Growth Strategies Of Iceland, UK Housing Market And Macroeconomic Indicators Of UK

Product differentiation

In the UK economy, along with big enterprises small and medium sized enterprise hold an important position. These sectors have significant contribution in enhancing economic growth and provide several Job opportunities. The small and medium sized business are motivated to invest in innovation to match the level of competition (smallbusiness.co.uk 2018). Iceland, operating in UK’s supermarket chain though has a comparatively small share in value chain but has interesting strategies to maintain its unique place in the supermarket chain. The report analyzes the growth strategy of one of the UK’s grocery retailer, Iceland.  

The Iceland Food Ltd, known by the name Iceland operates in supermarket chain in UK.  The company puts emphasis on selling of frozen food, prepared vegetable and meal. Apart from this, the company also engages in selling grocery items like meat, dairy and dry goods. In the supermarket chain of UK, Iceland captures a market share of 2.2% (iceland.co.uk 2018).

The grocery supermarket in UK has characteristics similar to that of an oligopoly market. Oligopoly is a market that has few large market players capturing a major share in the market The four major players in UK supermarkets are Tesco, Morrison, Sainsbury and Asda (Sparks 2016).

Figure 1: Share of different grocery retailers in UK

(Source: Sparks 2016)

In order to sustain in such an oligopolistic market structure Iceland has to design special growth strategy.

Product differentiation

In the oligopoly market, product differentiation is one of the most common strategy used by the market players. Product differentiation is the mechanism for making own product different from competitors (Sloman and Jones 2017). Higher the differentiation lower is the elasticity of the product. The retailers in the oligopolistic market therefore focus on specializing in a certain area and differentiate its product from the existing retailers. The area that Iceland choses to specialize is in the supply of frozen food. It is the specialist retailer of frozen food in UK. In this way, the company emphasizes on making a key difference from its competitors.

Innovation

In order to differentiate product, company needs to invest in innovation. Innovation helps to improve existing product by adding new features to the product. For several years. Iceland has remained a leading brand in frozen food through extensive investment in innovation.  The company invests in innovation in new product line to satisfy its customers.

Advertising

Advertising is one of important marketing strategy in the oligopoly market. The customers come to know about new product, specific feature of the product, price offers and other attractive features of the product. When more and more people have information about the competitors’ product, the market concentration reduces (Smit and Trigeorgis 2015). In order to promote it product, Iceland designs marketing campaign. The marketing campaign known as Power of Frozen to uplift shoppers’ view about frozen food. Overtime the company has changed its advertising pattern to attract attention of more and more customers. From initial store based campaign, the company gradually shifts to advertise in TV and in other social media.

Innovation

Convenience

Iceland provides a convenient means of shopping to its customers. The frozen food offered in the stores is easy to cook and involve minimal waste. Customers can easily shop from the local stores of Iceland whenever needed. The retailers also provide home delivery service for purchasing above an amount of £20 (iceland.co.uk 2018). Customers can shop online as per their convenience.

Value

The brand price of Iceland is benchmarked to ensure that it can offer same quality product at a lower price or offer a combination of a better quality and a relatively low price.

Iceland is one of the leading frozen food seller of the UK grocery supermarket. The company though has a comparatively small share in value chain but has interesting strategies to maintain its unique place in the supermarket chain. Product differentiation, innovation, convenience, advertising and value are the focus areas of the concerned company.

Real estate market is an integral part of any economy. Price in the housing market is determined from the interplay of demand and supply side factors. Since 1990s, the UK housing market has undergone drastic changes (Wilcox and Perry 2014).  A major change is observed in the ownership status of houses, which gradually shifted towards public ownership through because of intervention of Bank of England and local authorities. The report briefly discusses demand and supply side factors in UK housing market and the associated monetary policy of Bank of England.

Interest rate

 One primary determinant of housing demand is the rate of interest for mortgage repayment. Lower interest rate encourages people to take loan because of a lower cost of interest. Conversely, during tight monetary policy people have a lower demand for loan. This intron determines affordability of housing. In 1992, the prevailing interest rate in UK was as high as 15% (Campbell and Roskelley 2018). In response to high interest rate, the housing demand declined significantly. However, BOE took a policy of monetary easing during 1990s and 2000s. This encouraged people to buy more houses.

Availability of mortgage

Associated with interest rate, another determinant of housing demand is the availability of mortgages that is bank’s willingness to lend deposits as mortgage. When bank offers mortgages with multiple of bigger income then this increases effective demand of housing. The availability of mortgage varies with interbank strength of the financial sector (Oliner 2016). During global financial crisis, the economy has experienced a sharp increase in cost of lending which lead to a decrease in available funds for lending mortgages. This interrupted housing demand.

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Economic growth

In times of economic expansion, people experience a rise in their real income. This increases housing affordability and hence, housing demand.

Renting cost

If renting cost rises continuously then people have a higher tendency to buy own house. The mortgage payment might seem cheaper than the renting cost. In housing market of UK, renting cost if comparatively higher encouraging people to buy new house and thus boosting demand for housing (Campbell and Roskelley 2018).

Population

The strength of population helps to determine housing demand. Along with population, the size of household is also important in determining housing demand.

The effective supply of housing depend on construction of new houses in the economy. In UK, the number of new house construction varied in different years. During 1960s, the housing market had more than 400,000 new houses per year. This number has declined to 150,000 in the late 1990s and 2000s (Wilcox and Perry 2014).

One factor contributing to a decline in construction of new houses is restriction placed on housing planning in land identified as green-belt land. Builders are interested in constructing new houses only when it seems profitable to them (Oliner 2016). During boom in housing market, supply of new house increases while in phase of declining housing price, housing supply declines.

Bank of England uses monetary policy tools to stabilize housing market and tries to prevent any crash to occur in the housing market. The BOE regulates banks and interest rate to control mortgage loan in the property market. In the last few years, the housing price in UK has risen sharply in response to a higher demand. To restrict housing demand BOE has imposed a cap on the borrowing. The objective of this cap is to control flow of credit once housing price rises above expectation (McCrone and Stephens 2017). Banks in UK suffer severe loss when borrowers are unable to repay loans once the value of the house fell below the repayment amount. To prevent this, BOE lends money depending on the proportion of borrowed money to the value of houses. Restriction has also been placed in relation to income.

The major factors determining housing demand in UK include interest rate, availability of mortgage, Cost of renting, population, economic growth and income. On the supply side, the main determining factors are construction of new houses, profitability and restriction on housing planning. The Bank of England has imposed restriction on borrowing to control housing demand and housing price.

Convenience

The key macroeconomic indicators of an economy are Gross Domestic product and associated growth rate, inflation rate, unemployment rate, interest rate and such others. All these together determine macroeconomic state of a nation. The report focuses on performance of key macroeconomic indicators of United Kingdom for the past few years.

Gross Domestic Product is an overall measure of nations’ output. It indicates the total monetary values of all goods and services in the economy. There are two approaches to compute GDP of a nation. One is to use market value of the current year. This is known as nominal GDP. One better measure is to use market price of a stable base year. This is known as real GDP (Bernanke, Antonovics and Frank 2015). The real GDP is a more accurate measure of output performance as it is adjusted for inflation.

Figure 2: Trend in Real GDP in UK

(Source: fred.stlouisfed.org 2018)

As seen from the above graph, real GDP in UK has constituted a sharp increase in GDP for the last two decades. A break is observed in 2008 when GDP fell the following global financial crisis. The worth of real GDP in 2016 was 2647.90 billion USD. The average GDP in UK from 1960 to 2016 is 1137.23 billion USD. The GDP of UK reached to the highest level in 2007 when GDP was 3074.36 billion USD (tradingeconomics.com 2018).

GDP growth rate

Growth in real GDP is computed as a percentage change in real GDP from one year to another (Heijdra 2017). The real GDP growth rate is the measure of country’s economic growth rate.

Figure 3: Real GDP growth rate

(Source: tradingeconomics.com 2018)

The trend in real GDP growth rate shows a fluctuating trend. In 2017, the growth has slowed down to 1.7 percent. The negative external balance put a significant drag on economy’s growth rate. The fixed investment has increases as against a decline in business investment. The fixed capital formation is an important contributor of UK’s GDP.

Inflation is the measure of movement of price level. It is a situation when price level shows a continuous upward trend. Inflation can be caused due to both demand side and supply side factors. When upward pressure on price is due to the increase in aggregate demand, then it is called demand side inflation (Bernanke, Antonovics and Frank 2015). On the other hand, when inflation resulted from an increased production cost and therefore a shortage of supply then it is called cost-push inflation.

Value

Figure 4: Inflation rate in UK

(Source: inflation.eu 2018)

In UK, the price level has remained at a stable state. The rate of inflation even fell to 2.7 percent in the first quarter of 2018 (tradingeconomics.com 2018). Price increases at a slower rate for industries like transportation, hotel and restaurant, food and non-alcoholic beverages. Price level has increased slightly for clothing and footwear while it has remained fairly unchanged for housing, electricity, water, fuels and for miscellaneous goods and service.

Figure 5: Unemployment rate in UK

(Source: ons.gov.uk 2018)

The rate of unemployment in UK has declined overtime. However, in recent years following an increase in interest rate unemployment has increased slightly with jobless rate remaining unchanged at 4.3 percent (theguardian.com 2018). There is sudden slowdown in creation of new jobs, which worsens the condition of labor market.

The main indicators for measuring economic performance include GDP and its growth rate, inflation and unemployment rate. The real GDP in UK has increased overtime though fluctuation is observed in the growth. The price level as indicated from the inflation rate has settled at a stable level. The performance of labor market worsen in recent years because of tight monetary policy of BOE. 

Financial leverage can be defined as the degree up to which the securities that are having fixed amount of income and preferred stock are used as organization capital structure. The managers make the use of the financial leverage when the assets bought by them are within the debt capital to derive the earnings higher than the cost of debt that is used to finance them. Financial leverage is used by the managers as the medium of increasing the profit of the company (Atrill and Mclaney 2017). As the capital structure is considered as the vital element for any organization therefore the primary reason of leverage is to make decision relating to the amount of capital required to operate the business activities.

On ascertaining the amount to operate the business functions the managers make the use of financial leverage to assess the financial markets so that they can determine the medium through which an entity can raise capital. In the process of decision making raising capital is vital since the prevailing environment in the market might limit the ability of the firm to issue debt securities and common stock to attract the investors. Due to this, on solving the query the managers of an entity can project appropriate capital structure and construct the financial instrument that the business is required to sell the investors (Atrill, McLaney and Harvey 2014). The managers on adhering to the systematic procedure implement the decision relating to the long run strategic planning and the medium through which the managers would desire to grow the company.

Interest rate

For instance, ABC ltd has the capital structure that consists of 100 per cent equity based. As a result of this the return on equity is expected to fall between the range of 15.6% and 23.4% depending upon the level of an entity profit before tax. Correspondingly, when the ABC capital structure is re-engineered consisting of 50% and 50% of equity, the return on equity of the entity would increase significantly between the range of 27.3 per cent to 42.9 per cent.

The managers of the small business owners use the current account as the medium of decision making since they face the regular or day to day business activities. The information pertaining to the current account is used by the managers for monitoring the day to day business activities and generating reports in order to provide with them with the in depth understanding of business functions (Besley and Brigham 2013). The in depth business functions include gaining an understanding of profit margin and appropriate use of labour. The primary objective of applying the current accounting decision is to provide the managers with the in depth understanding of the input that are driven by data so that the managers can make the day to day decisions.

The managers of both the small and big can leverage the powerful tool of calculation in order to enhance the decision making capability over the period of time so that the business can gain higher amount of profit and greater degree of comparative advantage. The information of current account is used by managers to determine what a business should sell (Williams 2014). For example, the managers of an entity may remain uncertain regarding the area of focus. To examine the uncertainty, the accounting managers might assess the cost that give rise to each product and commonly related products.

The information relating to current accounting provide managers with the data regarding the means of employing tools for business growth (Warren and Jones 2018). Therefore, the managers place the focus on the current account information to continuously improve the business functions and justify the intelligent analysis of the organization data.

Tesco Plc
		2016	2015
Liquidity Ratios	Current Ratios
	Current Assets	14,828	11,958
	Current Liabilities	19,714	19,810
		0.75	0.60
Market Value Ratios	Earnings Per Share	2016	2015
		0.05	-2.12
Asset Management Ratio	Fixed Asset Turnover	2016	2015
	Net Sales	54,433	56,925
	Fixed Assets	33025	36791
	Less: Accumulated Depreciation	15125	16351
	Total Fixed Assets	17900	20440
		3.04	2.78
Debt Management Ratio	Debt Ratio	2016	2015
	Total Liabilities	35,278	37,143
	Total Assets	43,904	44,214
		0.80	0.84
		2016	2015
Profitability Ratio	Net Profit Margin
	Net Profit	138	-5,741
	Total Revenue	54,433	56,925
		0.25	-10.09

Morrison
		2016	2015
Liquidity Ratios	Current Ratios
	Current Assets	1,308	1,228
	Current Liabilities	2,747	2,273
		0.48	0.54
Market Value Ratios	Earnings Per Share	2016	2015
		9.51	-32.63
Asset Management Ratio	Fixed Asset Turnover	2016	2015
	Net Sales	16,122	16,816
	Fixed Assets	7,161	7,252
	Less: Accumulated Depreciation	3423	3391
	Total Fixed Assets	3738	3861
		4.31	4.36
Debt Management Ratio	Debt Ratio	2016	2015
	Total Liabilities	5,543	5,577
	Total Assets	9,299	9,171
		0.60	0.61
		2016	2015
Profitability Ratio	Net Profit Margin
	Net Profit	222	-761
	Total Revenue	16,122	16,816
		1.38	-4.53

The current ratio reported by Tesco Plc stood 0.60 for the year 2015 which subsequently increased to 0.75 in 2016. The EPS for Tesco Plc during 2015 stood negatively to -2.12 however it gained strength during the financial year of 2016 to 0.05. The assessment management ratio includes the Fixed asset turnover where Tesco Plc reported a total fixed asset turnover of 2.78 in 2015 and grew further in 2016 to 3.04 representing the company is generating greater revenue from its assets. The debt ratio stood stable with 0.84 and 0.80 in 2015 and 2016 respectively. The net profit margin for Tesco Plc stood negatively in 2015 to -10.09 while it improved in 2016 to 0.25.

Availability of mortgage

Morrison reported a falling trend in current ratio of 0.54 and 0.48 in 2015 and 2016. The EPS stood negatively in 2015 to -32.63 whereas in 2016 it improved to 9.51. The total fixed asset of the company though remained stable with 4.36 and 4.31 in 2015 and 2016 relatively. The debt ratio too represented a stable trend with 0.61 and 0.60 in 2015 and 2016. The net profit margin for Morrison Plc stood negative during 2015 at -4.53 due to the poor market demand however with stable market conditions the Morrison reported net profit margin of 1.38 in 2016.

Though Morrison reported a strong net profit margin in 2016, the overall performance of Tesco has been better in the chain of retail supermarket.

Computation of Present Value
Interest Rate	4.50%
Year	Start Principal	Start Balance	Interest	End Balance	End principal
1	£                    –	£             –	£       –	£          650.00	£     650.00
2	£            650.00	£      650.00	£  29.25	£       1,329.00	£  1,300.00
3	£         1,300.00	£   1,329.00	£  59.82	£       2,039.07	£  1,950.00

Initial Investment Amount	-50,000
Total Number of Years	5		NPV
	Project A	Years	Project B
Number of Years	Annual Cash Flow	0
Year 0	-50,000		-£ 50,000.00
Year 1	£        26,000.00	1	£              –
Year 2	£        17,625.00	2	£              –
Year 3	£        15,000.00	3	£              –
Year 4	£        10,000.00	4	£              –
Year 5	£        32,000.00	5	£ 99,500.00
Npv	£        23,811.83		£   8,387.92

On considering the above stated NPV of both the project a recommendation can be provided by stating that Project A must be selected instead of project B.

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