Strategic Analysis of the UK Grocery Market - Assignment Example

Executive Summary The report aims to carry out a strategic analysis of the UK grocery market with focus on Tesco which is one of the largest players in this segment in UK as well as on a global level. The report gives an overview of the UK grocery market and then moves on to internal and external analysis. SWOT model has been used for internal analysis while PESTLE model has been used for external analysis. The internal and external analyses are not mutually exclusive. In addition, Porter’s 5 forces model has been applied to carry out an analysis of the competition and key members of the supply chain. All these analyses have been carried out from the point of view of Tesco. However, references to UK general grocery market have been made times and again when required. The report concludes with the key takeaways from this detailed strategic analysis. 2. Overview of UK Grocery Market Retailing is one of the main contributors to UK economy with over 12% share. This sector acts as a bridge between production and consumption and is also a great generator of employment. In addition to the organized sector, there are a large number of unorganized players who are self-employed. UK grocery market has witnessed changes across both horizontal and vertical dimensions in the past few years. Horizontally, food retailers have ventured into other retail segments such as consumer goods, clothes, services and so on. Vertically, there has been a shift of power in the supply chain from the manufacturers to large organized retailers. This had a huge impact on the dynamics of the industry (Institute of Retail Studies 2003). 3. Internal Analysis of Tesco Tesco is primarily a food retailer with more than 2500 stores across the globe, a majority of which are in UK. The company has lately ventured into other business segments such as financial services, insurance, electrical appliances, telecommunications and insurance (Data Monitor 2004). SWOT analysis can be effectively used to carry out an internal assessment of Tesco. 3.1. Strengths One of Tesco’s biggest strengths is its continuously increasing market share. As of July, 2011, its market share is above 30% (Institute of Grocery Distribution). Tesco has almost doubled its market share in the past 7-8 years speaking high volumes of its growth. This growth has been enabled because of the continuous geographical expansion and opening of new stores. In addition, Tesco has strategically focused on non-food segment of the business and now it contributes very significantly to its revenues. Tesco has realized the importance of web in its marketing. It has one of the biggest online supermarkets in the world. Tesco has a great brand image among its customers. It is known for high quality goods, innovative measures and efficient processes. Tesco’s lead over other players in UK market is huge. This has been made possible due to economies of scale it has gained over the years. 3.2. Weaknesses Tesco’s success story has largely been possible due to the UK market. However, it is susceptible to risk in case of change in government regulations. Tesco has a largely untapped market in emerging economies such as China and India. In addition, Tesco has been very aggressive in its expansion strategy and acquisitions. This has meant taking a large amount of debt affecting its balance sheets. Such a capital structure would work till the going gets good but may backfire in tough times. 3.3. Opportunities Tesco has opportunities from two perspectives. One is the geographical expansion in emerging markets as discussed above. The second opportunity is to make efficient use of its scale and venture into new business segments. The margins in the food industry are declining and it is profitable to consider new avenues. Tesco has already started working on the same with new segments such as skincare (Data Monitor 2004). In this way, it would also be able to realize economies of scope. 3.4. Threats UK grocery market has witnessed a lot of price wars. This has especially occurred due to entry of foreign players. Any structural changes in the UK market are bound to impact Tesco the most. There have acquisitions by global giants such as Walmart to make deep inroads into this market. Thus, Tesco is witnessing strong competition in UK market. If Tesco pursues foreign markets more aggressively, it means more establishment and marketing costs which may further deteriorate its capital structure (Data Monitor 2004). 4. External Analysis of UK Grocery Market with focus on Tesco This section aims to analyze the various external factors impacting the UK grocery market and especially Tesco. This has been done through PESTEL analysis. 4.1. Political Factors UK grocery market is governed by political decisions in the country as well as European Union. There are employment norms under which the companies such as Tesco employ different types of workers such as full-time, part-time and contract workers. The companies also give preference to disabled, underprivileged and students in order to maintain employee loyalty in this attrition prone sector. Tesco has also ventured into other European countries and has to deal with conflicting political decisions in these countries which have an impact on its operations. 4.2. Economic Factors Economic factors are of great concern to grocery players such as Tesco. The sector is witnessing tough times over the past one to two years in wake of the Euro zone crisis. The unemployment has also increased further impacting the demand for retail goods. Most of these factors are beyond the control of these companies. 4.3. Social Factors Consumers now a day prefer a one stop shop for their entire shopping. This has motivated large retailers such as Tesco to include non-food items in their range of products. Also, there has been an increasing trend of eating fast foods and out of home dining. This has further accelerated the retail business. The increase in quality of life has also positively impacted retail business. 4.4. Technological Factors Big retailers in organized sectors such as Tesco have lapped up technological advancements to boost business. Tesco makes a large chunk of its sales online. It makes use of ERP and CRM systems to make its supply chain more efficient. It also uses ECR (Efficient Consumer Response) system to develop relations with customers. RFID tags have replaced barcodes to enable better and faster product handling. 4.5. Environmental Factors With increasing global awareness about environment, retailers in UK need to follow green supply chain practices by will or by compulsion. There have been a number of regulations on the environmental aspects which have impacted retailers in the past. Companies had to face severe taxes and penalties for violating environmental norms. Moreover, being seen as a socially responsible company generates huge trust and goodwill among the customers. 4.6. Legal Factors The Food Retailing Commission and other organizations in UK come up with legal norms from time to time to regulate prices and practices in the grocery market. While this is done to benefit consumers, it does have some negative impact on the retailers’ business. However, the companies do not have any option to take these into their stride and move ahead. 5. Porter’s 5 forces Analysis of Tesco Porter’s 5 forces model developed by Michael Porter helps in identifying the powers of the key participants in the industry’s supply chain and hence understand the dynamics of the grocery market in UK. 5.1. Threat of new entrants UK grocery market has four major players- Tesco, Asda, Sainsbury and Morrisons. There are a few mid-level players and a large number of small players. When these big players entered the market many years ago, it had a huge impact on the unorganized sector. But now the things are pretty settled. It is very difficult for new entrants to realize the economies of scale enjoyed by the big players. 5.2. Bargaining power of suppliers The bargaining power of suppliers who are basically manufacturers has diminished over the years. The supermarket chains such as Tesco are so huge that they completely dominate the terms and conditions of the business. In addition, these retail chains have the ability to source products from distant locations at cheaper rates. 5.3. Bargaining power of customers The bargaining power of customers is moderate to high. The power is high especially for commoditized products such as food items since the customers can always go the cheaper stores. This has led to a reduction in margins in the sector. 5.4. Threat of substitutes The threat of substitutes is very high. Unless there is a significant difference in quality, the cheapest substitute gets the best sales. 5.5. Competitive Rivalry The organized grocery market in UK is basically an oligopolistic market with a few dominant players. The competitive rivalry does exist to a certain level impacting prices and margins. But the rivalry could intensify with entry of players such as Wal-Mart. However, this rivalry leads to innovation and implementation of best practices by these players. 6. Conclusion On the basis of this strategic analysis it can be commented that UK grocery market is controlled by a few large players. However, the segment is in a state of transition. Any structural changes and mergers would ease the entry path for foreign players to enter this market. Tesco has a particularly dominating presence in UK. However, it needs to focus on new markets & segments, improving its debt structure and tackling future competition. 7. References Joe Tidd & John Bessant 2009, ‘Challenges in Retail Innovation: Aspects of innovation in Tesco plc’s market entry into the USA’ Michelle Lowe & Neil Wrigley 2010, ‘Tesco: from domestic operator to multinational giant’, Case Study Dunn, Mason, Scarff & Towers, ‘Tesco in Switzerland’ ‘Competitive Analysis of the Retail sector in the UK’ 2003, Institute for Retail Studies, Department of Trade and Industry, University of Sterling ‘Tesco: A case study in supermarket excellence’ 2004, Coriolis Research Bryan Ritz 2005, ‘Store Wars’, Business Review, pg. 22-23 S. L. Burt & L. Sparks 2003, ‘Power and competition in the UK retail grocery market’. British Journal of Management, 14, 237-254. S. Wood, M. Lowe & N. Wrigley 2010, ‘Conceptualising innovative customer-facing responses to planning regulation: The UK food retailers’, The Service Industries Journal, Vol. 30, No. 12, pp. 1967 – 1990 D Desjardins2005, ‘Tesco strategies turn up competitive heat in UK’, DSN Retailing Today, Vol. 44 Issue 4, pp.4-6; Institute of Grocery Distribution Market Share Data Available online from Datamonitor Report 2004?’Company Profile: Tesco PLC Analysis, November C. Flavian , A. Haberberg and Y. Polo 2002, ‘ Food retailing strategies in the European Union. A comparative analysis in the UK and Spain’, Journal of Retailing & Consumer Services, Vol. 9 Issue 3, pp.125-138 Ritz 2005, ‘ Store wars’, Business Review, Vol. 11, April, pp.22-23 Read More