesco, Sainsbursy, Asda and Morrisons. These retailers account for nearly 65 to 70 per cent of the total food sales in UK. Tesco is leading the market with 27 per cent market share, where the rest have 14 per cent, 15 per cent and 10 per cent respectively. The Cooperative Food Business is the fifth largest food retailer behind the big four.
  • The level of rivalry is intense which has been further increased as companies have faced financial challenges during the economic slump. The four giant retailers battle for market share and customer share. They attract consumers through price comparisons and value offers.
  • Cooperative Food Businesses dominate the convenience segment of the market. The four retailers upon sensed the market potential have recently entered in the convenience segment, where their positions are relatively weak at present.  Marks and Spencer and Tesco have 13 and 11 per cent market shares in the convenience segment which are largely behind Co-op Group’s 27 per cent market share.
  • The bargaining power of the suppliers is low. The main suppliers of retailers are food manufacturer such as Nestle, Kraft, Unilever, Kellogg, Danone, Proctor and Gamble and General Mills.
  • These food manufactures have to compete against each other to occupy shelf spaces of the four giant retailers. This has given retailers high negotiating power with the suppliers. 
  • There is a big threat of substitute food products, having numerous food suppliers in the industry. There is also a big room for innovations in the food product category.

Economic

Social

Technological

Environmental

Legal

Porter’s Five Forces

Industry Rivalry

Bargaining Power of Suppliers

Bargaining Power of Customers

  • The bargaining power of customers is high. The concentration of buyers is high and they therefore can dictate their rules/tastes.
  • Customers are less brand loyal, there are plenty of alternatives and switching costs are low. All of these factors place the bargaining power in the hands of the consumers.
  • The slow recovery in the economic conditions in UK still continues to affect retail sales as consumers choose to buy less and buy cheaper in order to make ends meet (Graiser & Scott 2004).
  • Similarly, as people’s incomes become more uncertain, they will shop around more (Flavián et al 2002).

Threat of Substitute Products                                                                   

Threat of New Entrants

  • Threat of new entrants is low. This is because it takes enormous capital investments to set up a successful chain of stores. The market is mature and an entrant would need to offer something radically new, which is rather difficult to do in food retailing.
  • All major retailers have strong established brand names and so enjoy customer loyalty, which becomes increasingly important in homogenous markets (Flavián et al 2002).
  • The incumbents are firmly holding their market shares and would utilise all means to counter any new entrants, including litigation (Graiser & Scott 2004).
  • Importantly, absence of experience and knowledge of operating in these markets - especially for foreign companies - would be a barrier to any new entrants (Doyle 2002).

Competition Analysis

The Competitive Profile Matrix (CPM) identifies a firm’s major competitors and its particular strengths and weaknesses in relation to a sample firm’s decisions. Following is the competitive profile matrix of Cooperative Food Business Group compared with Marks and Spencer and Tesco (Dess et al 2004).

Table 1: Competitive Profile Matrix of Cooperative Food Business Group

 

Critical Success Factors

 

Weight

Marks and Spencer

Cooperative Food Business Group

Tesco

Rating

Score

Rating

Score

Rating

Score

Advertising

0.20

3

0.6

4

0.8

4

0.8

Product Quality

0.10

4

0.4

4

0.4

4

0.4

Price Competitiveness

0.10

2

0.3

3

0.3

3

0.3

Management

0.10

3

0.3

4

0.4

3

0.3

Financial Position

0.15

3

0.45

4

0.6

2

0.3

Customer Loyalty

0.10

3

0.3

3

0.3

2

0.2

Market Expansion

0.2

3

0.6

4

0.8

3

0.6

Market Share

0.05

3

0.15

4

0.6

2

0.1

Total

1.00

 

3.1

 

3.6

 

2.2

 The competition matrix clearly identifies the areas which give the company the competitive advantage. Each of these areas is linked with the three aspects of the business identified earlier: finance, human resources and production.

Strategic Capabilities

Resources

The Cooperative Food Business Group is registered under the Industrial and Provident Societies Acts of 1965 and 2003. Its resources are entirely different from those of the competitors. Its human resource comprises of 110,000 employees. It operates close to 5000 retail outlets that allow it to serve 17 million customers per week across UK. 3000 new stores will be opened by 2013 which has created new job offers for potential competent employees.

Value System

The value system of the organisation is closely tied with social values and social benefit. This is due to the fact that the Group is owned by consumer members. The values that provide the foundation of the management and business philosophy of the Cooperative Food Business Group are: self help, self responsibility, democracy, equality, equity and solidarity.

Core Competencies

The core competencies of the Group stem from its financial position, its business model, strategy of partnerships and acquisitions and its workforce (Johnson & Scholes 2003).

Business Model

Its business strategy and business model are closely tied with social responsibility and social values that provide it a completive edge in the market and allow it to run a business that is socially appreciated and well accepted across the UK by the consumers. The business model allows consumers to attain the power. Consumers having power to influence prices, management and marketing of retailers is a challenge for competitors, the Group sees this as its biggest strength. The consumers are more driven towards spending more on a retailer that they know will give back to the society and cares for them, rather than the exploiting giants that are now struggling to sustain customer share.

Financial Position

£13.7 billion profits were obtained in 2010 by the Group which is attributable to the financially sound condition of the company. However, the acquisitions posed a financial burden on the company but because of the annual profitability, it was able to curtail the short term turmoil effectively and continued to expand. This financial position has allowed the company to invest heavily in stores, hire more employees and enter into new product categories.  

Cost Leadership

Cost leadership is where companies compete on the basis of their production costs and profit gains in returns. Such production cost reduction is received from economics of scale and extensive marketing and operational efficiency. The large supermarket chains which have access to fewer threats from high prices of suppliers are enjoying this cost leadership. The Cooperative Food Business Group follows the competitive strategy of cost leadership. Because of the benefit of this, the group charges comparatively cheaper prices to the convenience food products which attracts and sustain customers.

Human Resources

“People” culture prevails in the company. Bureaucratic structure with centralised decision making allows the owners to curtail a complete customer-centred approach in management and performance. Employees are regularly trained in order to be infused with necessary skills to counter competition. The centralised management style allows infusing and practicing the value system effectively and in a controlled fashion.

Partnerships and Acquisitions

The Cooperative Food Business Group has taken the acquisition strategy to expand in the UK’s retail industry. This strategy has produced fruitful results for the company in the form of improved profitability and enhanced its resource capability to enter into new markets and product categories.  The expansion in resources through acquisition will allow the Group to move towards an effective and cost efficient value chain which is essential to enter into many new markets and countries, without any fear of losing out due to competition, because the company has to offer several value added services backed with competencies that are not found in other competitors.

SWOT Analysis

Strengths

  • The Cooperative Food Business Group is the fifth largest food retailer behind the big four. IT dominates the convenience segment of the market.
  • Acquiring Somerfie’s 778 stores has infused strength in to the group’s ability to counter competition and expand its market share and profitability.
  • There is lack of innovation in the services that the Group provides that gives it little differentiation against competitors, and weakens its otherwise fortified market share.
  • The management system is potentially weak to cope with the challenges of integration and acquisitions. The structural integration needs to be improved.
  • Geographic as well as product category expansion are two opportunities available to the Cooperative Food Business Group at present.
  • Using the online selling channel and expanding in the online food retailing is another option.
  • Economic downfall has hurt consumer spending and has reduced the sales of the Group.
  • Its financial turmoil is partly attributable to the incompetency of the company to bear the financial burden of the recent acquisition initiative.
  • The entry of the big four along with Marks and Spencer in the convenience market segment is a threat for the Group. At present the Group holds market dominance but in the near future, as the retailers continue to occupy market space and consume more customer share, the sustainability of the Group in the market can be seriously threatened. The giants have a bigger pool of resources to combat the Group.
  • The Group will have to invest in introducing new innovations in services and expand into new product categories in order to sustain competitive advantage.

Weaknesses

Opportunities

Threats

Strategic Options and Evaluation

Two strategic options that the Cooperative Food Business Group have are: (1) Expansion into the Financial Service Sector; (2) Entry into the online food selling market.

The strategic options are evaluated based on the criteria of consistency, consonance, advantage, and feasibility.

Expansion into the Financial Service Sector

Following the lead of Tesco and Sainsburys and other big four retailers, who haves set their foot in the financial services sector, the Group is considering taking up the challenge to service this sector as well.

  1. Consistency – the strategy corresponds to the expansion strategy of the business. It will need to use acquisitions strategy to enter into the financial services sector.
  2. Consonance – because of the economic turmoil, the retailers that are in the financial services sector have suffered in terms of profitability. This is something that the Group needs to consider. The economic situation is expected to improve and the Group has optimistic performance and profitability forecasts. However, the industry poses a big risk.
  3. Advantage – Expanding into a new market would allow the Group to further strengthen its market leadership and increase customer share and profitability.
  4. Feasibility – The Group’s existing resources will not be sufficient to back this expansion strategy. Considering its recent financially troubling situation resulting from the integration with Somerfield’s stores, it is only evident that in terms of resources, this option is less feasible (Arnold 2002).

Entry into the Online Food Selling Market

The online food selling market is in its introductory stage and is growing. Asda and Tesco are successfully running online food divisions (Doyle 2002), and it is only time that Cooperative Food Group enters the market before it hits maturity and barriers to entry increase.

  1. Consistency – the strategy corresponds to the expansion strategy of the business. It will allow the company to increase its customer share and market share.
  2. Consonance – this will be a proactive strategy on part of the Group allowing it to enter the market that is in its introductory stage and holds potential for massive growth in the future.
  3. Advantage – The entry would allow the company to provide multi-channel buying opportunity to consumers, and thus, enable it to make use of a new competitive advantage.
  4. Feasibility – The strategy is feasible as the company has use its existing resources to implement it.

Recommendation and Conclusion

Cooperative Food Business Group’s recent acquisition strategy to expand in the industry has allowed it to create an effective and cost efficient value chain and has enabled to enter into many new markets and expand its resources without any fear of losing out due to competition. The company has to offer several value added services backed with competencies that are not found in other competitors. Online food retail industry is a viable strategic option open to the company that it can enter into without challenging its management to cope up with as well as benefit from in terms of increased profitability, market and customer share. The tools used in the strategic analysis, such as, PESTEL Analysis, Porter’s Five Forces Analysis, SWOT Analysis and Competitor Profile Matrix proved to be quite effective in aligning the challenges, strengths and capabilities that paved way for strategic routes for the future to be developed.

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