Global Business Environment Assignment

Introduction

Parhizgar (2002) defines the global business environment as the environment in the different independent countries, characterised by extrinsic factors to the home environment of the company. Parhizgar (2002) further argues that the factors exogenous to home environment impact either positively or negatively to the decision making on both capabilities and resource use of the company in context. Due to globalisation, the world is becoming smaller hence provoking challenges and opportunities in equal measure. According to Worthington and Britton (2009), a firm’s success is mainly determined by forces outside the firm’s traditional boundaries. In the context of global business environment, these forces vary from one nation to the next and consequent to such phenomena, firms are continuously confronted with emerging issues that necessitate modifications in their current national and global strategies.

In reference to the emerging issues in the current global market environment, conducting business globally is increasingly becoming complicated. Gerry et al. (2008), recommend the need to develop a strategic position so as to identify the impact of the environment on an organisation’s strategic capability. The PESTEL framework enables business managers to evaluate the current position of a firm in view of the macro environment. According to the PESTEL framework, global business environment is affected by the following factors; technological, political, environmental, economic, social and legal (Campbell, and Craig, 2005).  For instance, all businesses operate within the confines of the national governments. Consequently, the political system of such countries affects the business. While some political systems are safe for business, others are hostile and discouraging. The type of economy of a country has an impact too. For instance, free market economies have less interference on business activities. In command economies like Cuba, the government owns both the production and distribution processes hence discouraging private business. Gerry et al. (2008), affirm that social factors are an inescapable consideration for global business. The cultural practices and demographic trends across various nations impact either positively or negatively on growth of firms. Legal, environmental and social factors equally impact on the operations of the business. The intriguing factor is that the nature of the individual factors outlined further varies from one country to the other. For example, the economic challenges facing a company in UK can be different from those in Saudi Arabia.

The intent of Global Business Environment Assignment is to examine how economic and social factors affect the grocery retail industry in both UK and India. The essay begins by discussing the market performance of the retail industry in UK and India between 2007 and 2014. It then examines how economic and social environments in UK and India influenced the market performance in each country.

Market Performance of Grocery Retail Industry in UK and India

• United Kingdom: The grocery retail industry remains one of the most competitive retail markets in UK. The leading companies in this sector in the United Kingdom are Wm Morrisons, Tesco Organisation, Asda and J Sainsbury. Tesco leads with a 22% hold of the value share in 2015. J Sainsbury comes second with 13% and Asda third with 12% (Lang and Heasman, 2015). As illustrated in figure 1 below, grocery retail industry continued to record gradual positive growth between 2006 and 2014. For instance, in the year 2006 the market value of the industry in billion GBP was 128.7 compared to 174.5 in 2014 (Trading Economics, 2014).  The industry registered sluggish growth up until early 2014 as a result of the economic recession of 2008 and its impact. Economic analysts attributed the sluggish growth to the increase in the unemployment rate in UK that cut down consumer spending in this sector.Lang and Heasman (2015), further affirms that the grocery retail industry is heavily dependent on the consumer’s financial situations and sentiment, which in retrospect, are driven by economic situation. Currently, despite the fact that UK’s grocery retail industry is growing rapidly, there are fears that it could be one of the unhealthiest sectors, characterised by flattening of the demand line.

Figure 1: Market value of grocery retail in the United Kingdom (UK) from 2004 to 2014* (in billion GBP)

• India: India has been a consumption-driven economy in the past decade. The 2025 projections show that India’s consumption rate could increase by 2.5 times (Rishi and Singh, 2012). India is one of the top five retail markets globally in terms of economic value. Just like UK, the grocery industry in India recorded an upward trend between 2007 and 2014. The market performance of the grocery retail industry can be explained in three phases as illustrated in the figure 2 below.

Figure 2: Evolution of Indian Grocery Retail Market

 Between 2003 and 2004, the Indian grocery retail market began its growth phase. This phase was characterised by numerous international and domestic entrants. In 2006-2006, the industry grew to a tune of $330 billion and became recognised as the market with the most opportunity for growth. In 2008, the industry recorded a boom in its growth with record earnings. By the year 2014, modern grocery earnings in India had a value growth of 17 %. Among the factors that promoted growth of this industry include urbanisation and increase in consumer spending due to positive economic growth. However, the size of modern grocery retailers continues to be smaller than that of traditional retailers (Rishi and Singh, 2012).

Impact of economic and social factors on Growth Grocery Retail Industry UK and India

Economic contribution to the changes in United Kingdom

The global recession of 2008 and its aftermath had asignificant impact on the growth of the industry. According to the National Bureau of Statistics, UK economy experienced sluggish growth in the period between 2007 and 2013(Office of National Statistics, 2014). In 2008, UK’s GDP annual growth was the lowest as shown on table 1 below.

Table 1: UK GDP ANNUAL GROWTH RATE

The economy indicated negative a growth rate, a factor that catapulted to high unemployment rates, inflation and low consumer spending. High unemployment rate coupled with inflation means that consumers have less money to spend and the few who have, spend it sparingly.  Tesco, one of UK largest grocery was worst hit by this economic recession. Its annual growth rate of its UK stores recorded a 2% growth, the lowest it had ever reached for over 15 years (Tesco, 2010).  Further, as illustrated in the financial statistics on table 1below, UK stores (in comparison with other stores outside UK) indicated the second lowest sales.

Table 2: Tesco Financial Growth Rate 2004-2008

The situation at Tesco changed as soon as UK started recovering from the economic recession. In 2013, the economy grew significantly and in 2014 it recorded the highest ever since 2004. There was notable rise in the number of jobs, decline in the oil and food prices and also higher rate of consumer spending. This trend meant that consumers had money to spend hence contributing significantly to growth of the grocery industry in UK (Wrigley, 2014).

On the other hand, the economic recession had a positive impact on other companies in UK. For instance, while Tesco PLC was facing a downtown the German discounters- Aldi and Lidl experienced tremendous growth. Their sales reached a whopping 20.7 per cent. Even though this increase in growth was below Aldi’s regular growth, it was way far ahead of Tesco’s (Burt et al., 2010). According to Burt et al. (2010), the rise in sales of Aldi and Lidl was largely contributed by the middle class. Market research companies found out that the middle class was swayed to Aldi and Lidl since they offered them lower prices. Consumers with less money to spend are cautious on cost of items. They spend with very little confidence.

Economic Contribution to the Changes in India

In his report, Tescco International –An Increasingly Important Engine for Growth, Philip Clarke notes that the Asian market continues to experience gradual and steady growth. As shown on the figure below, India’s LFL performance stands out among Tesco’s Asian markets. This growth was highest in 2010 at +35 per cent. Despite the drop in the LFL performance in 2010, it significantly improved in the second half of 2011 (Wrigley, 2014).

Table 3: Tesco's Asian Like-For-Like Performance

The growth indicated on table 3 above is attributed to a number of economic contributors. India’s GDP growth rate was highest in 2010 at 10.3 % (Rate, 2010). This growth translated to availability of more disposable income. Consumers had relatively much to spend. Consequent to this, Tesco and the grocery industry in general enjoyed important growth this period. However, the decline of the GDP growth rate the following year created high unemployment rates and thus low consumer spending. This negative growth rate was reflected in the Tesco India’s LFL performance. The other factor that has contributed to gradual growth of Tesco in India is infrastructure development. The aggressive efforts by the Indian government to improve infrastructure translates to increased connectivity. Goods, as well as consumers can reach the market with ease thus facilitating more trade. On the other, credit availability at affordable interest in most of the Indian banks promoted investment in agriculture. The food industry in general got a boost and grew rapidly (Zameer and Mukherjee, 2011).

The rise in capital cost (this refers to electricity, real estate and port facility) impacted negatively on the growth of the grocery industry. On the same breath, India’s manpower power recorded an upward trend from 2004-2011(Zameer and Mukherjee, 2011). These factors lead to an increased cost of doing business. Retailers were forced to spend more on production if at all they had to stay in business. By doing so, their profit margin sluggishly grew in the period between 2013 and 2014. Just like in UK, the economic recession had a negative impact on the grocery retail industry. The global recession plunged the retailing into a five year low. Zameer and Mukherjee (2011),attribute the slow growth to; inflation, increase in inflation and declining consumer spending that consequently leads to a fall of the profit margins. Moreover, low purchasing power among the Indian consumers during the economic recession instigated stiff competition among the retailers. The competition witnessed implied that retailers had to invest more on ads and innovative strategies that could give them a cutting edge over their competitors.

Impact of Social Factors to the Changes

• United Kingdom : The social factors too had an impact on the grocery industry in the UK. These social factors include; the living standard, demographics and residential developments. The changes in the UK demographics have a huge impact on the grocery retail industry due to the fact that people of varying age groups exhibit different consumer patterns. Also, their preferences and consumer power varies too in line with their age. In his study, Börsch-Supan (2003), affirms that types of products that consumers demand are largely determined by consumers age. This phenomenon explains why retailers in this industry are keen on the demographic changes.

Figure 3: UK population by age 1974- 2044 (Projected)

As indicated on the table above, UK ageing population is larger than any other in the total population. This increase in ageing has been there since 1980 and poised to increase further according to UK projections.  The ageing population highly demands the supply of healthier and value –added foods so as to meet their needs. Thus, the ever increasing growth of the grocery industry from 2007 to 2014 is closely connected to the increase of ageing population that sparks demand for healthy grocery products (Mintel, 2009).

Statistics from The National Statistics (2010) indicated a slight decline in the Total Fertility Rate in 2009 (Statistics, 2012). However, in reference to the past the TFR continues to remain high. More children in the UK population create a rise in the demand for children items and educational stuffs. The other social factor to consider is the rise in the number of working women. The increasing number of working women contributed to increase in demand for local convenient stores where they can purchase their groceries ((International Labour Organisation).

The growth of the living standard in UK equally impacted on the growth of the industry. The Mintel Oxygen Report (2009) affirms that the rise in the living standard translates to a population that seeks a high quality of life. In addition, people are becoming increasingly concerned about their health. In response to such a trend, grocery industries tend to develop quality products to meet these needs. For example, in the period between 2008 and 2014, Tesco’s products in UK consisted of “organic foods”. Also, Tesco offered their consumers various substitutes for the same products. By meeting the consumers’ needs for healthy foods, Tesco’s growth as well as other industries in this cadre improved significantly. The trend confirms Börsch?Supan’s (2003) assertion that the products that consumers demand are a replica of their social conditioning as well as a product of their attitudes and beliefs.

• India: By the year 2014, India’s population was characterised a dominant youthful population, majority of whom were working (Giridhar, 2014).Having a majority of young people who are working generated huge income and savings for India. These factors, coupled with the fact that most of them lived in urban centres provoked an increase in sales for most of the retail industries located in the urban centres. The young urban consumers have a tendency to purchase their groceries once a week as it this is deemed convenient for them. This form of bulk purchase catapults to higher sales for retail grocery industries. The rise in the middle class population too had an impact since consumer spending went up due to availability of more disposable income. Apart from change in demographics, the high standard of living contributed to the growth of grocery retailing. As illustrated earlier, India GDP growth was highest in 2010 with a 10% rate. The high standard of living altered the consumer attitudes. For example, earlier on the Indian population considered shopping at malls as costly thus meant for the rich people. However, with improved living standard more and more people are shopping from major grocery retailers like Big Basket, Tesco and Grofers. The increase in sales of major grocery retailers is an indication that the living standard in India significantly improved in the period between 2008 and 2014(Zameer and Mukherjee, 2011).

The change in the consumption pattern is the other social factor that affected the grocery retail industry. Zameer and Mukherjee (2011), note that the Indian consumption patterns have changed significantly over time. For instance, traditionally the Indian consumers exhibited loyalty to a certain brand. However, current consumers are welcoming new products entering the market because they have discovered that they are paying for quality and not the brand. The successful entry of Tesco into India is largely attributed to this factor.

According to Freilich (1972), culture is a complex phenomenon that includes belief, art, law, knowledge, morals and customs. The changes in the way of life among in Indian population potentially had an impact on the grocery retail marketing. For example, the Indian culture has over time changed from spiritualism to materialism (Dasgupta et al., 2012).This means that people are spending more money to acquire products than they had ever done before.This shift impacted positively on the grocery markets since more people were willing to c spend money on grocery. Additionally, culture has changed in the sense that more women are currently working as opposed to the ancient times (Dasgupta et al., 2012). Their increasing number in the workforce brings the issue of convenience. Thus, there is a sharp increase in demand for convenient access to grocery products. The online grocery retailers like Big Basket have benefited from this phenomenon by delivering grocery faster and conveniently to people’s homes.

Comparison of the Differences /Similarities in India and UK

The grocery retail industry in the UK and India exhibited gradual growth in the periods examined. However, Tesco UK experienced a downtown in favour of the German discounters (Aldi and Lidl) in 2008. Despite the fear that loomed around the entry of Tesco into India, Tesco continues to experience growth. The recovery from the economic recession continues to foster growth of this industry. Increase in the employment rates, fall in inflation and availability of disposable income continue to harness positive impact on grocery retailers in UK. According to Zameer and Mukherjee (2011), the Indian grocery retail market indicates much more potential than any other Asian market. The reason for this is largely attributed to India’s recent infrastructural developments and cultural changes that favour FDI activities.

A comparison of the causes for the performance of the market in both countries shows remarkable differences and similarities that are worth noting in Global Business Environment Assignment. In both countries, economic factors like the country’s economic growth played a key role in driving sales. However, in India the market appeared to be driven by availability of credit and development of infrastructure. In both countries, varying social factors drove the markets. While in UK the ageing population was the key mover, in India the young population took centre stage. Nevertheless, the middle class population in both countries outdid both the rich and low class in terms of driving the markets.

Recommendations

The Global Business Environment Assignment generates crucial information that can be used to spark growth of the retail industry in both countries not only for the companies highlighted but also other retailers in this category. As noted, UK’s population is dominated by the old people who demand healthier products. Similarly, as a result of the improved living standards in India, healthier products more marketable than unhealthier ones. Consequent to this, retailers need to focus on production/sale of more “organic” products in order to meet the rising demand for them. On the other hand, the rise of both the middle class in the two countries demands aggressive marketing methods. Tesco, Big Basket and the German discounters- Aldi and Lidl need to focus on marketing strategies that targets this cadre. It might include offering discounts, promotions and products affordable to the middle class.

In general the findings of this report emphasise the need of market research for business intending to conduct global business. Assumptions cannot be made or knowledge of contributing factors in country A transferred to B. For example, one cannot assume that ageing population (a social factor in UK) is prime mover of sales in India.  Each country possesses unique characteristics that need to be carefully analysed before entry into any form of investment is done. Modern retailers might need to invest more on technology and hyper local models like Big Basket in India .The hyper local model is convenient for most consumers and has thus a lot of untapped potential for the industry.

Conclusion  

In summary, this report has examined how economic and social factors affect the grocery retail industry in both UK and India. The essay begins by discussing the market performance of the retail industry in UK and India between 2007 and 2014. In then examines how economic and social environments in UK and India influenced the market performance in each country. As evident in the findings and discussions, the causes for the performance of the markets in both countries had remarkable differences and similarities. In both countries, economic factors like the country’s economic growth played a key role in driving the sales. However, in India the market appeared to be driven by availability of credit and development of infrastructure. In both countries varying social factors drove the markets. While in UK the ageing population was the key mover, in India the young population took centre stage. Nevertheless, the middle class population in both countries outdid both the rich and low class in terms of driving the grocery retail markets. The findings highlighted and the discussion indicates that each country has unique factors that impact either positively or negatively on any business. Therefore, every business that intends to go global has to assess how the various factors (unique to their business) impact either positively or negatively towards growth of the intended business venture.

References

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