PESTLE Analysis - Tesco PLC - Case Study Example

International Introduction Tesco PLC is the largest company operating in the grocery retailer sector in Britain. Tesco Plc sells a wide range of merchandise including clothing, toys, electrical items, books, furniture, rental music, software and general grocery to a wide market share in the UK. Tesco Plc was founded in 1919 in London East End, United Kingdom (Tallman, 2009). The company has experienced high market growth and expansion and currently it has operations in 12 countries across the world and employs more than half million employees (YahooFinance, 2014). The company serves tens of millions of customers every week in its more than 6,700 stores that are located in countries such as United Kingdom, China, Malaysia, South Korea, Thailand, Hungary, India, Poland, Czech Republic, Slovakia and Republic of Ireland (YahooFinance, 2014). The UK annual revenues exceed 40,000 British pounds indicating that UK forms a core market segment for the company. The retailer controls more than 35 percent of the grocery retail sector market and its close competitors are Sainsbury’s (17 percent), Morrisson’s (10 percent). Company background The UK grocery retail market is highly competitive due to availability of several substitutes and alternative providers in the market. The switching costs to rival companies are low, but Tesco has attained competitive edge through competing on quality, innovation, product diversity and price (YahooFinance, 2014). Tesco Plc has implemented a customer database management system that ensures that the management understands the changing needs, customer values and preferences of the customers in each market segment (Baines, Fill & Page, 2013). Tesco Plc has understood the consumer buying behaviours and patterns in each of the core market segments and has attained customer loyalty through launching the Clubcard Loyalty Scheme (Tallman, 2009). Evaluating and analyzing developed and developing economies (PESTLE analysis) PESTLE analysis of Tesco Plc The PESTLE (political, economic, social-cultural, technological, legal and ecological) analysis is a strategic marketing tool that enables the management to understand the nature of the external business environment and the major forces that shape the industry structure and operation strategies. The tool is useful in foreign market entry since it identifies the external forces that each business should adapt to in order to attain competitive edge in the market (Burgemeister, 2003). Political environment The political environment refers to the level of political stability and government involvement in the free trade. The current political environment in UK is stable and the government encourages entry in to the grocery retail sector. However, anti-trust laws issued by the EU makes it difficult for mergers and acquisitions thus Tesco Plc has experienced difficulties in acquiring some of the small competitors (Burgemeister, 2003). The UK coalition government has been cutting government spending in order to fully recover from the previous effects of global financial crisis. The government has implemented strict financial regulatory policies in order to deal with any shortcomings in the institutional financial system. Economic environment The economic environment of Tesco Plc will determine its ability to expand operations and sales volumes in the markets of operation (Henry, 2011). The economic environment includes the economic factors that affect the consumer purchasing power such as the rate of national economic growth, the level of interest rates offered by the commercial financial institutions, the fiscal and monetary policies of the UK government, the consumer disposable income levels and exchange rates prevailing in the market (Baines, Fill & Page, 2013). The UK is experiencing sustainable economic recovery after the recent economic slowdown and stable interest rates. The recent increase in employment opportunities will increase the disposable income levels that leading to a higher consumption level in the economy. However, the devaluation of the British pound against other major currencies such as the Yen, the US dollar and Euro will negatively affect the profitability of the grocery retail chain in several markets of operation (Burgemeister, 2003). Social-cultural environment The social-cultural environment encompasses the consumer lifestyles. The social class, level of education, demographics, and attitudes of the consumers towards certain products (Burgemeister, 2003). The UK has a highly educated population and growing middle class consumers whose lifestyle is characterised by high demand for quality grocery and ambient shopping places (Henry, 2011). The UK consumers have favorable attitudes towards large grocery retail outlets since they associate them with their own social class and product quality. The UK population prefers health-conscious foodstuffs and tends to eat from restaurant outlets thus Tesco Plc must diversify in other sectors of the economy and stop relying on food grocery for its revenues (Burgemeister, 2003). Technological environment This refers to the advancements in telecommunication networks and other information processing technologies that have changed the business processes and that have allowed for global market reach (Harrison, 2013). The emergency of the internet and e-commerce platforms have led to new business streams and competitive edge for the businesses that have implemented modern technology in their operations (Henry, 2011). The technological environment will enhance the revenues of Tesco Plc since the company has already implemented customer relations management systems that aim at ensuring brand loyalty and has the Clubcard scheme card that has created switching costs for its customers (Harrison, 2013). The use of self-service tills and cameras in the outlets has enabled the company to control overcrowding and prevent shoplifting. The internet shopping has created customer convenience and mobile shopping platform (cortexica vision systems) for Tesco has improved the market share (Henry, 2011). Legal environment The legal environment refers to the industry regulatory laws on product quality and safety. There are various occupation health laws and food safety laws in the UK and contravention of such laws will lead to heavy legal fines and negative reputation in the market (Henry, 2011). The EU VAT increase may affect the demand for non-food products while the increase in the minimum wages due to labour unions agitation will increase the operating costs thus leading to a decline in profitability. For instance, South Korean government made restrictions on Sunday opening hours (Baines, Fill & Page, 2013). Ecological environment This refers to the impact of the business activities on the natural environment. Different environmentalist pressure groups and government laws require the businesses to recycle the waste products, avoid pollution and implement ethical business practices (Henry, 2011). Tesco must adopt renewable energy sources and minimise effluent emissions in order to attain competitive edge in the market and comply with environmental legislation (Paul, 2011). Tesco Plc rewards the bagless deliveries through the green Clubcard points and has added carbon footprint data on its products while at the same time encouraging reuse of the plastic bags (Harrison, 2013). PESTLE analysis of Brazil Brazil is the largest country in South America and one of the emerging markets due to the rapid economic diversification that has occurred over the recent years (Wetherly & Otter, 2013). Brazil has been able to attract foreign direct investments due to its diversified industrial sector and huge population. Brazil is a member of the UN, G20 and Union of South American Nations. Some of the leading companies in Brazilian retail market include Wal-Mart, Cassas Bahia, Makro, Carrefour, and Ponto Frio (Paul, 2011). Political environment The political environment is currently stable and the incumbent government has taken a conservative approach to economic policies (Harrison, 2013). The government has focused on the agricultural and social reforms (Harrison, 2013). Economic environment Brazil is the largest national economy in Latin America and ninth in purchasing power parity in the world. The country has an estimated Gross Domestic Product (GDP) of US $ 2.254 and annual GDP growth rate of 4 percent (Wetherly & Otter, 2013). The retail sales from packaged food market are estimated at US $ 113.8 billion and the annual growth rate in that sector is estimated at 25 percent. The hypermarkets increased by 7 percent due to preference to shop in convenient areas and social inclusion policies that have been implemented by the government. The agricultural sector constitutes 29 percent of the GDP and major multinationals in the sector include Unilever, Kraft, Bunge and Nestle. Brazilian grocery sector has a high level of internationalization and e-commerce accounts for 2.1 percent of retail sales (Wetherly & Otter, 2013). The soft drinks market is the third largest in the globe while the confectionary market is leading in the world. Brazil is a leading meat exporter and domestic market has a huge growth potential. Brazil has a large personal care and cosmetics market that has a annual growth rate of about 11 percent. Fifteen companies account for over 70 percent of the revenues from the cosmetics market and some of the leading players include Avon, Johnson & Johnson, Proctor& Gamble and Unilever. Samsung, Whirlpool, Toshiba and Philips dominate the electronics market and goods such as freezers, washing machines and audio equipment have experienced high market saturation (Wetherly & Otter, 2013). The Clothing and footwear market is competitive. Brazil’s grocery retail market is saturated and major players include Carrefour, Wal-Mart, Makro, Ponto Frio, Casas, Lojas Americanas, Netflix, Casas Bahia and Grupo Martins. (Wetherly & Otter, 2013). Leading exports include automobiles, electrical equipment, aircraft, coffee, textiles and corned beef.. The economic policies are geared at reducing the foreign debt and foreign exchange deficit (Dransfield, 2013). The level of unemployment is at high of 12 percent while the retail and consumer segments have been more attractive for foreign direct investments. The corporate income tax is levied at 15 percent and additional surcharge of 10 percent for the annual taxable income in excess of 109,000 US dollars. The social integration programme tax (PIS) and social contribution on revenues (COFINS) are texed at 1.65 percent and 7.6 percent respectively on the gross revenues. Federal VAT is charged on imports while State VAT is charged at between 17-19 percent on the movement of goods whether on freight or physical movement (Burgemeister, 2003). Social-cultural environment Brazil social-cultural environment stems from the Roman-Germanic traditions. Portuguese is the official language while more than 80 percent of the population lives in urban metropolitan areas (Wetherly & Otter, 2013). Brazilian consumer behaviour is not homogeneous and depends on the social class. The low-income households purchase mainly food grocery while the middle income households spend mainly on entertainment and communication goods. Brazilians prefer shopping malls, hypermarkets and supermarkets that offer convenient shopping experience and lower prices (Aswathappa, 2008). Brazilians associate brands with concepts like loyalty, status, quality and trust and are influenced by the brand attributes in their purchasing decision (Wetherly & Otter, 2013). Technological environment Brazil is a leader in science and technology development in Latin America. The government is developing an environment that supports scientific advances and innovation and technological research institutions such as Air force’s Aerospace Technical center, Brazilian Space Agency and Oswaldo Cruz Institute receive research funding from the government. Brazil generates a lot of revenues from the IT related services (Henry, 2011). Legal environment Brazilian legal system is based on the civil law traditions. The Administrative Council of Economic defense (CADE) is responsible for safeguarding the free-market enterprise and suppressing the anti-trust practices. The consumer code defense safeguards the consumer interests (Mellahi, 2008). Ecological environment Brazil holds more than one-third of the global rainforests and deforestation has been one of the issues affecting the country (Dransfield, 2013). The recent deforestation crisis has forced the government and pressure groups to demand for recycling of waste products and conservation of the natural environment in order to avoid the contamination of Amazon River and beaches in the country (Paul, 2011). PESTLE analysis of Australia Australia is a developed country that has an estimated population of about 20 million people and English is the main business language. Australia is a multi-cultural society that is composed of Aboriginal people and early immigrants from Britain, German and Asian countries (Henry, 2011). Political environment Australia is a liberal democracy that is based on constitutional monarchy and British Westminster system of governance. The country is a federal system that has numerous states and there are two main political parties that include Australian Labour Party and coalition of the Nationals and Liberty Party of Australia. The political polices aim at multilateral, regional and international economic integration (Mellahi, 2008). Economic environment Australian grocery industry is estimated to be worth US $ 130 billion and accounts for 10 percent of the GDP. The main players in the market include Coles and Woolworths, ALDI, Costco and Franklins and IGA. Australian grocery retail sector has a annual growth rate of 3 percent and supermarkets dominate the sector due to their economies of scale (Wetherly & Otter, 2013). Woolworths is the leading retailer with 34 percent of the market share, but competition has intensified due to value-conscious consumers. Food and liquor retailing is valued at US $ 125 billion and growth rate of 4 percent that is driven by rise in consumer disposable incomes. Food and beverage processing contributes US $ 88.7 billion while fresh produce accounts for US $ 5.5 billion. The exports from the sector have declined by 2.2 percent while the imports declined by 0.4 percent thus indicating a growth in domestic consumption (Wetherly & Otter, 2013). Australia has a GDP of US $ 1.3 trillion and AAA credit rating by international credit rating agencies. The Australian economic environment is conservative in foreign direct investments since foreigners can own only 15 percent in major resource companies and 50 percent in new projects (Wetherly & Otter, 2013). The economic growth rate is slow while the inflation rate has remained at a low of 3 percent. The unemployment rate stands at 6 percent (Aswathappa, 2008). The tax regime includes a sales tax of 10 percent, 30 percent corporate tax, progressive income taxes and pay-as-you-earn tax for the employees. Australia has established free trade agreements with several countries including China, US and Chile (Dransfield, 2013). The interest rates are as low as 3 percent while the exchange rates are stable. The inflation rate is 1.8 percent while the foreign direct inflows have exceeded 60 billion dollars annually. The GDP is about 980 US billion and economic growth has averaged 3.6 percent over the past years (Wetherly & Otter, 2013). Social-cultural environment The social-cultural environment is characterised by multi-ethnic and culturally diverse population. There are numerous religions and mass media influences the opinions of the people. The number of immigrants is on the increase and education standards are high. The people prefer work-life balance and quality products (Wetherly & Otter, 2013). Technological environment Australia has a well developed science and technology industry and the value of intellectual property is more than 30 billion US dollars (Dransfield, 2013). The country has good telecommunication infrastructure that supports e-commerce and customer relations management. Australian companies and consumers have embraced the use of technology in their product searches and shopping experience (Mellahi, 2008). Legal environment Australian company laws are similar to those of Britain and the legal framework supports enforcement of contracts and property rights. The country has flexible labour laws and the carbon pricing scheme has encouraged businesses to use alternative renewable energy sources (Harrison, 2013). Ecological environment Australia is an island continent and enjoys ecological diversity. The national parks form five percent of the geography and consist of rainforests, deserts, coral reefs and woodlands (Harrison, 2013). Comparison of Brazil and Australia as potential FDI choice Michael Porter’s diamond of national advantage model is useful in comparing the country attractiveness as potential for foreign direct investment choice between Brazil and Australia. The model considers the factor condition, demand conditions, related and supporting industries, firm strategy and rivalry, government support and chance (Mellahi, 2008). The factor conditions refers to the availability of production factors such as infrastructure, skilled labour force, capital and other resources of the particular country. The factor conditions cannot generate sustained competitive advantage, but some factors are essential for business growth. Australia has better infrastructure, highly skilled workforce and liquid financial system than Brazil (Wetherly & Otter, 2013). The demand conditions affect the competiveness of the country. Highly demanding consumers put pressure to firms thus encouraging high quality products and innovation. In this case, Australian consumers are more demanding than Brazilian consumers due to the cultural diversity of the population. The other factor is the availability of related and supporting industries (Wetherly & Otter, 2013). Supporting industries will enable Tesco Plc minimise operating costs, gain market information and innovative products. There are more supporting industries in Australia than Brazil. The firm’s strategy (Mellahi, 2008), structure and rivalry will influence the competitiveness of the firm. British firms are less hierarchical and rivalry in the grocery retail sector is high in Brazil than Australia. Brazil and Australia offers government support through enforcing anti-trust laws and encouraging competition in the grocery retail sector. The governments have laws on consumer protection and product quality standards (Wetherly & Otter, 2013). Recommendations There are numerous challenges and risks of expanding to Brazil such as the complex tax regime and employment regulatory regime. The tax rates and employee social charges on the payroll are high in Brazil while compared to Australia. Multiple taxes will reduce the economic returns of Tesco plc in Brazil. Brazil’s economic environment is volatile and the financial system is not well developed thus Tesco Plc may not be able to secure local financing in Brazil. Brazil has foreign capital registration rules and complex profit repatriation laws. The local infrastructure and distribution networks are not well developed and cultural norms do not favor the expansion in Brazil. However, Brazil government has implemented the Growth Acceleration Program (PAC) that aims at enhancing the infrastructure through developing new roads, rail and energy sources (Wetherly & Otter, 2013). The current investment project scope that Tesco Plc wants to undertake is high and there are legal risks that exist in Brazil since the legal system is based on Civil law. The legal system in Brazil may not be capable of enforcing certain investment contracts. The financial risk is high in Brazil due to poorly developed financial system that is prone to volatile economic conditions and financial shocks for the trading partners like the US and China. Australia has a highly developed physical infrastructure and multi-cultural population that will easily identify with Tesco Plc brand. However, Australia has laws that limit the foreign direct investment in certain sectors. Australia has supporting industries like the electrical industry and thus is ideal for Tesco Plc foreign direct investment. Australian business law is capable of enforcing intellectual property and business contracts. References Aswathappa, K. 2008. International business. New Delhi: Tata McGraw Hill. Baines, P., Fill, C & Page, K. 2013. Essentials of marketing. Oxford: Oxford University Press. Burgemeister, S. 2003. Market analysis. London: Routledge. Dransfield, R. 2013. Business economics. New York: Routledge. Harrison, A.L. 2013. Business environment in a global context. Oxford: Oxford University Press. Henry, A. 2011. Understanding strategic management. Oxford: Oxford University Press. Mellahi, K. 2008. Global strategic management. New York: John Wiley. Paul, J. 2011. International business. New Delhi: PHI Learning. Tallman, S.B. 2009. Global strategy: global dimensions of strategy. West Sussex: John Wiley. Wetherly, P & Otter, D. 2013. The business environment: themes and issues. Oxford: Oxford University Press. YahooFinance, 2014. Company Profile. [Online] Available at: HYPERLINK "http://uk.finance.yahoo.com/q/pr?s=TSCO.L"http://uk.finance.yahoo.com/q/pr?s=TSCO.L [Accessed 12 February 2014] Read More