Tesco Eroded Customers Trust - Case Study Example

Tesco Eroded s Trust Introduction The essay seeks to understand how Tesco, one of the largest and most well-known retailers with in the United Kingdom lost its reputation in the market as being the cheapest retailer in the market, along with shedding light at various other problems the business is facing problems. During the course of this essay, we will also shed light on the actions of the top management of the company that led to the problem, and the steps that were taken later on to take the company out of the situation it went into. Essay Tesco PLC is one of the largest and most well-known retail giants of the world. In terms of profitability, Tesco ranks third all across the globe when compared against other retailers. The super-store giant was found back in 1919 and has ever since expanded its foot-print in more than 12 countries across the globe, along with diversifying its business structure into various areas including financial service, telecom, petrol and software amongst others. Ever since Tesco came in to business, the company has been able to maintain its position amongst its competitors as the cheapest retailer. However, according to recent revelations, Tesco has lost its tag of being the cheapest retailer within the United Kingdom to Asda, whose prices are believed to be around six percent cheaper than that of Tesco (BBC News, 2015). It needs to be understood that winning the trust of clients is one of the key areas of being successful in the business world because it is truly in the hands of the clients to either make, or break a business. It is highly important to pay heed to this issue because many businesses only work because of their key features. Tesco’s main selling point or something that separated it from others within the market was the fact that it was able to sell its products the cheapest prices within the market. Over the years Tesco has built for itself a reputation amongst its clients of being the cheapest retailer in the market, and due to this fact many customers walked in to the store to make their purchases without even thinking of comparing prices with other retailers (BBC News, 2015). It needs to be understood here that customers had almost blindly trusted Tesco for its prices and associated it with being the most reasonably priced retailer within the market. It was this trust that brought Tesco so much business over the years and took it from a company that made £532 million in profits after tax in 1998, to being able to make £3,453 in 2013. This trust was broken in 2014 when customers began to realize that Tesco was no longer the cheapest retailer out there in the UK market. This proved to be detrimental for the Tesco as its clients had over the years trusted the company for being the cheapest, and now with prices being quoted by them being higher on average when compared to store like Asda, the customers trust was clearly broken. Sir Terry Leahy, the person accredited with Tesco’s growth into such a big name in the business world, also agreed with the view that the customer’s trust had clearly been broken by Tesco, which had led them to shop around elsewhere in search of decent prices. It is basic business knowledge that business generally compete in either of two categories; price or quality. If a business has chosen a strategy of competing with others, it should then ensure it sticks up to the reputation of maintaining its position within the industry on the basis of its selected strategy. Moving away from selected strategy can be tantamount to destruction then. As far as Tesco is concerned, its niche was being the cheapest retailer and that clearly did take a heavy blow as its prices went up past Asda in 2014. Post this scandal, Tesco had to define its existence in the market as to what it actually was; the lowest cost retailer, or just another retailer out there in the market. Being off track from its competitive strategy was not the only problem Tesco has been facing. During 2013 and 2014, a lot of key management employees were also seen leaving the company and that too at a time when the structure of retail markets all over the world had been facing a significant shift in design (BBC News, 2015). It is believed that many of these executives left the company during Mr. Clarke’s tenure as the CEO, as he took various measures in a bid to give boost the company’s declining profitability; moves that were not taken in consensus with the management and thus leading to cold relations between the upper circuits of the company. According to various interviews given by high level Tesco employees who quit their jobs amongst this drama, there were heated discussions at senior level as various employees had highly differing views as to how to get right the listing ship. It is widely believed that Tesco lost too much employees in too less time, and this was one of the key reasons why the Company’s performance was seen going down the drain. What was rather critical about this entire scenario was the fact that most of the employees that left the company amidst this drama were in fact very senior employees, who clearly knew how to sail the ship during a storm that Tesco was facing. However, a different picture altogether was provided by Mr. Clarke, the CEO of the company at the time when it was undergoing this scenario. According to him, at the time when he was given charge of the company, the company was already facing a lot of problems; problems of the nature that were critical to the very existence of the company. He also clarified his position regarding the resignation of many top level employees by saying that in order to bring the cultural and visionary change required by the company to thrive in the future, a lot of politically difficult decisions had to be taken, including letting go of people who were believed to not play a vital role in the future running of the business (BBC News, 2015). Yet another problem facing the company came from the company not really being able to compete well within the market, and also resorting to tactics that result in artificial expansion of the balance sheet. All the top retailers in UK, including Tesco have faced severe competition from discounters like Aldi and Lidl. However, what Tesco and other retailers did not understand was that they could not compete with them because the two businesses had completely different business structures. Sir Terry Leahy once rightly described these bulk stores as “new competition”. Due to these discount stores, along with low prices by Asda, Tesco was not able to report impressive sales and profit figures and also significantly lost its business to them. In a bid to restore profitability in tough times, Tesco took help from window dressing its financials; and got aggressively involved in increasing the number of sales promotions it ran its stores. The thing with sales promotions in stores is that promotions call for high payments from suppliers, known as commercial income, and this income would then be used to artificially inflate Tesco’s financials (BBC News, 2015). What needs to be understood here is that this income did not come from core operations of Tesco, but from activities that helped the giant in generating income from other specialized techniques, and was not really representative of the company’s overall performance. Along with Tesco, these tactics were also followed by other retail giants. However, what were required by customers were not temporary low prices during sales promotions but a consistently low price list. It is of critical importance here to understand that Tesco was resorting to such techniques primarily because it was not really doing well in its overall business operations, and needed areas to maximize its income and profitability from. Tesco’s image in the public was further damaged when the Serious Fraud Office launched an investigation into Tesco’s financial reporting. The investigation was primarily aimed at determining if Tesco had been misreporting its profits. The heart of this issue was an internal email sent out by the Chief Financial Officer of Tesco to his colleagues which mentioned how it was not allowed under accounting conventions to account for profits until it was actually earned or justified, whatever the case may be. He also mentioned that such acts were being carried out in various arms of the business and need be stopped in order to save the company from further embarrassment (BBC News, 2015). Tesco’s all problems were not internal in nature, but external as well. The company was facing a tough time with the cosmetics giant L’Oreal over various charges. During 2013, Tesco had put to dispute transactions worth £1 million in lieu of charges and fines under various supply based agreements. The situation took a bitter shape when L’Oreal threatened Tesco with taking legal actions against it over the disputed transaction, along with warning the giant of removing its products of its shelves. Though the situation is still pending, Tesco is likely to sort it out with the cosmetics giant as it cannot afford to not have products of such a well-known brand on the shelves of its stores. Conclusion Though Tesco is currently facing a tough time, the company was at one point in time the cheapest retailer in the UK market with the highest market share amongst all retailers. Despite the fact that some serious allegations have been leveled against the company during the last few years and there have been some internal issues faced by the company including issues within its management, there remains no doubt that Tesco is still amongst the giants in the retail scene of United Kingdom. With a new Chief Executive already in the chair, and with serious measures like cutting down pension plans and closing down loss making stores having been taken, Tesco clearly seems to be well placed to regain its lost position in the market. Though getting back its market share may take time, capitalizing on opportunities and taking business seriously is all what is needed for Tesco to regain its lot glory. Bibliography BBC News, (2015). Sir Terry Leahy: Tesco eroded customers trust. [online] Available at: http://m.bbc.com/news/business-30881267 [Accessed 15 Mar. 2015]. BBC News, (2015). Tesco to close 43 stores despite better Christmas sales. [online] Available at: http://m.bbc.com/news/business-30712762 [Accessed 15 Mar. 2015]. BBC News, (2015). Tesco: Where it went wrong. [online] Available at: http://m.bbc.com/news/business-30886632 [Accessed 15 Mar. 2015]. Read More