Microeconomic Analysis of J Sainsbury's Local store in Oxford Street
1.0 Introduction
Sainsbury's (JS) is the UK's third largest food retailer, with a chain of 583 Sainsbury's supermarkets across the UK, serving about 12 million customers weekly. The following report presents the analysis of JS Local store in Oxford Street, and considering its performance from a microeconomics perspective. The emphasis is given to the store's costs structure, competition levels, demand and supply sides, and price elasticity. Three economic problems faced by the store are also considered within the report, with the likely solutions and business strategies for improvement.
Key features of JS Local
2.1 Cost Structure
Mankiw (2003) states that the cost of something is what the company gives up to get it, known as opportunity cost. When talking about the cost of production of JS, it includes all the opportunity costs of making the output of goods and services. Companies tend to incur costs when they buy inputs to produce the goods and services that they plan to sell. In the case of JS, it can be assumed that the store, as a land, is fixed and that the company can vary the quantity of goods and products offered only by changing the number of workers.
Rational people think at the margin. This idea is the key to understanding the decision JS makes about how many employees to hire and how much of goods and products to offer at the shelves. JS's total costs can be divided into two types, being fixed that do not vary with the quantity of goods offered, and variable that change as the store alters the quantity stocked. Total fixed costs are a short run concept. For instance, JS will pay the same rent for the store whether the demand on the weekend is going to be higher or lower during the weekdays. At the same time, the relationship between total variable cost and sales within the store depends on the efficiency of the variable factors, primarily labour.
2.2 Competition Levels (Appendix B)
One of the most important and influential elements of the business environment is the structure of industry. How a company performs depends on the state of the industry and the amount of competition it faces. JS in Oxford Street faces an aggressive competition from nearby branded stores of Tesco Metro and M&S, and from small local retailers. The market price, therefore, is likely to fluctuate because of the increase in supply and local stores competition.
2.3 Demand and Supply Factors
For JS, main factor causing shifts in demand is the economy. For example, it is highly evident that employment levels and interest rates resulting in higher or lower consumer disposable income, changes in tastes and demographics will have a great impact on the JS operations. The price of substitutes and complements would also be influential in the case of JS products' demand.
For the supply side, changes in explanatory factors lead to changes in supply. The prices of products from the suppliers, the level of technology used by the store, company's management aims and overall company's expectations are likely to be significant in determination of the supply side of business.
2.4 Price Elasticity
Price elasticity of demand for JS's products measures how willing consumers are to move away from the products as the company introduces rises in prices. Elasticity reflects the many economic, social, and psychological forces that shape consumer tastes (Curran, 2000; Begg, Fischer and Dornbusch, 2003). Demand tends to be more elastic if close substitutes for JS products are available nearby, if the products are luxury rather than necessity, and if the market is narrowly defined. However, for the price elasticity of supply, it measures how much the quantity supplied by JS responds to changes in the price.
2.5 Aims of the Store
The primary goal of JS is to maximise its profits. In addition to this it desires to sustain its competitive position within the local market, achieve a strong competitive advantage and a broader market segment. JS aims to achieve high sales density to justify competitive prices and be able to piggy back the distribution systems established for the larger stores.
3.0 Problems Facing the Store
3.1 Low Demand Levels Falling Basket Sizes at JS
In comparison to local competitors' stores in Oxford Street, JS has experiencing a fall in average basket size, leading to decreasing profit margins. In the short run, a decrease in demand for JS's goods has to lower prices and lead to losses. However, in the case with JS that operate in a dynamic, competitive market with an overcapacity and oversupply, the company does not recognise the fact that by putting the prices JS is likely to lose its customers.
The main problem of the store and the company as a whole is the reputation of products being too expensive, and in spite of major systems investment, its poor levels of availability. In 2004 JS has certainly lost its number two position to ASDA (Appendix C). The business is losing primary customers, more than half of its customers see the store and the brand as a secondary destination.
Solution: According to Mintel report (2005) there is a new management team in place and that the position is recoverable. The new team has much to do to restore the business' momentum. In the meantime, JS has to put more emphasis on building up its reputation in the upper mass market, establishing a clear position between Tesco in the middle mass market and M&S and Waitrose at the upper end. It is a long term strategy and with a clear understanding from the management team, JS is likely to succeed. The company also needs to consider it resource based strategy of using its established brand and core competence into an effective resource to gain competitive advantage.
The management team has to recognize the growing need for a proper price led strategy in place, due to increasing levels of local competition and the growing demands and price consciousness of the customers, who are looking for saving on their every day purchases. JS has to consider more efficient pricing policies in order to be able to competitively stay in the market.
3.2 Increases in Market Supply Threat of New Market Competition
Food retailing is characterized by being a perfectly competitive market, with many buyers and retailers, offering largely the same products types. Porter (1980) suggests that threat into the food retailing market depends on the extent to which there are barriers to entry. The main barriers in retail industry generally include; access to distribution channels, expected retaliation, legislation and government actions and differentiation. The competition levels between food stores in Oxford Street are relatively high and any new small retailer will face sharp retaliation from the large brands presented, such as JS, Tesco, M&S and Waitrose that are located nearby. Though the market power of the large chains threatens the independence of smaller retailers, due to their bargaining power over the suppliers, JS is still faced with the problem of maintaining its market position and competitiveness. Because new retailers can enter the market in the long run, the response of the market to a change in demand depends on the time horizon.
Solutions: In order for JS Local to differentiate itself from the competition, the company should approach new strategic options of diversification or new marketing strategies of promotions and pricing. Currently the store offers a limited number of goods. By a clear analysis of the customer demands and expectations, the company is likely to increase the sales in the long run. For example, Oxford Street is famous for its shopping and nightlife. By extending the opening hours, JS will capture customers' trend for late evening snacks and quick shopping on the way home. Customers possess a high bargaining power. Hence by offering better deals and lower prices, JS may meet their expectations.
3.3 Low Labor Efficiency
One of the main factors of production is labor. It is variable and can be changed quickly, for example, by increasing number of part time workers or operating hours of the store. Labor markets, like other markets in the economy, are governed by the factors of supply and demand (Henderson and Quandt, 1971). Operating in a service provision industry, labor efficiency is the core factor that contributes severely to the level of sales. Because there are many other retailers in the local market selling goods and hiring workers, JS has little influence over the price it get for goods or the wage it pays. If JS is not perceived as a good company to work for, employees are likely to apply to other retailers. In addition to this, the proposed level of employment in 2004 (Appendix D) is relatively lower than in previous years. To some extent labor efficiency is also forced by City pressure on labor. This implies that people might not want to work, or are unlucky in their search. Another major weakness of labor being inefficient is the level of technology installed in the store.
Solution: If JS introduces new technology and provide everyone with effective training to increase the awareness, then the existing workforce would become more efficient. JS would like to see its workers giving increasing returns. If returns are increasing then worker efficiency is increasing. Worker efficiency is constant if returns to labour are constant. By offering satisfying pay packages, including incentives and benefits, by providing good working environment the company may improve motivation levels and be able to cope with any management changes.
4.0 Conclusion
It can be seen from the report above that the majority of economic factors are largely outside the control of the company, but their effects on performance and the marketing mix can be profound. There is no rapid growth scenario, though there is a question of a steady progress in the long run that needs a clear established and communicated strategy from the management level.
By remaining flexible, be ready to adjust to changes in the external environment, JS should never stop on searching and exploiting new opportunities and gaps for further expansion. To play a different game from competitors will mean for JS to be a strategic innovator and risk for a better position and ability to create something unique.
APPENDIX A
| STRENGTHS | WEAKNESSES |
| Quality and brand reputation. | Perceived to be more expensive than competition. |
| Strong own label portfolio and renewed product innovation in foods. | Non foods less developed than key competitors. Ongoing poor stock availability and customer service. |
| Recent disposals and restructuring has created a more focused, simplified business. | Ongoing poor stock availability and customer service. |
| Growing neighbourhood operations. | Weak like for like sales growth. |
| Advertising link with celebrity chef Jamie Oliver. | Problems within core business have resulted in retreat from USA and no European development. |
| New operating and C store management teams. | Slower than competitors to exploit new opportunities. |
| OPPORTUNITIES | THREATS |
| Investing £400 million to improve price, quality and service. | Interest rate rises could shift business to price led competition and put further pressure on like for likes. |
| Improve stock availability through simplified systems and more shop staff. | Poor staff morale due to weak results, management changes and redundancies. |
| Improve stock availability through simplified systems and more shop staff. | Poor staff morale due to weak results, management changes and redundancies. |
| Further C store development and completion of extension programme. | Winning back customers will prove difficult after prolonged period of disruption and poor stock availability. |
| Further development of non food ranges and own labels. | Tesco and ASDA well placed to pressurise weaker rivals. |
| Roll out of Sainsbury's to You in due course. | New management under pressure to deliver quickly as company has become a bid target. |
| Improve effectiveness of Nectar card. |
APPENDIX B
Competition Levels
The UK food retailing supply chain is concentrated in the hands of a few key multiple grocers. The combined penetration of the top three has increased dramatically with the leaders, Tesco and Asda, taking almost half of all primary shoppers. Appendix B presents the market share of leading grocery multiples in terms of numbers of shoppers, putting JS on the third place.
JS operates a tertiary production that refers to the production of service. The company has an estimated 13% of the UK market, making it the third largest supermarket, with sales of £15.5 billion in 2004. JS has suffered under competitive pressure from Tesco and Asda who have turned up the heat with drastic price reduction strategies. JS's response has been to stress the quality of its food offer; using the slogan 'Making Life Taste Better' it emphasises quality and choice rather than value. The depth and breadth of its premium sub brand 'Taste the Difference' bears this out. 'Taste the Difference' is very much the JS's flagship brand which has carried through its more upmarket brand aspirations.
In the thick of this concentrated and aggressively competitive environment, multiple grocers have used own labels to tighten their grip on the UK food retailing market. Retailers, including JS, use own label products to position themselves in the market, to undertake competitive offensives and still secure above average margins. Own label foods provide retailers with an unprecedented opportunity to develop their offering in terms of price and quality whilst retaining complete control. JS has levered its considerable expertise in retailing, close relationship with the customers and the customer intelligence company's loyalty card schemes gather to bring innovation to the market, particularly in convenience foods categories such as chilled ready meals. The challenge JS face is managing its flagship brand, albeit through third parties, across thousands of product lines.
Food retailing industry has established high entry barriers for new retailers. As Porter's five competitive forces framework suggests, it is harder for the company to obtain the necessary factors of production at the prices paid by the other companies in the market. There is a strong bargaining power of suppliers, in addition to market power of customers. In the case of retailing, it is hard to say whether JS at Oxford Street is the price taker or price maker, because the market itself sets the price. If selling above the market price, above the nearby stores of Tesco and M&S, JS would be perceived by the customers as being expensive, this will eventually threaten the profit margins.
APPENDIX C
Source of UK main grocery shopping, 1996 2004
| 1996 | 1998 | 2000 | 2002 | 2004 | % point change | % point change | |
| Base: adults aged 15+ | 1,052 | 989 | 992 | 1,015 | 1,015 | 1996 2004 | 2002 04 |
| % | % | % | % | % | % | % | |
| Tesco | 21 | 21 | 23 | 25 | 27 | 6 | 2 |
| ASDA | 11 | 12 | 18 | 19 | 20 | 9 | 1 |
| Sainsbury's | 17 | 16 | 17 | 17 | 13 | 4 | 4 |
| Safeway | 12 | 12 | 9 | 9 | 6 | 6 | 3 |
| Morrisons | 4 | 4 | 5 | 6 | 9 | 5 | 3 |
| Safeway+ Morrisons, pro forma | 16 | 16 | 14 | 15 | 1 | 1 | |
| Any Co op | 5 | 3 | 5 | 3 | 4 | 1 | 1 |
| Somerfield | 5 | 6 | 4 | 3 | 3 | 2 | |
| Kwik Save | 8 | 8 | 4 | 4 | 4 | 4 | |
| Iceland | * | * | 1 | 1 | 1 | na | |
| Waitrose | 3 | 3 | 3 | 1 | 4 | +1 | +3 |
| Aldi | na | na | 2 | 2 | 1 | na | 1 |
| Marks & Spencer | * | * | 1 | 1 | 1 | na | |
| Any Lidl/Netto | * | * | 1 | 2 | 1 | na | |
| Share of top three | 49 | 49 | 58 | 61 | 60 | +11 | 1 |
APPENDIX D
Workforce in employment in the UK, by gender and employment status, 1998 2009
| Men | Women | Total in employment | Unemployed | |||||
| m | Index | m | Index | m | Index | m | Index | |
| 1998 | 14.77 | 100 | 12.15 | 100 | 26.92 | 100 | 100 | 100 |
| 1999 | 14.9 | 101 | 12.35 | 102 | 27.25 | 101 | 1.76 | 99 |
| 2000 | 15.1 | 102 | 12.53 | 103 | 27.62 | 103 | 1.64 | 92 |
| 2001 | 15.2 | 103 | 12.67 | 104 | 27.88 | 104 | 1.44 | 81 |
| 2002 | 15.22 | 103 | 12.81 | 105 | 28.04 | 104 | 1.53 | 86 |
| 2003 | 15.41 | 104 | 12.91 | 106 | 28.32 | 105 | 1.48 | 83 |
| 2004 | 15.3 | 104 | 12.77 | 105 | 28.08 | 104 | 1.49 | 84 |
| 2009 | 15.32 | 104 | 12.95 | 107 | 28.27 | 105 | 1.58 | 89 |
