Tesco Case Study
A Case Study Documenting Tesco’s Success and Challenges.
Tesco is one of the world’s leading retailers with over 2100 supermarkets, in Europe, US and South East Asia. The group has interests in grocery, non-food items, financial services and telecommunications. It is committed to reducing prices for customers and offering the best value. It seeks to help customers spend less. For 2007, sales were £42,633.4 (mill) and it experienced sales growth of 21.9%. Tesco has over 400,000 employees.
Some of the key reasons for Tesco’s success include:
Tesco has been particularly successful because of its powerful brand. It has a reputation for value, low prices and for being customer focused. Its brand equity and associations have helped the company to expand into new sectors and markets. Tesco has also been strong in public relations, advertising and building profile in catchment areas on a local level. This local approach to marketing appears to be a key driver for success.
Tesco has a good range of products, including own label products. It seeks to provide excellent customer service, and ensure high levels of customer satisfaction. The own label products have helped strengthen profits for the group, and it broad appeal through good, better, best (finest ranges) caters for the widest consumer audience.
Aggressive overseas expansion has helped to keep profits high. The organisation has expanded into Eastern Europe, emerging nations such as China and South Korea and even the US, through mid market supermarkets known as, “fresh and easy”. Its strategy of being close to the customer has been assisted in the UK specifically, when Tesco developed different formats for shopping (convenience, metro, express, superstores). It has been the best retailer for format delivery and obtaining some of the best retail positions.
It gained a first mover advantage when it launched Tesco.com, which is one of the biggest and most successful online retailers. This part of the business continues to grow market share and has provided a channel to sell non-food items and other areas of the business including finance.
Information technology has revolutionized the retailer, not only in stock-control and distribution worldwide, but also in terms supplier management. It has enabled better I) retailer-manufacturer innovation ii) shorterning of decision making and greater knowledge sharing.
Tesco is one of the most advanced companies in consumer understanding aided by IT (e.g. Dunhumby and TescoClubcard data). Consumer data has i) shaped product offerings ii) ranges iii) given Tesco a better understanding of consumer segments and shopping profiles and iv) helped marketing to build loyalty and develop promotion offerings that suit target groups. This level of sophistication has helped Tesco to remain leader within the UK market.
Suppliers are internationally sourced, and Tesco gains scale economies from its large buying volumes. This has enabled the company to keep prices down and supported its low price strategy aimed at the broad consumer market.
However, the company has been criticized for its management of suppliers and clashes with the farmers union. There has been growing opposition to the supermarket because of its size, and the government (through the Monopolies and Mergers Commission) has been involved in ensuring competitive markets in the UK. Recent acquisitions such as T&S stores, have led to a high concentration, with only few dominant players within the market.
The organisation has a diversified product portfolio, which includes telecommunications, finance, insurance, which provides cross and up sell opportunities to customers. Profits have been invested to support research and development, and its aggressive international expansion plans.
Challenges and outlook for the Tesco Stores Ltd:
Intense competitive rivalry within the UK retail market is forcing retailers to look at cost savings and ways that they can differentiate from competitors. The retail market is mature and oligopolistic in its nature, with a few major multiple retailers dominating the market. Intense competition between the large retailers has to price wars with Asda and Tesco and low price competitors - Netto and Lidl are reducing margins for the industry as a whole.
Tesco has looked to increasing efficiency and effectiveness. Cost savings have been sought from the supply chain, through better use of IT, and from policies and management of suppliers to ensure the greatest value to the business and customer.
The market is highly regulated. The monopolies and mergers commission has been monitoring the market to ensure fair competition.
The government has also been active in planning restrictions for new store openings. Growth appears to come from gaining new customers, improving product offerings, and from higher margin items such as clothing, appliances and other non-food offerings. Many retailers have looked overseas to fuel growth.
Customers are still king. Success in the industry is still dependent on how well the retailer can meet the customer needs. Price, particularly in the UK has become a dominant feature. If the UK and US enter a recession, this will put added pressure on retailers to keep prices low. Household budgets may tighten, which could lead to reduced consumer spending.
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Tesco PLC is the largest food retailer in UK with a market share of 30.6%. It has expanded its operations across fourteen nations in Europe, Asia and North America (Telegraph media group (2011). It is the third largest retailer globally in terms of revenue earning after Wall-Mart and Carrefour and in fact, the second-largest in profit making after Wall-Mart (Nwagbara, 2011, p. 56). According to Nwagbara (2011, p. 56), Tesco’s commercial portfolio comprises of 450 superstores which offer both food and non-food items such as DVDs, phones and books, 170 metro stores which offer a variety of food products in towns and city centers and over 950 express stores offering more than 7,000 food products. Tesco has also been engaging in online retailing recently through Tesco Direct and Tesco.com. Tesco was established by jack Cohen in 1919 and launched its first store in 1929 in London (Nwagbara, 2011, p. 56). However, this company has evolved to become the market leader in the UK food retailing industry over the decades. This paper examines the impact of Tesco’s vision, mission and stakeholders on its overall success. Secondly, it examines six segments of Tesco’s macro environment that affect its performance. The Porters five forces analysis is conducted in order to determine the competitive advantage of this corporation. The paper also assesses the strengths, weaknesses, opportunities and threats posed by the internal and external environment of this firm. The unique strategies adopted by this firm in order to attain a competitive edge are evaluated. The paper briefly examines the effectiveness of corporate governance mechanisms and leadership within the company. Finally, it looks at the ethical conduct of this company and assesses its impact on the performance of this corporation.
Role of Tesco’s Vision, Mission and Stakeholders
According to Besanko et al (2009), a firm’s vision and mission statements play an important role in developing consumer royalty. Tesco’s vision statement reads “Our vision is for Tesco to be most highly valued by the customers we serve, the communities in which we operate, our loyal and committed staff and our shareholders; to be a growth company; a modern and innovative company and winning locally, applying our skills globally” while the vision statement reads “creating value for customers, to earn their lifetime loyalty.” Clearly, the vision and mission statements of Tesco focus more on the target market and not the products. They focus on the benefits that the customers are going to derive from the company and its products. According to Besanko et al (2009), such statements highly touch on the emotions of the consumers. Consequently, they contribute to building of loyalty among the consumers of the firm’s products. Apart from the vision and mission statements, some primary stakeholders of this company namely, particularly the leaders and the employees have played an important role in enhancing the successful performance of this company. After Philip Clarke took the leadership of this company, it started marketing itself using the phrase “”The Tesco Way.” This played a great role in displaying the firm’s values, purposes, principles and goals. This helped the company to expand internationally. Also, the firm changed its strategies to focus on technology under Leahys leadership, which has marked a lot of success. The employees of this company have also contributed to the development of consumer loyalty by being hard working and always being positive to customers.
Tesco Macro Environment Analysis
The environmental or external factors that affect the decisions taken by Tesco are grouped into six categories as discussed below:
The current political issue affecting Tesco are the changes in corporate tax rate. The government of UK announced in the 2012 budget that it would reduce corporate tax by 1% for two consecutive years (2012 and 2013) from 24% to 22% (Tesco, 2012a). This will save this company a lot of funds and make it more financially stable.
The major economic issues affecting Tesco currently are high unemployment causing a reduction in aggregate consumption. This has further restricted the growth of this company in UK (Tesco, 2012a).
The main social issue affecting Tesco currently is the change in consumers’ lifestyle, leading to a change in tastes and preferences. Tesco has responded to this by developing a new product range called “Clubcard” in order to suit different customer groups with different preferences (Tesco, 2012a).
Technology has a huge impact on the way business enterprises in all industries operate in the recent years. It has been playing as big role in shaping consumer spending habits. The internet, in particular, has opened a channel through which enterprises in the food retail industry distribute their products to customers (Tesco 2012a). The new technology has also led to the introduction of self-service checkouts in the food retail industry, hence enabling enterprises to reduce long-term staffing costs. Therefore, if well implemented and utilized, the new technology will support Tesco’s activities and ensure long-term sustainability.
In its corporate responsibility initiatives, Tesco has indicated that it recognizes its role of “creating sustainable ways of doing business.” In this regard, Tesco established a ‘zero-carbon supermarket’ in 2009 and aims at becoming a zero-carbon business by 2050 (Tesco 2012a). Additionally, this company has reviewed its supply chain to ensure that at least £1bn of its products sales are sourced from local suppliers in the UK.
According to Tesco (2011), competition law is the major legal issue affecting Tesco in the recent years. In 2011, Tesco, with other companies was fined £10.4bn for collaborating with other retailers in the UK to increase the prices of milk and cheese, an act that cost consumers £270m. Tesco’s competitors, Sainsbury, and Asda were also fined and this highly affected the industry’s ethical standing. Clearly, this act goes against the ideas of “responsible trading” set out by Tesco in its Corporate Responsibility Report. It goes against its responsibility of selling goods “ethically” and “responsibly” and this negatively affected credibility with its customers (Tesco 2011).
Porter’s Five Forces Analysis
As Porter (1985) explained, the purpose of analysis on a firm’s structure is to understand the effectiveness of its sources of competitive advantage. Below is an analysis of the five forces of competition that have an impact on the overall performance of Tesco:
There are three major competitors for Tesco in the UK food retail industry namely; Sainsbury, Asda and Morrison. These enterprises utilize different business strategies to attract customers. According to —, Sainsbury’s strategy involves providing premium services while Asda’s strategy involves providing value for consumers through appealing prices for different products. According to Tesco (2011), Tesco has changed its business strategy from that of “pile it high, sell it cheap” to a strategy that involves balancing both quality and price.
According to —, Tesco’s buyers have little power in regard to the company’s overall corporate strategy. However, customers in the food retail industry are able to switch easily from one retailer to another due to the low cost involved. This enables the consumers to wield much power as a collective. Tesco has responded to this by identifying the tastes of the customers and establishing the “Clubcard.” Since this product range was established, Tesco has been able to track any changes in behavior of customers and devised appropriate ways to respond (—). Consequently, Tesco has enjoyed a significant increase in customer loyalty recently.
According to —, Tesco suppliers are relatively weak or have quite little power in regard to working with this company. For instance, when it becomes necessary for Tesco to lower prices for its products, they share the pain with the suppliers by forcing them to cut prices for their supplies. According to —- this is largely caused by the fact that Tesco works with many suppliers, rather than a single large supplier. Tesco is usually able to change suppliers with relative ease and to adapt to the supply chain. In comparison with the suppliers, who often rely on this company for their survival, it means that the suppliers have little power to determine the products they offer and the prices for their products.
According to —, the “big four” supermarket chains (Tesco, Asda, Sainsbury and Morrisons) dominate the food retail industry, making it extremely difficult for small, new entrants to survive in the industry. However, according to –, the new entrants have recently changed the way they do business and are forming co-operatives which enable them to support each other and to become strong competitors. The threat of new entrants is increasing due to the increasing role of co-operatives and will be a key factor of consideration while determining competitive strategies in the future.
The current substitutes for Tesco’s business model are online retailing and discount stores. According to Tesco (2012a p. 15), Tesco has been putting efforts to extend into online retailing but maintains its focus on the physical store format. Secondly, the importance of discount stores has risen in the recent years, mostly due to the current situation facing customers. Tesco was using this model in 1990s but has recently expanded its strategy to include them. Alongside its “value” products, Tesco has added the “finest” quality-based product range which is aimed at fulfilling the demand of a market that is less price sensitive (Tesco 2012a).
Tesco SWOT Analysis
The following are the Strengths, weaknesses opportunities and threats facing Tesco Company:
Tesco commands the largest share in the UK market, reducing threat from new entrants. As mentioned, it is the third largest in globally and has international presence in over 14 countries. It enjoys strong financial power and brand name. This company has been able to take advantage of development in technology and as — explains, its usage of technology in marketing and distribution surpasses that of competitors.
Tesco has increased its geographical spread in the recent years and as – explains, this has made it difficult for this company to focus on specific markets. It has a high dependency on the UK market, making it vulnerable in case unfavorable conditions hit this market. According to –, the level of consumer satisfaction for Tesco in the international market is poorly rated, in comparison with the close competitors.
As mentioned, development in technology has opened an opportunity for business enterprises in the food retail industry to increase sales and reduce costs. Secondly, the popularity of this firm is increasing rapidly in the international market. This has opened an opportunity for this company to attract new customers. The company has an opportunity to expand into untapped markets especially in Asia through strategic alliance with local companies in those markets.
One of the major threats facing Tesco is the fierce competition that Tesco is facing in the UK food retail market. The UK competition law also poses a threat to Tesco as it limits its growth opportunities. For instance, this law was used by the European Commission to block Tesco from acquiring the British retailer Safeway (—). The reduction income rates and rise in unemployment in UK may lead to low purchasing power by consumers, leading to reduced sales by the company.
There are various strategies that Tesco can apply in order to maximize its competitiveness and profitability. The first strategy is to look for new opportunities in new markets or to expand into other industries such as banking. This will help to hedge on the risks associated with concentrating on one industry or market. Alongside the latest investment to increase consumer convenience in the UK market, Tesco will need to work towards ensuring consumer satisfaction, which is currently poorly rated in comparison with close competitors in other markets. This will enable this company to ensure that customer loyalty is maintained in the long-run. Further, Tesco should make maximum use of the “Clubcard.” The “Clubcard” can be used to gather information that can be utilized in various ways including improvement in customer convenience, improving layout of stores and reducing shopping times. Finally, it will be essential for Tesco to implement a dual delivery stream by implementing an effective online retailing system. Most of Tesco’s competitors have specialized products in either in-store or online retailing. Tesco should consider broadening its delivery stream by offering all of its products in online and in physical stores.
According to Boeger (2008) it implies ensuring that all business activities carried out within a firm meet or exceed the interests and the requirements of staff, customers, shareholders, suppliers, the surrounding community and the natural environment. According to Boeger (2008) this firm offers competitive products and services their customers to get the most out of their money. They give paramount importance to minimize the waste they emit, in order to conserve environment. They engage in charitable activities by giving donations to various institutions in the surrounding community. In addition, they treat their employees fairly and make them feel to be essential part of the enterprise. According to Tesco (2011), this is one of the key factors that have enabled the firm to increase earnings over time. However, the recent case in which Tesco was involved in increase the prices of milk and cheese goes against the corporate responsibility requirements and as mentioned earlier, it tainted the image of this company and the grocery industry.
In conclusion, the vision statement, mission statement and key stakeholders of Tesco, particularly leaders and employees have play an important role in developing consumer loyalty and hence contributed to the successful performance of this firm. The macro and micro-economic factors play an important role in shaping the decisions taken by this company and developing competitive edge of Tesco, as noted in this report. The SWOT analysis conducted on this firm indicates that the company has a bright future in case it employs appropriate strategies to invest in the available opportunities. Finally, Tesco is widely known to adhere to corporate responsibility requirements, though a recent case of misconduct threatened to destroy its reputation. , Tesco should always avoid engaging bad acts or in conflicts with legal bodies, which usually leads to loss of credibility before all stakeholders
- Boeger, N., (2008), Perspectives on Corporate Social Responsibility, Edward Elgar Publishing, Cheltenham
- Humby, C, Hunt, T. & Phillips, T., (2008), Scoring Points: How Tesco Continues to Win Customer Loyalty, Kogan Page Publishers, London
- Nwagbara, U, (2011), Managing Organizational Change: Leadership, Tesco, and Leahy’s Resignation, e-Journal of Organizational Learning and Leadership, 9(1), pp. 56-75
- Tesco (2011). Corporate Responsibility Report. Retrieved 10 March, 2013, <www.tescoplc.com/media/60113/tesco_cr_report_2011_final.pdf>
- Tesco (2012a). Annual Report 2012. Retrieved 10 March, 2013 From, http://www.tescoplc.com/files/reports/ar2012/files/pdf/tesco_annual_report_2012.pdf
- Tesco (2012b). Our Brands. Retrieved 10 March, 2013, http://realfood.tesco.com/our-food/our-brands.html