Strategies of Tesco PLC - Case Study Example

Report on the Strategy of Tesco PLC Abstract This report evaluates the business strategy of Tesco, the leading supermarket chain in the United Kingdom. The report evaluates both the macro- and micro-economic environments in which Tesco operates. An analysis of Tesco’s internal resources is also given as well as the organisation’s opportunities and threats. Finally, the paper evaluates Tesco’s current strategy after highlighting the strategic drift that the retailer has been focusing on. Recommendations are given at the end of the report based on these analyses. Table of contents Introduction Tesco PLC is the leading food retailer in the United Kingdom with a market share of 30.6%. It has expanded its operations across 14 nations in Europe, North America and Asia (The Telegraph, 7 October 2011). It is the biggest retailer worldwide in terms of revenue earning after Walmart and Carrefour and indeed, the second-biggest in profit terms after Walmart (Nwagbara, 2011, p. 56). According to Nwagbara (2011, p. 56), Tesco’s commercial portfolio comprises 450 superstores which offer both food and non-food items such as books and DVDs; 170 metro stores which stock an array of food products in towns and city centres; and over 950 express stores offering more than 7,000 food products. Tesco has also been engaging in online retailing recently through Tesco Direct and Tesco.com. Tesco was founded by Jack Cohen in the year 1919 and established its initial store in 1929 in London (Nwagbara 2011, p. 56). However, the company has progressed to become the leader in the United Kingdom food retailing industry over the decades. The purpose of this paper is to examine Tesco’s macro and micro environment and to determine its competitive position and development over the last few years. The paper also examines the company’s internal resources and evaluates how they fit into the challenges of its micro and macro environment. Additionally, the opportunities and threats brought about by its environmental conditions are assessed. Finally, the current strategy adopted by this company is evaluated, its viability gauged and recommendations given. The macro-economic environment Political The main political issues affecting Tesco currently are the changes in corporate tax rate and the employment law. The UK government announced in the 2012 budget that it would reduce corporate tax by 1% for two consecutive years (2012 and 2013) from 24% to 22% (HM Treasury, 2012). This will save Tesco a lot of funds and make it more financially stable. Additionally, the government declared that the increases in the nationwide minimum salary in the following years will be below inflation rate. This implies that the cost of employment will reduce in real terms. Therefore, Tesco will incur lower costs (in real terms) while recruiting lower-level workers such as checkout attendants (HM Treasury 2012). Economic The major economic matters that affect Tesco currently are high unemployment and price rises in the UK. According to BBC (2012a) the Consumer Price Index (CPI) in the UK has risen and has been fuelled by some of Tesco’s food products. The impact of this has been a reduction in consumption in the UK market, hence slowing Tesco’s growth in this country. Additionally, there is high rate of unemployment in the UK, causing a reduction in aggregate consumption. This has further restricted the growth of Tesco in the UK (BBC, 2012a). However, this may lead to reduction in the cost of employment in the future, thereby leading to a positive impact for the retailer. Social The main social issue affecting Tesco currently is the change in consumers’ lifestyle, leading to a change in tastes and preferences. Since 2011, Tesco has recorded a tremendous increase in sales for “free from range” products, indicating that there has been a huge change in tastes and preferences and people are opting for healthier lifestyles (Tesco, 2012b). This has necessitated the need for Tesco to keep track of this change and to take advantage of it. Tesco has responded to this by developing a new product range called “Clubcard.” The company needs to continuously engage in market research in order to be always informed about the changes in consumer tastes. Technological Technology has a huge impact on the way business enterprises in all industries operate in recent years. It has been playing as big role in shaping consumer spending habits. The Internet in particular has opened a channel through which enterprises in the food retailing industry distribute their products to customers. Recently, Tesco has recorded significant sales from this channel. However, as Which (2012) points out, this has opened a new line of scrutiny through which consumers compare Tesco to its competitors in various ways. New technology has led to the introduction of self-service checkouts in the food retail industry, hence enabling enterprises to reduce long-term staffing costs. Therefore, if well implemented and utilised, the new technology will support Tesco’s activities and ensure long-term sustainability. Environmental In its corporate responsibility initiatives, Tesco has indicated that it recognises its role of “creating sustainable ways of doing business.” In this regard, Tesco established a ‘zero-carbon supermarket’ in 2009 and aims at becoming a zero-carbon business by 2050 (Tesco 2012a). Additionally, the company has reviewed its supply chain to ensure that at least £1 billion of its product supplies are sourced from local suppliers in the UK. The company has also invested £1 billion into “revamping” stores in the UK to improve energy efficiency and customer convenience. Legal According to the BBC (2011), competition law has been the major legal issue affecting Tesco in recent years. In 2011, Tesco, together with other corporations was subjected to a penalty of £10.4 billion for working in cahoots with other retailers in the UK to raise the prices of milk and cheese, an act that cost consumers £270 million. Tesco’s competitors, Sainsbury and Asda, were also fined and this highly affected the industry’s ethical standing. Clearly, this act goes against the ideas of “responsible trading” outlined by Tesco in its corporate responsibility statement. It goes against its responsibility of selling goods “ethically” and “responsibly” and this adversely impacted Tesco’s credibility with its customers (Tesco 2011b). The micro-economic environment Competitive rivalry There are three major competitors of Tesco in the UK food retail industry namely Sainsbury, Asda and Morrison. These enterprises utilise different business strategies to attract customers. According to the BBC (2012b), Sainsbury’s strategy involves providing premium services while Asda’s strategy involves providing value for consumers through appealing prices for different products. According to the BBC (2012b), Tesco has transformed its business strategy from that of “pile it high, sell it cheap” to one that involves striking a balance between quality and price. Power of buyers According to Grierson (2012), Tesco’s buyers have little power in regard to the company’s overall corporate strategy. However, customers in the food retail industry are able to switch easily from one retailer to another due to the low cost involved. This enables the consumers to wield much power as a collective. Tesco has responded to this by identifying the tastes of the customers and establishing the “Clubcard.” Since this product range was established, Tesco has been able to track any changes in the behaviour of customers and devised appropriate ways to respond (Grierson , 2012). Consequently, Tesco has enjoyed a significant increase in customer loyalty recently. Power of suppliers According to Grierson (2012), Tesco suppliers are relatively weak or have quite little power in regard to working with the retailer. For instance, when it becomes necessary for Tesco to lower the prices of its products, it shares the pain with the suppliers by forcing them to cut the prices of their supplies. This is largely caused by the fact that Tesco works with many suppliers, rather than one large supplier (Grierson 2012). Tesco is usually able to change suppliers with relative ease and to adapt to the supply chain. In comparison with the suppliers, who often depend on the company for their continued existence, it means that the suppliers have little power to determine the products they offer and the prices of their products. New entrants According to Ruddick (2012), the “big four” retail chains (that is Tesco, Asda, Sainsbury and Morrison) dominate the food retail industry, making it extremely difficult for small, new entrants to survive in the industry. The shares taken by the “big four” and other food retailers are illustrated in fig. 1. Fig 1: Market share of leaders in the UK food retailing industry Source: Which (2012) However, according to Ruddick (2012), the new entrants have recently changed the way they do business and are forming co-operatives which enable them to support each other and become strong competitors. The threat of new entrants is increasing due to the increasing role of co-operatives and will be a key factor for consideration when determining competitive strategies in the future. Substitutes The current substitutes for Tesco’s business model are online retailing and discount stores. According to Tesco (2012a p. 15), Tesco has been implementing efforts to extend into online retailing but maintains its focus on the physical store format. Given the increased online business by competitors, online trading remains a threat to Tesco. To mitigate this threat, Tesco will need to integrate its new business format into its overall business strategy. Secondly, the importance of discount stores has risen in the recent years, mostly due to the current situation facing customers. Tesco was using this model in 1990s but has recently expanded its strategy to include them. Alongside its “value” products, Tesco has added the “finest” quality-based product range which is aimed at fulfilling the demand of a market that is less price sensitive (Tesco 2012a, p. 9). Internal resources Physical resources Tesco’s physical properties are developed and managed with respect to the needs of customers and with the goal of creating long-term benefits for the shareholders. As such, the company owns stores of different formats from the tiny “Metro” stores to the big “Extra” stores which are distributed in accordance with local demand in different markets. Another major physical resource for Tesco is inventory. Due to swift inventory turnover, the company manages and maintains this resource carefully to ensure that consumer demand is always saturated and that there is minimal wastage (Tesco, 2011). Financial resources Recently, Tesco has recorded a continuous decrease in financial resources, which is an issue of concern if the fall is sustained over a long period of time (Tesco 2012a, 14). However, the company has maintained an appropriate level of cash which is adequate to support business operations and if well invested, this should not be a burning issue. Tesco’s liabilities have also been declining in the last three years (Tesco 2012a, 14). This is positive news for this company since its opportunity to manoeuvre in the case of future economic uncertainty. Human resources As mentioned earlier, unemployment in the UK has increased in the recent years and this has increased the size and reduced the cost of labour force in the country. This implies that Tesco has a greater choice for recruitment candidates to lower level staff such as such as checkout assistants. According to Ruddick (2012), this may enable Tesco minimise long-term costs of staffing. With an increased choice of candidates, Tesco has an increased power to reduce salary and other staff benefits. Intellectual resources Intellectual resources are of utmost importance to Tesco, as with any other business. Currently, both “value” and “finest” brands for Tesco generate over £1 billion every month. It implies that these brands are the largest in the food industry in UK in terms of revenue earning (Tesco 2012b). These brands have led customers to increase the overall Tesco brand loyalty, which has enabled the company to maintain high growth levels and to ensure long-term value for shareholders. Opportunities and threats Opportunities As mentioned, development in technology has opened an opportunity for business enterprises in the food retail industry to increase sales and reduce costs. This has helped to increase consumer convenience and hence enabled business enterprises to boost sales. Tesco has utilised this opportunity by introducing more heavy goods such as dishwashers and by developing its “Tesco Direct” catalogue. It has also utilised the opportunity brought about by the new technology by developing self-service checkouts into its stores (Tesco, 2012b). The self-service checkouts currently account for more than 10 million transactions per week and thus, play a huge role in reducing staffing costs. Threats One of the major threats facing Tesco is the likelihood of future growth prospects in the United Kingdom remaining stagnant. According to Which (2012), there is a likelihood that the food retail industry is going to record low figures in the near future. The UK competition law also poses a threat to Tesco as it limits its growth opportunities. For instance, this law was used by the European Commission to block Tesco from acquiring the British retailer Safeway (BBC (2011). Therefore, Tesco will have to look for new opportunities in new markets or through venturing into other areas such as banking. Evaluation of the current strategy Strategic drift Tesco has recently focused on a strategic drift in the United Kingdom brought about by increased focus on US and Asian operations. UK sales have consequently declined lately with a significant market share being taken by the severe competitors (BBC, 2012b). It has therefore become necessary for Tesco to refocus on the UK strategy. As noted, Tesco has, in response, invested £1 billion to “revamping” its stores and to hire additional staff in order to improve customer experience. In short, the new strategy focuses on “overhauling” rather than expanding operations in the UK market. According to Which (2012), the customer perception for Tesco is currently poor compared to that of close competitors. As noted, Sainsbury’s strategy is quality-based and that of Asda is price-based. However, Tesco currently seems not to have a clear differentiation strategy. This is identifiable when comparing Tesco with the earlier-mentioned two competitors, who have clearly identifiable differentiation strategies in regard to customer perception. Therefore, this should be a point of consideration as the company implements its new strategy (Which, 2012). As indicated earlier, Tesco has enjoyed high customer loyalty rate in the recent years, which has matched its tremendous growth that has far surpassed that of rivals. This has helped to increase the long-term viability of the company. Despite this, Tesco has performed relatively poorly in regard to customer satisfaction, compared with the rest in the retail market (Which, 2012). This is amazing given that the company enjoys a high level of customer loyalty. Therefore, it will be essential for Tesco to put more emphasis on improving customer satisfaction in order to ensure long-term customer satisfaction. Conclusion In conclusion, the main issues affecting the strategic decisions of Tesco are economic-based in the short-term and technologically and socially based in the long run. Economic matters in this case include declines in consumer purchasing power due to the increased unemployment rate and the rise in CPI, leading to a reduction in aggregate demand and consumption. This will lead to a slow growth in all enterprises in the food retail industry, including Tesco. This implies that the major way by which Tesco can grow in the United Kingdom market is by taking the market share from its rivals. To achieve this, there is need to understand the changes in customer tastes and preferences and then respond in accordance with the market needs. This highlights the usefulness of “Tesco Clubcard.” This will help to cover the short-to-medium term needs of the company. As noted, technology can help to boost Tesco’s sales and to reduce costs, if well implemented and utilised. It provides customers with an opportunity to engage in online shopping, thereby adding consumer convenience. Additionally, development of self-service tills has helped to reduce the need to hire additional staff, hence enabling companies in the food retail industry to significantly reduce staffing costs. The online retailing and the “Tesco Clubcard” will also help the company to understand the current needs of customers. Tesco will gather essential information required to adapt effectively to changing customer needs, which will help the company to gain and maintain a competitive edge. Recommendations As noted in the strategic evaluation, Tesco’s competitors use clearly identifiable differentiation strategies while the strategy of Tesco is not clearly identifiable by customers. It is therefore vital for Tesco to develop a clear differentiation strategy, which will distinguish the company from its competitors. Alongside the latest investment to increase consumer convenience in the UK market, Tesco needs to work towards ensuring consumer satisfaction, which is currently poorly rated in comparison with close competitors. This will enable the company to ensure that customer loyalty is maintained in the long run. Further, it is essential for Tesco to make maximum use of the “Clubcard.” The “Clubcard” can be used to gather information that can be utilised in various ways including improvement in customer convenience, improving the layout of stores and reducing shopping times. Additionally, Tesco should always avoid engaging in bad acts or in conflicts with legal bodies, which usually leads to loss of credibility before all stakeholders. New technology has been implemented in the company in order to reduce staffing costs and to generate more revenue. This implies that there will be reduction in staff recruitment over time. This process should be done naturally in order to avoid the unconstructive publicity associated with making temporary layoffs. Finally, it will be essential for Tesco to implement a dual delivery stream by implementing an effective online retailing system. Most of Tesco’s competitors have specialised products in either in-store or online retailing. Tesco should consider broadening its delivery stream by offering all of its products in online and physical stores. References BBC 2011 “Tesco to fight dairy price-fixing from OFTA”, viewed 7 January 2013 BBC 2012a “Economy tracker” viewed 7 January 2013 BBC 2012b, “Tesco unveils profit rise and £1bn investment in UK”, viewed 7 January 2013 Grierson, J 2012, “Tesco suppliers in price warning”, The Independent, 26 September 2011, viewed 7 January 2013 HM Treasury 2012 “Budget 2012”, viewed 7 January 2013 Nwagbara, U 2011, “Managing organizational change: leadership, Tesco, and Leahy's resignation”, e-Journal of Organizational Learning and Leadership, Volume 9, No. 1, pp. 56-75. Ruddick, G 2012, “Tesco recovers UK market share”, The Telegraph, 24 April 2012, viewed 7 January 2013 Tesco 2011b, “Corporate Responsibility Report”, viewed 7 January 2013 Tesco 2012a, “Annual Report 2012”, viewed 7 January 2013 Tesco 2012b, “Our Brands”, viewed 7 January 2013, The Telegraph, 05 October 2011, “Tesco profits rise as overseas growth offsets sluggish UK”, viewed 7 January 2013 Which 2012 “Grocery prices: What you need to know”, viewed 7 January 2013 Read More