The Effect of Externalities on UK's Retailers

The Effect of Externalities on UK's Retailers

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The Effect of Externalities on UK's Retailers

1. Introduction

“In business the one thing you can be sure of is change” – (Peter Drucker)

In the recent years the development of the retail market has been greatly changed by external factors such as; political, economical, social, technology and legal (PESTL). This is also known as external macro environment, which concerns all businesses. This report will show what impact it has caused the retail business in the last forty years through these factors.

The retailing business has always existed, however it has been changing through external factors external factors. The retail industry is a huge business; an example of a highly profitable retail company would be Tesco. Last year they had total revenue of £38,259 million in Great Britain alone and there Net income was £1,576 million (Wikipedia, 2006). However, when it is bombarded with new laws, technology and other changes it needs to change as well, otherwise they may have huge consequences.

Only recently has the television had become popular, forty years in the past, only a few had a television. In this day and age people can go on the internet through their television sets and shop on their TV.

2. Methodology

In order to carry out this report, this includes, reading through academic materials such as: Omar (1999), McGoldrick (2002), Bromley & Thomas (1993) and also other academic materials from journals, internet and other materials. These writings develop the key issues with the macro environment and highlight: Political, Economic, Social and Technology. The table Fig 1.1 below from Omar (1999) summarises the key points:


External (macro) environment factors are those influencing factors that retailers are not directly able to control but which they will have to bear in mind during operation. It is usually the uncontrollable factors in the external macro environment that are the most important sources of both opportunities and threats to the retail organisation. The term macro environment, as used here, denotes all forces and agencies external to the retail organisation itself. (Omar, 1999; Berman and Evans, 1995)

The external forces are separate forces; nonetheless, these forces can combine together also. For example; when the government decreases the retirement age, this was affected politically, socially and economically.

In this section there will be an analysis of the key points from the external factors. However, due to the lack word limit, there will only be a selection of examples shown.

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3. Political Factors

Omar, (1999), asserts that, the political climate is an important determinant of retail population. Three considerations touching on the political climate are taxation, small business assistance, and the general sentiment toward business.

Also another factor that would be under political factors would be legislation of employment, which also affects the sociological factor. In the 60s, the women were penalised because of their gender and could not work in a environment of men, until the employment legislation was brought in, which was The Sex Discrimination Acts, 1974 and 1986. These outlaw discrimination on grounds of gender in employment and education. This was reinforced again within the Employment Act 1989. There many more legislation that affects the retailing industry and the history of legislation forty years ago, however the word limitation is limited.

A factor affected all retail businesses in UK and most countries in the European continent, was the European Union (EU). EU was founded in 25th March 1957, by France, West Germany, Italy, Belgium, Luxembourg and Netherlands. The EU helps the retailing industry to get goods from other EU members with ease.

A legislation that affects UK in the retailing industry is the EU’s competition policy. The principle elements of the EU’s competition policy include the following:
• There are laws preventing any activities by business restricting free competition
• The EU will control any merger creating a new firm with a turnover in excess of £4.2 billion.
There are some differences between the EU and UK competition laws. An example; the UK bans certain restrictive practices irrespective of its effect on consumers, whilst EU legislation only operates if consumers are harmed by the practice. In the case of any conflict between the two policies, EU legislation overrules that of the UK. (Surridge & Gillespie, 2004)

4. Economic Factors

Omar, (1999), had asserts that, economic conditions influence the retail population in at least two ways: the development of the business cycle and the cost of doing business based on specific economic requirements. The development of the retail life cycle has a profound impact on retail business failures and their discontinuance. Most of the business failures and business discontinuance are retailing businesses. A reason for business discontinuance could be because of gross domestic product trends.

A region's gross domestic product, or GDP, is one of the several measures of the size of its economy. The GDP of a country is defined as the market value of all final goods and services produced within a country in a given period of time. (Wikipedia, 2006)


Source: National Statistic Fig 1.2
Fig 1.2 shows how the GDP increased by 0.7 per cent in the second quarter in 2006 revised down from 0.8 per cent published last month. The downward revision is mainly due to lower estimates of government and other services output. The level of GDP is now 2.6 per cent higher than the second quarter of 2005. (National Statistic)

How is it going to impact on retailers?

Well if the GDP has been increasing throughout the year then this shows that the sales will likely to increase and also profits for the retail outlets. Also other markets shall be growing, which will create more competition. More retailers will attempt to grow; therefore requiring premises, staff, products (stock) etc.

Also pricing and inflation has increased by 66 times at an average rate of 4.3% since 1900 to 2000. (Hicks and Allen) See Fig 1.3
Recently the inflation in the UK has been increasing since the 1940s. This has quite a impact on the retailers, because this adds more cost for the retailers, such as: Premises, rent, stock would be more expensive. As you can see the inflation was quite low forty years in the past. Fig 1.4 shows the recent changes in inflation.

Source: Joe Hicks and Grahame Allen – House of Commons Library Fig 1.3



Source: National Statistic, 2005
Fig 1.4

The graph here shows that the UK inflation continues to remain restrained despite strong economic growth and historically high oil prices. As you can see the retail price index (RPI) has increased over the years.

5. Social/Demographic

Cannon (1980), states, that the socio-economic forces of demography, location, income and class establish many of the requirements for particular types of needs, drives and actions. After a while they change over time for both the total society and the specific individual or family.
The sociological factors can also be specified as the movement of people and the characteristics of people. British and Europeans in general, tend to move around freely; it has been estimated, for example, that one-fifth of all Europeans move every year. (Omar, 1999)

The sociological factor also includes the ageing population, (McGoldrick, 2002), now that there are more of an ageing population this means that they have more to spend on because of their there pension. The table below – Fig 1.5 – shows the ageing population increasing from 1971 onwards:

Source: National Statistic, 2003 Fig 1.5

6. Technology

Technology refers to the development and use of machinery, products and processes. Many technological advances are beyond the control of individual firms. (Omar, 1999)

Technology is probably one of the biggest reasons for change in retailing for the past four decades. Large retailers tend to have a lot of the latest technology such as Marks and Spencers and Sainsbury’s. Product efficiency would be one of their top priorities, and in order to make it efficient they have brought out GPRS for the Lorries. This helps the drivers to get to delivery points faster.

Digital TV also plays a part because now retailers advertise on digital TV while they are advertising you can go interactive and buys the product, also they do offer other products and you get home delivery, which is convenient for people who do not have the internet, they can do it straight through there TV.

Internet, mostly retailers have cheaper prices on the internet, customers can access this from all over the world very quickly, most items brought on the internet are delivered to your house but however you cannot see what you are buying, it can’t be touched nor worn like clothes, so that is a disadvantage for the internet. It is quite convenient for people who work long hours because they can access the internet anytime they desire. However, this also affects the economical trend and the sociological trend.

“Technology has permitted the transfer of time and, in some instances, has contracted time requirements. The video cassette recorder, the deep freeze and the microwave have all had this effect. Furthermore, the rapid growth of technology and its wide application have led to technological literacy on the part of the average consumer.” (David W. Walters; 1988)
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