Tesco Business Environment Analysis - Essay Example

Macro & Micro Economics of the of the Contents Contents 2 Introduction 3 Business Environment 3 Production costs and scale 5 Macro business environment 6 Sustainability practice of the business 8 Conclusion 9 References 11 Introduction The business of a company is largely dependent on the macro and microeconomic conditions of the nation in which it operates. Changes in the major macroeconomic forces like inflation rate, unemployment rate and interest rate impacts the way in which a business functions. Additionally, the market structure of the industry and the size and scope of major competitors alters the business strategies of companies. Micro economic forces like taste and preference of the consumers and changes in the disposable income impacts the demand of products produced by any organization. The purpose of this paper is to highlight the impact of macroeconomic forces on the business of Tesco. Tesco Plc is a multinational company operating in multiple continents namely North America, Asia, and Europe. This paper concentrates only on business of Tesco in the U.K. Major political forces shaping the economy; impact of recession; and the potential impact on the business are to be discussed in details. The sustainable practices followed by the company have also been highlighted. Business Environment Tesco Plc is a British retailing giant specializing in food business. Jack Cohen founded the Company in 1919 and it was named as Tesco in 1924. The company had started its business in 1929 with the opening of the first store in London. Tesco had continued its aggressive expansion in the U.K. and by 1960’s there were multiple stores in the country. With the onset of globalization in the 80’s the company had begun to diversify its business both geographically, and, in terms of its business portfolio (Tesco plc, 2014). Presently, the business of the company comprises selling of grocery, electronic items, clothing and furniture. It also includes providing financial, software and telecom services (Tesco plc, 2014). The company offers products that can be used by people of all age groups. Market share of Tesco in the U.K. is 28%. It has been observed that the market share of the company have declined from 31.7% in 2007 to 28.7% in 2014 (Wood, 2014). Theory of economics states that firms operating in the same market and offering same products by targeting similar base can be treated as competitors. The major competition for Tesco comes from ASDA, Sainsbury and Morrisons. The following pie chart shows the market share of Tesco as compared to its competitors. Figure 1: Share of competitors (Source: Li, 2008) After the global financial crisis it has been found that Tesco have been losing market share mainly to competitors like Waitrose, Aldi and Lidl that have a combined market share of 3.5%. The main reason that can be attributed to the fall in the sales is the heavy discounts that are offered by these stores (Williamson & Zeng, 2009). Apart from the new competitors, major rivals of Tesco operating in the U.K. and serving similar customer base includes Sainsbury, Morrison and ASDA and these three including Tesco are considered as four largest supermarket chains in the U.K.. In this regard the domestic competitors of Tesco have been shown in the above figure. However, Tesco also faces competition from global retailers like Carrefour of France, Metro of Germany and Wal-Mart of the U.S.A. The market structure in which Tesco operates can be considered as an oligopolistic one. This is because oligopoly is characterized by a situation where a small number of suppliers dominate the market by selling products to a similar customer base. The four large retailers in the market have the power to dominate price paid to the food producers and has the ability to squeeze the profit margins of these producers (Hitt, Ireland & Hoskisson, 2012). It can be commented that the demand curve for the retail market is inelastic on a whole as items of retail market needs to be purchased by consumers despite increase in prices. On the other hand if individual firms are considered then the demand curve is relatively elastic as individual firms alter their prices to attract more consumers. As Tesco sells similar products like ASDA or Morisson, so the consumers can easily switch from one of the retailer to another. The products offered by the retailers are close substitutes of one another so in order to retain customers the retail stores introduce loyalty cards as a part of marketing strategies. Tesco does not have complete power in altering the prices charged for the products because its competitors will easily react by lowering their prices as well which will lead to situations of price war ultimately leading to losses for both companies until conditions are stabilized. Therefore, it can be understood that Tesco cannot charge a price much higher than its marginal price as its competitors would follow the suit eventually. However, the strong grip over the market, use of innovative business practices like e-commerce in the business and the cost savings from thereon have made Tesco almost acquire the state of monopoly status in the market (Malley, 2010). Production costs and scale Factors of production of Tesco can be grouped into two broad categories namely labour and capital. Labour: The labour force of Tesco can be broadly categorized as senior management, middle management, staff performing clerical operations and direct sales team involved in selling the products. The total number of employees of the company is 216,763 among which 43% are males and 57% are females (Tesco, 2014). The percentage share of the male and the female employees shows Tesco respects gender diversity in its work culture. The employees are responsible for conducting the sales and generating business for the company. Human capital is the biggest asset that is possessed by Tesco because human capital is one of the strongest points of retail industry. The company recognizes that its human resource is a major asset as every individual working for the company has a unique contribution on the business performance and makes sure that they are rewarded adequately (Tesco plc, 2014). Based on the nature of the business structure of Tesco it can be stated that the fixed factors of production comprise a relatively smaller share compared to the variable factors of production of the company. Fixed factors of production and fixed costs arising from them comprise the buildings and its corresponding rent; transportation and storage devices and the costs involved in maintaining them; and executive employees and the salaries that needs to be paid (Malley, 2010). On the other hand the variable factors of production include the costs incurred in purchase from suppliers and the hourly wage that needs to be paid by the company to its huge sales force (Malley, 2010). Tesco enjoys both internal economies of scale and external economies of scale economies of scale owing to its large geographical coverage and the range of products it sells. The source of internal economies of scale is dominant market power, technological supremacy and organizational factors which results from division and specialization of labour. Sources of external economies of scale arise from expanding the overall level of output and the resulting reduction of average cost that occurs from therein (Needham & Dransfield, 2000). Tesco’s aggressive expansion strategy both on a domestic and international level indicates that the average cost of production is falling. Macro business environment This implies that Tesco comes under government regulations of all the countries in which it operates. However, this paper focuses only on the U.K. and comments on the stability of the government and its impacts on Tesco. The U.K. is a member of the European Union and boasts of a stable economy. The political risks in the country are extremely low and the government has undertaken a number of liberalization measures to attract foreign direct investment in the country. Additionally efforts have also been taken by the government like reduction of corporate taxes from 28% to 23% to encourage business enterprises. The inflation rate of the country in 2014 was 1.6%. The average rate of inflation of the country was 2.28% from 1998 to 2014 (Trading Economics, 2014). The average rate of unemployment in the country was 7.26% between the time period 1971 and 2014. Interest rate in the U.K. is set by the Bank of England and in 2014 the interest rate of the country was 0.5% (Trading Economics, 2014). The economy of the U.K. has been severely impacted by recession and all the three major variables namely interest rate, unemployment and inflation has underwent drastic changes in the past decade. According to the economists, rate of inflation falls when the economy enters recession. However, in case of the U.K. it was observed that the rate of inflation had not fallen during recession of 2008 owing to a number of measures taken by the government like cut in the rate of VAT, depreciation of the value of pound and rise in the global oil and petrol prices. Unemployment rates of the economy became very high as an immediate aftermath of recession of 2008 (BBC News, 2014). The job losses were highest in the retail and the manufacturing sectors. 39% of the job losses in the U.K. were reported from this sector. Since the onset of recession in 2008, the government has exercised monetary policy to keep the rate of interest low. The rationale behind lowering the interest rates was to ensure that the cost of borrowing money remains low. Interest rates were also kept lower to generate fresh investments. It was assumed that fresh investments will also generate new employments and reduce the overall level of unemployment in the country (Bennett, 2014). However, the worst phase of the economic crisis is over and the economy of the U.K. is recovering slowly. The unemployment rate has fallen in 2014 compared to previous year and rate of inflation is also under control. The consumer price index of the country fell to 1.6% in July compared to its 1.9% mark in June mainly propelled by the fall in cost of apparels and footwear, non-alcoholic drinks and food items (BBC News, 2014). The recession of 2008 in the U.K. had impacted Tesco adversely as the sales of the company had begun to fall. The products of Tesco like food items, clothing and items of daily use can be considered as normal goods. Despite earning the status of normal goods, recession had adversely affected consumer purchase from Tesco because consumers had begun to cut back on expenditure related to food, clothing and books (Kollewe, 2011). The loss of Tesco became the gain for heavy discounters like Aldi and Lidl. In the immediate aftermath of the crisis Tesco reacted by lowering the cost of its products in the range of 10% to 30%. The growth of the business also fell to 5.8% from 11% prior to the period of recession. Therefore, a major challenge for Tesco is whether it will be able to position itself against the super discounters. In the period of economic recovery of the U.K. economy Tesco is also reviving but the revival is slow and steady (Piercy, Cravens & Lane, 2010). In 2013 the U.K. sales have risen by 5.5% showing signs of recovery (Tesco, 2014). Tesco is unlikely to face any shortage in labour demand in the present economic condition of the U.K. as the economy have high supply of skilled labour but low demand due to the sluggish economic conditions. In this regard, Tesco plays an important role in creating opportunities for employment among the youth and help the economy to get out of the vicious cycle of high unemployment and inflation. Exchange rate impacts the profit margins and revenue earnings of Tesco. It has been found that Tesco had been able to maintain strong growth in the international markets of Asia despite currency fluctuations (Tesco, 2014). However, in the European Union exchange rate fluctuations had reduced the trading profit of 27.7%. Therefore it can be implied that fluctuations in the exchange rate has the probability to undermine profits of the company (Tesco, 2014). Other risks in a volatile economy involves the inability to access funds in to run operations and fluctuations in the interest rate of the economy can have negative consequences on the business. The future prospects of business of Tesco in the U.K. depend crucially on the extent to which customer confidence can be restored in the economy. Though, Tesco has been able to improve its sales in the Asian markets, its performance is relatively poor in the U.K. due to sluggish economic recovery. Poor pace of recovery of the U.K. economy and the growth of heavy discounting trend in the retail sector implies that tough conditions prevail in the future. Sustainability practice of the business Supply chain of Tesco releases considerable amount of impurities in the atmosphere through the transportation of inventories from the warehouse to the retail stores. Tesco has also been accused of wasting food by rejecting products of suppliers based on grounds of non-compliance with the company standards. The carbon footprint imposed by the company through its long-distance trucks is also high. It can be argued that the negative externality imposed by Tesco on the environment is not accounted in its marginal private cost of production (Tesco, 2014). The government of the U.K. have imposed pollution tax on U.K retailers to reduce their carbon footprint (Tesco, 2014). In an attempt to reduce the environmental impact on the society the company has taken a number of sustainable measures. Under the green business initiatives taken by the company it has pledged to reduce the carbon footprint. Tesco has taken a partnership with ERM to reduce the amount of its atmospheric pollution. In case of Tesco it has been found that there are three major forms of carbon emission that needs to be addressed namely the carbon emission from the buildings, the emission from transportation and the toxic gases used in refrigeration. Tesco has already taken measures to reduce its building emissions by using efficient lighting system and use of advanced equipments like fridges that consumes less power. Tesco has also pledged to lower leakages of hydrofluorocarbon and use renewable sources of energy like solar panels and wind turbines to reduce energy consumption (EMCC, 2013). “Fuel economy” initiatives have also been taken by Tesco to reduce the number of empty miles travelled by the trucks between hauls. Fuel consumption of trucks is regularly monitored. Consultants are hired at top management levels to strategize the reduction of carbon emissions by the business. According to the 2010 press release, Tesco has been able to save 200 million pounds based on its green business strategies (EMCC, 2013). Researchers have pointed out that adaptation of sustainable business practices by the company and socially responsible practices have a positive strong correlation with the financial performance (Hitt, Ireland & Hoskisson, 2012). Additionally, it has also been found that socially responsible activities and acts of community development are also associated with improvement of reputation of the company in the long-run. Conclusion Tesco have one of the four major supermarket chains in the U.K. with the largest market share. The company faces competition from not only domestic competitors like ASDA, Morrsion and Sainsbury but also from foreign retailers like Wal-Mart and Carrefour. Analysis of the political conditions in the U.K. has revealed that conditions are stable and efforts have been taken by the government to improve the business environment in the country. The sluggish economic growth and a shift in the consumer preferences towards discounted products have impacted the market position of Tesco and the company has lost 2% of market share compared to its peak period in recession (Wood, 2014). Growth of discount retailers and stiff competition in the retail markets is also one of the reasons that prevent the company from altering prices to manipulate profit. Analysis of the factors of production has revealed that most of the factors of production are variable and less of it is fixed. The hourly wage of the labour and the trade with the suppliers are two main sources of variable factors. References BBC News. (2014). Economy tracker: Inflation. Retrieved from http://www.bbc.com/news/10612209. Bennett, A. (2014). 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