TESCO Business Environment - Essay Example

? Tesco Business Environment Report TESCO BUSINESS ENVIRONMENT REPORT Established by Jack Cohen in 1919 and opening as the first supermarket in the UK, in 1956, Tesco is the biggest profit-based supermarket, providing money off coupons to customers with special offers (Tesco Plc, 2013: p1). As the leading retail and Food Company in the UK, Tesco also has branches in France, China, India, USA, Republic of Ireland, Slovakia, Poland, and Hungary. As a food and associated products retailer, Tesco also deals in car and health insurance, game, clothing, books, videos, music, and electrical goods. In addition, the company also offers financial and online services across Asia, North America, and Europe. Based on the revenue, it is the third largest retailer in the world behind Carrefour and Wal-Mart, which is the largest. In terms of profit, it surpasses Carrefour to rank only behind Wal-mart. In the UK, its biggest competitors are ASDA and Sainsbury. Tesco’s philosophy is embedded in their desire to expand and grow as is shown by their strategy. Tesco has a consistent and well-established growth strategy that has allowed them to strengthen their core business in the UK, as well as drive their expansion to other markets (Tesco Plc, 2013: p1). This paper will seek to discuss the business environment of Tesco. The business environment analysis will include the micro-economic analysis because it directly impacts the management of the company. A macro-environment analysis will also be essential because it impacts the decisions taken by the management, which will include a PEST analysis, SWOT analysis, and Porter’s five forces analysis. The paper will also compare Tesco’s financial ratios with those of its biggest UK rival, Sainsbury in order to determine its financial environment and performance. With regards to Tesco’s financial status, the analysis will be made for the period between 2009 and 2011. Finally, the paper will make recommendations as to how Tesco can adapt to the current business environment. Tesco’s Business Environment Analysis Micro Environment factors For Tesco, customers are one of the most important factors of the business. Tesco as an organization gives their customers increased benefits to keep them happy, for example, giving them the best quality and variety of products (Jones et al, 2012: p884). Tesco ensures that they are able to meet the demands of their consumers in an environment where competition is ever increasing, whereas also meeting the expectations of the wider market. Another factor is materials, which is important because production and sales at Tesco are directly related to materials. If the material is easily available, the production and sales will increase. Tesco ensures this by storing their material in easily accessible warehouses. Employees are another important micro-environmental factor. Tesco ensures that they have the best staff for them to offer better service to the consumer. Satisfaction of the employees helps to improve the quality of their service and improves their competitiveness (Elearn, 2013: p11). Suppliers are important to Tesco in order to offer competitive service to their customers. Having and maintaining efficient supply chains improves their ability to get orders delivered on time. Getting the material delivered on time has various advantages and it is essential for Tesco to maintain a good supplier-user relationship (Elearn, 2013: p12). The shareholders are an important micro-environmental factor, as well. Great organizations require good relations with their shareholders in order to increase their growth. Tesco gives substantial dividends to their shareholders, whereas also allowing their employees and suppliers to buy company shares. This gives added satisfaction to their suppliers and employees, improving their productivity. Media gives Tesco the ability to achieve top sales and, as such, it is an important micro-environmental factor. It is important to get information on new products and services, as well as organizational informational, as quickly as possible to the stakeholders, suppliers, employees, and customers. Tesco possesses a good media network that is able to get their ads out on the internet and TV, which improves their business (Elearn, 2013: p13). Macro-Environment factors Tesco PEST Analysis Political Factors: Tesco has global operations with stores in Asia, North America, and Europe. Therefore, its performance is influenced greatly by the political conditions prevalent in these countries. With regards to employment legislation, state governments normally encourage retailers to give jobs to locals (Mentis, 2013: p19). Tesco is aware of retailing’s impact on people factors and jobs as it is a labor-intensive and local sector. A large proportion of elderly, student, and disabled workers are working for lower rates at Tesco. These workers have the tendency to be more loyal to Tesco in an industry that has a high turnover of staff and are, therefore, attractive employees for Tesco. Economic Factors: Economic factors will influence Tesco’s demand, prices, expenditures, and profits, which makes it a big concern for Tesco. High levels of unemployment impacts on Tesco because it reduces demand for its products, and thus, affect the demand needed, for these products to be produced (Mentis, 2013: p21). Economic factors like unemployment have significant effects on Tesco’s marketing mix and performance. However, these are largely outside Tesco’s control. While Tesco is expanding globally, it is still highly dependent on the market in the UK. This has seen Tesco contend with a downturn last year in its non-food business. Social Factors: Because of social changes within the UK society, the approach towards shopping by customers has changed, moving towards bulk and one stop shopping that has forced them to increase the non-food items that they avail for sale (Mentis, 2013: p22). Demographic changes, such as increased women in the workforce, has resulted in home meal preparation decrements, which has allowed Tesco to concentrate on value added services and products. Additionally, Tesco has increasingly focused, on own-labels and improvements in the supply chain, to reduce costs. Finally, consumers have become increasingly conscious of their health, changing their attitudes to food products. In order to accommodate organic product demand, Tesco has had to develop its product mix (Mentis, 2013: p23). Technological Factors: Tesco has been greatly influenced by the advent of new technology with regards to the development of new products, which has benefited the consumers, as well as Tesco (Hamilton & Webster, 2012: p122). Tesco is able to improve customer satisfaction as; the goods are readily available, services are more personalized, and shopping has become more convenient. Tesco uses various technologies, including radio Frequency Identification, wireless devices, self-checkout machines, electronic shelf labeling, and intelligent scale. In addition, electronic scanners, electronic fund transfer systems, and electronic point of sale have improved stocking activities and distribution efficacy to a significant extent (Hamilton & Webster, 2012: p122). Tesco SWOT Analysis Strengths Tesco has the largest market share in the UK retail market with a share of 30.7% in 2010, which rose from the previous year’s 30.6% that shows its market share is rising (Keillor, 2013: p92). Tesco has a strong brand value and image, which is, probably, its strongest factor. Having been around for a long time, Tesco is trusted by most consumers. Tesco’s market leadership in the UK is protected since it attained its position as the number one retailer in the UK. With sales that are 71% higher than Sainsbury, its biggest rival, it will be a long time before their position is threatened. Tesco is also the biggest online supermarket in the world with double-digit growth in online grocery sales and a 30% increase for its Tesco Direct operations. Tesco has a strong platform for the development of this revenue stream with over a million households using the online services nationwide. Tesco telecoms has grown significantly in the last year driven by Tesco Mobile, which is one of the fastest growing mobile networks in the UK with a customer base of of 3 million in 2012. Weaknesses Tesco is highly dependent on the UK market, which puts it at risk if there is a power shift in the UK retail sector. While growth in international markets is consistent, significant changes in its market share could hurt its operations (Keillor, 2013: p93). Potential serial takeovers also pose a threat to Tesco with danger in Tesco turning to a consecutive acquirer due to its high enterprise value, which could reduce its earnings visibility, as well as quality. Opportunities Tesco’s improved merchandising skills and low cost structure could allow it to grow further its non-food market internationally and locally (Keillor, 2013: p93). Its entry into the Asian market gives Tesco tremendous room for growth, especially with its exclusive franchise agreement reached with Tata Group’s subsidiary, Trent. Tesco’s beauty and health sector is one of the UK’s fastest growing retailers for skincare products in the market. With further investment in toiletries, health care, and baby goods, this provides a further avenue for growth. Threats There is a risk that overseas profits nay decrease due to strong competition or industry conditions (Keillor, 2013: p94). The challenge from Wal-mart, especially after it took over Asda, is another threat to Tesco’s position as the biggest retailer in the UK. The heavy investment as Tesco enters new markets could lead to the use of debt as a finance alternative, which could expose Tesco to financial risk. Price wars with other retailers in the UK could hinder profitability and industry growth. Porters Five Forces Analysis The bargaining power of supplier’s threat is low because, normally, suppliers are reliant on Tesco for most of their trade contracts. Tesco can choose between various suppliers, pushing down the prices. The threat from bargaining power of the buyer is high since most buyers can change their retail outlet sans much inconvenience (Kew & Stredwick, 2011: p20). With the ready availability of price information and comparison online, this is even easier. While the location of supermarkets may make it difficult to switch, online shopping makes this less of a concern. The threat of new entrants is very low for Tesco in the UK as nearly four supermarkets control 80% of the retail market. The big supermarkets can exploit economies of scale, which smaller entrants cannot. However, this threat is higher on the global market. The threat of substitutes is also low as independent, and local shops are more expensive, whereas Tesco also operates local stores. Finally, the intensity of competitive rivalry is high as there is a threat that the UK retail market could become saturated, causing the fall of margins (Kew & Stredwick, 2011: p21). Comparison with TESCO Competitor Ratio analysis is useful in the determination of future, present, and past financial aspects of the business. In this case, a comparison of financial ratios between Tesco and Sainsbury will be carried out from 2009 to 2011to determine Tesco’s financial health over the period. Return on capital Employed Year Tesco Sainsbury 2009 12.8% 10.1% 2010 12.1% 11.00% 2011 12.9% 11.1% (British Retail Consortium, 2012: p1) This ratio shows the productivity of a company’s capital through relating overall profit to capital employed. Tesco’s ROCE dropped in 2010 but increased in 2011 because of operational improvement in greater capital efficiency, improvement in working capital, and profit growth. Sainsbury had a gradual increase through the three years. Return on Assets Year Tesco Sainsbury 2009 0.046 0.028 2010 0.051 0.053 2011 0.057 0.056 (British Retail Consortium, 2012: p1) This ratio shows the effectiveness of an organization’s assets in making profit. The above ratios are positive and satisfactory for both companies. Both retail outlets have made capital expenditures that have paid off in the last three years. Current Ratio Year Tesco Sainsbury 2009 0.77 0.54 2010 0.73 0.66 2011 0.66 0.58 (British Retail Consortium, 2012: p1) From the ratios above, it is clear that the current ratio trend is decreasing for both Sainsbury and Tesco, which could indicate that it is a problem within the industry. Gearing Ratios Year Tesco Sainsbury 2009 74% 33.30% 2010 54% 32.29% 2011 40% 30% (British Retail Consortium, 2012: p1) These ratios measure borrowed funds against equity capital, providing information on the company’s financial risk. Tesco has a higher gearing ratio compared to Sainsbury, although both are showing a decline in gearing ratio, signifying that they are switching to equity finance to reduce financial risk. Conclusion and Recommendations In spite of the global economic downturn, Tesco has managed to flourish and enjoy increasing market share in its food business, although there is a decrease in non-food business in 2011. Owing to its experience in the industry, Tesco earns loyalty and respect from the consumer, which helps them to maintain profitability and maintain its position. This has allowed them to launch new products like banking and telecoms that have increased its profitability. Tesco Mobile has allowed Tesco to change the way consumers do business, improving their service quality. Tesco’s new products and undertakings define its aggressive selling style and these initiatives have helped the company to maintain confidence and loyalty. From the analysis, it is clear that Tesco will most likely continue to dominate the retail industry in the UK, as its future is optimistic. Recommendations Tesco should continue to diversify their business while also focusing on specialized products in order to continue its growth. Tesco may also consider reducing their prices in order to make their products more available to the consuming public and to maintain a competitive edge, especially with the entry of Wal-mart into the market. Since the UK market will not continue growing at the same rate, Tesco should improve on their online marketing and sales since switching to other supermarkets is now easier for customers. Tesco should increase its expansion globally as the UK market is becoming more saturated. References British Retail Consortium. (2012). BRC-KPMG UK Retail Sales Monitor . Retrieved August 9, 2013, from UK Retail Sales Monitor : http://www.brc.org.uk/brc_data.asp?kCat=53&sCat=THE+BRC+KPMG+RETAIL+SALES+MONITOR Elearn, Robert. (2013). Business Environment. London: Routledge. Hamilton, Leslie. & Webster, Philip. (2012). The international business environment. Oxford: Oxford University Press. Jones, Peter. Comfort, Daphne. & Hillier, David. (2012). Corporate social responsibility and the UK's top ten retailers. International Journal of Retail & Distribution Management , 882 - 892. Keillor, Bruce. (2013). Understanding the global market : navigating the international business environment. Santa Barbara : Praeger. Kew, John. & Stredwick, John. (2011). Business environment : managing in a strategic context. London : Chartered Inst. of Personnel and Development. Mentis, Panagiotis. (2013). Tesco PLC's entry mode in the Slovenian retail market. Munich : GRIN Verlag. Tesco Plc. (2013). History. Retrieved August 9, 2013, from Tesco PLC - About us - History: http://www.tescoplc.com/index.asp?pageid=11 Read More