Introduction
There are various forms of market structures which exist in various marketplaces. This essay explores the market configuration which exists in the UK supermarket industry. As such, markets are influenced by several economic factors such as income level, inflation rate, forex exchange ratio, and taxation. While discussion the investment options for Penny Market in the Great Britain, this paper also explores the scope of Brexit and how it is likely to influence a business which plans to invest in the United Kingdom. UK’s departure from the European Community came with several detrimental effects which are still present in the current marketplace. Moreover, the COVID-19 pandemic has worsened the present marketplaces they are still suffering from the adverse effects of Brexit. Therefore, the paper will explore the immediate and long-standing impacts of the global crisis while also offering recommendations for the company which intends to invest in the United Kingdom.
Keywords: economic factors, Brexit, COVID-19, UK
U.K. Grocery Industry
Penny Market is a discount superstore that primarily operates in Germany. This supermarket was established in 1973 by Leibbrand Gruppe, and it has several stores around the world (Hardaker, 2018, p. 220). In this scenario, the discount store intends to establish operations in one of the most lucrative markets globally, the United Kingdom. The Great Britain market is regarded as a highly developed, advanced, and diversified market in Europe and the fifth-largest one on the entire planet (Geyskens, 2018). A few trade barriers also characterize it as it serves as an entry portal into the European Union for the United States exporters (Geyskens, 2018). Penny Market intends to establish its operations in the UK grocery retail segment. This sector has been growing since 2004 and is estimated to account for approximately 190 billion GBP in 2018 (Hantzsche, Kara and Young, 2019). This paper explores the market structures in Great Britain, the economic factors within this region, the influence of Brexit on businesses, and the consequences of COVID-19 on business operations in the UK.
Various Market Structures
Market structures differentiate and clarify firms based on the types of products they trade and how external factors from the macro-environment influence their operations. There are several market configurations such as oligopoly, monopoly, and monopolistic and perfect competition (Lábaj, Morvay, Silanič, Weiss and Yontcheva, 2018). A market with oligopolistic features is characterized by few firms leading to a limited rivalry (Lábaj et al., 2018). Such companies may cooperate or compete against one another to utilize their shared market influence to increase profits. Oligopolies are also known for their responsiveness to competitors’ actions (Lábaj et al., 2018). For example, if a company lowers product prices, the other companies will respond by lowering their prices to maintain their position in the industry (Lábaj et al., 2018). It explains why there is limited rivalry in this market arrangement.
A monopoly exists when a market has one firm that controls and influences prices and products. These marketplaces do not have product substitutes, and entry or exit is blocked (Scahill, 2020). Monopolies get their power and influence from capital requirements, economies of scale, technological advantage, and premediated moves (Scahill, 2020). A monopolistic rivalry is a market structure where minor firms compete against one another. They also retail the same products, but they are highly differentiated (Scahill, 2020). It is also described as having the freedom of entry and exit, and inelasticity of demand makes the prices of products and services.
The Market Structure of the UK’s Grocery Industry
Great Britain’s grocery sector depicts the significant characteristics of an oligopoly. A group of supermarkets that dominates this industry are famously referred to as the ‘big four’ such as Tesco, ASDA stores, Sainsbury, and Morrison’s (Hardaker, 2018). Tesco is a conglomerate operating in the grocery sector serves other global markets. Its central base of operation is located in Welwyn Garden City, England. Sainsbury’s Groceries is regarded as the second leading supermarket in Great Britain and is also the largest retailer of groceries in the region (Hardaker, 2018). Morrison’s operates in Bradford, England and makes deliveries of groceries and other products as an online platform. Lastly, ASDA stores is a retail enterprise that operates from Leeds, UK and its governing organization is America’s Walmart stores.
Generally, the grocery segment in this region is primarily oligopolistic because it only comprises four large firms and the constraints of entering this segment are relatively high. Moreover, this industry’s competition fits that of a non-price rivalry and the firms operating in it are interdependent (Scahill, 2020). For example, the business moves of Tesco influence the decisions of other supermarkets. Britain’s superstores offer exceptional products along with other services such as home shopping. Nonetheless, the UK’s grocery sector creates a more disadvantageous situation for the customers, such as complicity and considerate market share.
The primary characteristic of the UK grocery sector, which makes it oligopolistic, is its non-price rivalry. It is a marketing approach which allows firms to use factors such as packaging, after-sales and customer services to increase the demand for their products and services (Scahill, 2020). Most supermarkets, especially the “big four” in Great Britain, tend to use some marketing mix aspects to increase sales. For example, these stores are well known for using home-delivery systems, loyalty cards, and 24-hour shopping services to improve customer relationships and drive sales (Hardaker, 2018). Therefore, the market features explored above indicate that this industry is primarily oligopolistic.
Economic Factors of UK and their Possible Impact on Penny Market
Income level is an important aspect of the economic landscape that influences all types of businesses. It is the amount of money earned by individuals and subject to a given region’s taxation laws. At the end of the 2019 financial year, the intermediate disposable income was approximately 29,400 GBP in the United Kingdom (Sampson, 2017). Generally, income levels influence businesses in several ways, such as the marginal propensity of consumption, where a consumer spends money on commodities or services with a relative increase in their income level (Mishler, 2017). In contrast, a reduction in income leads to less spending, which also affects businesses.
By establishing business operations in the United Kingdom, Penny Market will enjoy some economic benefits such as UK residents’ income levels. Great Britain is the sixth most considerable financial system globally with an approximated financial output of 2.83 trillion USD and a per capita income of 42.943.90 USD as of 2018 (Liu, 2018). The figures reflect the region’s market attractiveness, and, therefore, Penny Market is most likely to benefit from increased demand and disposable incomes. According to a survey conducted in 2018, the UK grocery segment is anticipated to register a 14.8% growth by the end of 2023 (Hantzsche, Kara and Young, 2019). The online platform for managing this segment is also expected to remain the fastest-growing arena.
Inflation is a significant aspect of an economic landscape that should also be considered before establishing a particular region’s business venture. Governments use various policies to control the inflation rate, such as monetary and fiscal measures (Breinlich et al., 2019). Therefore, inflation can be described as a situation where the prices of products and services rise over a given period. Prices increases in the United Kingdom were estimated at 1.74% in 2019, which is a decrease from 2018 (Hantzsche, Kara and Young, 2019). In the case of Penny Market operating in Great Britain, rising prices imply that it would have incurred extra costs. For example, with suppliers’ prices fluctuating, the supermarket will have to take more time searching for and evaluating the best deals. The supermarket will also have to readjust its marketing program to accommodate the new changes such as reprinting sales brochures. Moreover, the superstore will have to renegotiate the wages of employees as the cost of living rises.
Unstable prices of commodities can also impact the firm’s international competitiveness, which intends to invest in the United Kingdom. For example, high inflation can affect the firm if it plans to import or export commodities and services (Lábaj et al., 2018). If Great Britain has a higher inflation rate than its trading allies, UK enterprises are more likely to become uncompetitive, resulting in loss of sales and shares in foreign markets (Chan, Ramly and Karim, 2017). Additionally, if the superstore faces competition from other foreign markets, it will lose its prices since they are rising less quickly than those in Great Britain (Maffini, Xing and Devereux, 2019). Therefore, inflation is an important aspect of the business environment that should be considered before venturing into a particular marketplace.
The Forex rate, also known as the exchange ratio, is the fraction at which one currency sells to one another. Various countries have their specific currencies, that are valued differently in foreign nations. For example, the United States uses the dollar while the UK uses GBP. When nations use these various currencies, transactions between individuals and enterprises are impacted. In 2019, one GBP sold at 1.33 United States Dollars (Breinlich et al., 2019). However, exchange rates are constantly fluctuating from one ratio to another, which may influence businesses in several ways. For example, if Penny Market invests in the United Kingdom, the superstore has to consider the price and demand of both exports and imports. Devaluation will be most likely to lower the prices of exports, thereby benefiting exporting firms (Mishler, 2017). If Penny Market intends to export its products to overseas nations, a situation of devaluation will enable it to export at a lower price. In contrast, if the firm invests in the UK market and intends to import raw materials from other nations, it will incur high costs.
Exchange rates are generally volatile; therefore, the grocery business reviews the market before venturing. As such, 40% of foodstuff purchased from the UK grocery segment is imported, meaning that if a period of depreciation persists, the prices of such products may escalate (Breinlich et al., 2019). Such a situation may also trigger inflation, which may affect grocery products’ sales. For example, in June 2016, the GBP declined by approximately 11% against the US dollar since the Brexit vote (Clarke, Goodwin and Whiteley, 2017). Moreover, the “big four” grocery stores continued to lose their market proportion due to Brexit and inflation (Clarke, Goodwin and Whiteley, 2017). Therefore, Penny Market should assess such factors to ensure a successful business venture in the UK market.
Taxation is a government policy that involves levying various forms of obligatory charges on individuals and businesses. There are several types of taxes which are levied on corporate enterprises. For example, Value Added Tax (VAT) is charged when customers purchase product and services (Alavuotunki, Haapanen and Pirttilä, 2019). A firm that intends to establish operations in the UK market will be liable to pay corporate taxes on its income and capital profits (Maffini, Xing and Devereux, 2019). The percentage of corporation tax in Britain for all firms is 19%, and it is bound to be decreased to 17% by the end of 2020 (Maffini, Xing and Devereux, 2019). Furthermore, changes in various types of taxes are likely to increase the consumers’ net income. If there is a reduction in income tax accompanied by increases in allowances, consumers will have more money to spend on products and services.
In contrast, an increase in specific taxes such as VAT may make the business raise the prices of its products to cover the increase in the cost of doing business. However, high prices may undermine sales, which implies that profits are affected. In conclusion, these are some of the economic factors which are most likely to affect Penny Market if it invests in the UK market.
The Effects of Brexit on Penny Market’s Business in the UK
Brexit is the retraction of Britain’s membership from the European Union (EU). The decision was made in June 2016 in a ballot that saw the UK leave EU (Clarke, Goodwin and Whiteley, 2017). While it does not have an association with the EU, it is currently in a transition period to discuss a new affiliation with the economic community (Sampson, 2017). Following the departure of Great Britain from the free trade zone, several businesses felt the impact. Therefore, Penny Market should consider such effects before investing in the UK. First, Brexit removed the UK’s tariff-free trade privileges with other EU members (Kierzenkowski et al., 2016). Without such advantages, businesses operating in the UK will have to be subject to tariffs, which raises the cost of exports. They are harmful to exporters because their products become expensive in Europe (Hantzsche, Kara and Young, 2019). In this case, Penny Market will find it hard to export its products to Europe. At least 33% of the UK’s imports originate from EU members (Gudgin et al., 2018). With tariffs in place, the prices of imports to Britain will be high.
Another considerable drawback that is more likely to affect UK businesses is Brexit’s damage to this region’s economy. The damage is attributed to uncertainty pertaining to the outcome of the UK’s retraction from the EU (Liu, 2018). Due to uncertainty, the UK’s economic growth decreased by about 0.9% between 2015 and 2018 (Chan, Ramly and Karim, 2017). The UK government also predicted that Brexit would deteriorate the region’s growth by approximately 6.7% over 15 years (Chan, et al., 2017). During the vote, the British Pound decreased from 1.48 USD to 1.36 USD the following day (Kierzenkowski et al., 2016). While it has a favorable impact on exports, it increases the cost of imports. Therefore, Penny Market should consider the possible repercussions of Brexit if it invests in the UK.
Another factor to consider is that Brexit has already undermined investment and employment growth in the UK. A survey shows that firms that have depicted Brexit as a significant source of uncertainty have had lower investment since the ballot than those which portray it as less significant (Chan, et al., 2017). UK’s departure from the free trade zone has also brought employment disadvantages to the region. The younger generation was the most affected, whereas Germany is expected to have inadequate skilled personnel by 2030 (Erken et al., 2018). This fact implies that Penny Market will find it difficult to recruit potential candidates for its management.
Businesses in the UK are currently finding it challenging to get possible applicants. As of 2017, the number of EU-born employees decreased by 5% (Simionescu, Streimikiene and Strielkowski, 2020). If the consequences of Brexit persist in the UK, its productivity is bound to decline in the future. If the situation compels the UK market to minimize the output of highly-productive companies by low-output firms, it will result in a lower average output (Erken et al., 2018). It will translate to a decreased level of productivity in the UK by approximately 0.5% (Erken et al., 2018). Therefore, Brexit’s consequences in the United Kingdom should not be overlooked by a firm such as Penny Market since they are essential for a prosperous future.
Consequences of COVID-19 on Penny Market and Should It Invest in the UK
Immediate Impact
The COVID-19 pandemic has resulted in rapidly evolving and unanticipated variables for British enterprises in all industries. The latest predictions provided by the Bank of England signify that the British economy will decline by about 14% in 2020 (Nicola et al., 2020). The contraction can only be compared to the largest annual decline in economic activity since the Great Frost at the beginning of the 18th century (Moore and Babij, 2017). Therefore, British businesses are impacted by unemployment levels that have risen from 4% to 6% since the advent of the pandemic (Brown, Rocha and Cowling, 2020). Household consumption is also expected to decrease by 14% at the end of 2020 (Nicola et al., 2020). Suppose Penny Market invests in this marketplace, it will have to manage these short-term effects of the pandemic.
Future Impact
Regardless of the pandemic’s temporary effects, the COVID-19 contagion may have some long-term effects on businesses operating in the UK. For example, consumers’ preferences may change over time, implying that they may want different products. With government lockdowns and curfews in place, consumers have changed their lifestyles (Nicola et al., 2020). According to Google Trends, a considerable number of consumers have been reported to have searched “home cooking” in March 2020 (Nicola et al., 2020). More consumers have also shifted to online shopping, which implies that E-commerce is growing and is also expected to keep developing. Therefore, the pandemic has not only affected businesses, but it has also changed various aspects of customer-business relationships.
In conclusion, this paper has explored the scope of the United Kingdom grocery segment and how firms intending to invest in it are more likely to be affected. Great Britain’s grocery segment has been explored, and it was discovered that it has an oligopoly’s primary features. This region’s economic landscape has also been covered with emphasis on income levels, forex ratio, taxes, and inflation rate. Brexit’s scope, which is the removal of the UK from the European community, has also been explored. Furthermore, the paper has also discussed the consequences of Brexit on firms operating with the UK. The effects of the crisis on businesses operating in this region have been covered. A business expansion such as Penny Market will have to consider the market attractiveness of this region before embarking on the journey of establishing a store in this area. Considering the British environment’s economic background, certain features such as income levels may be of advantage to the grocery store. However, the present condition of the UK under Brexit is more likely to have detrimental effects on the business operation.
Recommendations
Regardless of the economic and social landscape of Great Britain, businesses can find the right routes to follow for a successful venture. It is recommended that Penny Market should consider having cash reserves while also keeping enough inventories to manage inflationary pressures. The grocery outlet should also adopt currency diversification as a financial strategy for managing fluctuating forex rates. Using a forward contract, that is an accord between two parties to purchase or sell an amount at a ratio and date predetermined, can help curb the effects of volatile forex rates.
In managing Brexit’s detrimental effects, the grocery store should ensure that its brand remains strong and appealing. The store should also consider making its supply chain network active despite the UK’s departure from the EU. Workforce management is essential for the success of any company. Therefore, concerning the consequences of the economic factor, the grocery should evaluate its human resources to comprehend talent development requirements. Lastly, the business can mitigate the impacts of the COVID-19 pandemic by assessing workforce locations, reviewing the supply chain, and reevaluating continuity plans. With the above recommendations, Penny Market will find it easy to pursue its goals and objectives.
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