Nature of the Competition in the Retail Grocery Industry within Which Tesco Operates - Assignment Example

International Management Decision Making Qs Nature of the competition in the retail grocery Industry within which Tesco operates: Jack Cohen found Tesco in 1919. His discovery emerged from a measly investment of 30 pounds on his serviceman’s gratuity in a grocery stall. Tesco Tea was the first big private brand by Tesco. The name TESCO itself was coined via a combination of the initials of the tea supplier TE Stock well. Tesco launched its operations in 1929 in UK. Cohen had been very impressed with the sub market culture in America and wanted to explore the same in UK. Today, Tesco has made waves in the super market in the industry. In terms of revenue it is the third largest retailer in the world and in terms of profits it is the second largest retailer in the world. The market in which Tesco operates is a very competitive market. The retail grocery market in UK is home to hundreds of firms but the competition revolves around 4 major players in the market. These include Tesco, Asda, Sainsburry’s and Morrison’s. The overall firm concentration of these four firms is 76%. Thus, the nature of the market in which Tesco operates is an oligopoly. In an oligopoly market, a few larger firms dominate the market and the industry. The UK retail and super market has become increasingly concentrated in the last couple of year. With very few players in the industry, the market share of each of these players continues to rise. This is an oligopoly market and under the oligopoly theory these are the following basic characteristics that govern the market ; the competition is non-price based; there is intensive branding and brand loyalty; prices don’t fluctuate; the competitors are extremely interdependent on each other; the barriers to entry are strict; there is economies of scale ; a lot of focus on advertisements; every move by competitors is followed and looked at and the potential for a collusion. All these aforementioned characteristics prevail in the market in which Tesco operates. There the competition is not just about the product that is sold in the stores, but the overall experience that these super markets offer to their customer. Tesco’s strategy Tesco’s market share as of December 2009 was 30.5%. In the last couple of year its market share has risen above 25%. The company lay it’s foundations on the basis of this idea : “Pile it high and sell it cheap”. Tesco started off from small service stores initially and then went on to expand its operations nationally and globally. In 1956, Tesco opened its first self service supermarket. During the 1960s, Tesco continued to expand and acquired various store chains. Tesco’s primary aim was to focus on low pricing. The biggest obstacle in its way was the Retail Price Maintenance Act. Under this act, large retailers could not charge below a certain agreed price from their suppliers. In order to do away and overcome this obstacle, Tesco introduced the trading stamps. They were given to customers when they purchased products. The trading stamps could be traded for cash and gifts. When RPM was abolished in 1964, Tesco was able to offer competitively priced products to customers directly. Tesco’s global success was the result of a large number of well thought and well decided steps undertaken by the leadership at Tesco. Soon the leadership at Tesco focused on the following main areas: 1. Their core Business in UK 2. Their international operations 3. Venturing into non-food sector and retail services 4. Tesco. Com The core business in UK was the most critical art of their business. It was home to above 2.5 million people employed by February 2005 in 1779 stores. The UK business was important because it accounted for more than 80% of the total sales of Tesco. Thus to look after their business operation Tesco expanded into four different format of stores. They were Express, Metro, Super stores and Extra, each segmented for a different type of consumer market. On the other hand, Tesco also continued to innovate its product lines and product offerings for its customers. The center of all strategies implemented by Tesco was their diversification strategy. This strategy laid down the roots of success of Tesco in the last couple of years. The new businesses that it has created in the last 12 years in UK and globally have been very competitive and profitable. Qs 2: The nature of a competitive market and contestable market Report to the Competition Commission We, the four leading retailers in the UK grocery industry are writing in to tell you how the UK grocery and retail market is still very contestable. We agree that there is a high concentration ratio, but irrespective of that, the market is highly contestable and the concentration ratio will not have detrimental impact on the consumer interest. According to William Baumol, contestable market is one in which “ an entrant has access to all production techniques available to the incumbents, is not prohibited from wooing the incumbent’s customers, and entry decisions can be reversed without cost.” (Market structure and competiton) In a contestable market there are low barriers to entry and exist. Thus there is always the potential for suppliers to come in the market and provide fresh competition to the suppliers that exist in the market. In UK’s retail super market, the suppliers can still keep coming in. The market is still highly contestable and steps taken by the 4 retailing giants will always be in the interest of the consumers. No step will be impede the interest of the consumers. Contestable markets are very different from perfectly competitive markets. In a contestable market, every firm within the market can produce one specialized and differentiated product. This means goods and services cannot be substituted for each other. The UK retail market has all the three necessary conditions for contestability: These include availability of perfect information and sources in the market. There is complete freedom in the market to advertise and to enter a market. The sunk costs are incurred when setting up the business. Sunk costs are ignored in such a market structure because they represent a barrier to entry in the industry and prevent new entrants from coming. In case they fail, all their investment goes down the drain. There are various contestable markets which are already operating in UK. For instance Desktop publishing for magazines; Internet Service Providers – the entrance of Freeserve in 1999 created waves; the Electricity and Gas supply market has also become contestable in UK;OFGEM has taken price caps because it believes that contestability has hit an acceptable level. Parcel delivery has also become contestable and will soon expand its horizons to household mail services. Similarly Opticians market has also gained momentum in this field. Some of the low domestic airlines such as Go, Buzz, BMI-Baby and Ryan Air have entered in the market. Even the domestic retail clothing industry has become contestable. It enjoys above 15% of the UK clothing market. Some of the big names are Matalan, TK Maxx and Primark. Thus, you can see that contestable markets don’t harm the interests of the consumers. Some other emerging contestable markets include the desktop publishing market for magazines, the ecommerce market and household utilities market. There are many countries that have come up with favorable policies to support contestable markets in UK. They work for the welfare of the competition as well as the consumer. Perhaps, your commission can try that. For instance, some of the policies could aim at de-regulation and tougher competition laws. This means cutting down on barriers to entry in the market. Utilities and parcel market. Thus irrespective of high concentration ratios, in the aforementioned industries consumer interest was not undermined and lived up to the expectations of the market. Qs 3: To the Competition Commission, I am writing on behalf Tesco Plc and request you to consider for the bid for Safe way’s take-over. Tesco enjoys a commanding position in the market. The share price of the company has risen by 25% in less than 2 years and we have 30 % market share. The competition in the UK retail grocery industry is already very intense. Most giant retailers would be fighting for Safeway in some way or the other. Losing the bid for anyone will obviously lead to the inevitable ; coming under intense market pressure due to rising competition. I suggest that you consider us for the bid because we will produce economies of scale in the market. Our economies of scale will ensure that the consumer interest is never undermined and will work in alignment with the UK anti-competitor policy. We will create economies of scale through 3 main ways. These include 1. Specialization 2. Bargaining Power and 3. Through Indivisibility of resources We will bring about economies of scale via specialization through break down of production into smaller and separated tasks ; utilizing our resources efficiently. The efficiency will come from our specialized work force and specialized equipment and manufacturing processes that we will employ. We will also bring about economies of scales by doubling the amount of raw materials we will purchasing every month. As a result, we will be better able to negotiate our prices with the surprises. We understand the anti-competitive policy in UK but giving the bid away to Morrison’s will lead UK retail market to a more monopolistic structure. We hope that you understand that we will not violate this legislation under any circumstances. The other competitor running for this bid is Sainsbury. They already have 17% of the total market share and Safeway is at 11%. This means that if they are given the bid, the market will become further more concentrated. Similarly other competitors like Asda and Wal-Mart also enjoy 25% share in the market. Even if they take over the violation of legislation is likely. While Morrison’s will stay at their 25% market share by selling some of the Safeway stores, we plan to do the same by promoting economies of scale. This will keep the grocery sector of UK at bay with respect to prices and competition. If the bid is given to us, there will be no market distortion and we assure you that. We understand your fears regarding the rules of the competition authorities. The diversity of products offered by grocery retailers will not be compromised if the bid is given to us. We are completely aware of our responsibility as the largest retailer in the UK market and the importance of the role of the retailers for not just the consumers but also for the national economy. If the bid is given to us, the competition will not rest with just us. There will be a diverse product pool available to consumers to choice from. Moreover economies of scale will ensure that the competition does not restrict other retailers from entering in the market. The new entrants will keep coming. If you really need to keep a check on the market structure, then why don’t you look at other factors, such as the cost of the land, the price competition and the intensity in various market levels and the relations of the suppliers of most retailers? Having said that, granting this bid will not disappoint you for sure. Our economies of scale is just what this market needs and will promote diversity in products and offers to the customers. Works Cited Market structure and competiton. (n.d.). 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