We all know that our spending changes during the Christmas period: namely we spend a lot more than during the rest of the year. This applies across the board – we buy more clothes, food and drink, even though each day, we can generally only wear, eat and drink the same amount as usual! This has some interesting points from a behavioural economics stance, but here I’m going to think about the impact of this on some key retailers.
Marks & Spencer have previously made headlines for the wrong reasons: poor sales on clothes and the need for serious restructuring of its stores, target audience and marketing in order for this long-standing retailer to remain current and competitive. Although sales were expected to rise in the Christmas period, they did significantly better than expected, with sales growth of 2.3%, above the expected 0.5%. More encouragingly, this growth was not just in food, but in clothing and homeware as well.
One of the key reasons given for this above-expected improvement in sales was the conveniently timed Christmas, falling on a Sunday and hence giving extra shopping days. M&S have said that this certainly helped with their Christmas trading. Although this was good for Q4 trading, the timing will not play ball for Easter and they are expecting a negative effective during that trading period. Some analysts have said that despite the growth being boosted by the timing of Christmas, there were still signs of a change in fortunes. Bryan Roberts from TCC Global said:
“It might be the sign of some green shoots in that part of the business.”
This is consistent with the Chief Executive, Steve Rowe’s comments that despite the timing of Christmas adding around 1.5% to clothing and home sales growth, the recovery was also due to “better ranges, better availability and better prices”.
It appears as though many other retailers have experienced positive growth in Christmas sales, with the John Lewis Partnership seeing like-for-like sales growth of 2.7%, with Waitrose at a 2.8% rise.
The other interesting area is supermarkets. Waitrose and M&S are certainly competitors in the food industry, but at the higher end. If we consider the mid-range supermarkets (Asda, Morrisons, Sainsbury’s and Tesco), they have also performed, as a whole, fairly well. The low-cost Aldi and Lidl have been causing havoc for these supermarket chains, but the Christmas period seemed to prove fruitful for them.
Tesco saw UK like-for-like sales up by 1.8%, which showed significant progress in light of previously difficult trading periods with the emergence of the low-cost chains. Q$ was its better quarter of sales growth for over five years. One of the key drivers of this growth is fresh food sales and its Chief Executive, Dave Lewis said “we are very encouraged by the sustained strong progress that we are making across the group.” However, despite these positive numbers, Tesco only really met market expectation, rather than surpassing them as Morrison, Sainsbury’s and Marks & Spencer did.
Perhaps the stand-out performance came from Morrisons, with its best Christmas performance for seven years. Another casualty of the low-cost competitors, it has been making a recovery and Q4 of 2016 demonstrated this beyond doubt. Like-for-like sales for the nine weeks to the start of 2017 were up by 2.9%, with growth in both food and drink and clothing.
Morrisons has been on a long and painful journey, with significant reorganisation of its stores and management. While this has created problems, it does appear to be working.
We also saw a general move up to the more premium own-brands and this again benefited all supermarkets. Morrisons Chief Executive, David Potts said:
“We are delighted to have found our mojo … Every year does bring its challenges, but so far we haven’t seen any change in consumer sentiment. Customers splashed out over Christmas and wanted to trade up … We are becoming more relevant to more people as we turn the company around.”
So it seems to be success all round for traders over the Christmas period and that, in many cases, this has been a reversal of fortunes. The question now is whether or not this will continue with the uncertainty over Brexit and the economy.
Articles
M&S beats Christmas sales forecast in clothing and homeware BBC News (12/1/17)
Marks & Spencer reports long-awaited rise in clothing sales The Telegraph, Ashley Armstrong (12/1/17)
Marks and Spencer reveals signs of growth in clothing business Financial Times, Mark Vandevelde (12/1/17)
Tesco’s festive sales lifted by fresh food The Telegraph, Ashley Armstrong (12/01/17)
Tesco caps year of recovery with solid Christmas Reuters, James Davey and Kate Holton (12/1/17)
Tesco, Marks & Spencer, Debenhams, John Lewis and co cheer strong Christmas trading Independent, Josie Cox and Zlata Rodionova (12/1/17)
Morrisons sees best Christmas performance for seven years BBC News (10/12/17)
Morrisons enjoys some ‘remarkable’ Christmas cheer’ The Guardian, Sarah butler and Angela Monaghan (10/1/17)
Record Christmas as Sainsbury’s ‘shows logic of Argos takeover’ The Guardian, Sarah Butler and Angela Monaghan (11/1/17)
Questions
- Why have the big four in the supermarket industry been under pressure over the past 2 years in terms of their sales, profits and market share?
- How have the changes that have been made by M&S’ Chief Executive helped to boost sales once more?
- Share prices for supermarkets have risen. Illustrate why this is on a demand and supply diagram. Why has Tesco, despite its performance, seen a fall in its share price?
- What are the key factors behind Morrison’s success?
- What type of market structure is the supermarket industry? Does this help to explain why the big four have faced so many challenges in recent times?
- If there has been a general increase in sales across all stores over the Christmas trading period, that goes beyond expectations, can we infer anything about customer tastes and their expectations about the future?
Most of us will have milk in our fridges – it’s a basic product consumed by the majority of people on a daily basis and hence a common feature of most shopping trolleys. As we saw in the post Got milk?, the low price of milk has been causing problems for farmers. This has caused one Morrisons store to take a different approach.
In the increasingly globalised world, British dairy farmers are no longer competing against each other. The global market place means that they are now facing growing competition from abroad and in this global world, supply exceeds demand. Even in the EU, the member states in 2015 are exceeding the milk production levels from 2014. In many markets, we wouldn’t be so concerned about production (or supply) rising, as demand can keep pace. However, in the market for milk, it’s not a product that you consume (that much) more of as your income rises. So, as the world gets richer, demand for milk is not increasing at the same pace as supply – demand in China has collapsed. This means that prices are being forced down. Adding to this global market place, we saw the European Union remove its quotas on milk production, thus boosting supply and Russian bans on imports.
The farmers themselves are in a tricky situation. They are often the small players in the supply chain, with prices being forced down by customers, supermarkets and milk processors. AHDB Dairy, the trade body, says that the average price of milk has decreased to just 23.66p per litre. According to leading industry experts this is well below the costs of production, suggested to be closer to 30p per litre. If these figures are even close to being accurate, then clearly dairy farmers’ costs of production per litre are no longer covered by the price they receive. Every litre of milk produced represents a loss.
The price that supermarkets pay to farmers for milk does vary, with some such as Marks and Spencer and Tesco ensuring that they pay farmers a price above cost. However, Morrisons in Bradford has adopted a new strategy and brand. 
Their new milk brand ‘Morrisons Milk for Farmers’ has been launched at a 23p price rise for every four pint bottle. The catch: they will become the first UK retailer where the 23p price hike goes directly to farmers. This represents 10 pence per litre of milk going directly back to the farmers that produce it. This is a bold strategy, but data and surveys do suggest a willingness to pay more from customers, if it means that dairy farmers get a fairer deal. The protests we have seen across the country have certainly helped to generate interest and created awareness of the difficulties that many farmers are facing. Rob Harrison from the NFU said:
“We are pleased that Morrisons has acknowledged the desperate situation that many dairy farmers still find themselves in and recognise that retailers have a big role to play in, helping customers to support the UK dairy sector…
…Research from Mintel revealed over half of people who drink cows milk, would be prepared to pay more than £1 for a four-pint bottle of milk, as long as it is dairy farmers that benefit. This new initiative will enable them to do just that. The 10p a litre extra will go directly back into the dairy sector will make a difference on farm.”
The interesting thing will be to observe the impact on sales following this 23p price rise. We would normally expect customers to look for the cheaper substitutes, but evidence does suggest that British consumers are willing to pay the price premium if it means helping British farmers. A similar strategy adopted for British Cheddar Cheese proved fruitful and over the coming weeks, we will see if the average consumer is willing to pay directly the dairy farmers. The following articles consider this topic.
Morrisons milk for farmers brand goes nationwide at £1.12 for four pints The Grocer, Carina Perkins (12/10/15)
Morrisons to create new milk brand for farmers BBC News (11/10/15)
Milk price row: farming union leaders meet Morrisons bosses The Guardian, Graham Ruddick (11/10/15)
Morrisons to sell new ‘Milk for farmers’ brand to support British dairy producers Independent, Loulla-Mae Eleftheriou-Smith (11/8/15)
Government to give one-off milk payment for dairy farmers as Morrisons launches premium milk brand City A.M., Catherine Neilan (12/10/15)
New Morrisons milk brand pays farmers more The Yorkshire Post (12/10/15)
Questions
- Using demand and supply analysis, explain which factors have caused the price of milk to fall.
- When incomes rise, the demand for milk does not really change. What does this suggest about the income elasticity of demand for milk and the type of product that it is?
- If prices rise and sales also rise, does this suggest that British milk has an upward sloping demand curve?
- If we do see little effect on the demand for milk following Morrisons 23p price rise, what conclusion can we come to about the price elasticity of demand?
- Why do supermarkets and milk processors have the power to force down prices paid to dairy farmers?
- What type of market structure do you think dairy farmers compete in?
- If dairy farmers are unable to sell a litre of milk for a higher price than it costs to produce, is it a sensible strategy for them to remain in the market?
Oligopoly is the most complex market structure, characterised by a few large firms which dominate the industry. Typically there are high barriers to entry and prices can be very sticky. However, perhaps the most important characteristic is interdependence. With this feature of the market, oligopolies, despite being dominated by a few big firms, can be the most competitive market structure.
There are many examples of oligopolies and one of the best is the supermarket industry. Dominated by the likes of Tesco, Morrisons and Asda, competition in terms of branding, product development and quality is constant, but so is price competition. 
During the recession, you could hardly watch a TV programme that included advert breaks without seeing one of the big four advertising their low prices.
However, in the past few years, the supermarket industry has seen competition grow even further and the big four are now facing competition from low-cost retailers, including Aldi and Lidl. This has led to falling sales and profits for the likes of Tesco and Morrisons.
Tesco, Morrisons, Sainsbury’s and Asda have all felt the emergence of discount retailers and have seen their customer numbers fall. All have reacted with rounds of price cuts and new deals, and this price war looks set to continue. Morrisons have just announced a 14% average price cut on 135 products to match earlier changes in pricing strategies by the other main competitors. As I’m writing this during the Algeria v. South Korea match, I have just seen an advert from Sainsbury’s, promoting their milk chocolate digestive biscuits, priced at £1. The advert explicitly states that they are ‘less than Morrisons’, where the price is £1.50. This was soon followed by another from Sainsbury’s saying that 
the Cif bathroom spray is £1.50, which is ‘less than Tesco’, priced at £2.75. I need say no more.
So, what is it about this industry which means it is so susceptible to price wars? Are all oligopolies like this? The following articles consider the supermarket industry and the price wars that have emerged. Think about this sector in terms of oligopoly power and consider the questions that follow.
Morrisons announces another round of price cuts/a> BBC News (22/6/14)
Tesco suffers worst sales for decades The Guardian, Sarah Butler and Sean Farrell (4/6/14)
Britain’s Morrisons to cut prices on 135 products Reuters (22/6/14)
Morrisons slashes more prices by up to 41pct The Telegraph, Scott Campbell (22/6/14)
Sainsbury’s and Netto in discount store tie-up BBC News (20/6/14)
Slow to respond, Tesco now pays the price Wall Street Journal, Peter Evans and Ese Erheriene (19/6/14)
One million fewer customer visits a week at Tesco The Guardian, Sean Farrell (3/6/14)
Asda only one of big four to grow share as Lidl achieves highest ever growth Retail Week, Nicola Harrison (3/6/14)
Will Asda shoot itself in the foot with in-store cost cutting? The Grocer, Alec Mattinson (28/5/14)
Tesco sales slide at record speed as discounters pile on the pressure Independent, Simon Neville (3/6/14)
Quester: Back J Sainsbury to prove doubters wrong The Telegraph, Graham Ruddick (11/6/14)
Questions
- What are the key characteristics of an oligopoly?
- How do the above characteristics explain the conduct of firms in an oligopoly? How relevant is this to the supermarket industry?
- In many oligopolies, prices are sticky. Why is it that in the supermarket industry price wars break out?
- Is the kinked demand curve a relevant model to use when talking about the supermarket industry?
- What other industries fit into the category of an oligopoly? Is the kinked demand curve model relevant in these industries?
- Would there be an incentive for the big 4 supermarkets to collude and fix price? Explain your answer.
- Interdependence is the key characteristic in an oligopoly. Can this explain the behaviour of the supermarkets?
- Given that oligopolies are characterised by high barriers to entry, how is that Aldi and Lidl have been able to compete with them?
The supermarket industry is a classic example of an oligopoly. A market dominated by a few large companies, which is highly competitive and requires the companies to think about the reactions of the other competitors whenever a decision is made. Throughout the credit crunch, price cutting was the order of the day, as the big four tried to maintain market share and not lose customers to the low cost Aldi and Lidl. Morrisons, however, has found itself in exactly that position and is now looking to restructure to return to profitability.
Morrisons is well known for its fresh food, but it seems that with incomes still being squeezed, even this is insufficient to keep its customers from looking for cheaper alternatives. Morrisons’ market share has been in decline and its profits or the last financial year have been non-existent. It’s been losing ground to its big competitor, Tesco and part of this is due to the fact that Morrisons was late to enter the ‘Tesco metro’ market. It remained dependent on its large supermarkets, whereas Tesco saw the opportunity to expand onto the highstreets, with smaller stores. It was also late arriving to the online shopping business and while it has now developed more sophisticated IT systems, it did lose significant ground to Tesco and its other key competitors.
Another problem is that Morrisons has found itself unable to compete with the low cost supermarkets. The prices on offer at Morrisons are certainly not low enough to compete with prices at Aldi and Lidl and Morrisons has seen many of its customers switch to these cheaper alternatives. But Morrisons is fighting back and has announced plans to cut prices on a huge range of products across its stores. The fresh food aspect of the business will still remain and the hope is that the fresh food combined with cheaper price tags will allow Morrisons to re-gain lost ground to Tesco and take back some of its lost customers from the low-cost alternatives. However, it’s not just Morrisons that has been losing customers to the budget retailers. Tesco, Sainsbury’s and Asda have all lost market share to Aldi and Lidl, but it is Morrisons that has fared the worst.
The latest news on Morrisons’ profits and overall performance, together with its promise of restructuring and price cuts worth £1 billion has caused uncertainty for shareholders and this has reduced the value of shares. However, Morrisons’ Directors have tried to restore confidence by purchasing shares themselves. With expectations of price wars breaking out, the other supermarkets have also seen significant declines in their share values, with a total of £2 billion being wiped off the value of their shares collectively. The consequences of Morrisons’ performance will certainly continue: customers are likely to benefit from lower prices in all of the big four supermarkets, but investors may lose out – at least in the short run. The impact on jobs is uncertain and will certainly depend on how investors and customers react in the coming weeks. The following articles consider this sector.
UK grocer Morrison warns on profit, threatens price war Reuters, James Davey (13/3/14)
Morrisons and the threat to mainstream supermarkets BBC News, Robert Peston (13/3/14)
Morrisons expected to sell property in response to profit drop The Guardian (9/3/14)
Morrisons restructuring sparks fears of new price war BBC News (13/3/14)
Morrisons’ dividend up while profit falls? It’s hard to believe The Guardian, Nils Pratley (13/3/14)
Morrisons boss talks tough as group slides into red The Scotsman, Scott Reid (13/3/14)
Morrisons plots price cuts after annual loss Sky News (13/3/14)
Morrisons’ declaration of £1bn price war with budget stores hammers Sainsbury and Tesco shares This is Money, Rupert Steiner (14/3/14)
Ocado on track for first profit in wake of Morrisons deal Independent, Simon Neville (14/4/14)
Questions
- What are the key characteristics of an oligopoly?
- To what extent do you think the supermarket sector is a good example of an oligopoly?
- Why is the characteristic of interdependence a key cause of the potential price war between the supermarkets?
- Why has Morrisons been affected so badly with the emergence of the budget retailers?
- By using the income an substitution effect, explain how the big four supermarkets have been affected by retailers, such as Aldi and Lidl.
- Using a demand and supply diagram, explain how the share prices of companies like Morrisons are determined. Which factors affect (a) the demand for and (b) the supply of shares?
- What do you think will happen to the number of jobs in Morrisons given the performance of the company and its future plans?
After weak Christmas trading, Tesco issued a profit warning – its first in 20 years. Following this, their shares fell in value by some £5bn, but this was met with an announcement of the creation of 20,000 jobs in the coming years, as part of a project to train staff, improve existing stores and open new ones. Yet, Tesco has reported another quarter of falling sales.
Trading times have been challenging and the fact that the UK’s biggest supermarket is struggling is only further evidence to support this. In the 13 weeks to the 26th May 2012, Tesco reported a decline in like-for-like sales of 1.5%. Although much of the £1bn investment in Tesco is yet to be spent, the fact that sales have fallen for a full year must be of concern, not only to its Chief Executive, but also to analysts considering the economic future for the UK.
Consumer confidence remains low and together with tight budgets, shoppers are continuing to be very cautious of any unnecessary spending. Part of Tesco’s recent drive to drum up sales has been better customer service and a continuing promotion war with the other supermarkets. This particular sector is highly competitive and money-off coupons and other such promotions plays a huge part in the competitive process. Whilst low prices are obviously crucial, this is one sector where non-price competition can be just as important.
Although Tesco sales in the UK have been nothing to shout about – the Chief Executive said their sales performance was ‘steady’ – its total global sales did increase by 2.2%. The Chief Executive, Mr Clarke said:
‘Internationally, like-for-like sales growth proved resilient, despite slowing economic growth in China…Against the backdrop of continued uncertainty in the eurozone, it is pleasing to see that our businesses have largely sustained their performance.’
A boost for UK sales did come with the Jubilee weekend and with the Olympics just round the corner, Tesco will be hoping for a stronger end to the year than their beginning. The following articles consider Tesco’s sales and the relative performance of the rest of the sector.
Tesco’s quarterly sales hit by ‘challenging’ trading BBC News (11/6/12)
Tesco UK arm notches up one year of falling sales Guardian, Zoe Wood (11/6/12)
Tesco upbeat despite new sales dip Independent, Peter Cripps (11/6/12)
Tesco sales seen lower in first quarter Reuters, James Davey(11/6/12)
The Week Ahead: Tesco set to admit it is losing ground to rivals Independent, Toby Green (11/6/12)
Tesco’s performance in the UK forecast to slip again Telegraph, Harry Wallop (10/6/12)
Tesco: What the analysts say Retail Week, Alex Lawson (11/6/12)
Supermarkets issue trading updates The Press Association (9/6/12)
The Week Ahead: Supermarkets prepare to give City food for thought Scotsman, Martin Flanagan (11/6/12)
Asda’s sales growth accelerates Reuters, James Davey (17/5/12)
Asda sales increase helped by Tesco Telegraph, Harry Wallop (18/5/12)
Tesco v. Sainsbury’s in trading update battle Manchester Evening News (11/6/12)
Sainsbury’s out-trades Tesco on UK food sales Independent, James Thompson (10/6/12)
Questions
- Using some examples, explain what is meant by non-price competition.
- Why has Tesco been losing ground to its competitors?
- Given the products that Tesco sells (largely necessities), why have sales been falling, despite household’s tight budgets?
- Into which market structure would you place the supermarket sector? Explain your answer by considering each of the assumptions behind the market structure you choose.
- Why have Tesco’s rivals been gaining ground on Tesco?
- How might this latest sales data affect Tesco’s share prices?
- Based on what the analysts are saying about the food sector, can we deduce anything about the future of the UK economy in the coming months?
