Tesco as the Market Leader in the UK - Essay Example

Individual report about Tesco Executive Summary Tesco is the market leader in UK grocery retail segment. Tesco has successfully employed different marketing strategies over the years and commands the maximum market share in the industry. There are big four players who are engaged in a constant battle with each other namely Tesco, Asda, Sainsbury’s and Morrison’s. Recent financial crisis has made Tesco look at different marketing strategies and it needs to constantly update its strategy to achieve profitability and maintain its market share. This report will discuss about the macro and micro environmental analysis of Tesco, PR issues and business level strategy of the company. Contents Introduction 4 Analysis of the external environment 4 PESTEL analysis 4 Porter’s 5 Forces Model 6 Analysis of the internal environment 8 Resource based view 8 Value Chain analysis 10 Strategic Analysis 11 Business Level Strategy 11 Corporate level strategy 12 Suggested Strategies of Tesco 13 SAF Model of Tesco 14 RACE Model of TESCO 15 Conclusions 15 References 17 Introduction In the past ten years the general UK grocery market has been increasing steadily. The total grocery market has increased from £ 93 billion in 1998 to £ 146 billion in 2008. But following uncertainties like high unemployment, financial crisis, tight household budgets etc. the UK grocery market is facing difficulties. Though the UK grocery market has not been able to completely get rid of these uncertainties, the growth rate assumed by it is still reasonable. In 2008, the grocery market of UK was worth £ 146 billion which is an increase of 5% from 2007. The above two sectors have given tough competition to the traditional retail, due to which the market share of it has decline to less than 5 %. Online retail channel has a very small market share in the grocery market. There are other supermarket chains in UK namely M&S, Waitrose, Iceland, etc. This report will take a look at the strategic analysis of Tesco. Analysis of the external environment PESTEL analysis Political forces The main direct effect which politicians will have in shopping and retailing is through their power over the land-use planning system. Though land-use planning is a local authority matter, but national government intervene to give guidance and directions on the assessment of development proposals and opportunities. It has become difficult to obtain planning permission for developments away from existing town centres. This has emerged as a general concern among all the retailers. Retailers are also affected by many public policy which tries to regulate competition, trading conditions and safeguard consumer interest. There have been many changes like easing of restrictions on trading hours. There has been tight regulation on food stores due to concerns over public health (Saloner, Shepard and Podolny, 2008, p. 211). This is done for ensuring that the retailers do their jobs properly and to make sure that there is a level playing field. Further political parties draft legislation and activities which affect retailing. Government decisions affect supply side of retailing like general issues like taxation on business rates and VAT rates which affect retailing like other businesses. Decisions on road pricing affects the costs of movement of goods, fuel tax etc. Economic forces The economic structure will affect the retail landscape through construction of landscapes for consumption. The recent economic situation has made the life of these retail stores quite difficult. But the only safe assumption is that the broad economic structure of Britain will remain in place, this would open scope for further growth in retail sales. There are many developers who are willing to invest in the commercial property of UK. Tesco officially announced that the company is looking to invest 2 billion pounds in China and thus is expected to have larger profit margins (Jones, 2013, p. 1). Following the 2008 financial crisis the UK economy was under recession and there has been a sharp fall in GDP and the disposable income of household. In 2009 the growth of disposable income in UK was even lower. Social Factor The retail grocery industry is shaped by social changes. These include personal value, attitudes, lifestyles, demographics changes and household structure etc. Changes in the above factors will create opportunities and threats for the retailers. The demographic changes have profound impacts on the retail stores since individuals of different consumer behaviours will have different preferences and purchasing power (Ansoff, 2007, p. 152). With change in age structure the preferences of goods changes. Further the type of services and products which are demanded by consumers also change according to personal, attitudes and lifestyle value. With growth in living standard, individuals are pursuing high quality lifestyle. Technological factors It is one of the main macro environmental variables which affect the UK grocery industry in terms of supply chain and operations. With rise in internet development there has been dramatic increase in subscription to the Internet. According to office of national statistics 73 % of adults in Great Britain have access to Internet every day. There have been a rapid change in the way of retailing and mainly leading retail supermarkets have successfully set up their online retail store (King, 2008, p. 1). Legal factors The UK legislation system has put in place a number of rules and regulations to monitor the grocery retail industry. The government has put in place many legislations of licensing of alcohol, tobacco, employment and consumer legislation and the registration of food premises. The retailers in Britain have to comply with food safety and hygiene regulations for selling fresh food. They needs to comply with Food Hygiene Regulation 2006 which is concerned with factors like cleanliness, registration of premises, food hygiene, temperature control, provision of equipment and facilities etc (Sadler, 2003, p. 164). Porter’s 5 Forces Model Threat of New Entrants In UK the retail grocery segment is dominated by four big retailers like Asda, Tesco, Sainsbury’s and Morrison’s. Together they contribute to 75. 2 % of the market share and contribute to around 80% of the total grocery sales. The grocery sector in UK is at an advanced stage and the large supermarkets have already established their bases and are operating efficiently. Entering into the industry is difficult since it needs huge capital investments to ensure that they can build a new brand name along with effective supply chain. Further the investment in terms of technology further demands huge capital like advanced operation system in checkout process and stock management (Smithers, 2007, p. 1). Power of Suppliers This power is fairly low in UK grocery market and they are affected by most of the retail chains. The fear of losing their business to large supermarkets makes the suppliers dependent on these supermarkets. Thus established players like Asda and Tesco are in a better position to match the lowest price from supplier because of they can enter into negotiation with small chains. There are instances where the large supermarkets have made last minute changes in the order to meet the latest customer demands (Cox, 2006, p. 164). Power of Customers Standardization of products results in lower switching cost for the customers and thus the power of customers are high. There is not much differentiation of food and drink in the grocery stores and thus the buyers have to option in purchasing process and can move to another brand with low switch cost. Further with global economic recession the customers become the core centre of strategy formulation for the supermarkets to maintain their market share, to maintain their market position. Many supermarkets offer discount and promoting price to increase customer loyalty (Wood, 2011, p. 1). Threat of Substitutes The threat of substitutes is high. There are a wide range of retailers to satisfy the demands of consumers. The consumer can go to traditional market to convenience store to buy their products instead of driving a long way to buy from Asda or Tesco. In UK the number of traditional retail store or convenience store is far more than the established supermarkets. According to research the number of convenience store in UK is six times more than the supermarkets. Threat of Rivalry within the Industry The rivalry within the industry is high because the profits are huge. Inside UK there is a wide array of large supermarkets like Tesco, Sainsbury’s. These supermarkets struggle with each other to gain a large market share than its competitors by attracting new customers from their usual shopping places. Further with popularization of Internet, the customers can easily compare the prices online and which makes it difficult to retain the current customers and attract new ones. Analysis of the internal environment Resource based view The resource based view of a firm describes the critical role of the resources and capabilities in the success of a firm. It forms the basis of competitive advantage of a firm. According to it the competitive advantage of a firm lies mainly in the application of valuable tangible and intangible resources of the form. The tangible resources are the physical and financial assets of an organisation which is easiest to identify and evaluate. The tangible resources of Tesco consists of 6,784 stores worldwide, with more than 3, 10,000 employees, a turnover of £ 72.4 billion and net profit before tax of £ 3.5 billion. Tesco has used these resources as its opportunities for economizing on their use and have looked at different possibilities for employing existing assets more profitably. The intangible resources are the invisible resources or skills like a particular technology, brand name, customer information, corporate culture and reputation. These are essential and invaluable to the competitive power of the form because of their potential sustainability and uniqueness. The intangible resources of Tesco are wide customer information, wide knowledge of retail industry, reputation in promoting big brand and service innovations like 24 hour opening and good brand awareness. But to Tesco the three most valuable intangible are the product reputation, company reputation and employee know-how. But to gain competitive advantage it is an organisation must have unique and valuable resources which are rare, non-substitutable and non-imitable. Thus it is essential for a firm to have the right resources for attaining core competency. There is a need for distinction between core competences and threshold capabilities. Threshold capabilities indicate the activities which a company need to do for its survival and it is directly linked to critical success factors. Tesco has to present a customer friendly environment to attract maximum number of potential consumers and thus it needs its staff to have a helpful attitude towards the consumers. These capabilities help Tesco survives in the industry. Core competencies, key success factors and critical resources are all key components for achieving competitive advantage. An essential strategic capability of Tesco is its cost efficiency. 30.1 % market share of Tesco helps it to have a significant influence on its cost through experience effect (The Week, 2013, p. 1). Due to large volume sales, Tesco has high bargaining power, and has to ability of spreading the overheads. Tesco benefits from labour efficiency, specialisation, standardisation, technology driven learning and better use of equipment. Tesco has acquired multichannel leadership in the arena. The growth of Tesco is mainly due to the fact that it was able to meet the needs of the entire consumer segment in the society. Tesco is using its resources to grow domestically and also reposition itself internationally. Tesco confirmed its joint venture with food retailer China Resources Enterprise (BBC, 2013, p. 1). Tesco is using its financial and human resources to lay the foundations for a very different shopping environment in the future and the progress it has made so far is impressive. Tesco has a strong brand image because of excellent value, good faith, good product and service development. They have used this image to significantly rebuild and better manage the product lifecycles along with efficient delivery of various product and services. Strategic expansion, efficient operation and continuous innovation have made Tesco the largest and most successful retailer. Value Chain analysis Inbound Logistics Tesco draws its goods to regional distribution centres from suppliers for delivery to the stores. Tesco is also extending its logistics to reduce the costs and improve reliability. Processes Tesco launched Operation Checkout in 1977 which featured centralized purchasing, price reductions for their stores. The company has opened finance centre in Glasgow Silverburn Extra store where it provides free financial advices for loans and insurance. The stores of Tesco are divided into five different formats and they are differentiated according to range and size. Outbound Logistics Food sales are available to the in selected stores and the goods are handpicked within each store. Marketing and Sales Tesco has launched “The Tesco way” which indicates focus on both employees and customers away from the company itself. The holders of loyalty programs receive Clubcard statement which offers discount coupons which can be spent online, in-store or on various Clubcard deals. Service Tesco has diversified its business lines greatly into including varieties of food and non-food items like financial, telecommunications, services and clothing. The superstores of Tesco are standard large grocery supermarkets which has smaller range of non-food items. Analysis of PR crises In 2013, the shares of Tesco fell the most on the FTSE 100 after traces of horse meat was discovered in the samples of beef burgers. The tests was carried out by The Food Safety Authority of Ireland (FSAI) which confirmed that the burgers in Tesco contained horse DNA and it was produced in two plants, one in UK and another in Ireland. The Horse meet accounted for around 29 percent of the meat in Everyday Value Beef Burgers in Tesco. This raised the issue of consumer offence and deception given the deeply different cultural perception of horse meat in British Isles. This issue resulted in dent in the public confidence in the retailer. Though FSAI concluded that this posed no risk to public health, it will temporarily reduce the trust of the consumer in the quality of products of Tesco (Martin, 2013, p. 1). Strategic Analysis Business Level Strategy The Business level strategy of Tesco is a hybrid one. It looks at both cost leadership and differentiation. Tesco strives to have the lowest cost and it offers variety of services and products in the market at lowest possible prices. The ability of Tesco is based on the ability to control its operating costs such that it is able to price its products competitively and is able to achieve high profit margins and hence have competitive advantage. Tesco also uses differentiation strategy and it offers products and services features which are unique and enhances the customer’s value. Through this Tesco creates brand loyalty in their product offerings and thus have price inelasticity on the part of the buyers. Tesco uses different approaches to differentiation like technology, product offerings, customer service etc. Tesco also uses focus strategy which can either be differentiation or cost leadership which is aimed towards focused, narrow market. Tesco focuses on creation of internal efficiencies which will help withstand external pressures. Thus Tesco has to have frequent interactions with regulatory authorities and supplier sectors of the environment (Ruddick, 2014, p. 1). Corporate level strategy Ansoff Matrix Market Penetration Tesco has made many international expansion strategies to meet the needs of the customers. It has entered into joint venture with local partners like Charoen Pokphand in Thailand, Samsung Group in South Korea and has appointed a very high proportion of local personnel in management positions. In Poland, Tesco has in the recent time suffered from the rise of proximity retail, but it has launched a turnaround strategy where it has built 450 stores and annual revenue of more than £ 2 billion. In Thailand it is revamping its Clubpack range of bulk-buy products which is used by small traders. Tesco entered into joint venture with China Resources Enterprise’s Vanguard business (Neville, 2014, p. 1). New Product and Services Product development is the heart of any industry of things and services and many are dependent on it. Tesco has launched many non-food items like Insurance, Mortgages, credit cards loans, saving schemes, electronics etc. which have made life easier for the customer as they can get the entire product under one roof. Tesco have introduced bio fuel instead of petrol and diesel and is working on improvement of its quality. Market development Tesco bought Williom Low in 1994, a Scottish supermarket chain. In June 2003, the company bought Two –Network in Japan. In Poland, Tesco purchased Casinos Leader supermarkets in 2006 which were reconfigured subsequently as small Tesco stores. Tesco continuously make small changes for diversification of its businesses. Tesco made many changes in 2005-06 fiscal years in European and Asian countries like Poland, Japan and South Korea (Butler, 2013, p. 1). Diversification Tesco has greatly diversified its business from food to non-food items. Originally it started its business by selling food items but then it started diversifying in areas and included many non-food items like DVD sales, clothes, internet service, customer financial service, consumer dental plan. Tesco also focused on building its private labels and it introduced brands like F+F and Cherokee brand clothing. In non-food brands Tesco included electronic stores, beauty and finest health (Ireland, Hoskisson and Hitt, 2008, p. 79). Suggested Strategies of Tesco Tesco has failed to adapt to the change in competition from space race to distinct offer competition. Tesco has lost its differentiation by increasing prices faster than anybody else. The current strategy of Tesco is vague and it does not solve any problem and lack differentiation and internationally remains overly centralised. The management should try to relaunch the Finest, Everyday Value and Healthy Living. Tesco needs to take sufficiently severe measures to tackle the problems. The sales in large stores are declining and thus Tesco must develop compelling offer to ensure that it wins share of a declining large store market. This is because a compelling offer is the only way to win back customers and Tesco with its uneven weighting in the direction of big stores must work harder in order to offset the drawback of its large store location. Tesco must also try to win share in the emerging channels of convenience and internet. Tesco must stabilise its business in Asia and Central Europe (Angwin, 2008, p. 142). SAF Model of Tesco Suitability Tesco became the largest retailer in UK and it has diverse in to different continents. Tesco is expanding its operation in Asian markets but given the differences in culture and religion, it will take time to be number 1 in that region. Tesco is working on cultural and religion, like in Indian culture where there is restriction on meat eating because of religious values. Similarly in Pakistan, they need to use Halal meat in case they have to sell it in the market and majority of Pakistani people eat halal meat (Dransfield, 2013, p. 156). Acceptability Tesco is trying to import goods from Europe to meet the demands from UK. This is an important strategy since they know that the population of UK will increase and they will not be able to deliver goods in its present quality and quality will decrease if they don’t import which will affect their brand name. Feasibility The business model of Tesco is feasible and there are more than 500 stores in UK and it covers entire market. It has started their restaurant business, electronics business in UK and has expanded into Europe, USA, Asia and slowly eyeing every continent in the globe. They expand according to the demand and hence they have not entered Africa as the supply and profit is not acceptable to them (Kourdi, 2010, p. 214). RACE Model of TESCO Tesco has increased its in-store digital presence of its F&F clothing line to increase the awareness of F&F’s multichannel offer and experience. Tesco used it as a great opportunity to engage those in-store F&F customers who have never shopped F&F online. By doing this Tesco increased the interest of the customers digitally in-store while providing them the opportunity to engage and see the grate range of online products available to them (Ryan and Jones, 2012, p. 211). Tesco has focused on technological innovation for engaging with the customers. Tesco has leaded the market with strong technological innovating, with it being the first to offer online shopping. The innovations of click and collect, personal checkouts shop and drop, interactive screens, proposed micro delivery are great and it makes the Tesco shoppers happy as it saves money and time (Rogers, 2012, p. 1). Conclusions . In UK there are around 92, 796 grocery stores in UK which can effectively be split into four sectors, Traditional retail, Convenience store, superstore and supermarkets, Hypermarkets and Online channel. Among them, superstore, supermarkets and hypermarket is the largest and in 2008 they accounted for 73 % of the total grocery sales. The biggest grocery chains in UK are Tesco, ASDA, Sainsbury and Morrison’s and all of them account for around 73.6% of the total grocery market. Tesco has a market share of 30.2%, followed by ASDA 17.3 %, Sainsbury 16.6 %, and Morrison’s 11.1%. Macro environmental analysis of Tesco reveals that the company faces strong forces from Political, Legal, Economic factors. Tesco has used technological and social factors to its advantage and generated profit out of it. Micro environmental analysis reveals that Tesco is in a strong position with respect to supplier and mew entrants. But it needs to come up with effective strategies to keep the consumers loyal to them as the switching cost is very low. Further the intense competition makes Tesco always look for differentiation and cost leadership strategy which has make its business model effective for so many years. The Value Chain analysis and Resource based view points to the ability of Tesco to effectively use its resources in meeting its objectives. Tesco has faced few PR issues which need to keep in check so that it does not damage the brand image of the country. Tesco is currently the number 1 supermarket in UK but it needs to go in expansion mode for it to be number 1 worldwide. References Angwin, D. 2008. Business Strategy Pathfinder: Core Concepts and Micro-cases. New Jersey: John Wiley & Sons. Ansoff, H.I. 2007. Strategic Management. New York: Palgrave Macmillan. BBC. 2013. Tesco in talks with China Resources Enterprise. Available at: http://www.bbc.com/news/business-23628045. [Accessed on: 21 April. 2014]. Butler, S. 2013. Every little hurts: Tescos battle to regain markets and reputation. 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