tag:theconversation.com,2011:/us/topics/sainsburys-37538/articlesSainsbury's – The Conversation2021-12-06T12:45:38Ztag:theconversation.com,2011:article/1731132021-12-06T12:45:38Z2021-12-06T12:45:38ZAmazon and Tesco’s checkout-free stores are a niche idea that won’t save the high street<p>There have never been so many different ways to shop for groceries. The biggest chains offer customers a choice of vast superstores, smaller branches, and online options to buy from home. </p>
<p>Now some of the UK’s best known supermarkets are experimenting with <a href="https://www.ft.com/content/10523ec5-c470-4800-ba21-839487042210">checkout-free stores</a>. Following Amazon’s lead (it launched in London in March 2021), Sainsbury’s (Pick & Go) and Tesco (GetGo) have recently opened branches which offer a streamlined shopping experience. </p>
<p>The stores are kitted out with machine learning, camera and shelf technology (with weight sensors and motion detectors) to track which items consumers pick up and take with them. There is no need for any scanning or interaction. You simply choose what you need and leave. </p>
<p>This sounds extremely convenient. And for the supermarkets it is a business model which will save on staff costs, and provide valuable information about shoppers and their habits (data which could potentially be made available as another source of revenue). </p>
<p>But is the checkout-free concept necessarily good for consumers and high streets? </p>
<p>It certainly provides what some consider to be <a href="https://www.matt-watkinson.com/the-ten-principles-behind-great-customer-experiences">two key principles</a> of creating a good <a href="https://www.accenture.com/gb-en/insights/interactive/retail-customer-experience-reimagined">customer experience</a>: perceived autonomy and ease.</p>
<p>These modern stores are designed to make people feel that the shopping experience requires less effort, without the need to go through the processes of queuing, placing (or scanning) items at the till machine and making a payment. </p>
<p><a href="https://www.sciencedirect.com/science/article/abs/pii/S0022435900000452?via%3Dihub">Research suggests</a> that when people are able to spend less time and effort in a shop, they may consider this a sign of excellent customer service, making them more likely to return. </p>
<p>But there are elements of checkout-free shopping which are not so customer friendly. To begin with, it is a niche concept which will only appeal to shoppers who are technologically adept. It relies on consumers having access to a smartphone and a particular app, registering payment details, and sometimes using a QR code to enter and leave.</p>
<p>These expectations demand a level of <a href="https://www.sipotra.it/wp-content/uploads/2016/12/The-Digital-Competence-Framework-for-Consumers.pdf">digital competence</a> which is by no means universal, and immediately excludes those, like my elderly mother-in-law, who are more technologically challenged. </p>
<figure class="align-center ">
<img alt="An advert for checkout-free shopping." src="https://images.theconversation.com/files/435611/original/file-20211203-17-12zzn4m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/435611/original/file-20211203-17-12zzn4m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/435611/original/file-20211203-17-12zzn4m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/435611/original/file-20211203-17-12zzn4m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/435611/original/file-20211203-17-12zzn4m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/435611/original/file-20211203-17-12zzn4m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/435611/original/file-20211203-17-12zzn4m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">As advertised by Amazon.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/amazon-go-convenience-store-no-lines-1574790205">Shutterstock/Michael Vi</a></span>
</figcaption>
</figure>
<p>They may also be less than ideal for <a href="https://www.gov.uk/government/publications/vulnerable-consumers/consumer-vulnerability-in-digital-markets-summary-of-stakeholder-roundtable">vulnerable consumers</a>, who have <a href="https://doi.org/10.1108/JSM-05-2017-0156">accesibility issues</a> related to physical mobility, vision or hearing. If these customers are excluded from this experiment in autonomy, then it becomes an exclusive service. So these stores appear not to be be designed with all consumers in mind. </p>
<h2>Check-out free for all</h2>
<p>It is also worth asking whether the checkout-free store offers an “authentic” shopping experience. Or is it just a slightly different version of <a href="https://theconversation.com/shopping-goes-mobile-13932">mobile shopping</a> which happens to take place in a building? </p>
<p><a href="https://doi.org/10.1108/IJRDM-10-2020-0412">Our research</a> suggests that the convenience of checkout-free stores, like online shopping, will have some appeal. But customers are less likely to enjoy and value the experience because it provides little in the way of discovery (finding new products) or connecting with other people. </p>
<p><a href="https://theconversation.com/five-ways-to-save-britains-struggling-high-streets-90362">Others have suggested</a> that to save struggling high streets, the shopping experience needs to be fun and socially engaging.</p>
<p>For this reason, checkout-free stores are unlikely to be a development which will draw people back to high streets. While convenience has its place, it does not inspire people to spend more time and money in neighbouring outlets in the same way that social shopping – spending time browsing with friends – does. </p>
<p>Instead, the check-out free supermarket will appeal to consumers who prioritise speed and efficiency, like visiting a drive-through take-away. It will be appreciated by those who simply want to top up on a few grocery items on their journey between home and office, when there’s no time to lose, and are comfortable with the requisite technology. But they will not be on everyone’s shopping list.</p><img src="https://counter.theconversation.com/content/173113/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kokho Jason Sit is affiliated with The Chartered Institute of Marketing.</span></em></p>Sainsbury’s is also experimenting with the till-free technology.Kokho Jason Sit, Senior Lecturer in Marketing, University of PortsmouthLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1160832019-04-29T12:14:20Z2019-04-29T12:14:20ZShopping trends mean blocking the big Sainsbury’s-Asda merger may not protect customers<figure><img src="https://images.theconversation.com/files/271449/original/file-20190429-194620-ka977c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Staying separate.</span> <span class="attribution"><span class="source">John David Photography / Shutterstock.com</span></span></figcaption></figure><p>The proposed merger of supermarkets Sainsbury’s and Asda is now off the table as the regulator <a href="https://theconversation.com/sainsburys-asda-merger-failed-big-bet-has-serious-strategic-consequences-116012">has ruled against it</a>, saying it would lead to higher prices for consumers. The merger would have created the largest supermarket in the UK in an already concentrated market where the market shares of the top four players add up to <a href="https://www.kantarworldpanel.com/en/grocery-market-share/great-britain">a whopping 68% of the total market</a>. </p>
<p>Under any other circumstance, it would have made a lot of sense to block a merger of this scale. But given the conditions at this time in food retail, stopping this deal won’t necessarily protect customers. There is fierce competition in the industry, ruling out the possibility of increasing prices.</p>
<p>Supermarkets have been hit by <a href="https://www.about.sainsburys.co.uk/investors/annual-report-2018">multiple disruptions</a> in the past couple of decades, and the traditional way of shopping for groceries in big stores has been declining, replaced by discount stores, convenience stores, and online shopping.</p>
<p>The biggest challenge comes from the new discounters like Aldi and Lidl. They put even the traditional UK discounters such as Wal-Mart’s Asda to shame with their hard-to-match low prices. The Aldi phenomenon has swept through the UK. It has opened numerous new stores since 1990, luring customers with aggressive prices, good quality products, and advertising that trumpets blunt price comparisons. </p>
<p>Among several factors that drive Aldi’s cost advantage is its no-frills, small store format, stocked mostly with own brand products. This gives the company the ability to work with and negotiate the best prices <a href="https://www.npr.org/sections/thesalt/2017/09/27/552384150/discount-grocers-aldi-and-lidl-give-u-s-stores-a-run-for-their-money?t=1556369139095">from their long-term suppliers</a>. Further savings are made by having customers do some of the work, such as opening boxes and taking carts back. And the product selection is very limited, with one or two choices for most products. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/271448/original/file-20190429-194606-4jdfll.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/271448/original/file-20190429-194606-4jdfll.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/271448/original/file-20190429-194606-4jdfll.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/271448/original/file-20190429-194606-4jdfll.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/271448/original/file-20190429-194606-4jdfll.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/271448/original/file-20190429-194606-4jdfll.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/271448/original/file-20190429-194606-4jdfll.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Supermarket disruptors.</span>
<span class="attribution"><span class="source">JFs Pic S. T / Shutterstock.com</span></span>
</figcaption>
</figure>
<p>These days, Aldi and Lidl are no longer underdogs. Together, they command over 13% of the market, as the <a href="https://www.kantarworldpanel.com/en/grocery-market-share/great-britain">fifth- and seventh-biggest players in UK</a>. Their model is the antithesis of the mainstream supermarket business model, which is based on a large variety of products, alternative brand choices, customer service, and in some cases store ambience and experience. </p>
<h2>Changing habits</h2>
<p>While the traditional supermarket model hasn’t entirely lost its appeal, consumer expectations and shopping habits have changed in multiple ways. Today’s consumers prefer lower prices, but they also want high quality fresh produce and other products. They value convenience in shopping, but they also shop in multiple stores to get what they want. Increasing numbers are shopping online. But supermarkets still haven’t figured out the best way to respond to these disruptive changes. </p>
<p>When customers shop more locally and frequently, the large-format supermarkets outside of town and city centres no longer generate enough sales. The grocery business is a high-volume, low-margin trade where steady customer traffic matters. Without high sales volume and fast inventory turnover, supermarkets cannot cover their “fixed costs” like rent, technology and staff. Opening new convenience stores helps to reclaim the lost business but doesn’t compensate for diminishing large store margins. </p>
<p>When it comes to the steady growth of online food shopping, all major players offer this, but they often rely on the click-and-collect method, which has marginal profitability due to added labour costs. Highly-automated fulfilment centres are more efficient, but they require substantial investments upfront. </p>
<p>Adding up the loss of sales to convenience, discounters, and online, many traditional UK food stores are suffering from reduced profitability. </p>
<h2>Bold and risky</h2>
<p>Enter the Sainsbury’s-Asda merger. This was a <a href="https://theconversation.com/sainsburys-and-asda-merger-its-all-about-market-share-95822">bold and risky move</a> as it would have increased both companies’ exposure to retail disruption. But it would have also given the merged companies a stronger base to respond to discounters and the online shopping trend.</p>
<p>Food manufacturing firms have much <a href="https://www.forbes.com/sites/sageworks/2017/09/24/these-industries-generate-the-lowest-profit-margins/#6e91c608f49d">better profit margins</a> than supermarkets. So increasing their power against key suppliers is one way supermarkets are trying to survive. While this may not have enabled either company to match Aldi-Lidl prices, they could have narrowed the gap.</p>
<p>Sainsbury’s also planned to leverage Asda stores for Argos pickups, a catalogue retailer owned by Sainsbury’s. This would have helped them better use their big stores, while expanding the reach of Argos. Plus, a combined response to online sales would have created significant economies of scale when investing in the necessary infrastructure to meet customer demand for online shopping.</p>
<p>So blocking the Sainsbury’s-Asda deal may strengthen the hands of Aldi and Lidl. Perhaps that’s good news as they can grow and make their low prices available to more customers. But there may be other implications. </p>
<p>Customers today enjoy having the luxury of shopping at different types of stores. A rapid rise of new discounters and online models may not allow enough time for supermarkets to adapt and traditional store options may fade away as a result, reducing options for consumers in the future. </p>
<p>Even if they survive, an increasingly singular focus on price competitiveness and cost cutting can have other consequences. It can harm farmers and food producers with little power to negotiate, leading to the loss of small and midsize farms or putting added pressure on the environment and farm worker health. Plus, food quality may suffer under pressure to rapidly cut costs. </p>
<p>Aldi and Lidl have managed to achieve good environmental standards along with efficiency by working with their suppliers over a long period of a time, albeit for a relatively narrow range of products. If other players are pushed to match the cost advantages for a substantially larger range of products in a short time period, compromises in other important areas can happen. So more competition may not turn out to be better for consumers after all.</p><img src="https://counter.theconversation.com/content/116083/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Yasemin Kor is affiliated with Cambridge Global Food Security Initiative. </span></em></p>Supermarkets have been hit by multiple disruptions in the past couple of decades and they are struggling to survive.Yasemin Kor, Beckwith Professor of Management Studies, Cambridge Judge Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1160122019-04-25T15:25:22Z2019-04-25T15:25:22ZSainsbury’s-Asda merger: failed big bet has serious strategic consequences<figure><img src="https://images.theconversation.com/files/270969/original/file-20190425-121245-1ufxku2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The two supermarkets will not become one.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/flint-uk-may-1-2018-asda-1081695164?src=eIrzcUMDvdQTjTtFwY3zuA-1-0">John David Photography / Shutterstock.com</a></span></figcaption></figure><p>The problem with big bets is that sometimes they don’t pay off. While a lot of attention is often paid to successful mergers and acquisitions (M&A) deals, little attention is paid to the dark side of M&A – what happens to a company’s strategy when a deal fails. The UK competition watchdog’s <a href="https://www.bbc.co.uk/news/business-48048596">decision</a> to block Sainsbury and Asda from merging will have big consequences for both supermarkets.</p>
<p>The proposed £10 billion merger was designed to solve a pressing strategic problem in the UK: an increasingly competitive industry where the winners are aggressive discounters (Aldi and Lidl) and, to some extent, the premium niche competitors like Waitrose and M&S. For the giant supermarkets, Sainsbury’s, Tesco, Morrisons, Asda, the recent past has been marked by heroic struggles to achieve some profitability and find growth in a slow market. </p>
<p>With the centre ground under constant performance pressure, Sainsbury’s and Asda’s decision to merge made perfect sense. It might also have provided some protection against current threats presented by new entrant Amazon. Through the merger they would be able to significantly reduce their costs, allowing them, in theory, to pass on price reductions to consumers. But the regulator took the view that the combined group, with around 30% of the market, might wield monopolistic power that could lead to an increase in prices and reduced customer choice.</p>
<h2>What next?</h2>
<p>Following the regulator’s decision, Sainsbury’s share price fell 7%. But when the merger was originally announced, Sainsbury’s share price <a href="https://www.about.sainsburys.co.uk/investors/share-price-information/chart">soared to 314p</a>. This means that the share price fall to 212p is a 38% reduction. The market is clearly judging the deal a failure. And, as the share price is below Sainsbury’s pre-deal share price of 266p, the market is also judging Sainsbury’s to be in a worse strategic position than it was before merger talks. </p>
<p>The first strategic problem is that Mike Coupe, Sainsbury’s CEO, has spent a lot of time and effort convincing the markets that the merger was the best way forwards for the company. Now this strategy is in ruins, there is a problem that arguing for another strategy will most likely seem second best, so garnering investor support could be difficult. </p>
<p>Big deals need big commitment from CEOs. Unfortunately, Coupe will have suffered reputational damage by failing to achieve the deal, and an unfortunate media slip following news of the merger (he was <a href="https://www.youtube.com/watch?v=I3q-zBLZEW4">caught singing</a> “We’re in the money”), now seems like hubris.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/I3q-zBLZEW4?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
</figure>
<p>Nonetheless, from a strategic point of view, Sainsbury’s could look for other M&A deal opportunities in the supermarket sector, using the same logic of efficiency gains and market power benefits. The main problem though is that there are no large targets available. And, even if they might become available in some shape or form, Sainsbury’s would most likely run into regulatory constraints again and also face significant restructuring costs. </p>
<p>Sainsbury’s could make small acquisitions, but due to its size, these deals would make next to no difference to the group’s overall performance. Even if the small acquisitions are innovative players, it would still take a long time before they really could make a significant impression. </p>
<p>Another strategic option is to grow overseas through a major cross-border M&A. But the supermarkets have generally had rather poor experiences with international expansion, with many <a href="https://www.theguardian.com/business/2013/aug/11/tesco-retreat-overseas-rotten-returns">destroying value</a>. Other alliances might help reduce the basic problem of reducing costs, but it is difficult to see how they can consistently close the gap with discounters. It might also consider buying outside of the industry as a defensive hedge to change, but this is risky territory indeed.</p>
<p>Sainsbury’s big size means it needs to do something bold. But, having had its deal rejected, there is a risk that it will revert to incrementalism. This may be too little too late and would not really address the pressures of a squeezed supply chain, consumers requiring even lower prices and major new entrants forcing the pace of change. Plus, there’s also a risk that Asda might be acquired by another competitor (it is owned by Walmart so its future will depend on the US giant’s plans). This would further weaken Sainsbury’s strategic position.</p>
<p>While there are always opportunities for further cost reductions, Sainsbury is already well run so these gains will be marginal, hard to achieve and, if pursued too aggressively, run the risk of changing the nature of the business as it is. Rather than being whittled away by a thousand cuts, Sainsbury’s may alternatively look to transform itself rather than trying to preserve its current way of competing. </p>
<p>The industry as a whole fears Amazon taking over. Just the announcement of Amazon entering the industry, <a href="https://theconversation.com/will-amazon-do-to-the-grocery-industry-what-it-did-to-ecommerce-96874">when it bought Whole Foods in 2017</a>, caused share prices to fall. Maybe in the face of the revolution in digital strategy, where the largest operators in traditional industries such as accommodation (Airbnb), taxis (Uber), retail (Amazon), don’t own large amounts of assets, Sainsbury’s should rethink the supermarket business. Perhaps its largest assets – the megastores and car parks – are also its biggest source of rigidity. Responding more rapidly to a changing environment and staying in tune with changing customer demands may require a different sort of business model.</p><img src="https://counter.theconversation.com/content/116012/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Duncan Angwin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Sainsbury’s faces tough times ahead following the blocking of its merger with Asda.Duncan Angwin, Sir Roland Smith Professor in Strategic Management, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/958222018-05-01T11:00:03Z2018-05-01T11:00:03ZSainsbury’s and Asda merger: it’s all about market share<figure><img src="https://images.theconversation.com/files/217020/original/file-20180501-135810-1vxqigp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Ceri Breeze / Shutterstock.com</span></span></figcaption></figure><p>British retailers Sainsbury’s and Asda have agreed to a £13 billion merger. They plan to keep their brands separate so retailers may not notice a difference. But, together, the two will be the biggest player in the grocery market and the move would mark a significant shift for the supermarket industry, which faces a number of challenges. </p>
<p>This merger is all about market share. It follows hot on the heels of supermarket giant Tesco’s £4 billion takeover of Booker, the country’s largest wholesaler <a href="https://www.telegraph.co.uk/business/2018/03/05/tesco-completes-4bn-takeover-booker/">in March 2018</a>. This created a food and drink powerhouse with a market capitalisation of nearly £20 billion. It put Tesco way ahead of its rivals in terms of revenue and market share and clearly acted as a wake-up call to them. Then there is the growing threat of Amazon, which <a href="https://theconversation.com/amazon-dives-into-groceries-with-whole-foods-five-questions-answered-79638">bought Whole Foods last year</a> and is <a href="https://www.theguardian.com/business/2016/nov/16/morrisons-expands-amazon-deal-offering-delivery-in-an-hour">working with supermarket Morrisons</a> to deliver in parts of the UK.</p>
<p>The market has seen rapid growth and changes over the last decade and organic growth for either Sainsbury’s or Asda would be very difficult. Both businesses suffer from a legacy of large out of town stores, which are less popular with consumers. They both need to up their games to improve their products, online services, and capitalise on how and where people like to shop. </p>
<p>The obvious solution is to grow their customer base and revenues, while cutting their margins, through merging. Together Sainsbury’s and Asda have more than 31.4% of the grocery market, making them the market leaders. Their combined revenues are in the <a href="https://news.sky.com/story/sainsburys-and-asda-agree-to-join-forces-11353408">region of £51 billion</a> (based on 2017 figures).</p>
<p>Meanwhile, Walmart, which owns Asda, can let go of its interest in the UK market and focus on its base in the US which is <a href="https://www.retaildive.com/news/walmart-is-streamlining-us-operations/504828/">facing various challenges</a>. Walmart will receive nearly £3 billion in cash and 42% of the combined business, in return for selling Asda. </p>
<h2>Benefits for all?</h2>
<p>Like any merger and acquisition, this will bring strength to the balance sheet through capitalising on the strengths of both businesses. Asda is much more popular in the north of the country, whereas Sainsbury’s is more popular in the south. </p>
<p>Argos, which was bought by Sainsbury’s in 2016, will also benefit. The catalogue retail chain has a strong online offering, which should help Asda in the same way that it has already helped Sainsbury’s. In turn, Asda, which is also big in non-food products, will play host to Argos concessions in its stores.</p>
<p>The merger would give the group more than 2,800 stores. Executives <a href="https://www.telegraph.co.uk/business/2018/04/30/sainsburys-asda-promise-price-cuts-no-store-closures-mega-merger/">have said</a> that none will be shut as a result of the merger but they are planning to save £500m through “operational efficiencies” and by opening Argos concessions in Asda stores. This means that suppliers are likely to be effected.</p>
<p>Customers, however, are likely to benefit from this and see lower prices, more choice and improvements both in store and online. Sainsbury’s CEO, Mike Coupe, who will lead the combined group, <a href="http://www.bbc.co.uk/news/business-43945254">said</a> that prices of common products should drop by around 10%. </p>
<p>By joining forces with Asda, Sainsbury’s will be hoping to compete with the likes of Aldi and Lidl, which have changed the game for supermarkets in recent years. The combined business will be able to up their game on pricing of common products, negotiate for lower pricing with competitive suppliers and improve their online business. </p>
<p>Coupe has <a href="https://www.telegraph.co.uk/business/2018/04/30/sainsburys-boss-mike-coupe-man-become-king-uk-retail/">vast experience in the industry</a> so is well positioned to lead the new supermarket giant. He has experience at Unilever, Tesco, Iceland and Asda so understands the culture of both firms. And he seems confident of the new giant’s prospects.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"991004380018167808"}"></div></p>
<p>But the deal is not yet done. Because of the size of the two supermarkets, the merger requires regulatory approval from the Competition and Markets Authority (CMA). This could be a challenge as both business are closely related which would create a monopoly over the grocery sales. It may well come with demands to close stores. By comparison, the Tesco-Booker deal was <a href="https://www.independent.co.uk/news/business/news/tesco-booker-takeover-deal-cma-competition-regulator-supermarket-wholesale-a8119826.html">approved by the CMA</a>, which pointed out that the two companies did not compete “head-to-head” in most of their activities.</p>
<p>The competition in the retail sector is as fierce as ever. The merger between Sainsbury’s and Asda shows the need to stay competitive – especially following Tesco’s growth and Amazon moving into the industry. To stay afloat, businesses must lower their prices, keep loyalty, improve convenience and innovate to better attract and retain their customers. The latest merger follows industry trends and is a clear indication that other deals are likely as stores seek to keep up with the market.</p><img src="https://counter.theconversation.com/content/95822/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Naaguesh Appadu does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Facing stiff competition, the obvious solution is for Sainsbury’s and Asda to grow their customer base and revenues, while cutting their margins, through a merger.Naaguesh Appadu, Research Fellow, M&A Research Centre, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/854972017-10-20T13:53:21Z2017-10-20T13:53:21ZTesco has shown it can do recovery but can it now keep pace?<figure><img src="https://images.theconversation.com/files/190057/original/file-20171012-6540-1lqexr2.jpg?ixlib=rb-1.1.0&rect=144%2C128%2C1900%2C1235&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/tescomedia/14967566046/in/dateposted/">Tesco PLC/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>When supermarket giant Tesco found itself in the <a href="https://theconversation.com/trolley-load-of-trouble-in-store-for-tesco-and-its-bean-counters-32008">grip of an accounting scandal</a> in 2014, it brought in <a href="https://www.theguardian.com/business/2014/jul/21/new-tesco-ceo-dave-lewis-profile">Dave Lewis</a>, an supermarket outsider as CEO, who the company believed could rally the group’s tumbling share price and aid a recovery. It helped that Lewis had been a rising star at Unilever, the shampoo-to-Marmite conglomerate, where he had already shown his ability to strengthen brands. </p>
<p>The question in 2014 was whether Lewis could transfer his skills into an industry where competition, relationships with supplier and customer needs are very different. Tesco probably didn’t have any choice. The company needed to distance itself from a <a href="https://www.sfo.gov.uk/cases/tesco-plc/">Serious Fraud Office investigation</a> into the overstatement of profits.</p>
<p>Lewis has ridden a recovery that was marked by more price-conscious consumers buying <a href="http://www.nielsen.com/uk/en/press-room/2014/uk-shoppers-turn-to-supermarkets-premium-own-brands.html">own-brand products</a>. But he also helped to accelerate it, with cost reductions and the <a href="https://www.tescoplc.com/media/264194/annual-report-2016.pdf">sale of peripheral businesses</a>. Tesco is now on a similar financial footing to direct competitors, Sainsbury’s and Marks & Spencer. Lewis is also challenging the discounters, Aldi and Lidl, in the all-important area of fresh food. </p>
<h2>Priced out</h2>
<p>While this has been going on, however, Tesco has put pressure on suppliers to keep prices down in an <a href="http://www.proactiveinvestors.co.uk/companies/news/179359/tesco-s-sales-rise-as-price-cuts-attract-customers-but-analysts-warn-inflation-may-hit-margins-179359.html">attempt to absorb</a> some of the 3% food inflation <a href="https://tringeconmics.com/united-kingdom/food-inflation/forecast">forecast for the UK</a>.</p>
<p>This is painful for suppliers and it might trigger a price war if competitors also seek to use profits to absorb food inflation, which <a href="http://www.cityam.com/269528/food-price-inflation-cools-retailers-act-protect-shoppers">they appear to be doing</a>. Either way, it seems like a temporary strategy or, if it persists in the long term, Tesco will reduce profitability for itself, M&S and Sainsbury’s. The alternative will be food price rises which drive more consumers to discounters.</p>
<p>Lewis needs some new sources for growth. In anticipation of increasing competition, Tesco’s <a href="http://www.independent.co.uk/news/business/news/booker-tesco-takeover-deal-complete-2018-wholesaler-competition-and-markets-authority-a7995996.html">acquisition of the wholesaler Booker</a> is designed to connect up the value chain and cut costs. And if Booker became exclusively or mainly a supplier to Tesco, that would reduce the options for about 5,000 small, local retailers under brands such as Londis and Budgens. That could help <a href="http://www.telegraph.co.uk/business/2017/10/05/tescos-booker-takeover-must-blocked-wholesalers-tell-watchdog/">drive customers towards Tesco</a>. </p>
<p>Competition is fierce in the UK, and so international markets provide a route to growth. Tesco, however, has had its fingers burned before. It <a href="https://www.theguardian.com/business/2012/dec/05/tesco-american-dream-retreat-us-fresh-easy">pulled out of the US</a> in 2013 after failing to make headway, and under Lewis, the recovery included some retrenchment which saw <a href="https://www.ft.com/content/5499cf8c-5266-11e7-bfb8-997009366969?mhq5j=e7">its activities in Thailand</a> canned. </p>
<p>Tesco says there <a href="http://uk.reuters.com/article/uk-tesco-south-korea/tesco-says-no-more-big-overseas-disposals-being-discussed-idUKKCN0RU2ET20150930">will be no more overseas disposals</a>, but British supermarkets are finding it difficult to make a go of foreign ventures; both <a href="https://www.theguardian.com/business/2013/aug/09/tesco-withdraws-brand-china-joint-venture">Tesco</a> and <a href="https://www.ft.com/content/33935a30-161e-11e7-80f4-13e067d5072c?mhq5j=e7">M&S</a> have stepped back from ventures in China. This means domestic competition is likely to intensify.</p>
<p>Is there room for improvement online, where Tesco was <a href="http://www.telegraph.co.uk/finance/markets/2788089/A-history-of-Tesco-The-rise-of-Britains-biggest-supermarket.html">a first mover in 2000</a>. However, the model is easily replicated and competition is emerging from all sides. Aldi set up its own delivery service <a href="http://www.independent.co.uk/news/business/news/aldi-launches-online-shopping-with-wine-delivery-service-a6822561.html">in 2016</a> and M&S has been <a href="https://theconversation.com/mands-delivers-but-is-it-too-late-79065">lining up its own offering</a> for this year.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/190060/original/file-20171012-31431-1gyze7f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/190060/original/file-20171012-31431-1gyze7f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/190060/original/file-20171012-31431-1gyze7f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=434&fit=crop&dpr=1 600w, https://images.theconversation.com/files/190060/original/file-20171012-31431-1gyze7f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=434&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/190060/original/file-20171012-31431-1gyze7f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=434&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/190060/original/file-20171012-31431-1gyze7f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=545&fit=crop&dpr=1 754w, https://images.theconversation.com/files/190060/original/file-20171012-31431-1gyze7f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=545&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/190060/original/file-20171012-31431-1gyze7f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=545&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Tills ringing.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/brizzlebornandbred/13619444923/in/photolist-mKvdtV">Paul Townsend/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<h2>Room for manoeuvre?</h2>
<p>So what issues does Lewis need to get his teeth into now? <a href="http://www.insider.co.uk/company-results-forecasts/tesco-bank-based-in-edinburgh-11286109">Tesco Bank</a> continues to <a href="https://www.tescoplc.com/media/392373/68336_tesco_ar_digital_interactive_250417.pdf">make some advances</a>, however the banking sector itself is becoming crowded as the <a href="https://theconversation.com/apple-pay-no-sure-thing-in-mobile-payments-race-58580">likes of Apple Pay</a> disrupt an already competitive sector. </p>
<p>The effort involved in making Tesco Bank succeed would be considerable and might be a distraction that will take time, focus and talent away from the supermarket business. Tesco Mobile, a <a href="https://www.tescomobile.com/about-us/">joint venture with O2</a>, could though consider a venture with one of the new banking entrants such as Google wallet.</p>
<p>Further cost reductions are dangerous. It leads Tesco into a different type of competition with discounters such as Aldi. Their business model is based on own brand labels, no-frills store design and efficiency. This may be difficult for Tesco to replicate. Tesco’s sheer size has already given it huge economies of scale, but the discounter model adds complexity for which managers are needed and so will increase inefficiency. The number of own-brand labels could go up, but big gains are limited as Tesco brings in so many products from so many different markets.</p>
<p>Another avenue to pursue is differentiation – the only problem is what form that should take. And if Tesco does come up with some distinct advantage, then how long will it last? Much that supermarkets do is readily replicated. The Tesco innovation of one-hour delivery times <a href="http://www.mirror.co.uk/news/business/now-tesco-offering-one-hour-10476408">for certain products</a>, is now being <a href="https://www.retailgazette.co.uk/blog/2017/09/marks-spencer-trial-one-hour-delivery-service/">trialled by M&S</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/190596/original/file-20171017-30406-1vw5i9x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/190596/original/file-20171017-30406-1vw5i9x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/190596/original/file-20171017-30406-1vw5i9x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/190596/original/file-20171017-30406-1vw5i9x.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/190596/original/file-20171017-30406-1vw5i9x.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/190596/original/file-20171017-30406-1vw5i9x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/190596/original/file-20171017-30406-1vw5i9x.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/190596/original/file-20171017-30406-1vw5i9x.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Hot on Tesco’s heels.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/karen_roe/7754159354/in/photolist-cPd6qE-cPdcm9-jYQKna-fpo2tE-cPdgch-cPdBry-cPd3Py-cPdAf3-cPdm4b-cPd2a1-cPd6UQ-cPdQzw-cPdDFJ-cPdL3s-cPdr8d-cPdiQE-cPdosA-cPdfWU-cPddSd-cPdcS1-cPd1HW-cPdkBS-cPdEib-cPdaWf-cPd9PY-cPdryq-cPd8LQ-cPcZDA-cPdfmY-cPdjgo-cPdDcJ-cPdam9-cPd7PE-63x6gv-nmHqgd-3ggYHf-6auXQM-4qRP4d-71dZ3m-cPdq5W-cPdnuA-6RAdLh-cPdgH1-cPd4Lw-cPdkc7-cPdyZq-cPddpu-cPd4m1-cPd1bU-cPd2Jq">Karen Roe/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>It looks like a tricky road from here for Lewis, marked by little certainty about the nature of the competition. Amazon.com is experimenting <a href="https://tamebay.com/2017/10/amazon-fresh-expands-uk-offering-booths-deal.html">with market entry</a> and would bring a huge capacity to analyse consumer data to gain an edge – the very thing that helped Tesco become the largest supermarket in the UK through judicious use of loyalty programs. </p>
<p>It also remains difficult to predict the nature of supermarket consumers. Discounters are still on the march – Aldi’s market share <a href="https://www.managementtoday.co.uk/why-aldi-lidl-will-keep-growing/article/1386497">rose 13.5%</a> in 2016, while the overall market <a href="https://www.statista.com/statistics/375318/grocery-market-percentage-growth-great-britain-uk/">grew by just 0.5% </a>. Continued caution around spending would tend to favour them.</p>
<p>Was it luck or skill that helped Lewis to deliver a recovery for a company that was in a bad way both financially and ethically? Either way, he will probably need both from hereon in. His <a href="https://www.ft.com/content/4e5c7f03-dd55-3194-bcd1-942d17fd90b0">symbolic move to reinstate the dividend</a> will cheer investors and staff, but in some ways recovery is the easy bit. It is keeping pace in a brutal food retail sector that will really set him apart.</p><img src="https://counter.theconversation.com/content/85497/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Harminder Singh does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Dave Lewis has dragged the supermarket clear of an accounting scandal. Now for the hard bit …Harminder Singh, Senior Teaching Fellow, Strategy & Business, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/755082017-04-05T12:42:02Z2017-04-05T12:42:02ZWhy there’s no such thing as a free coffee – even at high-end supermarkets<figure><img src="https://images.theconversation.com/files/163627/original/image-20170403-21950-978bzm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Coffee time.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/stirling-scotland-february-03-2017-waitrose-571474210?src=Eaw0jFd3RsmxjJaYiEzqXQ-1-5">Shutterstock</a></span></figcaption></figure><p>The two most powerful words in marketing are “free” and “sex”. Nothing grabs the attention like an offer that includes one or the other in the strapline – although no one has yet linked the two together in a promotional campaign. Such is their power to elicit a response, both words are handled with kid gloves by the <a href="https://www.asa.org.uk">advertising regulators</a>, whose job is to issue guidelines about what the industry can and can’t get away with.</p>
<p>A “free” offer has to be demonstrably free, even though in marketing terms what passes for free is perhaps not as obvious as it is to the rest of the world. So called “loyalty programmes” are often cited as examples of free stuff being given away in return for customer fidelity. But “free” in this case <a href="https://theconversation.com/why-free-will-eventually-cost-you-31336">comes at a price</a>. The data that companies gather about people’s buying habits from <a href="https://theconversation.com/inside-the-massive-market-for-loyalty-cards-and-frequent-flyer-miles-51329">schemes such as Tesco’s Clubcard</a> more than outweigh the cost of any rewards.</p>
<p>Indeed, Tesco arguably achieved its position as the UK’s largest retailer on the back of its hugely successful loyalty scheme. Such was its success, loyalty schemes are now the “must-have” accessory for any upwardly mobile and ambitious retailer.</p>
<p>By any definition, the British supermarket <a href="http://www.waitrose.com">Waitrose</a> is a hugely successful brand. Over the past 20 years it has gone from being a niche grocery store to a leader in the premium supermarket sector. The success was based on a very clear understanding of their customers and the values of the brand – refined undoubtedly by the introduction of the “myWaitrose” loyalty card in 2011. </p>
<p>In keeping with the aspirational nature of their targeted demographic, myWaitose differed from supermarket loyalty schemes like Tesco Clubcard and Nectar by giving cardholders access to exclusive competitions and offers instead of allowing them to collect points. It later began to give cardholders 10% off selected products, as well as free hot drinks in store. And, as the company has <a href="http://www.dailymail.co.uk/news/article-4374834/Shoppers-fury-Waitrose-changes-free-coffee-rule.html">recently discovered</a>, it is very easy to give things away – but much less easy to take them back again.</p>
<p>The problem with “free” promotions is that they can quickly lose their intrinsic value. Consumers start to look at them in a different way and see them as a right, rather than a reward. Companies always need to be mindful of the way their marketing activities are perceived, and clearly Waitrose came to believe that the offer of a free hot drink needed a bit of repositioning. </p>
<p>Perhaps it was that they felt too many people were taking advantage and that the hurdle of paying for something would deter some of that behaviour. However, there is nothing to suggest that Waitrose was heading for a <a href="http://www.telegraph.co.uk/finance/newsbysector/transport/3047854/Terminal-5-joins-the-list-of-top-PR-blunders.html">Hoover-style promotional fiasco</a>, where thousands took advantage of an offer too good to be true. Most people will still see it as a very good offer, but perhaps look at it in a slightly different way.</p>
<p>Waitrose has found to its (slight) cost that you mess with your loyalty scheme at your peril. Changes to the myWaitrose programme apparently created uproar among some of its customers. At least, that is the <a href="http://www.telegraph.co.uk/news/2017/03/21/customers-dismayed-waitrose-curbs-free-coffee-stores/">story the newspapers</a> have been promoting since Waitrose announced it would be “refining” its free tea and coffee benefits from the beginning of April 2017.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"844308287520673794"}"></div></p>
<p>Now myWaitrose members will be asked to confirm they have made a purchase before picking up their “free” hot beverage. True, it means that the drinks will no longer be free, but thanks to social media, Waitrose’s indefatigable members have already worked out that because there is no minimum spend requirement, it is possible to spend just a few pence in-store and still qualify for a free drink.</p>
<h2>Wake up and smell the free drink</h2>
<p>So is this just a storm in a teacup? And will it harm the Waitrose brand? First, it appears that the media were far more interested in creating the <a href="http://www.telegraph.co.uk/news/2017/03/21/customers-dismayed-waitrose-curbs-free-coffee-stores/">resulting uproar</a> than the members were. A quick scan online suggests that a few die-hard Tweeters were outraged by Waitrose’s decision, but the majority were tweeting about how to buy a mushroom for three pence and still qualify for a coffee. </p>
<p>And will it harm Waitrose the brand? Unquestionably not. Brands such as Waitrose are not built through one-off promotions. They are created by building long term emotional bonds with their customers. So long as the company continues to provide quality, choice and a clear value proposition that aligns with their customers, there is no reason to say it won’t keep on growing.</p>
<p>But one word of caution. Brands are built on trust and once that trust is lost, it is very difficult to win it back. The market is littered with companies that lost the trust of their customers (<a href="http://www.telegraph.co.uk/finance/newsbysector/transport/3047854/Terminal-5-joins-the-list-of-top-PR-blunders.html">Hoover and Ratners</a> to name but two) because they misunderstood that important message. “Refining” the free beverage offer will not harm Waitrose’s hard won reputation, but it should remind even the most esteemed brands that once the customer has developed an expectation, it can be tricky to take that expectation away.</p><img src="https://counter.theconversation.com/content/75508/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard West does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Waitrose has withdrawn its free coffee offer to loyalty cardholders – but on what grounds?Richard West, Senior Lecturer in Marketing, University of WestminsterLicensed as Creative Commons – attribution, no derivatives.