PESTLE Introduction

Discount retailing has recently witnessed a surge in popularity among consumers, mainly due to the recession. During the economic downturn consumers continued to spend cautiously, while unemployment also affected several households in the UK. These factors served to push up demand for discount retailing, notably for grocery products, as such items are necessary purchases. Non-grocery discount retailers also witnessed an increase in sales during and after the recession. However, this area of market was also popular prior to the downturn. Prior to the recession, discount retailers maintained their position in the market, ranging from large household names to small privately owned high-street shops. The value aspect of products offered by discount retailers has meant that they have continued to remain appealing to consumers. As a result, this is believed to have influenced some non-discount retailers to use similar tactics by offering their own value ranges, for instance, Sainsburys basics range or ASDAs Smart Price line. Value clothing ranges have also proved successful, e.g. ASDAs George range, which has established itself as a well-known brand and currently has its own website. The retailer also owns a number of ASDA at Home stores, which specialise in distributing the value clothing brand. The recession itself is believed to have helped the discount retailing market. However, some discount retail companies did not survive in the marketplace. This was witnessed by the loss of Netto at the start of 2010, with the grocery retailer missing out on the discount boom created by the recession, leading to its exit from the UK market. This was also seen more recently in June 2011, when TJ Hughes announced that it had fallen into administration and that its 57 discount department stores would be closing. According to an article published by The Independent in April 2011, despite a disappointing start to 2011 on the high street, the discount market is booming. Notably, grocery retailers, such as Aldi and Lidl, reported record market share, while Primark has announced that, despite being slow at the start of the year, sales have picked up considerably since the end of February. It is also believed that, rather than shopping at such outlets because of financial hardship, consumers have been using discount retailers out of choice despite some indication that rising food prices have affected consumer shopping habits. The surge in food prices has been influenced by a number of economical factors in the UK and, according to the British Retail Consortium (BRC), food inflation slowed to 5.2% in July from 5.7% in June. This increase in costs at the till is thought to have encouraged sales in the discount retailing market. However, as competition with other non-discount retailers, such as the supermarkets, remains fierce, there is some indication that consumers are now choosing cheaper outlets out of preference. This competition from supermarkets has been achieved through excessive promotions and advertising. Research from the BRC has indicated that around 39% of groceries bought in the UK are purchased when on offer. However, retail analyst Clive Black of Shore Capital believes that, while discount grocers are value driven, the limited range of products available is appealing to some consumers as it removes the temptation of buying other products that are available in supermarkets. Food prices have risen extremely quickly in recent years, driven by a number of factors. Floods and droughts in Russia, Australia and India have affected a number of crops and the cost of commodities, and it is believed that increased consumption of meat and dairy products in emerging economies is also influencing the rise in prices. In the UK, the recent rise in value-added tax (VAT), which came into force in January 2011, has added to costs at the till, while inflation on food and drink has remained high over the past year. Transportation has also affected costs for manufacturers and retailers, while the weak pound has remained an issue.

PESTLE Political Economic

Population
The UK population has continually increased year-on-year, reaching 62.2 million in 2010. In terms of gender, there are slightly more women than men, due to women having a longer life expectancy. The population increase is primarily down to the ageing demographic currently being witnessed in the UK. The ageing population could make retailers re-structure their target audience in order to cater for older consumers.

Gross Domestic Product

Gross domestic product (GDP) increased by 1.3% in annual chain-linked terms, following a decline in 2008 and 2009. This decrease was principally due to the economic climate and the recession, which impacted consumer spending in the economy.

Inflation
In 2010, inflation increased sharply by 5.1 percentage points, reaching 4.6%, following deflation of 0.5% in 2009. The recent increase was principally down to an increase in transportation costs, most notably fuel. However, the current weak pound has also had a negative impact on costs in the UK. Unemployment in the UK has risen dramatically since 2007, due to the economic climate and the negative impacts of the recession. Between 2008 and 2009, the number of unemployed people increased by 68.1% to 1.53 million, before dropping by 2% in 2010. Unemployment affects not only those out of work but also the entire economy, as people are more cautious about spending in an uncertain economic climate.Household disposable income has increased continually over the review period, reaching 15,676 in 2010. A higher level of disposable income usually means an increase in consumer spending. However, with the price of fuel, gas, electricity and food all increasing due to inflationary pressures, any rise in disposable income is likely to cover the cost of bills and necessary items.

The U.K. market is probably the most dynamic and quickly changing retail environment in Europe right now. There is strong evidence of a major shift in price levels, from inflation to deflation. There is evidence that the consumer is becoming ever more value-oriented and that this plays into the strategies of Tesco, Asda and Morrisons, while disfavoring Sainsbury and Safeway. Tesco, Sainsbury and Safeway have all reported first-quarter sales. The trend is for slowing growth, unquestionably, but the underlying numbers for each player reveal how each chain is handling the tough environment. Tesco reported the highest like-for-like of the three players (up 4.5%), despite 1.3% deflations: The company is investing in price to keep the consumer in its stores. Safeway had 3.0% LfL, which stepped up dramatically in the second six weeks of the quarter (first six weeks, 2.2%) and included 0.7% deflation: The company used heavy promotions in the second half of the quarter to drive sales. Finally, Sainsbury reported the worst LfL of the group (up 2.7%) with only 0.2% deflation. Sainsbury ran very heavy

promotions in June in alcohol and with loyal consumer vouchers, but it was barely enough to keep it in the running with the other two chains. Sainsbury claims its consumers are much less price sensitive than others. We believe this is nave: As the market sours and consumer confidence dims, value and price are ever more important, and our research suggests Sainsbury will continue to lose share if it does do not address that issue. All of the above being said, valuations in the market right now are at very attractive levels. Traditionally, food retailers were defensive names that outperformed in a downturn. Diversification of food retailers into general merchandise and new channels, the rise of competitive channels (discounters) in some parts of the world and company-specific problems have meant that the stocks have not done as well as in previous bear markets. In addition, as the entire market has come down, even the best performing of the food retailers have fallen, as investors have sold positions that had held very well in order to fund outflows from their funds. Fundamentally, the best player in the group is Tesco, and we continue to recommend Tesco as a buy and as our top pick of all the pan-European retailers. Safeway and Sainsbury are both looking cheap on valuation, but we believe they are fundamentally well behind U.K. market-leader Tesco and even behind Asda or Morrisons. We rate Tesco outperform, Sainsbury and Safeway market-perform. Perhaps the most dynamically changing market in Europe is the U.K. market, and perhaps the most pervasive theme in the market is the deflation/ inflation of food prices and how that has affected the players, their profitability and their ability to invest, and their stock prices. From 1993-99, the U.K. market was one of the toughest in Europe, with on-and-off deflation and a shift in the way people were shopping that ultimately left Tesco leading the pack by the middle of the decade (see Exhibits 17 and 18). Tesco was able to leverage that gain by consistently investing in price to increase volumes and reinvesting that success in systems and, again, in price. This led to the engine phenomenon that has worked so well in retail around the world (e.g., Wal-Mart in the United States) (see Exhibit 19). It also meant that Tesco outperformed the other two players by a wide margin in the stock market Social
Social trends that affect cooking and eating habits include the rise in the number of working women, an increase in the number of single-person households, greater exposure to foreign cuisines, a lack of cookery instruction in schools and competing demands on leisure time. Some people consider food and drink an intrinsic part of their social life they enjoy preparing food for others and eating in company. For others, it is a lone pursuit a simple refuelling exercise and preferably one that can be dispensed of whilst doing something else Committed

expenditures are largely for items, such as food, drink, tobacco, housing, fuel and light, clothing and essential transport, which are considered necessary in a modern society. In the post-war years, the amount spent in the United Kingdom on foods has been rising steadily. There has been a switch to more expensive foods with more butter, canned fruit, sugar, meat, eggs and cheese being consumed and a falling demand for jam, flour and potatoes. This trend has implications for other goods. Once an economy has been jerked into a higher food consumption pattern, the new standard will be relinquished only as a last resort. Spending on all committed items has been well maintained, or even increased, despite fluctuations in economic activity. The only item to remain constant in the post-war years is spending on essential public transportation despite increasing population and dispersal of industry this raises question of whether private motor transport may also contain a large committed element. In Britain and America, customers display, in differing

degrees; (a) a tendency to cling to higher food and service standards; (b) a faster rise in discretionary income than in disposable income; and (c) a lag in expenditure on consumer durables compared witli all discretionary expenditure. The conclusions leave important implications for the United Kingdom both as regards marketing problems raised by the increase in teen-age incomes and in re-assessing the part played by consumer durables in the British economy. The main reason cited by respondents for shopping at discount non-food retailers was the value for money that such outlets offer, with 65.4% of respondents agreeing that this was the case. Similar penetration levels were also registered among both men and women. In terms of age, younger consumers aged between 16 and 19 (83.8%) were most in agreement with this statement, followed by those aged between 45 and 54 (67.8%). Consumers in grade C2 were the most likely to shop at discount non-food outlets for value purposes (70.4%), as were respondents that were not working (excluding retired or invalid), at 74.6%. In terms of region, respondents living in the South East (75.3%) were most likely to shop at discount non-food retailers due to the value for money that they offer, followed by respondents in the South West (73.9%). Other reasons cited by consumers for shopping at discount non-food retailers, included: the choice that such outlets offer (14.6%); that they cannot afford to shop anywhere else (2.8%); in order to keep up with changing fashions (2.3%); and because of the benefit that such retailers provide when shopping for growing children (2.1%).

Technological Investment in development of foodservice technology is considered a luxury as the sector comprises predominantly by small and medium size businesses that may not be able to afford the heavy costs involved. However rapid advancements in information technology have allowed dedicated suppliers to foodservice businesses to develop such innovative products or services. Such hardware or software developments enable food and beverage outlets to increase quality of product, productivity and profitability. Often these products may seem existing developments from industries leading the technological advancement arena such as airlines and retail, but this paper reveals that this is no longer the case. Technology is developing at an ever increasing pace and dramatically changes business models in the hospitality industry. The paper aims to illustrate that investment in technological advancement within the food servicesector is happening in a number of areas and highlights benefits in the areas of quality, cost, speed, dependability, (Panteined)
Equipment such as the refrigerator, microwave and food processor, and gadgets such as talking timers, have contributed to changes in cooking and eating habits over the years. Technology will continue to shape the market through the development of further labour-saving devices. For example, it is possible to buy refrigerators with built-in barcode readers, which do away with the need for a written shopping list. When an empty container is swiped, a product is automatically added to the housekeeping list. In years to come, we are promised interactive kitchens, in which appliances are networked and controllable from other locations.

Legal The National Minimum Wage (NMW) applies to the majority of workers and enforces the minimum rates of pay per hour. These rates are usually increased each year and come into force

on 1st October. The NMW for 16 to 17 year-olds is currently 3.64 per hour, while for 18 to 21 year-olds the hourly rate is 4.92. From 1st October 2010, employees aged 22 and over will be entitled to a NMW of 5.93 per hour. In common with many national retail food markets in Europe, the rising degree of market concentration in the UK food sector has been a cause of concern to both consumer groups and food producers in recent years. By 2006, the four leading food retailers in the UK had a combined share of the grocery market of around 75 per cent, with the largest of these accounting for around one-third of all food sales (Office of Fair Trading, 2007). The issue has also aroused the attention of the UK's principal anti-trust authority, the Competition Commission, which has undertaken two statutory inquiries into food retailing in the last decade (Competition Commission, 2000, 2008). A key motivation underlying their scrutiny of the supermarkets was: . . . [the] public perception of . . . an apparent disparity between farm-gate and retail prices . . . which is seen as evidence by some that grocery multiples were profiting from the crisis in the farming industry. Competition Commission (2000), vol.1, p.3 Statutory inquiries are expensive in terms of time and resources and are thus not undertaken without good grounds for doing so. This paper offers one possible approach based on a firstfilter test of price data that may be used as part of the preliminary analyses into the presence of buyer power in such markets. Contingent on assumptions relating to functional form and technology, we reject the null hypothesis of perfect competition in seven out of nine specific food groups investigated. While not conclusive that buyer power is the primary cause of widening margins between retail and farm price spreads, as a first-pass test, it suggests that buyer power is a potential candidate among others. The paper is structured as follows. In Section 2, we provide some background material to the UK Competition Commissions concerns about buyer power exercised by dominant food retailers and the motivation for our testing procedure as a filter.1 In Section 3, we outline the theoretical model that underpins our conceptualization of a vertically-related market. The model is by no means intended as a detailed description of the UK food chain, but it does serve as a useful device for characterizing how prices are transmitted in such a market, albeit in simplified form. It also forms the basis for determining the appropriate econometric approach and the interpretation of the key variables used to identify the existence of oligopsony power. Section 4 describes the data that are used in the testing procedure while Section 5 shows how the test for oligopsony power In this paper, we have devised a simple means of testing for the presence of buyer power in vertically-related markets such as those characterizing the food chain. By constructing a quasireduced form model of the retailer-supplier pricing equations, the null of perfect competition can be rejected if the shifters from the supply and demand equations are significant and correctly signed. In principle, the approach sits between other methods of evaluation, to which it is complementary. In particular, we are able to move away from nave concentration-based indicators of buyer power and the practical limitations of structural econometric modelling. The approach is simple and transparent yet delivers a statistical test derived from a theoreticallyconsistent basis. Furthermore, the test demands relatively little in terms of data and is implemented using standard techniques of modern time-series analysis. The technique is most applicable where products undergo relatively little transformation between marketing levels and is thus particularly well-suited to the relatively unprocessed products of the food chain. In the

UK at least, these are also products over which concerns of potential buyer power abuse have been most acute. Drawing on data from a basket of nine basic products of the UK food industry, we show that in seven cases, the hypothesis of perfect competition can be firmly rejected at conventional levels of significance, implying that for these food products at least, the market is characterised by buyer power by our measure. As such, our findings corroborate the findings of Competition Commission (2000) and lend support to the recent request by the Office of Trading for further detailed scrutiny of the UK food chain by the UKs competition authorities. Of course, we cannot interpret our results as being conclusive of the use of buyer power in UK food retailing. Among many important caveats are that the test is predicated on simplifying assumptions, the data subject to measurement problems and the procedures prone to statistical error. However, the methods we employ are both familiar to applied economists and readily implemented, and deliver what we may call a first pass test, that when used in combination with other evidential indicators, can be useful in contributing to uncovering the existence of buyer power in the vertical food chain. All retailers are obliged to follow the law and the cost of
labour is often the second-highest expense for retailers, behind the cost of goods. Discount retailers may try and cut back on other expenses in order to operate at a lower cost. These cuts can include sourcing from cheaper locations, where laws do not protect the cost of labour. This has been an ongoing issue for UK retailers, which consistently attempt to source materials and products from the cheapest locations (for example, the Far East) HM Revenue & Customs can also enforce penalties for those employers who do not follow the minimum wage law. The penalty for not paying employees correctly is 50% of the total underpayment that has occurred from 6th April 2009, with a minimum penalty of 100 and a maximum of 5,000. However, if employers pay the arrears and the penalty within 14 days of the date at which the notice was served, employers are only required to pay half of the penalty. The Working Time Regulations outline the laws regarding the number of hours an employee can work. Employees in the UK cannot be forced to work in excess of 48 hours an average a week (usually based over 17 weeks); however, employees can work more over this period as long as the average over the whole period calculates to less than 48 hours per week. However, there are some exemptions if the job entails any of the following: employees who choose freely how long they work workers in the armed forces, emergency services and police domestic servants in private houses sea transport workers, mobile workers in inland waterways or a lake transport worker onboard sea-going vessels. For younger workers, who are aged under 18, but are over the school leaving age, the number of hours is capped at 40 a week, and employees cannot work more than 8 hours per day. Hours cannot be averaged out for younger workers. All retailers looking to expand or open a store have to deal with planning issues, which can be difficult, controversial and time consuming. All changes to new or existing buildings and alterations or changes to land use need planning permission, with retailers required to submit a planning application to the relevant Local Authority in order to do so. This can be a lengthy process, as companies often have to wait a great deal of time for planning permission to be granted Sunday Trading laws were first introduced in England and Wales under the Sunday Trading Act 1994. Different regulations apply to different shops, while in Scotland there are no restrictions. In England and Wales, small shops with a floor area of up to 280 square meters (sqm2) can choose their own Sunday

hours, while larger shops with a greater floor space can only legally open for 6 hours, between 10am and 6pm. These larger stores are also permitted to stay closed on Easter Sunday and Christmas Day. The majority of retailers in the UK must adhere to a range of ethical codes pertaining to their suppliers. Specifically, ethical trade means that retailers, brands and their suppliers take responsibility for improving the working conditions of the people who make the goods. The majority of workers employed by supply companies are based in developing countries, where specific laws to protect workers are inadequate or not properly enforced. Discount retailers actually have a huge opportunity to help influence the conditions of some of these overseas workplaces due to their huge buying power. However, some of the larger names in the market are often the ones accused of exploiting the industry. Notably, the retailer Primark has been targeted by the media on numerous occasions despite being part of the Ethical Trading Initiative (ETI). It was also reported in November 2010 that ethical standards were not only being misused overseas, but in the UK as well. The Channel 4 Dispatches documentary, Fashions Dirty Secret, investigated the working conditions within a clothing manufacturing site based in Leicester, and revealed that some employees were being paid half the minimum wage and were working in dangerous conditions. Retailers revealed to be using the manufacturing site included BHS, New Look and Peacocks, among others. Ethical and environmental issues are becoming more of an important factor to consumers and the media has become more interested in exploiting companies that flout ethical working codes, which can result in a loss of customers if such bad press is aired. In order to maintain high standards, organisations such as the ETI and Fairtrade Foundation have been established through these organisations, and mean that members can become more aware of the codes and practices available in order to maintain high ethical and environmental standards in the workplace.

Ethical Trading Initiative

The ETI has been set up for UK businesses and focuses on improving the implementation of codes of practice on supply-chain working conditions. The ETI is comprised of companies, trade unions and voluntary organisations, where all corporate members are required to adopt the ETI Base Code of labour practice. The code of practice specifically enforces the following points: employment is freely chosen freedom of association and the right to collective bargaining is respected working conditions are safe and hygienic child labour is not used living wages are paid working hours are not excessive no discrimination is practised regular employment is provided no harsh or inhumane treatment is allowed. The discount retailer Primark is part of the ETI and complies with these regulations, while also creating further opportunities for its workers. These include providing financial inclusion for workers, focusing on womens health, working with the homeworkers and providing educational resources.

Environment British Retail consortium

The BRC is currently working on the following policy issues through the Environment Policy Action Group: - BRC climate change initiative, A Better Retailing Climate - Waste Electrical & Electronic Equipment Directive (WEEE Directive) and the WEEE Recast - Implementation of the Batteries Directive - Carbon Reduction Commitment - Reducing packaging and food waste - The On-Pack Recycling Label (www.oprl.org.uk) - Waste Prevention and Recycling for customers, suppliers and owned operations. - Climate change adaptation - Chemicals Legislation including REACH and CLP - The Eco-design Directive, including Energy Using Products (EuP) and Energy Labelling Regulations - Reductions of carrier bags distributed and the introduction of a charge on carrier bags in Wales