Analysis of Tesco Stores - Case Study Example

Abstract

Tesco operates the largest number of retail stores in the UK, as well as other countries. Despite maintaining a significant share of the grocery market, Tesco faces competition from Sainsbury’s, Asda, and Morrisons. In 2014, Tesco was affected by an accounting scandal that ended up costing 263 million pounds. Tesco’s earnings are likely to grow as it is expanding its operations in different countries, and diversifying its ventures. As Tesco is expanding its activities to other nations, South Africa can help it to increase its long-term value. The South African economy offers support to large firms that conduct global operations. A large number of foreign investors have chosen South Africa as one of the best target markets in the African continent.

Introduction

Tesco is a firm that owns and operates retail stores in the UK, as well as various other countries across the globe. Although this multinational retailer has expanded its operations in different continents including Asia and Europe, it has not exploited other emerging markets in the world. Tesco would have a good chance of increasing its operating profits if it enters into the African continent and conducts its operations in South Africa. The South Africa’s business environment would be suitable for Tesco’s entry due to its political stability and the high number of foreign direct investments. This report will evaluate Tesco’s current situation in the retail sector, its strengths and weaknesses, and its threats and opportunities. The analysis will focus on the political, economic, technological, and social factors in South Africa.

Tesco operates the largest number of retail stores in the UK, and it has expanded its operations in various other countries such as Thailand and the Czech Republic (Tesco, 2016). After its establishment in 1919, Tesco has progressively grown over the years especially following its introduction of online services for its customers in 2000. The company sells a variety of products in its stores across the 12 countries it currently serves, with a 994 million pound operating profit before exceptional items (Tesco 2016).

Strengths

Apart from being the biggest retail store in the UK, Tesco competes with some of the most valued brands in the world, and its superior performance has enabled it to stay ahead most of its competitors. Tesco’s performance has not been achieved easily, but changes in its management and strategy enabled the retail giant to maintain its outstanding performance. Tesco’s market share had been declining since 2011 but recently, it increased its sales by 1.3%, and this was the first sales growth since 2015 (Yeomans 2016). The rise in the company’s sales means that it acquired a larger share of the UK grocery market. Tesco reduced its net debt by 0.8 billion pounds during the first half of 2016, hence making its balance sheet more secure (Tesco 2016).

Tesco has always strived to perform better than its competitors by making its customers loyal to the retail store. For instance, the firm’s like-for-like sales performance in the second half of 2016 in the international market was 2.1%, indicating a significant growth in its sales (Tesco 2016). The fact that Tesco introduced a loyalty card to its customers in the UK before any other grocer shows that it significantly contributes to customer satisfaction. These aspects have enabled Tesco to maintain the largest grocery market share in the UK at 28.2%. Despite maintaining a significant proportion of the grocery market, Tesco faces competition from Sainsbury’s, Asda, and Morrisons, whose market shares in October 2016 were 16%, 15.6%, and 10.4% respectively (Kantar World panel 2016).

Weaknesses

Although Tesco made a turnaround in its financial performance just recently, its profits were adversely affected in 2015 due to significant write-downs in its stock and property portfolio (Butler & Farrell 2015). The company made a loss of 6.4 billion pounds after its portfolio reduced in value, making this one of the biggest retail losses in the UK at that time. While Tesco derives most of its profit from the UK market, its high dependence on it could be the reason that its financial performance was adversely affected in 2015. It is apparent that the retail store’s reliance on the UK market might have an impact on its balance of power and share if it does not continue diversifying its areas of operation. After the company had reported the loss, it had to announce 5000 job cuts in the UK and 4000 others in its overseas stores (Butler & Farrell 2015).

In 2014, Tesco was affected by an accounting scandal that ended up costing it 263 million pounds after its profits and sales dwindled (Butler & Farrell 2015). This scandal damaged the company brand image because the majority of people would not like investing in a firm associated with financial misconducts. Tesco has to work on its debt reduction as its total indebtedness stood at 17.9 billion pounds as of August 2016 (Tesco 2016). The company’s significant capital expenditure due to the expansion of its stores makes it difficult to reduce its net debt significantly.

Opportunities

Tesco’s introduction of different food brands in its stores with a market-leading price has attracted many customers, and most of them are making repeat purchases (Tesco 2016). While its grocery market share stands at 28.2%, this might grow in the next few years as the company has already demonstrated a turnaround in 2016. Tesco’s earnings are likely to increase as it is expanding its operations in different countries, and diversifying its ventures to include banking. Many individuals shop online, and Tesco took this opportunity in 2012 to launch the first online grocery shopping services in Slovakia and the Czech Republic (Tesco 2016). Tesco’s expansion in the global market has progressively increased its sales performance, as it improved from 0.6% in the first half of 2016 to 2.6% in the first half of 2016 (Tesco 2016).

Threats

The retail company faces competition from other established stores not only in the UK but also in the international market. For instance, Sainsbury’s market share significantly improved in the first quarter of 2014 and it reached 17.1% while Asda was at 17.3% (Kantar World Panel 2016). Tesco’s competition from other stores such as Asda is stiff considering that it is a subsidiary of Wal-Mart, another retail giant. Tesco (2016) reports that the exit of the UK from the European Union might result in currency fluctuations, market volatility, and changes in interest rates, and all these aspects might create business uncertainty. Equally significant, as Tesco strives to enter new markets, it needs to invest heavily, and this could further affect its net debt.

South Africa’s PEST Analysis

Political Factors

As Tesco is expanding its operations to other nations, one of the international locations that can help the retail store increase its long-term value is South Africa. The country has a GNI per capita of $5994, with a population of 54.9 million (Focus Economics 2016). The economic policies implemented in South Africa make the country a suitable area where investors can operate without many restrictions. This aspect is evidenced by the entry of giant retailers in the country, and an example of this is Wal-Mart (PWC 2012, p. 2). The presence of the global retail stores in South Africa illustrates the stability of the nation and its attractiveness as an investment destination.

The business environment in South Africa would be suitable for Tesco’s entry due to several factors. The entry of the nation into the BRICS trade bloc has enhanced the volume of commerce that South Africa does with other member countries including India, China, and Russia (Piotrowicz & Cuthbertson 2015, p. 69). This aspect illustrates the political stability of the nation and its high position in the continent, and this is another factor that makes it a suitable region for Tesco to expand its operations. The business environment in South Africa is open and liberal, and it has strong investor protections (Oxford Business Group 2014, p. 30).

Economic Factors

In 2015, South Africa’s GDP was US$329 billion, and this was a drop from the previous year’s GDP of US$357 billion (Focus Economics 2016). The economic growth in the country’s GDP during the same year was 1.3%, and the GDP per capita was US$5994. The country’s economy grew by 3.3% in the second quarter of 2015, and this resulted from the improvement in various sectors of the economy including agriculture, mining, and manufacturing (Focus Economics 2016). The drop in the nation’s GDP might be a hindrance to Tesco’s business operations if the economy does not improve. The economy of the country, however, offers support to large firms that compete globally (Oxford Business Group 2016, p. 22).

The annual variation in the South African investments in 2015 was 1.4%, and this was an improvement from the previous year’s annual change of -0.4% (Focus Economics 2016). Although the South African economic climate has not been at the desirable levels in the recent past, the country received the highest number of foreign direct investments in 2013. The FDI inflows in the country increased from $4.6 billion in 2012 to $8.2 billion in 2014. These figures reflect the high number of foreign firms that entered the market and others that expanded their operations (Oxford Business Group 2014, p. 29). The increase in the number of investments in South Africa between 2014 and 2015 proves that Tesco would not be making a wrong decision to introduce its stores in that country.

The South African CPI inflation rate at the end of each period has been progressively improving since 2011. In 2015, the country’s inflation rate was 5.2%, and this was an improvement from the previous year’s CPI inflation of 5.3%. The decrease in the Consumer Price Index reflects an increase in the average cost of goods and services, and this shows that the nation’s citizens have the ability to spend more money on commodities.

Although some of South Africa’s economic indicators such as the inflation rate have shown some recovery over the years since 2011, the country’s economic growth has not attained its potential. There is currently a weak global demand for the nation’s products, and structural reforms are lacking (Focus Economics 2016). The lower levels of consumer confidence and weak fixed investment in South Africa have forced the nation to increase its benchmark rate as a way of keeping the inflation at the lowest level possible. The retail sector in the nation, however, played a significant role in helping the country bounce back from the 2008-2009 financial crisis (Oxford Business Group 2014, p. 112). A large number of foreign investors have chosen South Africa as one of the best target markets in the African continent.

Social Factors

South Africa has improved on several social aspects over the years. For instance, the adult literacy rate in the country was 82% in 1996, and it went up to 93% in 2011 (Oxford Business Group 2014, p. 17). The increase in the nation’s literacy rate means that the middle class has expanded, hence providing a large market for consumer goods. The people who are not part of the nation’s middle class and upper class would provide a ready market for consumer goods since most of them are literate and they have disposable incomes. The South African consumption of food and beverages has steadily increased since 2011, and the market demand has expanded by 3.5% in real terms during the same period (PWC 2012, p. 28).

Slow growth in South Africa’s real income had resulted in a decline in the household consumption, but the projected macroeconomic growth outlook indicates that this would change. The expected household consumption was set to improve from 2.8% in 2014 to 3.4% in 2016 (Oxford Business Group 2014, p. 29). As the household consumption grows, it is apparent that the demand for groceries and other household items will increase, hence creating a market for Tesco’s products.

Technological Factors

South Africa has one of the most developed IT markets in the African continent, and the country’s IT companies are among the best in prepayment and electronic banking services (Oxford Business Group 2014, p. 168). Considering that Tesco is heavily reliant on technology and it serves many customers through its online shopping services, it will find the South African market to be accommodating. The use of smartphones in the country is high, as most of these phones are affordable to the middle-income, as well as lower-income consumers (Oxford Business Group 2014, p. 166).

Conclusion

Tesco reduced its net debt by 0.8 billion pounds during the first half of 2016, hence making its balance sheet more secure, and it increased its sales by 1.3%. Tesco has strived to perform better than its competitors by making its customers loyal to the retail store through the loyalty card that it offers. The retail company’s reliance on the UK market, however, might have an adverse impact on its balance of power and share if it does not continue diversifying its areas of operation. Tesco faces competition from other established stores across the globe. South Africa’s economic policies make the country a suitable area where Tesco can operate without many restrictions. The increase in the country’s FDI inflows indicates that the entry of Tesco would be a good idea.