Oligopolistic Market Competition in the UK - Report Example

Study Of The Oligopolistic Market Competition In The UK Table Contents Introduction…………………………………………………….3 Tesco’s structure, conduct and performance………….…………………..3 2. Stores and pricing strategy…..…………………………………8 PESTLE and SWOT analysis of Tesco……………………………………8 Competition……………………………………………………………….10 Recent failures of Tesco…………………………………………………..11 Porter’s five………………………………………………….……………12 Non-price competition………………………………………………….…14 Effects of Tesco’s market structure on producers and consumers……….15 Challenges from discounters Aldi and Lidl……………………………….16 Evaluation…………………………………………………………………17 3. Conclusions……………………………………………………18 4. References………………………………………………..……19 1.Introduction The purpose of this study is to give detailed analysis of the oligopolistic market within supermarket industry in the UK and to describe this issue using one of the biggest retailers – Tesco corporation. It is a multinational business operating in more than 12 countries around the world, the company has a rich history, and picking this particular retailer will help to better understand the oligopoly phenomenon and competition within oligopolistic market (Tesco PLC). Tesco’s structure The governance structure can be see with the help of the following table. Table 1. Governance structure of Tesco As we see from the table above, the company is headed by chairman who is John Allan. Tesco PLC Board consists of a number of committees dealing with issues such as remuneration, audit, corporate responsibility. Overall aim of this department is to execute regulative and supervisory operations. Executive committee is responsible for the production process directly in order to maintain flawless performance. This department is busy with such tasks as marketing and commercial issues, technological aspects as well as social and customers matters (Financial Times, 2009). Conduct As a peculiarity Tesco has and uses a certain code of business conduct which is to state the minimum requirements and expectations for the employees, it is to provide a guideline intended for a specific area of risk. There are 21 statement to fit any situation and any problem, and the code gives a contact information in case the consulting is needed. The code of conduct is complex and it is combines 3 components in order to provide the best service: law-abiding as the key to clients’ trust and sound reputation, special training is considered. The other components is abiding of Tesco Values as a guidance for conduct when difficult decisions are to be made. This is a set of appropriate steps to do the right thing which are to prevent further issues with the law. Performance The ratios of profitability are to display the overall performance and efficiency of the company. Basing on data from Annual report the gross benefit margin of 2009-2010 period experienced increase to 0,34 percent. The net profit during the same period increased to 4,11 percent from 3,97. This is the evidence that Tesco was able to provide every year revenue growth. It is due to Tesco’s belief that company can operate efficiently within worldwide markets having sound profitability. Apart from that the profitability ratios give the information for the investors to make sure the company experiences evolution. During 2008 the Tesco corporation displayed improvement in sales growth ratios which put Tesco on 3rd position among worldwide competitors (Humby, 2008). The other ratio to be considered is the equity return or return on investment. In period of 2010 the return on invested increased about 0.06 percent. That year, Tesco CEO Terry Leahy stated about 145 stores were predicted to be very profitable in 2013 fiscal year. Due to this statement it led to return on growth of equity. Moreover, the significant enhancement and progress in markets of Asian world such as Korea and Thailand contributed to a great extent to driving sales growth. Return on Assets ratio helps to assess the manner in which assets are used to create income. The Return on Assets ratio during 2010 increased to 6.9 percent from 6.4 percent due to the charge of amortization on acquisition of arising assets which in its turn increased group trade profits. Additionally, the joint ventures sequence as well as transaction of leaseback helps Tesco to release cash (Tesco, 2010). Liquidity ratio is the indicator of the company’s ability to fulfill its debts (Winters, 2002). However during 2009-2010 period the current ratio decreased. This happened due to the fact Tesco always has new markets to make investments. Taking into account that Tesco’s debt facing is high, CEO tends to think this is a very healthy balance sheet (Bloomberg, 2009). Quick ratio is meant to display the ability of the company of making payments on current obligations. Annual report showed that in 2010 this ratio suffered decrease due to financial crisis Tesco had faced. Table 2. Tesco’s performance during 2000-2009. Key variables Ivory research Table 3. Tesco’s performance during 2002-2015 period Quartz The market of the UK grocery provision has been undergoing transformations in order to fulfill the needs and requirements of the clients. The process involves constant assessment of the biggest stores to make research in question of demand among different groups of consumers. Thus it would be necessary to study and find out how exactly this market is structured and to estimate the level of influence on the competition. Oligopoly is definition to a specific situation on a market where there is a severe competition between several firms. This kind of market can be characterized by a number of aspects: considerable anxiety bout a market share along with special suggestions within it and efforts made in order to enhance loyalty of the brand and being prepared to make sacrifice in terms of profit to join share of market price war. Supermarket oligopoly market Table 1. Tesco’s market share Kantar Worldwide 2014 When talking about leadership Tesco has been ahead of the others in grocery market of the UK for more than 25 years (Humby, 2008). The main reason of such position of Tesco is the change being led in industry. Tesco was to be first to present the club card, the idea of sales on-line came out in Tesco, and it was first to attempt introducing of non-food store. The Tesco business has expended to extent when it has more than 2282 operation in 6 various formats of stores such as Extra stores, One-stop stores to name a few which are intended to fit every taste and each specific situation. Having this diversity in formats which is sound strategic approach made a great contribution to success of Tesco and the clients have the opportunity evaluate Tesco in the most efficient and convenient way. 2. Stores and pricing strategy There are about 900 Tesco stores which are operating as Express stores. And approximately the same number of Superstores and One-step stores which occupy 2nd and 3rd position among different formats. About 200 of stores are positioned as Metro and Extra stores, and the newest one is to be known as Home plus stores format. The distinction between these stores is that no food is sold in Home plus, thus different stores have a specific concept. According to Baye, the base for pricing strategies is a specific market situation and conditions, trends in economy and competitions aspects are also very important. Managers adopt pricing strategies based on economic forces and system and these strategies influence profitability ratios. In terms of Tesco, these strategies are: high quality of products and services, innovative skills for clients, immediate reaction to attendance, programs for enhancement sufficient delivery, valued brand, appeals of promotion etc (Tesco PLC, 1992). 2.3. PESTLE and SWOT analysis of Tesco Tesco’s PESTLE analysis studies the major external aspects that are sure to be influential for the company. There might be local, national and international political factors. In this respect many governments can be involved and Tesco might have to cooperate with Columbian politics in order to establish adequate supply of coffee (Baye, 2000). Factors in economic sphere also have large influence on business. Stock market fluctuations, increases of taxes are sure to threaten and injure Tesco’s bottom line. Social aspects are diversified and they can involve immigration influence and aspects such as fashion changes. New technologies have a great impact on business, this fact is based on introducing of online shopping which contributed to recent success of Tesco among its clients. The situation when external factors change might result in a number of problems with law. As any other huge organization Tesco is sure to feel the influence of the environment. For example, fossil fuel is used in Tesco’s transportation field. Main challenge in this aspect is to decrease this demand. To sum it up PESTLE analysis of Tesco is to examine each external factor thoroughly and study the manner in which these impacts change. Tesco’s SWOT analysis Strengths According with the information from Datamonitor 2014, Tesco is ranked 3rd biggest company in the world which operates more than 4 thousand stores in Europe, Asia and the USA. Through the years company showed efficient performance, which is the evidence of adequate strategies applied. Due to annual reports of the company its turnover is increasing every year by 10 percent in average (Financial Times, 2009). Weaknesses Taking into account recent years Tesco was not very successful as compared to other competitors. A lot of products were to be recalled due to bad quality and thus causing considerable losses, such situation happened in 2009 and this is not in favor of company’s relations with clients as well as brand reputation. One of the main weak points of Tesco company is the lack of diversification in geographic sense, as key operations are concentrated within the United Kingdom retail sector. This may cause systemic risks of the market in general (Financial Times, 2009). Opportunities The network of commercial portfolio of Tesco corporation is rising. The company managed to open over 700 stores and almost half of them are international. This diversification approach might play a crucial role in enhancement its economy of scale and at the same time cutting risk exposure to minimum. The site introduced in 2010 helped in attracting over 1 million new customers. The focus of the company is made on global expansion, and this step is to strengthen position in global market. Food retail is the strongest industry as having something to eat is the priority even during the hard times (Financial Times, 2009). Threats The shadow of financial crisis was drawn on the economy in general resulted in contraction to over 3 percent in 2009. The fact that Tesco is concentrated in the UK market can influence its financial position. The decrease in income and unemployment growth affected the behaviour of customers which in its turn affected company’s sales, especially non-food products. Despite of being the leader inn this sector over 15 years, since 2010 Tesco started to face severe competition, talking about Sainsbury’s, Asda and Morrisons (Mintel, 2010). Competition Table 4. Share price diagram As it can be seen from the diagram above Tesco and Sainsbury’s were engaged into severe competition during the period of 2011-2014. Beginning with January, 2011 up to January 2012 Tesco rates of share price were considerably higher than those of Sainsbury’s and reached the sum of 440 pence. The period of March, 2012 up to April 2013 these rates reached their approximate equality and these two giants were performing in the same directions. But beginning from July 2013 Sainsbury’s started to display increase in share price and it was sustained up to March of 2014 (Financial Times, 2009). Recent failures of Tesco Tesco as a major food retailer has become a main topic for discussion recently as can be seen from the news. The company’s assumption of having over-stated profits of half of a year by no more or less than 250 millions has caused serious debates about the board of directors company’s composition as well as the utilization of inadequate policies in sphere of accounting. Before the appointment held in October 2014, it appeared that board of Tesco didn’t have non-executive directors with experience in retail. This particular malfunction was an indicator that there were severe problems with knowledge within the board to question and challenge executives of the company in the most effective way( Baye, 2010). The treatment of the accounting was adopted and approved by the Audit board which afterwards signed off the profit figures. The problems in composition of the board and recognition of income are sure to lead to failures in corporate governance system as Hugh Wilmot states in his article (Financial Times, 2014). He claimed that code of corporate governance in UK doesn’t feel the need in appropriate experience of the non-executive directors and more than that malfunction in assessment of commercial income displays a failure in setting appropriate mechanisms of regulation in order to curb corporate power abuses. In this respect, reform is vital. The chain of Tesco supermarkets tends to be engaged into litigation, related to personal injury claims, staff dismissal and unfair attitude as well as treatment of suppliers. The tags that were used in 2005 as information collector on product movement were viewed as spy chips and received severe criticism. The other unpleasant issue happened few years ago when Tesco store failed to deliver products bough online to university campus and offered no apology and no money were returned. In 2013, a huge scandal eroded as the DNA tests revealed that horse meat was present in a vast number of meat products without having proper declaration. These issues managed to play a dramatic role in Tesco’s customers losses (Mintel, 2010_. 2.6. Porter’s five Threat of substitute products and services This particular threat is very low in food product sense and medium and even high for non-food products. Taking into account food aspect, the substitutes of main retailers are small convenience stores and organic shops. They are not considered a threat at all for stores like Tesco with hight quality of products and low prices (Financial Times, 2009). In this respect Tesco is making a step further by introducing express stores thus building borders to these shops not letting them enter the market. When talking about such items as clothes or anything else but food, here the threat is considerable (Mintel, 2010). Threat of entry of new competitors The level of threat concerning new competitors in food retail sphere is low as it requires large amounts of investments to sustain competitiveness and to build up the brand. The major brands in food industry also known as “the 4” such as Tesco, Sainsbury’s, Asda and Morrisons have captured the full market and account for over 80 percent of general shopping in the United Kingdom (Mintel, 2010). More than that, new entrants are to create and produce items at extremely low price to set their market value. In order to get planning autorisation from government on a local scale takes resources and time in order to create new stores which is a certain barrier for the new entrants. Intensity of competitive rivalry Talking about this particular aspect, it is worth mentioning the intensity of competitive rivalry is very high. Tesco is experiencing severe competition from the direct competitors mentioned above such as Sainsbury’s , Asda, Morrisons and Waitrose and they are all struggling with each other over prices, promotions and products all the way through. It is to be noted, that in different periods Asda and Sainsbury’s displayed growth in market share. Consequently, slow growth of the market indicated that the rise of the market shares of competitors intensified the level of rivalry and this fact is to threaten the leadership position of Tesco(Humby, 2008). Bargaining power of buyers The bargaining power of buyers is considerably high. In specific situations where there is a little differentiation of products and they are more standardized, the switching cost is rather low and customers are empowered to shift to another brand very easily. Customers are focused on low prices one way or another and having the opportunity of online shopping the prices can be compared and the best ones are chosen(Humby, 2008). Bargaining power of suppliers The bargaining power of suppliers is also very low. It is worth mentioning that suppliers are to a great extent interested in long-term cooperation with huge food retailers and losing these nets is a dreadful situation. In this respect, the market position of giants such as Tesco, Asda and, of course, Sainsbury’s is to be enhanced and strengthened by means of negotiations which can play a positive role in establishing sound connections and in acquiring the best and low prices from suppliers (Humby, 2008). Non-Price Competition Despite of the fact that strategies in terms of price play a crucial role in consumers’ expenditure enhancement as well as the reputation, non-price competition focused on other measurements for market occupancy increase are no less important in process of attraction of new clients. Customers are empowered to change the place of shopping provided the quality of service is not satisfying. Non-price competition involves a number of strategic approaches implying usage of advertising in mass media as well as marketing, systems of delivery, utilization of innovative systems such as online shopping. Analyzing Tesco’s performance by means of Annual Reports, it is evident that the proportion of people willing to chance brands are considerably low (Baye, 2000). Tesco uses non-price competitions to believe that the clients after finishing shopping would come back again. Management of each store in chain is concentrated on high quality service in order to bear existing clients as well as to attract the new ones. Effects of Tesco Market structure on producers and consumers Due to the fact that Tesco is the biggest land holder, company is considered to be viewed in a risky situation. Taking into account the previous success of Tesco there have appeared 3 major aspects that are to be estimated upon: 1. The manner in which Tesco uses products of its brand. 2. The offer to be inclusive, Tesco’s will to fit clients with high and low income. 3. Concentration on a customer in order to create value for clients being at the same stores. Nevertheless Tesco has been a subject of criticism for occupying the major part of the market through being extremely histile so that other companies are bound to be closed. But despite of this clients take benefits from the oligopoly of Tesco (Baye, 2000). To be more precise when supermarkets are supplied with goods at a lower price, theoretically it is profitable for customers as well as the store provides sound in-store services and convenient environment for shopping. Analyzing all the gathered data it is transparent that this market structure is mostly beneficial but still Tesco’s future in terms of customers reins very unclear. It is a big question whether Tesco will take the advantage of their market share, will Tesco start creating the monopoly and will the clients be able to change anything in this circumstances. Challenges from discounters Aldi and Lidl In the past year of 2014 Tesco has given free way for the famous discounters such as Aldi and Lidl which have experienced a significant growth by means of cheap and more comfortable offer rather than spending hours in immense supermarkets (Butler, 2015). All giants involved in famous “4” experienced sales drop down and at the same time Aldi and Lidl celebrated almost 30 percent growth. During Christmas time Tesco slashed their prices and this promotion was very simple and well advertized and thus made Tesco 65 percent cheaper than 2013, taking into account the same products (Butler, 2015). More than that this promotion resulted in being 20 percent cheaper than other competitors, including Aldi and Lidl. The analysts tend to believe that CEOs of the huge supermarket chains are to take serious steps through closing one of the five stores in oredr to recover from the dramatic change in shopping habits. The point is that the main problem of Tesco appears to be not the price at all, it is over-expansion that is to be fixed which resulted in more than 60 percent of stores about 50,000 sq ft. in comparison discounters such as Aldi are in pursuit of new locations and Lidl is notices to be opening about 30 stores this year, and Aldi is working on 65 new stores (Butler, 2015). The growth of these discounters primarily was influenced by growing quantity of products in stocks as well as introducing vas number of premium-price products; nevertheless analysts admit these strategies can come to exhaustion very rapidly (Baye, 2000). Evaluation Regardless of the situations and hardships such as wars, economic crises, disasters, food is something people need one way or another and this is what makes food industry play a central role in everyday life of people. Consequently food retailing sphere is overloaded with chains of supermarkets, varying from small markets to huge shopping malls in order to fit each and every taste and to fulfill the needs of customers from different social groups. In case of the United Kingdom Tesco is one of the largest food retailers that has rich experience and long time history within oligopolistic market. The fact that this corporation has been operating for almost a hundred years is an indication that the strategies and manners of conduct created and applied were chosen correctly as these components made it possible for the company to acquire huge customer base and become favorite place to shop. Of course, the business world is developing and growing and Tesco cannot but feel the competition within the industry and such competitors as Sainsbury’s and Asda have all the opportunities to win the struggle. It goes without saying, that it takes a lot of time and huge efforts to create a brand and establish a firm position for it within a market. Here Tesco is in favorable position and more than that this company is an undisputable leader when it comes to customers service. But nevertheless there is a certain threat coming from discounters that seem to grow and manage to gain more trust and devotion from customers. Thus, Tesco needs to consider high quality and severe supervision as the guidance for successful performance and in this case more is not better, and perhaps closing several huge stores and opening small ones with a certain density would play a crucial role in maintaining Tesco’s position and customers attitude. Apart from this diversification and expansion might be of great help in establishing sound global market position(Baye, 2000). Conclusion Looking back at the long-time history of Tesco, the company has come to suffer the biggest loss ever seen on high street in UK dropping from 6.4 billions as consequences of immense writedowns on the property portfolio value as well as the stock is considered. Dave Lewis who is chief executive of Tesco described this loss as a “big significant number”. Thus approaches to shape the future prospects of Tesco are to be considered and more shifts are expected to arrive. Despite of the numerous speculations and debates over potential disposals, Lewis stated that Tesco would keep searching for investment possibilities in order to guarantee business strength (Baye, 2000). What can be seen nowadays it is the rise of the new and strong basis for Tesco to be grounded on. Due to the fact that Dave Lewis occupies this position not for a long time and during this period a considerable progress was noticed in question of establishing the key strategic plans intended to bring competitiveness back, measures to protect and enhance the balance sheet, efforts to rebuild trust and absolute transparency which is the core of future perspective of Tesco. Executive committee engaged in Tesco is to estimate strategies progress on a local level within a corporation. All units involved in business possess aspirational targets for Key Performance Indicators or KPIs. These indicators are connected to objectives in terms of strategic planning as well as all units performance and they are monitored on a constant basis every month and the information is reported to board of directors. In Tesco’s case KPIs are to be standardized in to make sure information is relevant, clear and transparent (Baye, 2000). The success Tesco’s business in a market is not a chain of coincidence, it is a path of adequate and appropriate management along with leadership. There are three major ingredients such as vision, values and mission to established and combined and a certain manner in which business is run. Putting together intitiatives and recourses in pursuit of strategy must be supported by regular monitoring of KPIs disclosure of company at all levels. References Baldassarri, M. (1992). Oligopoly and dynamic competition: Firm, market and economic system. New York, N.Y.: St. Martins Press in association with Rivisita di politica economica, SIPI, Rome. Baye, M. (2000). Oligopoly. Bingley: Emerald Group Publishing Limited. Chiron, P. (2001). Tesco ([Eґd.] 2000. ed.). Paris: Eurostaf. Corina, M. (1971). Pile it high, sell it cheap: The authorised biography of Sir John Cohen, founder of Tesco. London: Weidenfeld and Nicolson. Friedman, J. (1983). Oligopoly theory. Cambridge [Cambridgeshire: Cambridge University Press. Humby, C., & Hunt, T. (2008). Scoring points how Tesco continues to win customer loyalty (2nd ed.). London: Kogan Page. Tesco Case Study How Tesco Became the UKs Largest Retailer. (2011). Place of publication not identified: Datamonitor Plc. Tesco Non-Food Case Study Non-Foods Hold the Key for Tesco Future Growth Strategy. (2007). S.l.: Datamonitor Plc. Tesco PLC. (1992). Watford: Institute of Grocery Distribution Read More