International Management Decision Making:Tesco plc - Essay Example

?International Management Decision Making: Tesco plc Nature of Competition in the Retail Grocery Industry in the UK 1 Market Structure The briefbackground information on Tesco plc indicated that the nature of competition in the retail grocery industry in the UK, within which Tesco plc dominates is an oligopoly, described as “a situation of competition between the few, where a few large firms dominate an industry” (Brief Background Information 2011, par. 3). This fact was corroborated by Fabe (2011) in his published article on the UK Retail Grocery that indicates that “the market environment of the UK grocery retailer industry is more patterned after oligopoly. For instance, the presence of a few major firms in the industry such as Morrisons, Tesco, Sainsbury, Asda and Safeway, is a distinct feature of an oligopoly” (Task 2 par. 5). However, in an article written by Evans and Baxendale (2007), the authors disclosed that since Tesco’s market share has already exceeded 25%, as per the Competition Commission, a regulatory body that monitors organizations structures through market shares, its market structure should already be classified as a monopoly (Evans and Baxendale 2007, 1). The authors went to extensive discussions that aimed to discredit those who classify Tesco’s as a monopoly. It is therefore noteworthy to cite Fabe’s arguments that: “In its purest form monopoly is defined as a market structure where there is a lone producer of a product that has no close alternate producer and that is protected by consequential, if not prohibitive, barriers to entry. Accordingly, the pure monopolist faces the market demand for its good and is capable of choosing among the various price-quantity combinations on its demand curve with the single-minded goal of maximizing firm profits. This market structure is very different from the competition types as these market structures not only have a number of competing firms but barriers of entry are not present. Compared to other forms, the monopolistic market structure is the least apparent market structure in the UK grocery retailing industry” (Fabe: Task 2, 2011, par. 7). 1.2 Market Share As indicated the retail grocery industry in the UK is participated by hundreds of small firms, but the market share information attests concentration of customers to only four major firms, to wit: Tesco (30.4%), Asda (17.4%), Sainsbury (16.1%), and Morrisons (11.5%). Figure 1 below illustrates the market share of major retail grocery firms in the UK: Figure 1: Comparative Market Share in the Retail Grocery Industry in the UK Source: Brief Background Information, 2011, par. 2. 1.3 Price/Non-Price Competition The University of Delaware’s notes on the nature of pricing differentiated price versus non-price competition through its respective characteristics and features, to wit: Price Competition: “Match, beat the price of the competition. To compete effectively, need to be the lowest cost producer. Must be willing and able to change the price frequently. Need to respond quickly and aggressively. Competitors can also respond quickly to your initiatives. Customers adopt brand switching to use the lowest priced brand. Sellers move along the demand curve by raising and lowering prices” (University of Delaware n.d.) Non-Price Competition: “Emphasize product features, service, quality etc. Can build customer loyalty towards the brand. Must be able to distinguish brand through unique product features. Customer must be able to perceive the differences in brands and view them as desirable. Should be difficult (impossible) for competitors to emulate the differences (PATENTS) Must promote the distinguishing features to create customer awareness. Price differences must be offset by the perceived benefits. Sellers shift the demand curve out to the right by stressing distinctive attributes” (University of Delaware n.d.) Through the identified characteristics and for being classified as an oligopolist, Tesco plc therefore practices non-price competition where customer loyalty is built around establishing corporate image based on additional services offered (aside from the low priced – products) that focus on offering their customers “the whole experience of shopping” (Brief Background Information 2011, 2). 1.4 International Competition The issue of international competition has been addressed by the Competition Commission’s report entitled “Supermarkets: A report on the supply of groceries from multiple stores in the United Kingdom” where Chapter 9 discussed international price comparisons. As disclosed, “a great deal of recent attention has been given to grocery prices in the UK when compared with other European countries and the USA. Prices in the grocery retail sector have been compared with those in other countries by the media, politicians and grocery retailers themselves to attempt to shed light on whether the UK is a relatively highly-priced market for a one-stop grocery shop” (Competition Commission 2000, 181-182). In this regard, the report from the Competition Commission (CC) revealed that “the UK was the 11th most expensive of 15 EC countries for food and drink in 1996. Between 1996 and the third quarter of 1999, its food and drink prices rose by only 1 per cent, the third lowest rate of food and drink inflation in the EC. This may be compared with Eurostat economy-wide UK inflation which was 4.8 per cent over the same period” (Competition Commission 2000, 202). The CC’s findings in general summed that “in the second half of 1999, supermarket grocery retail prices in Great Britain were around 12.9 per cent above those in France,2 between 12.5 and 18.5 per cent higher than Germany and 10 per cent higher than the Netherlands. This gives a range for a weighted average price difference of approximately 12 to 16 per cent between Great Britain and the three other markets” (Competition Commission 2000, 208). Therefore, based on international pricing competition, UK’s grocery prices are still relatively more expensive than other European countries if the same trend in currency prices continue up to contemporary times. This could be the reason why is it only ranked 4th “after Wal-Mart Stores, Inc., Carrefour S. A. and Metro AG), according to a worldwide study by Deloitte Touche Tohmatsu in 2010” (Brief Background Information 2011, 1) and could be the market leader in UK where local prices of products are deemed homogeneous among grocery chain outlets. 1.5 Countervailing Power Countervailing power is defined as a buyer power where “where competition among suppliers is imperfect, the normal selling price is above the competitive price” (Chen 2007, 6). In Tesco plc’s case, countervailing power is eminent as revealed in the background information, to wit: “farmers in particular have complained that they are put under huge pressure to deliver higher and higher quality and standardisation at lower and lower prices and believe they are effectively bullied into submission by the power of the supermarkets which drive prices to them down but do not pass on the same price rises to consumers” (Brief Background Information 2011, 2). This was confirmed by Fame (2011) when he indicated that “according to analysts UK’s grocery sector is highly competitive and concentrated on price. If this is the case, there will be a thin margin between success and failure among similar businesses. With this kind of business environment, it is very likely that only the largest companies will succeed. If this will continue, a monopolistic environment can take place. Moreover, this tight market environment will make all retailers edgy over slight business or economic changes, making competition even more cutthroat” (Fabe: Task 2, 2011, par. 13). 2. Competition in the Retail Grocery Industry: Competitive versus Contestable Market According to Riley (2006), contestable markets are defined by William Baumol as existing where “an entrant has access to all production techniques available to the incumbents, is not prohibited from wooing the incumbent’s customers, and entry decisions can be reversed without cost” (Riley, Contestable Markets 2006, par. 1). There were three identified conditions that satisfy a pure market contestability condition: (1) perfect information and the ability and/or the right of all suppliers to make use of the best available production technology in the market; (2) the freedom to market / advertise and enter a market with a competing product; and (3) the absence of sunk costs – this reduces the risks of coming into a market” (Riley, Contestable Markets 2006, par. 5). On the other hand, Evans and Baxendale (2007) contended that “some economists define a competitive market not as containing perfect competition characteristics, but one that is contestable. Providing new entrants are able to challenge for the profits being generated by incumbents, the market is competitive. Since the barriers to entry and exit are the solve province of government regulations, their only responsibility in providing a “competitive market” is refraining from restrictions on businesses. In fact regulations can be counter productive since they raise the cost of doing business, offering an advantage to existing firms, or larger ones who can afford legal advice and regulatory expertise” (p. 9). The retail grocery industry, the nature of competition is increasingly manifesting characteristics and feature of contestability due to the presence of identified conditions abovementioned. In addition, as emphasized by Riley (2006) other factors have contributed to increasing contestability of industries within the UK markets, such as: entrepreneurial zeal, de-regulation of markets, more stringent competition laws, the emergence of The European Single Market, and technological advancement. For example, the de-regulation of the telecommunications industry paved the way for its contestability condition. As indicated, the industry regulator, OFCOM, “believes that the retail market for broadband is now sufficiently competitive market so that it can operate without price regulation. In the past, industry regulators in recently privatized industries where monopoly power remained have used their powers to impose price regimes on the major utilities. But as competitive forces have strengthened, so the role of the regulator has moved away from direct price controls, towards a broader role of monitoring the scale and quality of competition within a market” (Riley, Contestable Markets 2006, 1). Other examples of increased contestable markets in the UK are illustrated below: “Free newspapers e.g. Metro Radio stations in the digital age Low cost airlines (Ryanair and EasyJet et al) Cross channel transport Domestic Clothing Industry - (Matalan, TK Max and Primark) Food retailers and the market for organic products New entrants in mail market New entrants into online gaming Telecommunications Voice over internet (Skype) New entrants into fixed line market (e.g. Talk-Talk) New entrants into health care Contestability in broadband market Fitness franchises Deregulation of chemists – to allow supermarkets into the sector Deregulation of gas, electricity companies” (Tutor2u n.d., 7). From Tesco’s standpoint, despite the high concentration ratio, the groceries market is highly contestable and the concentration ratio does not have detrimental impacts consumers’ interests. This argument is actually supported from the discourse by Evans and Baxendale (2007) who indicate that consumers get the best deal in contestable markets (p. 9). By encouraging various industries to manifest characteristics of contestability, efficiency is encouraged and those providers and organizations that could not compete on a more standardized and professionalized basis have no other option except to leave the industry. Tesco was noted to have the ultimate decision makers in these markets as the consumers. “Tesco customers have chosen to frequent Tesco’s rather than the alternatives, and since the alternatives have been unable to offer a better service their resources and capital are of greater use elsewhere” (Evans and Baxendale 2007, 13). 3. Comparative Financial Performance: Tesco plc with Morrisons UK and Sainsbury plc Tesco plc, Financial Highlights from 2007 to 2011 UK retail statistics 2007 2008 2009 2010 2011 Revenue UK 32,665 34,858 37,650 38,558 40,117 Total Group 42,641 47,298 53,898 56,910 60, 931 Group operating profit 2,648 2,791 3,1692 3,457 3,811 Profit (?m) 1,892 2,124 2,133 2,327 2,655 Number of stores 1,988 2,137 2,306 2,507 2,715 Total sales area – 000 sq ft 27,785 30,457 32,389 34,237 36,722 Average store size (sales area – sq ft) 34,209 35,055 35,215 35,485 35,970 Average full–time equivalent employees 184,461 193,917 194,420 196,604 200,966 UK retail productivity (?) Revenue per employee 177,084 179,840 196,436 196,120 199,621 Profit per employee 11,292 10,814 13,065 14,303 15,098 Weekly sales per sq ft 25.48 25.43 25.34 25.22 24.95 Basic earnings per share 23.61p 26.95p 27.14p2 29.33p 33.10p Diluted earnings per share 23.31p 26.61p 26.96p2 29.19p 32.94p Dividend per share8 9.64 10.90p 11.96p 13.05p 14.46p Source: Tesco plc 2011 Morrisons, UK : Five Year Summary of Results (2 weeks ended 30 January 2011) Consolidated statement of comprehensive income 2011?m 2010?m 2009?m 2008?m 20071?m Turnover 16,479 15,410 14,528 12,969 12,462 Cost of sales (15,331) (14,348) (13,615) (12,151) (11,826) Gross profit 1,148 1,062 913 818 636 Other operating income 80 65 37 30 21 Administrative expenses (323) (315) (281) (268) (272) (Losses)/profits arising on property transactions (1) 4 2 32 38 Operating profit before pensions credit 904 816 671 612 423 Pensions credit 91 – – – Operating profit 904 907 671 612 423 Net finance costs (30) (49) (16) – (54) Profit before taxation 874 858 655 612 369 Taxation (242) (260) (195) (58) (121) Profit for the period attributable to the owners 632 598 460 554 248 Earnings per share (pence) – basic 23.93 22.80 17.39 20.79 9.32 – diluted 23.43 22.37 17.16 20.67 9.31 – underlying 23.03 20.47 16.67 14.38 8.28 Dividend per ordinary share (pence) 9.60 8.20 5.80 4.80 4.00 Source: Morrisons, 2011 Sainsbury’s plc: Five Year Summary 2011 2010 2009 2008 2007 Financial results (?m) Sales 22,943 21,421 20,383 19,287 18,518 Underlying operating profit Retailing 738 671 616 535 429 Sainsbury's Bank - - - - 2 --------------------------------------------------------------------------------------------------------------------- 738 671 616 535 431 Underlying net finance costs (97) (79) (113) (99) (92) Share of post-tax profit/(loss) from joint ventures 24 18 16 (2) - Underlying profit before tax 665 610 519 434 339 Increase on previous year (%) 9.0 17.5 19.6 28.0 38.9 Retailing underlying operating profit margin (%) 3.50 3.36 3.26 3.00 2.54 Earnings per share Underlying basic (pence) 26.5 23.9 21.2 17.4 13.0 Increase on previous year (%) 10.9 12.7 21.8 33.8 36.8 Proposed dividend per share 15.10 14.20 13.20 12.00 9.75 Retail statistics for UK food retailing Number of outlets at financial year end over 55,000 sq ft sales area 64 45 34 24 20 40,001 - 55,000 sq ft sales area 124 125 130 130 124 25,001 - 40,000 sq ft sales area 155 156 153 161 167 15,000 - 25,000 sq ft sales area 113 115 108 100 98 under 15,000 sq ft sales area 478 431 367 408 379 TOTAL 934 872 792 823 788 Sales area (000 sq ft) 19,108 17,750 16,703 16,191 15,715 Net increase on previous year (%) 7.7 6.3 3.2 3.0 3.6 New stores 68 89 29 35 40 Sales intensity Per sq ft (? per week) 20.04 20.42 20.01 19.69 19.30 Source: (Sainsbury plc 2011) Comparative Analysis: Tesco pls with Morrisons and Sainsbury plc a) Sales b) Profits c) Share price performance (EPS) It can therefore be deduced from the comparative five year financial summaries of the three major companies within the retail grocery industry (Tesco plc, Morrisons, and Sainsbury) that the financial performance of Tesco plc far exceeds those of its two competitors in sales, profits and EPS. As validated by Fabe (2011), “Tesco is a UK retail giant operating in the grocery industry. It is known for its mission, which stresses that the purpose of the company is to create value for its customers so as to earn their lifetime loyalty” (Task 5, par. 1). In the process, through creating value in the minds of consumers with the design of appropriate marketing strategies that focus on competence and qualifications of its employees, the leadership development and trainings accorded, and observance of corporate responsibility to various stakeholders, Tesco plc continues to support and sustain exemplary performance amidst the highly competitive environment. 4. Strategies Implemented by Tesco plc It is clearly and explicitly stated in the official website of Tesco plc that they adhere to a “seven part strategy (that) aims to broaden the scope of the business to enable it to deliver strong sustainable long-term growth, to wit: (1) to grow the UK core; (2) to be an outstanding international retailer in stores and online; (3) to be strong in everything we sell as we are in food; (4) to grow retail services in all our markets; (5) to put our responsibilities to the communities we serve at the heart of what we do; (6) to be a creator of highly valued brands; and (7) to build our team so that we create more value” (Tesco plc 2011). A closer evaluation of these strategies would reveal that Tesco’s approach in the design of their strategy is multidimensional and holistic as diverse perspectives and points of views are taken into consideration in the development of their core competencies and internal resources to enable them to capture opportunities in the external environment; and at the same time, be able to address eminent threats from competition and other external pressures. For example, their foremost strategy is to develop and sustain its core business of maintaining strength and competitive advantage in the retail grocery industry. The statistics provided in the background information attests to its success, being considered as the fourth largest retailer worldwide and the leader in the grocery market in the UK. By expanding slowly and carefully in international markets, Tesco’s internal and financial resources are enhanced. Currently, Tesco maintains 14 markets across Europe, Asia and North America (Tesco plc 2011). In addition, through strategies of developing and maintaining human resources through a system of training programs, motivational incentives and rewards, and by supporting gender diversity, team building and innovative skills are enhanced which reverberates to improved performance and financial success. Through forging commitment to assist in programs that adhere to corporate responsibility (sustainable fishing, responsible trading, tackling climate change, helping customers get active, and fundraising for charities (Tesco pls 2011)), the organization projects an image of commitment and dedication to improve the wellbeing of mankind. All of these strategies assisted in reaching its current size in the global grocery and general merchandising industry. Estimates of Demand Conditions Through responsible buying and selling of products and by establishing cordial relationships with various stakeholders, particularly their suppliers, Tesco is able to maximize the value of the products they offer to the consumers. Information that has been collected and analyzed is transformed to effective pricing through monitoring the movement and strategies of its competitors. As the CC indicated, “practically all the main parties actively and carefully monitor their competitors’ prices, and in most cases attempt to a greater or lesser degree to ensure, at least on some proportion of their lines, that they do not price out of line with their main competitors. Indeed, on certain lines, no major party wishes to be seen to be above anyone else, such that an equalization of prices across such multiples can occur for some time. This can extend to specific pledges not to be undercut” (Competition Commission 2000, 142). Further, since Tesco operates in an oligopoly market structure, the demand curves for particular products may still be difficult to identify. As emphasized by Riley (2006), the kinked demand curve model that is reflected under oligopoly increases the tendency that “a business might face a dual demand curve for its product based on the likely reactions of other firms in the market to a change in its price or another variable. The common assumption of the theory is that firms in an oligopoly are looking to protect and maintain their market share and that rival firms are unlikely to match another’s price increase but may match a price fall. I.e. rival firms within an oligopoly react asymmetrically to a change in the price of another firm” (Riley, Oligopoly - Overview 2006, 1). Reference List Brief Background Information. Case , BC415012S International Management Decision Making, 2011. Chen, Z. "Defining buyer power." AAI Invitational Symposium on Buyer Power. 2007. 1-7. Competition Commission. Supermarkets: A report on the supply of groceries from multiple stores in the United Kingdom. 2000. http://www.competition-commission.org.uk/rep_pub/reports/2000/446super.htm (accessed December 21, 2011). Evans, AJ, and T Baxendale. Are Tesco acting competitively? Report to the Competition Commission, ESCP-EAP European School of Management, 2007. Fabe, V. UK Retail Grocery Market. 2011. http://www.ivythesis.com/samples/UK%20Retail%20Grocery%20Market.htm (accessed December 19, 2011). Morrisons UK. Five Year Summary of Results. 2011. http://www.morrisons.co.uk/corporate/2011/annualreport/investor-information/five-year-summary-results/Default.aspx# (accessed December 20, 2011). Riley, G. Contestable Markets . September 2006. http://tutor2u.net/economics/revision-notes/a2-micro-pricing-power.html (accessed December 20, 2011). —. Oligopoly - Overview . 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