UK SUPERMARKET INDUSTRY

UK Supermarket Industry

UK Supermarket Industry

Introduction

The focus of this paper is on concentration ratios, changes that have taken place, and the extent of the concentration, but not about the competitive nature of the supermarket structure in UK. Concentration ratios can, however, also provide information regarding an industry's competitiveness and the scope available for economies of scale. (Fairris, 2007)

Concentration ratios provide estimates of the extent to which the largest firms contribute to activity in an industry. They can be derived using variables such as sales (turnover), employment and profits, but this article mainly focuses on gross value added (GVA) and output.

Discussion

Concentration ratios are a measure of the degree of concentration in a market. First of all, the supermarket industry in UK is an profitable industry due to:1) its high concentration ratio: the top three companies account for 90% of total market share while Tesco & J. Sanisbury along account for about 75%, forming approximate duopoly market pattern. 2) high entry barrier caused by patent and trade market protection for concentrate producers and extensive capital investment forconsumer goods. 3) high degree vertical integration. 4) economies of scale resulted from large market share by major players. Secondly, supermarket in UK and potential market worldwide is huge. (Haltiwanger, 2006)

Price Leadership is an implicit agreement under which firms in a market choose a price leader, observe that firm's price and match it. This type of behavior greatly affects other firms. Other firms, maybe smaller, try to protect themselves so they develop strategies to maximize their profits. The price leader considers what will happen if they lower prices, other firms will follow, but some will not. Thirdly, current players spend heavily on marketing to promote their brands. In the course of their marketing campaigns, they also increase the total market, something that a single firm might not have accomplished if there had been no competitors. Thus competition partly leads to the success of existing firms. Also, both Tesco & J. Sanisbury used brand extension, either under a mega-brand or by promoting different brands under the same company, to get into many categories in the soft drink industry, achieving economies of scale in their operations. (King, 2008) Lastly, the concentrate production is a business with extremely low costs, resulting in a high operating margin. Marketing spending account for the highest percentage spending of sales, as branding is crucial to establishing entry barriers and grabbing more "throat share". Concentrate producers increased control over bottling business because they can easily integrate process of brand positioning and marketing campaign. Furthermore, such control can not only ensure its manufacturing capability and guarantee its high level of supply chain coordination, but also set entry barrier for all potential entrants, especially those lacking of huge capital investment. Additionally, such control can maintain the crucial relationship with retailers who are key success factors for sales of super market items.

UK retailers continue to face various challenges, for example, the impact of large out-of-town shopping facilities and competition from businesses based in Europe and ...