A longitudinal study of competition and performance in the UK grocery retail industry

The grocery retailing industry is a key sector of the UK economy, accounting for 16%of consumer expenditure. As such developments in this sector will have an importanteffect on UK economic and social welfare. Arguably, competition in the sector hasintensified in the last two decades. Yet significant consolidation in the sector has putit under the spotlight of the UK competition authorities. Previous research analysingfactors affecting the performance and positioning of UK grocery retailers has tendedto be restricted to a limited time period and a small sample size. This study extendsthis research by investigating industry evolution and factors affecting performanceand industry structure with longitudinal panel data, covering a two-decade timeperiod. The sample used covers a wide variety of grocery retailers with a range ofdifferent attributes over a significant period in the development of the industry,running from 1985 through to 2003.Strategic group theory is employed to study industry evolution and examine theeffects of strategic positioning on performance. Specifically, fixed-effect paneleconometric models are estimated at different levels of aggregation to analyse firm,industry and strategic group effects on the performance of retailers. Also, stochasticfrontier models, in the form of Cobb-Douglas and Transcendental Logarithmicfunctions, are estimated at different levels of aggregation to analyse the efficiency ofretailers in the sector.The results from cluster analysis on strategic groups suggest that industry structureis likely to become more concentrated, and the size of retailers will be a significantmobility barrier in the industry. The profitability analysis finds industry level factorsand strategic group composition to be crucial in explaining performance differences.The efficiency analysis finds large retailers exhibiting economies of scale throughoperating large store formats to be significantly better positioned from smaller-formatretailers with fewer outlets. Consistent and significant time dummies demonstrate thefavourable macro environment enjoyed by the retailers for much of the 1990s.The analysis reveals potentially useful insights for retail managers, especiallyconcerning the importance of positioning in the industry and the choice of strategicorientation. More generally, the study opens up further possibilities for future studiesof performance and efficiency measurement over an even longer time as the sectorcontinues to develop and shape the way consumers shop in the UK.