Environmental audit of supermarkets by eloisesusie

BML329 Macro-Environmental Audit of Supermarkets

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Contents Introduction .......................................................................................................................................................... 2 Influences on the supermarket industry ........................................................................................................... 2 Political – Brexit ............................................................................................................................................... 2 Economical – Increase in minimum wage .................................................................................................... 2 Sociocultural – Consumer Ethics .................................................................................................................. 3 Technological – Online competition ............................................................................................................ 4 Appendices ............................................................................................................................................................ 5 Appendix 1 – PESTLE Analysis ...................................................................................................................... 5 Appendix 2 – Porter’s 5 forces ..................................................................................................................... 6 Appendix 3 – National Minimum Wage....................................................................................................... 6 References ............................................................................................................................................................. 7

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Introduction Supermarkets are worth 179.1bn GBP to the UK economy (Statista, A, 2017) with 27.8% of this held by Tesco (Kantar, 2017). Tesco first overtook Sainsburys’ market share in 1996 and has held the lead of the market since then (Winterman, 2013). However, in the last couple of years recovery from the recession and growing inflation has encouraged consumers to opt for discounts and cheaper alternatives to branded options. This has led to the UK having the highest share of food volume sales on promotion in Europe (Statista, B, 2017) and German chains Aldi and Lidl promptly increasing their combined market share to 12% (Butler, 2017). This report explores how the UK’s supermarket industry could be impacted by four pressing factors as identified in appendix 1.

Influences on the supermarket industry Political – Brexit The affect Brexit will have on the UK’s supermarkets is unclear and this uncertainty causes its own problems. There has already been some controversy since the referendum with the FTSE 100 ending the day 3.15% lower one day after the leave vote (BBC, 2016). Notoriously, Tesco and Unilever argued over Unilever wanting to raise prices across its products to reflect the fall of the pound (Buttonwood, 2016). Marmite-gate ensued with Tesco pulling Unilever products such as Marmite and PG Tips from online stores over a 24-hour period before agreeing an arrangement in private (Ping Chan and Rayner, 2016). If Brexit continues to affect the UK economy more inbound suppliers could raise their prices to generate the same amount of profit. This affects Porters’ (1979) five forces (appendix 2) as the bargaining power of suppliers could heighten, potentially leading some supermarkets to alter suppliers, possibly sourcing more from within the UK (Kantar Retail, 2017). A worry of UK consumers is that Brexit will remove certain EU food standard laws such as the chemicals used in food production (Batchelor, 2017). Supermarkets would therefore have to keep a close eye on suppliers as any changes could lead to public trepidation equivalent to the 2013 horse meat scandal. Nonetheless, the UK government has announced plans to transfer all EU laws to UK laws although they may be changed (BBC, 2017). Despite ‘shrinkflation’ being partly blamed on Brexit, the ONS has dismissed Brexit as one of the factors, although it has assisted in the price increase of some imported products (Milligan, 2017).

Economical – Increase in minimum wage In April 2016, the UK government introduced the national living wage: essentially the national minimum wage for workers over 25 (GOV.UK, 2017). The national minimum wage has also been steadily increasing year on year as seen in appendix 3. By 2020 the goal is for the national living wage

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1502622 to be £9 an hour (BBC, 2015). Supermarkets are legally bound to follow the policy and raise their pay accordingly. Some supermarkets make the headlines by offering a minimum wage well over the constitutional standard; Aldi are currently the highest paying supermarket in the UK (Fleming, 2017). Paying personnel a favourable wage has been proven to have benefits such as increased productivity and greater customer service alongside staff retention (Ton, 2014). Alternatively, many supermarkets have been relieving staff or shortening hours in order to accommodate increased wages with more than 3,700 shop workers made redundant before the rise in April 2017 (Rodionova, 2017) and the office of budget responsibility believes that 60,000 people in the UK will lose their jobs due to Osbourne’s 2020 goal (Sheffield, 2015). As the minimum wage continues to intensify, supermarkets will have the tough decision of whether they can afford to maintain all their staff or to cut costs elsewhere and benefit from an abundance of productivity alongside avoiding the negative notoriety that comes with reducing personnel.

Sociocultural – Consumer Ethics Consumers have greater access to information than ever before which means they are more aware than ever as to where their purchases come from (Bones, 2014). Bad press not only damages a company’s reputation; after the 2013 horse meat scandal the value of Tesco dropped by £300m (Fletcher, 2013). The price war between major supermarkets inundated when it came to public attention that the price of milk was so low some farmers were not being paid enough to cover the costs of production, prompting two out of three dairy farms in the UK to have closed between 1995 to 2014 (Ruddick, 2015). Public perception showed overwhelming backing for farmers with 63% of consumers believing UK farmers are not paid enough and 58% willing to pay more for fair pay (Davies, 2016). The competition took a spin to portray good ethics to customers with Sainsbury’s running a press ad outlining the prices the major supermarkets pay for milk and Morrisons launching a “Milk for farmers” range (Gwynne, 2016). Ethical shopping is a buyer hot button as it is a buyer decision that is being talked about (Aaker, 2014, p.30). Influence of magazines such as ‘Ethical Consumer’ and social media campaigns are bound to further affect consumer buyer behaviour (Rasool Madni, 2014) and supermarkets are even being ethically ranked leading to more retailers pledging to create less waste (Broomfield, 2016). It has been proven that believing one is ethical leads to happiness (Stillman, 2011) demonstrating that for supermarkets to flourish they must take note of their consumers ethics.

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Technological – Online competition Online shopping has been embraced by most supermarkets and even independent farms are taking advantage of technology using apps such as ‘Farmdrop’ which connects consumers directly with suppliers through a B2C model (Farmdrop, 2017). Shorter supply chains are a threat to both bricksand mortar and virtual supermarkets (Fishburn and The Crowd, 2014). The UK is currently set to become the second largest online grocery market worldwide by 2020 (Statista, C, 2017) reflected by the arrival of online only stores such as Ocado and Amazon Fresh. As of September 2017, Ocado currently holds a market share of 1.4% (Kantar, 2017). The company largely revolves around technology and has held trials of self-drive delivery trucks through the backstreets of London with the system planned to be ready for launch in 2019 (Hern, 2017). Research shows that Generation Z and Millennials are the generations most likely to use a virtual supermarket proposing longevity for Ocado (Nielsen, 2015). Amazon are a newer player to the virtual supermarket platform but are already generating a big impact in the UK by offering various online shopping services. Amazon Prime Now is a service in partnership with Morrisons that offers ‘prime’ customers their weekly grocery shop within one hour. On the day the deal was announced shares in Ocado fell by 10% (Butler, 2016). When Amazon bid for ‘Whole Foods’ in June 2017, most major supermarkets shares dropped whilst Morrison’s climbed (Elder, 2017), proving that allying with an online supermarket is one of the most valuable competitive advantages to have.

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Appendices Appendix 1 – PESTLE Analysis Political

Risk Potential Risk Opportunity

Brexit – Imports may be affected by any changes in laws. (BBC, 2017). Monopoly restrictions – Takeovers may be blocked as each supermarket can only own a certain percentage eg. Tesco (The Guardian, 2007). Sunday trading law - Calls have been made to relax closure on Sundays (Eleftheriou-Smith, 2016). Sugar tax – This will increase prices of many products including supermarkets own brands (Boseley, 2016). 5p bag law – 5p bags are now being phased out by some supermarkets (Smithers, 2017).

Economical

Increase in minimum wage – could lead to loss of jobs (GOV.UK, 2017). Merges and Takeovers – such as Sainsburys and Argos (Jahshan, 2016). New Entrants to market - Amazon taking market share (Elder, 2017). Misrepresenting accounts – Tesco had to pay a fine of £129m for misrepresenting accounts (Ruddick and Kollewe, 2017). Buying crops years ahead – natural disasters could ruin crops (Selby, 2017).

Sociocultural

Consumer Ethics – affects consumer buyer behaviour (Bones, 2014). Food trends - less red meat, vegetarian and added protein (Lempert, 2016). More single people - smaller food packs and ready meals (Millard, 2015). Convenience of 24 hour shops. Accessibility – Aldi have introduced student shuttlebuses (Barrell, 2015).

Technological

Contactless cards and apple pay – Could alter where consumers shop if they can pay for goods easier (Titcomb, 2017). Self-scan - means less staff are needed but increases theft (Knapton, 2016). Online competition – Willingness to use virtual supermarkets (Nielsen, 2015).

Legal

Zero hour contracts – found to cause anxiety and may become illegal (McVeigh, 2014). Taxation policies – push up food prices (Warrell, 2014).

Environmental Environmental protection – Supermarkets have the chance to improve their environmental impact (Tesco PLC, 2017). Animal welfare – There is pressure on supermarkets to guarantee their supplies have had high animal welfare (Ethical Consumer, 2017).

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Appendix 2 – Porter’s 5 forces

Adapted from: (Porter, 1979)

Appendix 3 – National Minimum Wage

(Minimum Wage, 2017) Page | 6

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