Power and Competition in the UK Retail Grocery Market - Essay Example

I. Introduction In an industry where increasing costs and tougher competition continues to squeeze a company’s margin and profitability (BBC Business 2011), it is imperative that Tesco should formulate and implement competitive business strategies that would ensure not only its survival in the short run, but also its long-term growth in the future. In the first half of 2011, Tesco’s competitor Sainsbury reported a better sales performance with a sales increase of 1.9% compared to Tesco’s 0.5% sales increase (BBC Business 2011). This recent development in the retail industry is alarming because competitors are beginning to undermine Tesco’s leading position in the market. This development stresses the importance of crafting and implementing a competitive business strategy for Tesco’s to regain its market leadership. II. Company Overview: Tesco PLC Tesco is the largest retailer in Great Britain and the third largest supermarket in the world. Its market share in the UK retailing industry is 12.5% and it controls over 30% of the grocery market which is 75% dominated by four major players Tesco, ASDA, Sainsbury and Morrison (Dobson et al 2008). Tesco has 2,440 stores and has an employee of more than 4,000,000 people. Its online grocery store www.tesco.com is recognized as the world’s biggest online grocer in the world. It has its own-label products which accounts approximately 50% of its sale. III. Industry Analysis: PESTEL For any business enterprise to become more responsive to the changing demands of the market, it is imperative that it should be able to define its internal competence and resources and external environment as well so that it can devise a strategy where it can profit and regain its market position. The tools that will be used to define both the internal and external environment of Tesco are PESTEL, Porter’s Five Forces and SWOT Analysis. PESTEL Analysis a. Political factor The liberalization of trade allowed other competitors to enter into market to compete with Tesco which contributed to its sales decline. In a report by Lyall, “foreign discounter such as Aldi and Lidl combined with an increased domestic rivalries appears to have blunted the edge Tesco had” (2011). b. Economic factor – perhaps this is the most significant factor in Tesco’s external environment that contributed to its underperforming sale in the first half of 2011. In Mintel’s May 2009 survey, it reported that 43 percent of consumers say “trying to add to my rainy day savings/emergency fund” (ProgressiveGrocer 2010). This was corroborated by a recent survey conducted by Mintel, who also reported that consumers today are more price conscious than previous years (Mintel 2011a). These development in the grocery made consumers to become more receptive more with foreign discounters because they are now more price conscious than before. c. Social factors Due to the recent economic crisis, consumers are now scaling down on their luxury expenditures and became more conscious on cost. This shift in consumer behavior affects Tesco because some of its consumers are switching to foreign discounters to save on grocery costs. d. Technological factors Technology is an important organizational competence that can enhance a company’s competetiveness. It enhances a company’s competitiveness by being more responsive to customers’ needs and being more efficient. In the case of Tesco, its technological investment in 2009, particularly its in-house designed supply chain application enabled it to increase the availability of its stock and reduced warehouse stocking resulting in the more efficient operation of its warehouse. e. Environmental factors To date, Tesco does not have any environmental issues and this factor did not contribute to Tesco’s underperforming sale. f. Legislative factors If there is any recent legislative factor that has an utmost relevance to Tesco today, that would be the passing of the Tesco Law on October 06, 2011 which has been named after the chain store. The new law states that “supermarkets, banks and other high street stores are now able to offer legal services to their customers” (Wilson 2011). In response, Tesco launched an online legal store offering basic legal services in a cheap and straightforward access to justice to millions of people (Market Watch 2011). This new legislative development provides more opportunity for Tesco to explore other area in the market aside from its core business and can supplement its declining sale to regain its leading market position. IV. Porter’s Five Forces Industry Analysis a. Threat of rivalry The threat of rivalry undermined Tesco’s leading position in the market. In a report made by Lyall (2011), she explained that the reason why Tesco fell behind Sainsbury in first of 2011 is due to the “tougher competition from foreign discounters such as Aldi and Lidl, combined with an increase in domestic rivalries” which blunted the edge Tesco once had. The combined threats from foreign discounters and traditional rivals such as Sainsbury redefines the competition landscape where the grocery industry in the UK was thought to be traditionally oligopolistic and only confined to the five major (Burt & Sparks 2003). In crafting a business strategy Tesco now has to rethink its industry assessment and consider foreign discounters as a real threat in its position in the market. b. Threat of substitute products The threat of substitute products to Tesco is low because any attempt to substitute the existing product line can drive the prices down that could hurt all the players in the industry that includes Tesco and its competitors. c. Threat of new competitors The new development in the first quarter sales in the grocery industry now requires reassessment of the industry. Where before new competitors are not considered much of a threat considering that the market is oligopolistic in nature (Burt & Sparks 2003), new competitors such as foreign discounters (i.e. Aldi and Lidl) proved to be a real threat that can undermine Tesco’s once leading position in the market. d. Bargaining power of suppliers Threat from suppliers is minimal. In the grocery industry, it is the norm that large supermarkets dictate the price that will be paid to suppliers. The supplier has very little leverage to bargain because if supplier does not agree with the supermarket, supplier will have no retailer to sell its products. e. Bargaining power of buyers Tesco’s underperformance in the first half of 2011 could be attributed to the bargaining power of buyers shifting preference towards the cheaper foreign discounters. This is highly probable because these foreign discounters addresses the market’s heightened sensitivity to price where buyers are likely to switch retailers with a mere ?10 increase in their weekly shop (Mintel 2011). V. SWOT Analysis Strength Among the food and grocery retailers, Tesco is the third largest grocery retailer in the world. It has 4,331 stores across Europe, United States and Asia. Tesco’s size being one of the leading grocery retailer in the world provides it with the advantage of economy of scale and easy entry into untapped markets (Data Monitor 2010). Tesco’s investment in information technology over the years it to optimize its performance at a peak efficiency. This investment played a significant role in driving the company sales and improved supply chain. Its improvements in “stock management supply chain application in 2009 implemented an efficient ordering systems and introduction of in-store monitoring processes, helped the increased availability of products in stores and reduced warehouse stock . This technological improvement enabled Tesco to become more responsive to customer’s needs while effectively optimizing inventory costs (Data Monitor 2010:5-6). Weakness The product recall in June 2009 in Ireland indicates a lapse in Tesco’s quality control that could cause not only financial drawbacks but could also hurt the image of its brand. The recalled product was the 567 gram cans of Value Beans and Sausage that was found to contain plastics. A product recall was also made with its fresh & easy brand chili lemon flavored pistachio nuts due to the suspicion that they may have been contaminated with salmonella virus (Data Monitor 2010). Opportunities Tesco’s online shopping capability enables it to reach 13% of adults who has never shopped online. This untapped market can make a sizeable pool of opportunity in the short term (Mintel 2011b). Tesco can capitalize in this untapped market because it has the largest online grocery store. Its online grocery store can also supplement its lackluster sale performance and regain its leading market position. In addition, the passage of the new “Tesco Law” can also provide opportunity to Tesco to explore in other non-traditional market (such as law) where it can supplement its sales to regain its market position. Threats Competitors are the biggest threat for Tesco that does not only include the four major players but also the foreign discounters. VI. Conclusion The seeming underperformance of Tesco is caused more by external factors such as the economic slowdown that consumers are holding back their buys especially in premium items and foreign discounters which were not considered as a potent threat before. This has affected Tesco because approximately half of its product line which are considered to be premium brands and a little pricey compared to discounters. In the long run, Tesco internal capabilities will enable it to regain its market position. It has the distinct advantage of having the most number of stores in UK not to mention having one of the most sophisticated technological infrastructure to become responsive to customers when the economy gets better. It is important however that Tesco should reassess the industry to consider foreign discounters as a threat. This will provide Tesco a realistic and timely perspective of the market when it execute its business strategy. The prospect that Tesco will again regain its leading market position is validated by BBC, the same news organization that reported Tesco’s underperformance compared to Sainsbury. It redeemed Tesco by stating that “Sainsbury's may have pipped Tesco at the post in terms of growing UK sales, but for overall prospects Tesco remains the darling of the sector"  (BBC Business 2011). References: Burt, Steve L.; Sparks, Leigh (2003). Power and Competition in the UK Retail Grocery Market. British Journal of Management, (3), 237-254 DATAMONITOR: Tesco Corporation (2010). Tesco Corporation SWOT Analysis, 1-9. Dobson, Paul W.; Chakraborty, Ratula (2008). Buyer power in the U.K. groceries market. Antitrust Bulletin, 53(2), 333-368. Lyall, Ian. Resilient Sainsbury turns the tables on struggling Tesco. Online. Available from: http://www.proactiveinvestors.co.uk/companies/news/33986/resilient-sainsbury-turns-the-tables-on-struggling-tesco-33986.html [Accessed 19 November 2011] MarketWatch (2004). Tesco: no frills legal services. MarketWatch: Global Round-up 3(8), 98-99. Mintel (2011a). Online Grocery Retailing - UK - September 2011 online. Available from: http://oxygen.mintel.com/sinatra/oxygen/display/id=545492 [Accessed 15 November 2011]. Mintel (2011b). Pricing and Promotions in Food - UK - May 2011 online. Available from http://oxygen.mintel.com/sinatra/oxygen/search_results/show&/display/id=545239 [Accessed 15 November 2011]. Mules, Rachel (2011). Supermarket Wars. BusiDate (4), 2-4. ProgressiveGrocer (29 December 2010). Mintel Predicts 2011 Consumer Trends online. Available from http://www.progressivegrocer.com/top-stories/headlines/supplier/id31828/mintel-predicts-2011-consumer-trends/ [Accessed 15 November 2011]. Wilson, Charles (2011). Battle of the Aisles. Credit Management, 20-21 Read More