Economic Background of Tesco - Case Study Example

TESCO-A Case Study Tesco is one of the top three global superstore giants with over 2000 stores in the UK alone and outlets in11 countries worldwide with a strong presence in Malaysia, South Korea, Taiwan, Poland and Tokyo. In 1995 Tesco overtook Sainsbury's as the UK's largest supermarket. In 2001 Tesco occupied 15.6% of the UK grocery retail market and was the market leader by 6%. Tesco's enormous share is still growing: by September 2004, it had increased to a massive 28%, around 12% more than its nearest market rival, Asda. If we include Tesco's share of the convenience store market (considered a separate sector by UK competition authorities) in this figure, Tesco could be said to control 34% of the grocery market. As a group its turnover is 28 billion per year and even as a leader it continues to build market share because of its winning strategy.( Corporate Watch, 2004). In this paper we aim to get an insight into Tesco's economic strategy and analyse the different problems it currently faces and might encounter in the future. We also aim to present plausible solutions to tackle the stated problems. Tesco's Evolution in Strategy: Tesco's growth over the last two or three decades has involved a massive transformation of its strategy and image. Key reasons for this success have been a three prong strategy plan: They are: (1) Omnipresence: Tesco has an insatiable appetite for space, and relentlessly pursues the best new sites. When it comes to just number of stores and locations, Tesco leaves its rivals standing. In the 1960s, Tesco was buying up literally hundreds of grocery stores and small grocery chains around the country. It introduced 'Home 'n' Wear' departments into larger stores to carry higher-margin non-food merchandise, including clothing and household items, and opened its first 40,000ft 'superstore' in Crawley, Sussex. In 2002, it stunned experts and the competition by buying T&S, a chain of 850 convenience stores across the country. The deal doubled the group's store count in the UK at a stroke. The scale of it allowed them to capture quite an increase in market share, and they really caught the rest of the industry off guard. (2) Targeting all Income Groups: Learning from its past mistakes, Tesco diversified its level of products and prices to appeal to all income brackets in the same store. Tesco offers three distinct ranges of own-brand products, from Value to Finest, priced to attract all types of shoppers to its stores. Therefore in spite of its humble beginnings as a 'thrifty' store, Tesco now has more upmarket customers than M&S and Waitrose put together attracting 15 million customers per week to its stores comprising of the high and low income customer segments. Investing in Growth, Diversification and Expansion-Thinking Big: Tesco has multiplied its power and standing by reaching far and wide both in terms of diversification and expansion in terms of products and locations. It has expanded its grocery retailing at home in UK by finding innovative and energetic in finding ways to expand, such as making a large-scale move into the convenience-store sector, which the major supermarket chains have traditionally shunned. Tesco has found stunning success in its diversification to non-food business. In 1974, in a deal with Esso, Tesco began to open petrol stations on the grounds of its superstores. The idea was successful and by 1991 Tesco was the country's largest independent petrol retailer: it now accounts for 12.5% of all petrol sold in the UK. (Corporate Watch,2004).By late 2004 it was widely regarded as a major competitive threat to traditional high street chains in many sectors, from clothing to consumer electronics to health and beauty to media products. Tesco sells an expanding range of own-brand non-food products, including non-food Value and Finest ranges. Tesco has pioneered the concept of retail services. Tesco has taken the lead in its sector in expanding into areas like personal finance , telecoms , and utilities. It usually enters into joint ventures with major players in these sectors, contributing its customer base and brand strength to the partnership. Other supermarkets in the United Kingdom have done some of the same things, but Tesco has generally implemented them more effectively, and thus made most profit. Tesco has also been a pioneer online. By September 2005 online sales in the first half of the year were 401 million, a 31% year-on-year increase, and profit increased by 37% to 21 million. (DaveChaffey.com). The Tesco.com site acts as a portal to most of Tesco's products, including various non-food ranges (for example, Books, DVDs and Electrical items under the 'Extra' banner), Tesco Personal Finance and the telecoms businesses, as well as services offered in partnership with specialist companies, such as dieting clubs, flights and holidays, music downloads, gas, electricity and DVD rentalsTesco began to expand internationally in 1994, and in the year ending February 2005 its international operations accounted for just over 20% of sales, or about 7 billion (Wikipedia,2006). Tesco rolls out successful UK initiatives in other countries. For example Tesco Financial Services and Tesco Express convenience stores both operate in several markets. Confident with the success it has encountered so far in Eastern Europe and Asia, Tesco seems poised to penetrate the United States market soon. Tesco has also announced plans to move into the Real Estate Market with Tesco Home plus. (The above picture is courtesy of bbc.co.uk) Potential Problem Areas in Tesco's future: 1. Cost Pressures: Tesco's relentless pursuit of growth has its pitfalls. Tesco's credit rating fell in 2003 as so much of its growth was based on borrowing. In January 2004, Tesco raised 773m by placing 315m new shares23, and in March 2004 announced a joint venture with property group Topland to release 650m from its UK property portfolio.(Corporate Watch,2004). The main reason for the new share offering is to pay off the company's debt. There is also a lot of cost pressures form Asda, Tesco's number one competitor, whose main strategy is undercutting the competition's pricing scheme. So there is a pressure on Tesco to at least offer a comparable price in basic everyday items and their value line. Tesco has been accused of squeezing prices paid to farmers in attempt to keep pace with prices. This led environmental campaign group Friends of the Earth to call on the government to introduce stronger protection of Tesco's suppliers. Tesco prides itself on its ability to promote local UK and Ireland suppliers and products as opposed to Asda which has been widely criticized for outsourcing production to third world countries to cut over head costs. But if Tesco is to effectively compete with Asda on prices and not over burden the local farmers with excess demand and low prices, it should look into more options in other countries with big supply potential to compensate for its excess demand. The economies of scale in many developing countries might provide an opportunity for Tesco to save money while at the same time being fair in payment to the suppliers locally and abroad. But it is imperative to make sure that the local UK suppliers are not rendered jobless being as Tesco is the main retailer and therefore their primary buyer in the UK. 2. Accusations of Monopoly: Recently Tesco has come under a lot of fire from campaign groups who resent its expansion and store openings. They claim that it takes away the element of choice from the customers and is completely unfair to small businesses and stores nation wide. Another point of controversy is the recent expansion of Tesco into the convenience store market. When a company controls more than 25% of a business sector in the UK, it is usually blocked from buying other companies in that sector (but not from increasing its market share through organic growth). The Office of Fair Trading currently treats supermarkets and convenience stores as two distinct sectors - although this definition has been challenged by smaller retailers, including the Association of Convenience Stores. Tesco's construction of giant stores in small towns has led residents to object to increased traffic, noise and flooding. The Observer reported last October (2005) that the Department of Trade and Industry is considering a new review of supermarkets business under the auspices of the Competition Commission. This could prove to be a major hurdle in Tesco's continued growth and lead to stagnation of profits. One of the best ways to avoid controversy at home front and not rely so much on the UK market alone would be an energetic overseas expansion programme. This could shift attention from its dominant domestic position and accusations of monopoly. So far Tesco has been more cautious than Walmart (the now owner of Asda) in its overseas initiatives, choosing developing countries in Eastern Europe and Asia with weak retailers as opposed to sophisticated markets. It has worked out very well for Tesco till now as its local concentration has strengthened its market share in UK. It is now in a good position to be more aggressive about expanding outside of the UK and mature enough to take on the more serious players in retail. 3. Dearth of New Store Locations in urban areas: Tesco has almost exhausted sites for new stores. Tesco, in common with other major food retailers has found difficulty in obtaining planning permission for sites on the edge of urban areas. It is government policy that first preference should be for town centre locations, followed by edge-of-centre sites, and only then by out-of-centre sites. However, within these urban areas there are few locations available which are sufficiently large to accommodate the floor space required for a modern retail outlet trading to take advantage of economies of scale. The protection of green field land and the application of this sequential approach by planning authorities have focused company attention on brown field sites within urban areas. These are often in need of remediation, and located in run down areas, ie, they are typically high cost/low revenue options. In these circumstances, the Tesco strategy for generating an acceptable return is to encourage the economic, social and physical regeneration of the locality in which the store would be located. The attraction of workers and residents to the area presents a new customer base. Greater numbers of people with access to disposable income represent a growing customer market with a Tesco store at its heart. Further development and focus on such regenerative community efforts on the part of Tesco will go a long way not only in gaining more locations but more importantly for the company, as a public relations venture to attract more goodwill in the community and woo its detractors.. References BBC News.(April 2005).Tesco profits break through 2 bn. Retrieved April 2006 from http://news.bbc.co.uk/1/hi/business/4435339.stm. BBC News.(January,2006). Tesco accused of 'near monopoly'. Retrieved April 2006 from http://news.bbc.co.uk/1/hi/scotland/4618972.stm. Case Study Tesco. Multilane Retail. Retrieved April 2006 from http://72.14.203.104/searchq=cache:vI4aNfC3tmwJ:www.dione.co.uk/pdf/Case_Studies/Tesco.pdf+study+of+++TESCO+problems&hl=en&gl=us&ct=clnk&cd=25. DaveChaffey.com.(2006). Tesco.com case study. Retrieved April 2006 from http://davechaffey.com/E-commerce-Internet-marketing-case-studies/Tesco.com-case-study. Observer.(October 30h ,2005).Tesco Braced to fight its corner. Renewal.net case study. Tesco Regeneration Partnerships-Alloa store. Retrieved April 2006 from http://72.14.203.104/searchq=cache:qe6NbqxLlvIJ:www.renewal.net/Documents/RNET/Case%2520Study/Tescoregenerationpartnership.doc+study+of+++TESCO+problems&hl=en&gl=us&ct=clnk&cd=10. Talking Tesco. Working with our Suppliers and produced in Ireland. Retrieved April 2006 from . TESCO, a Company Profile (September 2004).Corporate Watch. Retrieved April 2006 from http://www.corporatewatch.org.uk/lid=252. TimesOnline.(October 18th,2004). Revealed:the secret of Tesco's success. Retrieved April 2006 from http://business.timesonline.co.uk/article/0,,14390-1316536,00.html. Wikipedia(2006).Tesco.Retrieved April 2006 from http://en.wikipedia.org/wiki/Tesco. Read More