Small business management Assignment UK food grocery retail sector
Farm Shop – Chatsworth Farm Shop
Small business (Chatsworth farm shop) in the grocery/food retail segment evaluating the operational benefits and challenges and the entrepreneurial processes that contributed to the success. Small business management UK food grocery retail Benefits challenges Porter’s five forces, Value proposition Value chain, Team building entrepreneurship
Table of Contents
The following report analyses a small business (Chatsworth farm shop) in the grocery/food retail segment evaluating the operational benefits and challenges and the entrepreneurial processes that contributed to the success.
In the United Kingdom retail sector accounts for a large part of employment and gross domestic product. In the recent decades there has been consolidation in the industry with larger players like Tesco, Sainsbury, Asda, Morrison’s etc. consolidating or defending their market share, facing competitive pressure from the recent entrants with cost leadership strategies, such as Aldi and Lidl, increasing their market share (refer appendix I for grocery retail market share). While the top three have tried to defend their market share through various strategies, it was the bottom of the pyramid of the industry – independent and small-scale retailers that have suffered (Fernie et al., 2015). Many small-scale retailers have closed shop as they could not match the product variety and competitive prices of larger retailers. Small retailers could not offer a significant niche, differentiation or an alternate business model to compete against the larger players in the industry, who have also ventured into the high-street with small format shops, directly challenging the small corner shop retailers (Gonzalez and Dawson 2015).
While the corner shop food/grocery retailers have been affected, there has been some interest in farm/estate based shops (farm shops) and farmers market, but which accounts for a very low percentage of the overall market, but offering a differentiated business model and a niche in the market, offering certain value to consumers. Farm shops and farmers markets enable the producers (farmers) an opportunity to sell directly to end consumers, without going through the supply chain (Department for Environment, Food and Rural Affairs 2012)
The National Farmers Retail and Markets Association (FARMA), is a non-profit association promoting farmers market by offering FARMA certification for its members who mainly sells directly to consumers (FARMA 2017). Direct selling to consumers has different business formats.
- Farmers market has independent producers (farmers) with single or multiple produce, having small stalls (temporary infrastructure) in larger markets, which could be permanent or temporary (weekly, monthly, special occasions – Halloween nights).
- Farm shop concept is influenced by US farmer shops, started to appear in UK in mid-1970s (Goldsmith 2012). Farm shops in the UK could be fed by large estate with multiple produce (meat, vegetables, fruits), even with processing capabilities for value addition (packaging, meat processing, packaged foods, frozen foods). Farm shops can also have the Pick-Your-Own concept where consumers take their own produce from the farm.
- Independent farm shops source produce locally and often have forward integration through home delivery and online purchasing to cater to the wider target audience.
The farm shops offer local provenance and British origin products is getting increasing attention from consumers as a result of food scares (BSE and worries about GM food) (Guardian 2012). Consumers are getting more aware of quality and safety as well as environmental friendliness. There is increasing interest among consumers to support local farmers, environmental friendliness, organic food (Feldmann and Hamm 2015). Although the concept of farm shops emerged only towards the end of 1970s and has not seen significant growth in the recent years, it is a model trusted by consumers to offer British origin products, quality and environmental friendliness. Nevertheless the expansion of the larger supermarkets to the internal areas of the country where farm shops are located is a threat to the business model.
Chatsworth house a stately home in Derbyshire is the seat of Duke of Devonshire. It has a 35,000 acre agricultural estate belonging to the trustees of Chatsworth settlement. Chatsworth farm opened their farm shop in 1977 and currently employs about 100 people. It has a business model of sourcing products from its own farms (50% of sales) and balance mostly from tenant farmers and local producers (Goldsmith 2012). The farm shop offers a range of meat, poultry and game, fresh fruit and vegetables, alcoholic and non-alcoholic beverages and a range of packaged food products (Chatsworth 2017).
Chatsworth farm shop is selected as it is considered as the pioneer in the farm shop business. It has encountered difficulties in the past including loss-making years, but has improved its business model by opening new services such as an in-house kitchen, bakery, fish counter and delicacies over the years. More than half of all the products are either produced or prepared on the Chatsworth estate.
Porter’s five forces model analyses the industry to evaluate the intensity of competition and attractiveness of the industry. Food/grocery retailing is a large industry with multiple formats, business models and sectors within it and farm shops are a small part of the independent/small food/grocery retail sector. The following Porter’s five forces analysis evaluates the larger food/grocery retailing industry, but also considers the specific sector mainly the independent/small food/grocery retailers to evaluate the competitive intensity and attractiveness of the specific sector.
Threat of new entrants in the food/grocery retail sector is limited as a result of
- Substantial market share held by the top three retailers (Jary and Wileman 2016).
- Economies of scale for the large multi-store retailers.
- Cost advantage two large supermarket chains from established value chain (suppliers).
However new small-scale players could enter the small-scale food/grocery sector as
the investment is not substantial.
- No specialist knowledge or technology is required.
- There are no particular barriers to entry apart from existing competition.
The possibility of new farm shops, fed by its own estate (integrated value chain) is minimal and such new entry does not pose any threat to existing farm shops. There could be spread of farmers market (new farmers market in different areas) and farm shops fed by local produce (managed supply chain). Nevertheless existing farm shops cater to mostly the local market and the new entrants in different parts of the country does not pose a threat.
The bargaining power of suppliers (farmers, producers, food processing, and packaging) are limited on the larger food/grocery retail industry. The size of any supplier in the market (scale and market share) is not sufficient to erect a high bargaining power. Majority of the suppliers do not have any uniqueness apart from integrated food processors and branded products (Shaw et al., 1992). Almost all type of products even if branded has perfect substitutes and alternates and the cost of switching from one product to another by the retailer is insignificant.
From the perspective of farm shops, there are virtually no suppliers. The packaging and other product/service providers do not have any uniqueness, have perfect substitutes and switching cost is insignificant. The lack of any kind of bargaining power of the suppliers is a significant advantage for farm shops. Almost all the produce of farm shops is either directly from the farm/estate, usually under the same ownership. Other local produce are a part of partnership and the common interest of both parties (local farmers and farm shops) have significant parallels, removing the concept of supply of power.
The substitutes for the existing brick and mortar model food/grocery retail segment are the online sales business model. However the extent of substitution effect of online sellers are not very significant as a majority of the food/grocery products are perishable (limited shelf life). Nevertheless shifting consumer preferences are offering an increasing ability of online sellers to substitute the brick and mortar model (Grewal et al., 2012). However the branded multi-store supermarkets are now offering online purchasing and hence there is insignificant substitution effect from external players.
From the perspective of small-scale/independent retailers, online sellers are a limited threat. However farm shops and other small scale/independent retailers cater to the local market and the possibility of reducing the market share in the locality is not very significant. Furthermore even farm shops have established forward integration through offering online purchasing of a large number of products. The forward integration through online sales is in fact enhancing the market share of small-scale farm shops by introducing a larger market.
There is no bargaining power of consumers for the food/grocery retail industry as the number of customers equals the population of the country. The size of each purchase is insignificant. The differences or uniqueness offered by the larger players in the industry are mainly based on quality and price, where each player has entrenched their market position (Dobson et al., 2009). Further food/grocery products are not considered price sensitive as they are essential commodities. Although there are enough substitutes among the food/grocery retailers and the cost of switching is also insignificant apart from local availability (access to substitute retailer), the sheer size of the consumer base reduces any bargaining power.
From the perspective of small-scale/Independent farm shops, the bargaining power of consumers is slightly higher than the larger supermarket chain stores. The independent farm shops have a specific limited number of customers and their individual purchase size considering the overall lifetime value is slightly significant. Local farm shops cater to the ultra-local market and the number of customers is limited and permanent (Sundbo 2016). There are also enough substitutes for these customers (larger supermarkets, other corner shops) and the cost of switching for them is insignificant. Hence contrary to the larger food/grocery retail industry, there is a slight amount of bargaining power of consumers over the farm shops.
The competitive rivalry in the food/grocery retail industry is high among the larger supermarket chains as they have adopted different business models, based on price and quality (Steiner 2004). The loyalty of consumers to retail stores is minimal although loyalty schemes have erected switching cost. There are no significant perceivable differences between the supermarkets offering quality and those that have adopted cost leadership strategies.
From the perspective of Independent farm shops, the competitive rivalry in the industry is a concern as the larger supermarkets are expanding and offering competition. The switching cost for the existing consumers of farm shops are virtually non-existent, although quality differences, attractiveness of local produce, helping/enabling local farmers, and environmental friendliness and so on could have a role in consumer behaviour and consumer loyalty (Malandrin 2015).
Chatsworth farm shop is a pioneer in in the farm shop sector having opened in 1977 and offers its own produce or local products. The regional minded approach attracts the ultra-local consumers and some tourists. There are insignificant supply chain/logistics costs for Chatsworth farm shop, thus reducing the cost of operations and able to offer prices at the same level as the larger competitors and ensuring sufficient margins. The products are differentiated from the traditional grocery/food retailers based on local provenance and hence able to attract consumers wishing to purchase British origin products, support local farmers, environmental and quality conscious consumers.
There is no increase in the market segment size and hence growth of the market for Chatsworth farm shop apart from through forward integration in the form of online sales and the traditional values of the farmhouse could have an impact on increasing the market share; however this increases the cost of operations to forward supply chain and logistics operations.
The business model of Chatsworth farm is the integration of farming, production, processing, packaging and direct sales, which is better analysed with the help of Porter’s value chain. Porter’s value chain is the set of activities performed by an organisation to deliver product/service value and is based on process view of organisations considering the entire organisation as a system made up of subsystems, transformative processes and outputs (Porter 1985). Porter’s value chain analysis considered for Chatsworth farm shop includes the elements of the estate as the ownership of single and the value chain has to be considered from the perspective of business unit.
Accounting, legal administration and general management
· Small scale operations reduces the cost of infrastructure related elements
|Human resource management
· Low skilled manpower, shop operations, farm operations
· Cost of operations are low as a small-scale/independent operator
· No significant technology and knowledge requirements apart from basic computer systems
· Insignificant procurement necessities as there are no high value goods/services needed from external sources
· Insignificant as sourcing of materials is low, no warehouse operations.
· Low cost
· Extensive operations concerned with farming, internal movement of products, processing, packaging, value addition
· High cost
· Insignificant movement of final product.
· Forward integration (online sales) adds outbound logistics
· Low cost
|Marketing and Sales
· Established market requires relatively less effort in marketing and sales.
· No significant service related operations.
The difference in business model of Chatsworth farm shop is evident from Porter’s value chain. The value chain analysis included the estate that provides the products after farming, processing, packaging and value addition. When considering the individual business unit of Chatsworth farm, the operations cost also reduces and hence the individual unit (farm shop) is able to achieve low cost in almost all operational areas and gaining competitive advantage over the larger and other smaller/independent retailers (corner shops). This business model based on the value chain is difficult for competitors to reproduce, especially the larger retailers.
The main benefit of Chatsworth farm shop, considering it as an individual business unit is the low cost of operations. When analysing the total business which includes the estate, processing, packaging and value addition activities; can be considered as forward integration of the producer (Chatsworth farm/estate). This forward integration has benefited the entire organisation as it is able to sell directly to consumers, avoiding intermediaries and offering the uniqueness or differentiation of local produce, where consumers can assess the quality. Hence the Chatsworth farm shop is a niche organisation among the small/independent retailers, differentiated from corner shops as well as larger supermarkets. Main consumers are from the ultra-local area along with tourists and the sustainability of the benefits arise from increasing environmental, ethical and quality consciousness, as well as the mentality of consumers to support local farms and local businesses.
The limitation of Chatsworth farm shop is the inability to expand its market as the connection of the shop with the estate is through localised activity. Expansion of the shop by increasing branches might diminish this perceived connection. However, forward integration through online sales can increase the market share of the farm shop.
Chatsworth farm shop revolves around its own products (lamb, beef and game) with a cause and philosophy of promoting local products. The organisation has built up partnership and association with its tenant farmers as well as other local producers providing quality goods and ensures a team consciousness among the local people. There is evidence of team building efforts at Chatsworth farm in their organisational structure, organisational culture, communication and the innovation policies, which can all indicate team building efforts according to Robbins (2001). The structure of Chatsworth farm is based on a model of co-operatives with the farm, farm shop, garden and other revenue accruing areas separately managed, but having an integrated strategy to attract customers at the same time maintaining the unique culture connected with the history of the area. The growth objective of Chatsworth farm takes into consideration their immediate suppliers included in the value chain which results in its competitive position of uniqueness based on ultra-local products. This partnership and association with the tenant and other local farmers, the farm shop is able to improve its profitability as most of the operations is within the value chain. Hence the most important element of team building by Chatsworth farm is the partnership and association with tenant and local farmers and offering ultra-local products mainly to the immediate and surrounding customer base, enabling high customer loyalty, customer satisfaction and good image.
Chatsworth farm shop is a pioneer and indicates the entrepreneurial as well as leadership characteristics. Its organisational philosophy of promoting local produce has contributed to a tight culture; however it has taken risks in its managerial approach through creative solutions to problems and has a vision for the future of the business. As indicated by Carter and Dylan (2012) emerging ventures go through several transformations before finalising on a business model, Chatsworth farm shop also went through several changes, initially starting with the estate only products, developing local partnership with tenant farmers, enhancing the product range through local producers and increasing the value addition by offering cooked/semi-cooked packaged as well as in-house restaurant. It has a generic business model of high differentiation (only local produce) and customer focus as it has to maintain close relationship with the local customers. The opening of the theme park, restaurant, hotel, sculpture gallery and garden has enhanced the number of tourists/visitors contributing to increased sales for the farm shop.
The above factors indicates the constant generation of ideas, selection of feasible business opportunities, structured planning process, allocation of resources to particular areas and the involvement of stakeholders, all of which suggests the entrepreneurial process. Most importantly the competitiveness of Chatsworth farm is based on its innovative business model of including its partners and suppliers in the value chain thereby contributing to improved profitability for the farm shop. Chatsworth farm shop has allocated enough resources to its growth as there is a master plan for various renewable projects in the estate, improving access and enjoyment of visitors (Chatsworth 2017). Currently in the fourth and the final phase of the master plan which is expected to complete in November 2017, improves accessibility to visitors, offer better facilities and restoration of damaged areas enhancing the overall sustainability of the entire estate which could improve the number of visitors and hence the market share.
The retail sector in UK is huge and any initial thoughts about UK retail would be focused on larger organisations such as Tesco, Asda, Marks & Spencer’s and so on. However the research on management of small business with a focus on the benefits and challenges of the operation of a small business in the larger industry indicates the possibility of entrepreneurship opportunities even in the highly competitive market space. The industry analysis using Porter’s five forces model suggests high competitive rivalry for the UK retail industry; however smaller niche players such as Chatsworth farm shop is able to operate with a generic strategy of differentiated focus.
Analysing Porter’s five forces application further, it appears that the forces affecting the narrow sector of small/independent retailers and farm shops is markedly different from the forces affecting the larger industry. A traditional analysis using Porter’s five forces would be from the perspective of larger industry players like Tesco, Asda, Marks & Spencer’s. While competitive rivalry and threat of new entrants are the forces affecting the larger industry, for the smaller player players, the bargaining power of consumers is important as these independent farm shops have a restricted and almost permanent market segment (ultra-local consumers). This indicates that Porter’s five forces model has to be applied considering the specific sector in the industry rather than the industry as a whole.
The value proposition of Chatsworth farm shop is markedly different from the traditional larger and smaller retailers and Porter’s value chain model clearly suggests the value driving activities. Porter’s value chain has to be used to analyse a business unit which in this case would be the Chatsworth farm shop, but such an evaluation would have indicated almost all the value chain elements as significantly cost-effective as there are no cost additives. The operation of Chatsworth farm shop includes certain operations within the estate such as packaging, processing and so on, as they are internal aspects of the value chain. Unlike other organisations, these elements are internalised by Chatsworth farm shop and hence the value chain has to consider the integrated business unit rather than considering farm shop as the business unit. This also suggests the need for evaluating the context of analysis when utilising Porter’s value chain model.
A section of the assignment had to be based on identification and evaluation of team building efforts and entrepreneurial process that contributed to the success of the organisation. The limited public information available about Chatsworth farm shop reduced the possibility for a detailed evaluation of these aspects. However with the available public information about the history of Chatsworth farm shop, certain aspects of team building (Association with local producers) and entrepreneurial process (pioneer in the field, development of business model) only a short analysis was done. Finally reflecting on the larger retail industry, it appears that small niche players have scope and area for showing their entrepreneurial spirit; however their ability to grow is restricted as a result of intense competitor action. Further niche players have to concentrate on a particular market segment as in the case of Chatsworth farm shop focusing on the ultra-local consumers. Any expansion would dilute their niche and remove the customer focus.
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Great Britain grocery market share