The objective of this assignment is to assess the risks in the UK economy and how they are impacting different sectors and the sector participants. This assignment however takes the example of the retails sector. This is because Retail sector is among the most important sectors for any economy and so as for the UK economy. All the risks that economy is facing directly and indirectly impact this sector as well. The retail sector is a vital part of the UK economy that comprised 5.2% of the UK DGP in 2020 and employed 9.3% of all UK employees as per 2019 figures. So it forms the backbone of the UK economy. (Economic trends in the retail sector, Great Britain – Office for National Statistics, 2022)
Retail sector is still growing in spite of being a mature sector with its sales doubling in the last two decades. Tech has also impacted this industry significantly and along with all kind of tech being used in stores, online sales are also rising rapidly. (Economic trends in the retail sector, Great Britain – Office for National Statistics, 2022)
Asda is among the top players in the retail industry and that is why it is chosen for the purpose of assessing the retail industry and how the risk of Asda correlates with those of the retail industry.
One tool that can help assessing the risk facing the industry is PESTEL Analysis which can help assessing the overall risks of the economy in a systematic manner.
There are numerous political factors impacting the UK economy including Russian-Ukrainian War and UK stance on it and UK’s relationship with Europe, particularly after the UK is failed to struck any deal with the Europe. This impacted the supply chain for majority of the industries and so as for the retail sector. While Russian invasion of the Ukraine caused the energy prices and thus costs increase, the no-deal Brexit results in Europe being treated same as the rest of the world and so resulted in port delays, and not enough drivers driving between countries. “Britain’s economy is forecast to slow to a standstill next year as it suffers more than any other major industrial country from the effects of Russia’s invasion of Ukraine(Elliott, 2022).” Moreover, there are additional paperwork and legal challenges as well that also resulted in increasing the costs as well as supply shortages. Then, due to increased costs, demand have gone down, negatively impacting the whole economy, and disposable income of the people and so as the demand for the retail sector(Cook, 2022). This risk to UK economy is expected to impact the retail sector as well with the threat of further shrinking of the demand.
As already explained, political issues causing prices going up and decrease in the disposable income, but COVID-19 has also negatively impacted the supply chain and jobs and causing inflation to rise(Coronavirus (COVID-19) and its effects on household consumption, UK – Office for National Statistics, 2022). Due to high energy prices, there is a threat of recession in the UK this year. Whereas the GDP growth rate is also expected to remain lower than the predicted in both 2022 and 2023(The Bank of England predicts a lengthy recession at the end of the year, 2022).“The challenges are spread across the economy, with both consumers and businesses under pressure. Business investment continues to under-perform expectations and subdued growth prospects, rising costs and increasing debt, particularly among small and medium-sized companies, mean a turnaround looks unlikely in the short-term(Banks, 2022).” This resulted in people and businesses not investing much into the economy, resulting in reducing the growth rate further. All this means, bit of gloomy future for the retail sector over the next two years.
Social factors evolved rapidly in the last two years particularly with regard to attitudes regarding consumption and buying behaviour particularly due to COVID-19. Not only that people are now more than ever conscious about their health but are focusing more on the online shopping, a trend increased many folds during COVID-19 and now seems like a long term trend. People like to buy from the safety of their homes and found it more convenient as well while organizations are also allowing more and more work from home. This is impacting retail sector as well as they need to spend more on the health and wellbeing of their employees as well as ensuring as safe and secure place for the customers as well as they are spending more on hygiene products. This resulted in increased operational cost for the businesses in the economy, and so as for the retail sector. (Coronavirus (COVID-19) and its effects on household consumption, UK – Office for National Statistics, 2022)
Tech factors are also very important for the economy as they have changed the businesses in several ways and not only resulted in more efficiency but made the businesses more secure and cost effective as well. As a result, they have increased the speed of economic progress of a nation. The same has happened in the UK economy and the business sector where there is increased trend of automation, like self-checkouts as well as use of tech in all facets of the operations, from human resource management to inventory management and sales and marketing to after sales services. The retail sector has also adopted this technological use. There is increased trend of online shopping which is facilitated through the websites and mobile apps. The COVID-19 has fuelled the technological use further. However, while machines has increased the security of the personal through reducing the need of physical contact with the personal, however, the instances of fraud are also increased due to online shopping and the organizations need to spend further in this arena to ensure that they stay ahead of the hackers to prevent their system. (How technology is reshaping the future of retail – Latest Retail Technology News From Across The Globe – Charged, 2022)
While there is an increasing trend among the consumers of being environmentally conscious, the COVID-19 outbreak has increased this trend further. Moreover, the recent changes in weather patterns have also made the people think more about protecting the environment which is also reflecting in their shopping behaviour as consumers are ready to spend more for the products that are sustainable and environment friendly. “Sustainable, inclusive growth will require changing the workplace to maximize the contributions of all people(COVID-19: Implications for business, 2022).” This is also impacting the retail sector as it also need to adopt sustainable measures in order to keep its customers satisfied.
Legal factors also impacts the economy in a great was and increasing the costs of doing business which is harming the wellbeing of the businesses. Particularly, ever stringent labour laws are increasing the costs. Often the companies feel pressurized that hurt their profitability by retaining their employees, like that in the COVID-19 times. Then, the safety laws, like increased health and safety requirements due to COVID also increased the costs many folds, hurting the profitability. Moreover, the companies are also increasingly more likely to adopt to carbon neutral position due to increasing environment protection costs.(Business insights and impact on the UK economy – Office for National Statistics, 2022)
Risk Factors for the ASDA, the company within Retail Sector
Asda Stores Limited came into existence in 1949 as Associated Dairies & Farm Stores Limited which later became ASDA in 1965(Asda History, 2022). The company owns over 600 stores in the UK and Northern Ireland. Asda is the 3rd largest supermarket in the UK only behind Tesco and Sainsbury by market share. The company is also offering its products through its website and mobile app that is serving around 98% of the UK homes. For this purpose, the company has established over 37 distribution and fulfilment centres along with thousands of suppliers(Asda Stores Ltd Selects TrueCommerce to Manage its Business Transformation Initiative as It Separates from Walmart, 2022).That is why, it is an appropriate firm to assess the wellbeing of retail sector with the United Kingdome, and thus chosen for this assignment
In order to assess the company’s key risk factors and how it compares with those of the other firms within the sector, PESTEL will be used. PESTEL is useful because it helps classifying risks in a systematic manner that can easily be evaluated afterwards.
With regard to political risks, ASDA, like other supermarkets and retailers, is facing the impacts of the aftermath of Brexit as well as rising energy costs due to the Russian-Ukrainian War and British stance regarding it. The company is also facing the supply chain shortage and increased and cumbersome legal requirements regarding border movements with the Europe. As a result, same like other retailers, it is also facing supply shortage and increased input costs, which is not only harming its profitability, but the increased inflation is causing the demand to its products decline and thus causing decrease in its revenue growth.
Again, with regard to economic risk factors, ASDA is a great representative of the retail sector and faces similar risks as other retail companies within the retail sector as all of these sell almost similar products, with majority of those form the same suppliers as well or sourced from the same region. Then, they sell to the same customers. As a result, they all are facing the increased input costs, increased operational costs and decreasing growth rate as the inflation is hurting the disposable income of the UK residents.
However, in the recent times, the company has improved in profitability reporting 42% increased profits because of reduction in safety related costs imposed by the COVID-19 regulation. “Grocery like-for-like sales decreased by 0.5% in 2021 compared with 2020, when the UK spent most of the year under Covid-related restrictions, resulting in more meals being consumed at home. However, like-for-like grocery sales remained strong on a two-year basis, with growth of 4.6%.” the company is also becoming the UK’s second largest online retailer with over one million online slots per week. (Giltrow, 2022). This is in contrast to how other major retailers have reported. For example, for Tesco, their net profit declined by 74.48% in the year ending Feb 2022(Tesco Net Income 2010-2022 | TSCDY, 2022), which shows, ASDA’s supply chain has become much more resilient as compared to other major retailers. Sainsbury also shows growth in profits but it was more of due to exceptional items like setting legal disputes (Preliminary Results for the 52 weeks ended 5 March 2022, 2022).
As far as social risk factors is concerned, again Asda is facing the same risks largely as the whole economy as well as the sectors is facing overall. These includes people moving more towards online shopping, wanting healthier food options and then decrease in disposable income that threatens the wellbeing of the firm. Asda however is well on course in dealing with these issues as already explained as it become the second largest online retailer in the UK and then its profitability is also on the rise.
With regards to technological factors, they impact the ASDA in the same way as other industry participants. Physical visits of the different retailers like ASDA, TESCO, Sainsbury and Aldi shows similar checkouts. Then, they have setup similar website and apps for consumers and even the layouts are pretty much similar for ASDA, TESO and Sainsbury while Aldi’s, being more focused on cost cut, the lay out is lot more messy. All these companies are trying to deal with the increased trend of online shopping by the consumers while keeping the costs low in order to reduce the impact of increasing inflation.
In case of environmental risks, they are pretty much same for the ASDA as other sector participants. That is why, ASDA is also trying to deal with the environmental factors in pretty much the same way by offering sustainable packaging and reducing the amount of packaging while encouraging reusable shopping bags. This is because the consciousness of the consumers regarding environment is expected to increase particularly as the UK is also facing the impact of global warming apparently as evident from the recent draught.
Again, ASDA is also facing similar legal risks as other industry participants are facing. Legal burden is increasing like “new laws limiting the way retailers can display “less healthy” products are causing a fresh challenge for independents during an increasingly difficult trading period(Pitcher, 2022).” This and other laws regarding labour rights, health and safety and environmental protection are adding to the operational costs in an already difficult time, when the inflation is already rising and the disposable incomes for the consumers are at a decline.
These are highly turbulent times for the UK economy due to several reasons like COVID-19, Brexit and the Ukrainian-Russian war that all has negative impact on the UK economy and the retail sector. The risks facing the economy are also impacting the retails sector, which is perhaps the most important sector in the economy as every household is attached to it as customer. There are not only political and economic challenges for the retail sector and the chosen company ASDA but there are also changing social and technological trends that pose significant risk and challenges for the UK retail sector. Then, legal challenges and associated costs are also negatively impacting the retail firms. The sector participants needs to remain vigilant regarding these challenges or else survival can become really tough for them in future.
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