Reasons Leading To the Loss of Competitive Advantage of Tesco - Research Paper Example

Reasons Leading To the Loss of Competitive Advantage of Tesco

Summary

Tesco, which is a leading UK supermarket retailer, has been losing its share of the market to its local competitors Aldi and Lidl. The current trends of market share, annual sales, advertisement expenditure, percentage share in total retail sales has been derived for the three companies. A critical analysis has been presented in this paper, which highlights the inability of Tesco about differentiation, marketing and advertising, sales and promotion and space allocation strategies and comparing the same with the major competitors, Aldi and Lidl. By using Porter’s Generic Strategies and value chain analysis, the main causes for the decline in market shares of Tesco has been illustrated and further the competitive opportunities have been recommended that would help in the progress of the brand.

1. Introduction and issue identification

Tesco used to be the biggest retailer of UK during 2000’s. However, it has lost its customers to discounters Aldi and Lidl who were two of the largest competitors of the brand (Kukreja and Gupta, 2016).

Figure 1: Trends of market share of Tesco, Aldi and Lidl from 2011 to 2015 (%)

(Source: Mintel, 2015)

Figure 1 shows how the market share of Tesco has been declining over the last five years fell from 25.4% in 2011 to 24.2% in 2015. The market share of Aldi, on the other hand, has been increasing during the same period increased from 2.1% in 2011 to 5.5% in 2015. The market share of Lidl increased from 2.4% in 2011 to 3.7% in 2015. It is evident from the figure that discounters Aldi and Lidl showed an increasing trend in their share of the market whereas Tesco, which used to be the biggest supermarket of UK, showed a decreasing trend.

Figure 2: Annual sales per outlet of Tesco, Aldi and Lidl from 2010 to 2014 (£000)

(Source: Mintel, 2015)

Figure 2 shows that the annual sales per outlet of Tesco had decreased from 15,613 in 2010 to 12,698 in 2014. Aldi’s annual sales per outlet showed opposite trends where it increased from 4,974 in 2010 to 12,375 in 2014. The increase for Lidl was from 5,395 in 2010 to 7,717 in 2014. So, what reasons lead to loss of Tesco’s competitive advantage?

2. Aim

There are many reasons including external environment, internal environment, corporate strategies, etc. that lead to Tesco lose its competitive advantages. Exploring and identifying the reasons that lead to Tesco lose its competitive advantages help companies to adapt efficiency strategies for their business and to achieve competitive advantages. The aim of this paper is to analyse the internal reasons lead to loss of Tesco’s competitive advantage compared to its competitors Aldi and Lidl by using Porter’s Generic Strategies and Value Chain.

3. Clarification of theoretical context

3.1 Competitive advantage

The conditions that allow companies or countries for producing a good or service at a lesser price for customers are known as competitive advantage (Porter, 2008). These conditions allow companies to generate superior margins and better sales than its competitors. Many factors attribute to competitive advantage, which include cost structure, product quality, intellectual property, brand, network distribution and customer support (Porter, 2008). Competitive advantage is an attribute that enables companies to perform better than its competitors (Vorhies and Morgan, 2005). It includes factors like access to natural resources, geographic location, access to new technology, highly skilled labour and barriers to high entry.

Competitive advantage helps to outperform rivals and enables a firm or company and its shareholders to generate higher value. Sustainability of competitive advantage makes it difficult for competitors to nullify the advantage (McWilliams and Siegel, 2011). Comparative advantage and differential advantage are the two major kinds of competitive advantage (Sigalas, Pekka and Georgopoulos, 2013). It can be achieved by offering better value to a company’s clients. These unique services are recognized by target markets. Consumers are interested in products that have lower prices and higher quality and advertising such products and services has a positive effect on the competitive advantage (Sigalas, and Pekka, 2013).

3.2 Porter’s Generic Strategies

Porter’s generic strategies show how a company pursues competitive advantage across the market scope that it chooses (Bordean, Borza, and Glaser-Segura, 2011). There are three generic strategies. They are either low cost, differentiated or focus. Either a company chooses any one type of scope, i.e. focus or industry-wide that offers its products across various segments of the market (Bordean, Borza, and Glaser-Segura, 2011).

The framework of Porter’s Generic Strategies is useful for gaining a comparative advantage (Bordean, Borza, and Glaser-Segura, 2011). Porter’s generic strategies perform an examination of the environment and then take decisions for achieving a desirable position. These strategies are used for attaining improved performances for gaining competitive advantage. The constituents of generic strategies include cost leadership, differentiation, cost focus and differentiation focus (Nandakumar, Ghobadian and O'Regan, 2011). Competitive advantage includes cost leadership and differentiation strategies within its broad segments; whereas, the narrower industry segments aim at gaining a cost advantage with the help of cost focus and differentiation focus strategies (Allen and Helms, 2006).

3.3 Value chain analysis

Value change analysis is a tool, which is used for analysing the internal activities of a firm or organization. The goals of this strategy tool is recognising the activities, which are most valuable for the firm, and the ones that could be improved for the provision of competitive advantage (Fearne, et al., 2012). Value chain analysis comprises of activities that a firm, which operates in any specific industry, performs for delivering a valuable good or service. This concept is derived through business management and was described by Michael Porter for the first time in 1985 (Ponte and Gibbon, 2005).

Inbound logistics

Arrangement of the inbound movement of machine parts, materials and finished inventories received from suppliers, assembly plants, warehouses and retail stores to manufacturing units (Fearne, et al., 2012).

Operations

This is concerned with the management of conversion process of inputs to outputs (Koc and Bozdag, 2017).

Outbound logistics

This is the process, which is related to storing and moving the final output and the related flows of information from the production end to the user end (Soosay, Fearne and Dent, 2012).

Marketing and sales

Sale of a product and the process for creation, communication, delivery and exchange of offerings that is valuable to consumers, clients, business partners and the society (Gereffi, Humphrey and Sturgeon, 2005).

Service

This includes the overall activities that are required for keeping the products or services working efficiently for the customer after its sale and delivery (Ponte and Gibbon, 2005).

4. Evaluation and analysis

4.1 Differentiation

According to Porter’s generic strategies, a firm following differentiation strategy wants to retain its uniqueness in the industry along dimension, which is highly valuable to the customers. The firm selects attributes that are perceived as important by many consumers in an industry and positions itself in a unique way for meeting those needs (Allen and Helms, 2006).

Figure 3: Differentiation and trust of different brands in UK supermarket industry

(Source: Mintel, 2015)

Figure 3 shows the differentiation and trust of different brands in the UK supermarket industry, namely Tesco, Sainsbury’s, Waitrose, Aldi and Lidl, etc. It can be seen from the figure than Tesco is amongst the lowest differentiated firms in the industry which carries out around 30% differentiation whereas its major competitors, Lidl and Aldi are the top differentiated firms which carries out around 50% differentiation. According to Porter’s generic strategies, a successful differentiation strategy is achieved when:

• Exclusivity is carried out
• The firm has superior marketing skills
• Product innovation is carried out instead of process innovation
• Research and development is applied
• The firm has been able to customer support (Allen and Helms, 2006)

Lacking of differentiation may be one of the major reasons that lead to Tesco lose its competitive advantages. As included in the differentiation segment of Porter’s generic strategies, sometimes firms discover that buyers like some unique feature in the products sold by their competitors and they try to introduce similar features in their own products in order to boost up sales (Bordean, Borza, and Glaser-Segura, 2011). There would be firms in the market who deal with products with similar features because of which it would be difficult to differentiate the products. Owing to these reasons, if Tesco does not differentiate, the profit margin of its business might get affected (Mukerjee, K., 2007).

Aldi and Lidl are two of the biggest competitors of Tesco. Both these brands are two of the most differentiated retailors in the UK supermarket industry. They marketed exclusive products in accordance with the requirement of differentiation in Porter’s generic strategies. The firms had very strong marketing skills compared to other existing competitors in the market. They used product innovation while other existing firms in the market had been using process innovation going against the requirement of differentiation according to Porter’s generic strategies. Aldi and Lidl had been extensively carrying out research and development in their production processes and the firm were successful in retaining their customer support. These led to a gain in the competitive advantages of both Aldi and Lidl.

According to porter’s generic strategies, differentiation strategies helps companies to focus on the product’s cost value as compared to other similar products available in the market by creating a perception of value among buyers and potential buyers (Nandakumar, Ghobadian and O'Regan, 2011). It allows businesses to compete in other areas than price. A successful strategy of product differentiation leads to the creation of brand loyalty among consumers (Allen and Helms, 2006). A strategy, which focusses on the product quality and design, may lead to the creation of the perception that no substitutable products are available in the market.

4.2 Marketing and advertising

According to Porter’s value chain analysis, marketing and advertisements is involved with activities, which has close association with provision of a means through which consumers can buy the product. The customers are induced to purchase by means of advertising, promotion, sales force, quoting, channel selection, channel relations and pricing strategies (Fearne, et al., 2012).

Advertising helps a company to introduce a new product in the market, expand the market, increase sales, fight against competition and enhance the good will of the company (Porter, 2008). It also helps to provide education to customers, eliminate intermediaries from, the market scenario, produce products of better quality, render support to salesmanship, provide more employment, reduce prices of newspapers and magazines and ensure a high living standard (Gupta, 2009). Marketing is very important for the strategic development of any company (Doole and Lowe, 2008). Marketers directly influence the development of the communication processes and they are responsible for advertising the value of the products and services to customers. Sales, advertising and strategies of marketing teams for the promotion of products are included in marketing as a whole. There are many other advantages of marketing, which includes development of ideas regarding new products, increase in sales, recognition of the brand and savings in cost.

Figure 4: Total advertising expenditure of Tesco, Aldi and Lidl from 2011 to 2014 (£)

(Source: Mintel, 2015)

Figure 4 shows that the advertising expenditure of Tesco experienced a decline during the period 2011-2014 from approximately £140,000,000 to £100,000,000 whereas, the advertising expenditure of Aldi raised from approximately £20,000,000 to £70,000,000 and that Lidl raised to £50,000,000. This shows that Tesco took lesser initiatives to advertising as compared to its competitors. It may be another major reason that leads to Tesco lose its competitive advantages. According to Porter’s value chain, marketing is a secondary function to the primary offerings of any business (Gereffi, Humphrey and Sturgeon, 2005). If a brand cuts down advertising expenditures, its presence in the both digital and traditional media does not disappear or its customers do not forget about the company after it had marketed itself for years. Aldi and Lidl carried out effective advertising and promotion of their products with increasing expenditure in advertising, which somehow increase their sales and competitive advantages. Tesco failed in effective implementation of advertisement and marketing strategies, which has negative influence on its competitive advantages.

4.3 High prices and lack of promotions of Tesco

Tesco, which has been popular for offering the cheapest prices in the market, has been facing difficulties due to Aldi and Lidl’s growing popularity. The company provides many multi-buy deals and special offers favouring consistent low prices. However, it has not been able to offer the same prices as Aldi and Lidl even after cutting down its own margins for reducing costs. Aldi’s market share rose from 1.4 to 5.4 percent during 2005-2015 and Lidl’s market share rose 1.8 to 3.8 percent during the same period (Cat and Nicholas, 2017). This increase in the market share of both Aldi and Lidl could have been possible due to its low prices as compared to Tesco. Tesco cut down prices of its 380 brands by 25% but could not gain as much market share as Aldi and Lidl. The low prices of Aldi and Lidl resulted in an increase in their own and a loss in Tesco’s competitive advantage. Lidl has increased its marketing expenditures by 59.5% whereas Aldi has increased it by 66.2% (Cat and Nicholas, 2017). Although Tesco has been the most popular supermarket chain of Ireland but Aldi and Lidl have gained the biggest share of the market.

According to Porter’s value chain analysis, the major determinants of promotion management are marketing and advertising (Fearne, et al., 2012). The advertising and promotions of Tesco lacked effectiveness. The promotional measures were not as good as Aldi and Lidl’s and so Tesco failed to attract a large customer base. Aldi and Lidl followed a marketing strategy, which was both cost and time effective, and so it retained larger number of customers (Grewal, Levy and Kumar, 2009). The firms carried out impressive advertisement and promotional measures, which induced customers to purchase their products. The prices of Tesco were also higher than that of Aldi and Lidl leading to a loss in its competitive advantage.

4.4 Operation Space Allocation

According to Porter’s value chain analysis, operations management involves activities that have close association with transformation of inputs into final goods (Fearne, et al., 2012). These activities include machining, packaging, assembly, maintenance of equipment, testing, printing and facility operations (Fearne, et al., 2012).

Space management or effective allocation of space increases sales and profits of the company (Hwang, Choi and Lee, 2005). The main purpose behind merchandising is to attract customers, slowing down customers so that they can have a closer look at the displayed goods and items and ultimately transform their thoughts into purchasing decisions (Hariga, Al-Ahmari and Mohamed, 2007). The increased sales and profits result from:

• Ranking the product sales for the identification of the best and least contributors to gross margin. The retailer can perform adjustment of space in a way through which profit can be maximized (Murray, Talukdar and Gosavi, 2010).
• Placing the related merchandise beside the bestselling products increases buying impulses of customers (Murray, Talukdar and Gosavi, 2010).
• Designating locations for necessity products so that customers can easily find them (Murray, Talukdar and Gosavi, 2010).
• Usage of planograms for maximising social impact (Murray, Talukdar and Gosavi, 2010).

Figure 5: Overview percentage linear shelf space split in front of the checkout area by Food and Non-alcoholic drinks, Alcohol, Grocery non-foods, and General merchandise

(Source: Mintel, 2015)

Figure 5 shows the percentage of linear shelf space allocated in front of the checkout area for food and non-alcoholic drinks, alcohol, grocery non-foods and general merchandise. It can be seen from the figure that Aldi and Lidl have the highest space allocated for food and non-alcoholic drinks whereas Tesco has the lowest space allocation for the same. Aldi has 70.2%, Lidl has 72% of space allocated for food, and non-alcoholic drinks whereas Tesco has only 45.7% of its space allocated for such product segments (Mintel, 2015). Tesco failed to attract customers, as they were not efficient in allocating linear shelf space for the necessity commodities in front of the checkout area. Aldi and Lidl on the other hand had allocated larger space for food, non-alcoholic drinks, non-food grocery, alcohol and general merchandise, which helped them to gain a greater competitive advantage and market share as these stores attracted greater number of customers.

Figure 6: Sales as % all retail sales of different brands in UK supermarket industry

(Source: Mintel, 2015)

Figure 6 shows the sales as percentage of all retail sales of different brands in the supermarket industry of UK. It can be seen from the figure that both Aldi and Lidl sales of food items account for 85% of the total retail sales. The food item sales of Tesco accounts for 63% of total sales, which is much lesser than that of Aldi and Lidl because Tesco has a low percentage of linear shelf space allocated in front of the checkout area for food and non-alcoholic drinks. The effective strategies of operation space allocation incorporated by Lidl and Aldi have gained success in attaining competitive advantage in the supermarket industry. In contract, Tesco, who has a low percentage of linear shelf space allocated in front of the checkout area for food and non-alcoholic drinks lose its competitive advantages.

The business operation of Aldi and Lidl reflect the fact that they have knowledge about their customer demands. Aldi makes use of a lean approach to operate its business in order to offer quality products at fair prices to its customers. Hence, they allocate their space in a way so that customers gets a variety of food and non-alcoholic products and gain competitive advantage as it is able to charge competitive prices for these products (Cleeren, et al., 2010).

5. Conclusion

Tesco has been facing severe competition from discounters Aldi and Lidl, which lead to a fall in its market shares. Tesco has been charging higher prices than its competitors because of which the retailor has not been able to attract greater number of customers. Tesco’s pricing strategy follows cost leadership and not product differentiation. The advertising expenditures of Tesco are also lower than of its competitors Aldi and Lidl. The space allocated in Tesco stores for food and non-alcoholic beverages has not proven to be adequate and due to ineffective space allocation strategies of the store, it gradually lost its customer base. All these points are the reason behind the downfall of Tesco’s market share in the world market. A critical analysis has been performed in this paper using academic evidences and Porter’s Generic and Value Chain analyses. Making use of these theories, a study on the degrading competitive advantage of Tesco has been done in this paper.

6. Recommendations

The strategic decision of Tesco should be the trade-off between cost leadership and differentiated retailer. By maintaining effective differentiation strategy along with efficient promotional activities, Tesco would be attracting majority of the customers and thereby gain competitive advantage amongst the rival firms in the retail industry. Tesco should use pricing strategies that would help the firm in providing their customers with products at low prices. This would help in acquiring new customers and retaining the old ones. It is more feasible for Tesco to invest in advertising because it has been consistent in losing its market share to its competitors. Tesco should put more focus on online advertising including social media advertising, E-WOM, chat group advertising, etc. (Dehghani and Tumer, 2015). Online advertising forms a major determinant of marketing and advertising and adopting these measures might prove to be beneficial to the retailer and help it to gain a large customer base (Dehghani and Tumer, 2015). Tesco should allocate more linear shelf space in front of its checkout area for food and non-alcoholic beverages in order to attract more customers as buyers are mostly lured by these strategies. It should place its non-food grocery products and general merchandises in a way that is easily noticed by customers. Tesco should allocate space differently for alcohol as well in order to ensure the ease of customers when they make decisions about purchasing different items at the store.

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