Tesco - Micro and Macro Economics Analysis and Possible Strategies - Example

Analyse a firm based in the UK or EU country with Micro and Macro Economics and a Recommendations of its possible Strategies Tesco Plc is presently one of the largest retail companies in the world. It has its origins in a market stall opened in London in 1919. Over the years, the organization has expanded its business across the world. It currently serves 14 markets belonging to Europe, North America and Asia. (Tesco Plc, 2011). Micro Analysis The Retail Business Tesco Plc’s primary business consists of providing retail services to the population through its retail store outlets located across its major markets. Contrary to wholesale firms, retail companies are required to cater to the needs of a local segment of the population. Accordingly, Tesco has concentrated on strengthening its local operations in the various markets. The company has designated a separate management team for its operations in the different markets. The core retail service business has been adequately supported by financial and information technology services. The firm has utilized its technical expertise and human skill resources from across the word to gain a strong foothold in the respective local markets. This has helped it to emerge as a successful international retail company. (Tesco Plc, 2011). The sales and profit growth of Tesco Plc during 2008-2011 can be observed from the table below: Table: Tesco Plc’s Sales and Profit Growth 2008 2009 2010 2011 Sales Growth of Tesco Group (including VAT) 11.1% 15.1% 6.8% 8.1% Sales Growth of Tesco UK (including VAT) 6.7% 9.5% 4.2% 5.5% International sales Growth (including VAT) 25.3% 30.6% 8.8% 13.7% Profit Before tax 5.7% 4.1% 8.9% 11.3% Underlying Profit Before Tax 11.8% 9.8%s 8.7% 12.3% (Tesco Plc, 2011) Demand, Supply and Price Elasticity of the Retail Business The retail industry faces a strong market demand across the world. Though, consumers can buy necessary commodities at wholesale markets at a much cheaper price, they get ready access to these goods at the nearby stores. Wholesale markets in a particular city are few and far between. On the other hand, retail stores have been established in almost every neighborhood. Citizens get the daily provisions of their necessary commodities from the retail shops. Buoyed by the steady demand, their retail companies have established their retail chains across their markets. They maintain a steady supply of the retail products to their stores, so that the retail shops are never in dearth of the essential products which are in such high demand among the citizens. All tyhese factors have played a significant part in Tesco Plc’s business. The price elasticity of the retail products and the retail industry in general can be said to be moderate. The various retail products are moderately sensitive to the changes in their respective prices. When one retail company increases the price of its retail products, the consumers always have the option of buying the products from another retail chain store. However, the necessary commodities like the food items sold through the retail stores have low prices elasticities. Customers will continue to buy them, even if their prices are increased. Since the retail companies offer a diverse portfolio of products through their stores, different products are endowed with different price elasticities. Thus, Tesco Plc remains very careful in devising its pricing strategies. Other International Businesses The company has forayed into online retailing services and financial services after evaluating that there was a strong demand for these new services in the international market. Tesco’s international businesses are characterized by a competitive outlook and a continuous endeavor to expand their scale of operations. This strategy has ensured a sound growth in worldwide sales, market shares, revenues and return on capital employed (Tesco Plc, 2011). Adopting Technology to suit Growth Requirements Tesco Plc is focused on expanding its scale of operations in all the aspects related to its businesses. It has concentrated on both vertical as well as horizontal growth. It has consistently introduced new products in its retail stores across the world, to be marketed to the local population. Simultaneously, the company has explored new geographical markets to expand its existing businesses. Thus, Tesco has primarily been a growth driven company which has been successful in maintaining its growth impetus over a considerable period of time. Another reason for Tesco’s success has been the firm’s consistent focus on innovation. It has always kept itself abreast of the latest development in the retail industry and has adapted its technology and processes to the new methods. The company has been able to foresee the changing trends in its businesses and altered its operational processes to maintain its commitment to its customers (Tesco Plc, 2011). Tesco Plc operates as a public shareholding company, with its shares being listed on the London stock exchange. The company has been careful in ensuring a good return on investment for its customers. It aims to generate an ROCE (Return on Capital Employed) of about 14.6 per cent by the year 2014-15. During 2010-11, Tesco took an important step in this direction, when its ROCE increased to 12.9 per cent as compared to 12.1 per cent in 2010. One reason behind this was the strong growth in profits experienced by the firm. The company had also implemented a sale and leaseback project in the capital market which resulted in an increased capital efficiency and an overall improvement in its working capital. Table: Tesco Plc’s ROCE during 2008-2011 (Tesco Plc, 2011) Another important concept in this context is the total shareholder return. It has been defined as the ‘notional return on a share and is measured as the percentage change in the share price in addition to the dividends paid. This return is usually calculated over the last five years. Table: Tesco Plc’s Total Shareholder returns during 2008-2011 2008 2009 2010 2011 Total Shareholder Return 22.8% 8% 9.5% 6.7% (Tesco Plc, 2011) The information in the above table is depicted in the diagram below: Social Initiatives Tesco has committed itself towards environmental causes as well. It has declared its long term objective of becoming a zero-carbon organization by 2050. During 2010-11, Tesco succeeded in reducing the carbon emissions from its basic buildings portfolio by 7.7 per cent from the previous year. (Tesco Plc, 2011). Table: Tesco Plc’s Reduction in Carbon Dioxide Emissions 2008 2009 2010 2011 Reduction in Carbon Dioxide Emissions 4.6% 4.8% 7.8% 7.7% (Tesco Plc, 2011) Macro Analysis Past Condition of the Economy The success of a retail business in a particular economy is primarily determined by the purchasing power of the local population. If people have more disposable income to spend, the purchase of consumer retail products automatically increases. The disposable income of consumers is again dependant on the overall economic condition of the country. The health of an economy is generally reflected by the macroeconomic indicators like GDP growth, level of interest rates, inflation rate, and unemployment rate and so on. Therefore, the retail industry indirectly depends on the macroeconomic condition of a country. The relation between GDP and the consumer’s income is reflected in the following equation: GDP = C (Y) + I (Y) + G + (X-M )……………(1) Where GDP: Gross Domestic Product C : Consumer Expenditure Y; Income of the Consumers I : Investment Expenditure G; Government Expenditure X: Exports M : Imports Equation (1) states GDP to be equal to the Consumer Expenditure, Investment Expenditure of the business firms, the Government Expenditure and the sum of Exports minus imports. Actually the relationship between the consumer expenditure and GDP follows a cyclical nature. According to Keynesian economics, the two variables share a positive relationship. As consumer expenditure increases, this injects new demand in the economy which results in a higher level of GDP being produced. Again, as the GDP production goes up, individuals are paid a higher income. After saving a part of this, individuals are left with a higher amount of disposable income to spend on their necessities. Consequently, the consumer spending increases in the economy. Thus, it reflects a cyclical nature of relationship. The main markets of Tesco Plc: UK, rest of Europe, Asia and North America have all witnessed steady growth of GDP during the past few years. The international financial crisis of 2008 had brought about an economic recession in the entire global market. However, during the last three years the international financial institutions and the governments of various countries have undertaken adequate measures to tide over the effects of the crisis. As a result of these positive policies, most of the major national economies have regained their momentum and have reported significant growths in their GDP. This has facilitated the expansion of Tesco’s business across the world. The inflation rate of an economy usually has an inverse relationship with the unemployment rate. This is reflected in the equation of the Phillips Curve. When the government implements macroeconomic policies to reduce the unemployment rate in the economy, it increases the inflation rate. This heralds a situation of continuous increases in prices. In such a situation, the unemployment rate being low, majority of the people in the economy are employed and thus have access to individual incomes. The population has higher purchasing power than before, but since the inflation rate is high, all the consumer goods become expensive to the customers. This makes retail products less attractive to the general population. This can be an adverse effect on the growth prospects of the retail industry. However, most of the western developed economies have maintained a balance between their inflation rate and the rate of unemployment by administering suitable policies. The retail industry in UK, the European Union countries and northern America have not been affected by uncontrolled price increases. Therefore, they have proved to be suitable for the expansion of Tesco’s business activities. Present Condition of the Economy From the macro-economic perspective, Tesco Plc’s retail business is concentrated in three main markets: Europe (especially United Kingdom), North America and Asia. The primary statistics regarding Tesco’s four main markets are presented in the table below. Region Revenue No of Stores Employees Selling Space (square foot, % of Group) Tesco UK £ 40,766 million 2,715 293,676 36.7 million sq ft (35.4%) Tesco Europe £ 9, 192 million 1,082 89,559 30.2 million sq ft (29.2%) Tesco N. America £ 495 million 164 4,134 1.7 million sq ft (1.6%) Tesco Asia £ 10,278 million 1,419 104,071 35.0 million sq ft (33.8%) (Tesco Plc, 2011) From the above information, Tesco has the largest operations in the UK, followed by Asia, the rest of Europe and North America. The operations in the UK market are driven by a strong sales momentum in the region. The company hopes to sustain this performance in the future too. The above data for the financial year 2011-2010 reveal that Tesco has performed particularly well in the markets of the European Union and the Asian countries. The company’s businesses in these two regions have been operational for seven years now. These two markets are also expected to generate a considerable amount of business in the coming years and the firm will concentrate on expanding its operations in these regions. It would also devote special attention to the North American market, which is relatively small compared to Tesco’s other markets. The recessive impacts of the global financial crisis of 2008 have subsided and the overall economic conditions of the global market have shown signs of improvement. This has helped Tesco to expand its international business successfully. The macro-economic conditions of these markets have created a conducive atmosphere for the expansion of Tesco’s business operations. (Chief Executive’s Review, 2011). Future Prospects of the Economy As discussed in the earlier section, the international economy back on its growth path. It has been able to ward off the recessive impact of the financial crisis of 2008. The western economies are expected to maintain a steady rate of economic growth in the coming days as well. This will ensure a conducive environment for the expansion of the retail industry in these countries. Therefore Tesco Plc remains assured of doing good business in these markets. On the other hand, the Asian economy also has a promising outlook for the future. Many of the Asia-Pacific and the South-East Asian countries are expected to have high GDP growths in the coming years. This presents an excellent prospect for Tesco Plc in expanding their business in these regions. Strategy Recommendations Based on the firm-level and the economy-level analysis of Tesco Plc, a set of strategies can be recommended for the future expansion of the firm. In the past, Tesco has followed the strategy of vertical as well as horizontal expansion. This has proved to be successful in expanding its operations related to every aspect of its business. Tesco can continue to pursue the strategy of expanding its business across different retail segments as well as exploring new geographical markets to sell its products. With the progress of human civilization aided by the marvelous inventions of science and technology, the requirements of consumers are increasing by the day. Commodities earlier thought to be items of luxury are now being viewed as necessary items. Fortunately, individuals are also gaining access to the purchasing power to buy these goods. In such a situation, Tesco can focus on expanding the product portfolio available in its retail stores. Earlier, retail stores used to only sell consumer necessities like food and clothing. However, that situation has long changed and nowadays consumers go to the retail outlets to buy a variety of commodities. Therefore, a retail firm can always take advantage of such an opportunity and expand its business by offering its customers with diverse products. Such a strategy will not be new to Tesco Plc. In fact, it has already expanded its retail products portfolio to include clothing and electronic necessities. Now, its products can include food items, clothing goods, electronic gadgets, home appliances, kitchen requirements and various other items of daily use. Following such a strategy, Tesco might have to open more than one retail outlet in a particular area. If the overall business from that location is profitable, the firm should not hesitate in expanding its retail chains. The firm can also devise a specific plan regarding the pricing of its retail products. Though retail shops are not able to offer products at a low price like the wholesale outlets, they can always ensure that their pricing strategy remains attractive to its customers. Often retail shops are found to be offering products at a price, which is marginally lower than that prevailing in the market. Tesco Plc can ensure its access to a wider spectrum of customers by following such an economical pricing scheme. (Strategy Analysis – Tesco Plc, 2009, pp.2-13; Tesco Plc, 2012) Finally, Tesco Plc can carry on with its aggressive expansionary strategies with respect to the different geographical markets. The firm already has a very strong presence in the European Union, with majority of the shares of its revenues being generated from the UK market. It can concentrate on expanding its operations in North America since there is a huge opportunity n the retail sector of this economy. Tesco has a limited presence in USA and Canada and it can concentrate on introducing more retail chains in both the countries. In the last few years, Tesco has also expanded its business in the countries of Asia and the Asia Pacific region. Countries of these markets like India, China are expected to have a strong economic growth in the coming days. These will result in more jobs being generated in these countries and producing gainful employment for a larger section of the population. The Indians and Chinese people are expected have higher purchasing power in the future. The company can take advantage of this situation and expand its retail business in these growing economies. In its established markets of UK and the rest of Europe, Tesco Plc can concentrate on expanding its business vertically by introducing new retail products. In this way, by following a comprehensive growth strategy, Tesco Plc can chart out its future course of growth. (Woods, 2008, pp.2-15) References 1. McAleese, D. (2004) Economics for business. (3rd edn). London: Prentice Hall. 2. Sloman, J. and Hinde, K. (2006) Economics for business (4th edn) London: Prentice Hall. 3. Gregory, M., and Taylor, M., (2008) Macroeconomics (European edition) London: Palgrave Macmillan. 4. Begg,D., Ward, D. (2009). Economics for Business (3rd edition). London: McGraw-Hill. (Chapter 2-5, 8-15) 5. About Tesco, (2011). Tesco Plc, available at http://www.tescoplc.com/about-tesco/a-global-business/ (accessed on January 2, 2011) 6. Annual Report, (2011). Tesco Plc, available at http://ar2011.tescoplc.com/ (accessed on January 2, 2011) 7. Overveiw, (2011). Tesco Plc, available at http://ar2011.tescoplc.com/overview/tesco-around-the-world.html (accessed on January 2, 2011) 8. Chairman Statement, (2011). Tesco Annual Report, 2011, available at http://ar2011.tescoplc.com/overview/chairmans-statement.html (accessed on January 2, 2011) 9. Chief Executive’s Review, (2011). Tesco Plc, available at http://ar2011.tescoplc.com/chief-executives-review.html (accessed on January 2, 2012) 10. Key Performance Indicators (2011). Tesco Plc, available at http://ar2011.tescoplc.com/business-review/key-performance-indicators.html (accessed on January 2, 2012) 11. Samuelson, L (1986). Microeconomic Theory, USA, Springer 12. Rubinstein, A. (2006). Lecture Notes in Microeconomic Theory, USA, Princeton University 13. Bergin, J (2006). Microeconomic Theory: a Concise Course USA, Oxford University Press 14. Nicholson, W & Snyder C. ( 2008).Microeconomic Theory: Basic Principles and Extensions, USA, Cengage Learning 15. Salvatore, D (1992), Schaum’s Outline of Theory and Problems of Microeconomic Theory, USDA, McGraw and Hill 16. Michi, T.R (2002).Macroeconomic Theory: a Short Course, New York, M.E Sharpe 17. Wickens, Michael (2012), Macroeconomic Theory: A Dynamic General Equilibrium Approach, USA, Princeton University Press 18. Ljungqvist, L. & Sargent, T,J (2004), Recursive macroeconomic theory, USA, MIT Press 19. Sargent, T.J (1987), Dynamic Macroeconomic theory, USA, Harvard University Press 20. Benassy, J-P (2011), Macroeconomic Theory, USA, Oxford University Press 21. Our Strategy, (2011), Tesco Plc, available at http://ar2011.tescoplc.com/business-review/our-strategy.html (accessed on January 2, 2012) 22. Growing Retail Services (2011), Tesco Plc, available at http://ar2011.tescoplc.com/business-review/growing-retail-services.html (accessed on January 2, 2012) 23. Growing the UK Core, (2011), Tesco Plc, available at http://ar2011.tescoplc.com/business-review/growing-the-uk-core.html (accessed on January 2, 2012) 24. Tesco UK: a growth company, (2011), Tesco Plc, available at http://ar2011.tescoplc.com/business-review/growing-the-uk-core/tesco-uk-a-growth-company.html (accessed on January 2 , 2012) 25. Outstanding International Retailer, (2011). Tesco Plc, available at http://ar2011.tescoplc.com/business-review/outstanding-international-retailer.html (accessed on January 2, 2012) 26. Communities, (2011). Tesco Plc, available at http://ar2011.tescoplc.com/business-review/communities.html (accessed on January 2, 2012) 27. Five Year Records of Financial Statements, (2011). Tesco Plc, available at http://ar2011.tescoplc.com/pdfs/financial/five_year_record.pdf (accessed on January, 2, 2012) 28. Group Income Statements, (2011), Tesco Plc, available at http://ar2011.tescoplc.com/pdfs/financial/group_income_statement.pdf (accessed on January, 2, 2012) 29. Notes to Group Financial Statements, (2011), Tesco Plc, available at http://ar2011.tescoplc.com/pdfs/financial/notes_to_the_group_financial_statements.pdf (accessed on January, 2, 2012) 30. Group Cash Flow Statement, (2011), Tesco Plc, available at http://ar2011.tescoplc.com/pdfs/financial/group_cash_flow_statement.pdf (accessed on January 2, 2012) 31. Strategy Analysis – Tesco Plc (2009), available at http://coursework-writing.co.uk/data/6.en/39/business_coursework_1.pdf (accessed on January 2, 2012) 32. Woods, M. (2008). Linking risk management to strategic controls: a case study Of Tesco plc, available at http://www.nottingham.ac.uk/business/rmgic/ssrn_tesco_paper.pdf (accessed on January 2, 2012) Read More