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Economics for Business: Tesco - Essay Example

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Economics is a social science whose concepts can be readily applied to any business organization. In fact, it is irrefutable that the operation of business entities is being strongly governed by the different economic principles, such as the law of supply and demand and concepts such as elasticity…
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Economics for Business: Tesco
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Download file to see previous pages This field shows how business entities are affected and respond to external problems such as oil price increases and currency fluctuations.
This report will analyse the operation of Tesco PLC using an economic point of view. The first section will apply microeconomic concepts of supply, demand, and elasticity. Afterwards, it will also expose three economic challenges which are faced by the company in short, medium, and long term as well as recommend possible solution to these problems. The paper will conclude with its findings.
"Our core purpose is, 'To create value for customers to earn their lifetime loyalty'. We deliver this through our values, 'No-one tries harder for customers', and 'Treat people how we like to be treated'."
Tesco is an international supermarket chain based in the UK, specializing in a range of products including; clothes, consumer electronics, consumer financial services, internet services and consumer telecoms. For the end of the 2005 financial book year it generated a net income of 33.974 billion with a pre-tax profit of 1.962 billion. According to TNS Superpanel, Tesco owns 30.6% of the UK grocery market and that 1 out of every 8 spend in the UK on retail sales is spend at Tesco.
With Tesco supplying 30.6% of the UK grocery market, out of a population of +- 60.6 million (CIA, 2006 est) it is assumed they have a customer base of 18.5 million. Any change in the market environment will have a major effect on Tesco grocery sales due to its large share in the market it caters to. If for example there is an increase in the fuel price, which will result in subsequent increase in the cost for grocery distribution and delivery will adversely affect the prices of groceries. This will essentially cause a surge in total demand and will be felt by the company as a drop in revenue.
Figure 1: Effects of Change in Demand
Elasticity
As can be seen from graph 2 a change in price will negatively influence the demand, this lower demand will result in lower level of sales and can also squeeze the net income of Tesco. For the large retailer, with its huge UK customer base this can result in a major loss of income, and due to the fact that they work on a very high amount of sales with a very marginal profit margin on each product, such a reduction in demand can seriously affect their bottom line.
What can also be seen from the graph are the huge movement on the demand side with a small price increase. This implies that the general market of Tesco is very elastic or price sensitive. A lot of factors also contributed to the price elasticity of demand. One of which is the presence of competitors who can charge a lower price should Tesco choose to impose price increases. The rise in prices is always met by decreases in demand which reflects the customers' price sensitivity. Tesco recognize this as it established a product line which caters to highly price sensitive customers. This product line is called Value by the retail giant, indicative of what it offers to the buying public.
A good illustration of how prices affect the buying behaviour of the public is the analysing the effect of a general rise in the prices of grocery items in Tesco. When grocery prices increase, ceteris paribus, people tend to buy less quantity of it as their ...Download file to see next pagesRead More
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