INTRODUCTION 2018). The British company took a massive hit

INTRODUCTION

Tesco PLC has established itself as the biggest food retailer in the UK and is among the top 10 retailers in the world (Deloitte, 2018). The British company took a massive hit in 2014 after the 2014 accounting scandal, which led to a decrease in its sales and profits and ultimately its market share. The recovery process hadn’t even started yet when it had to introduce price cuts in 2015, because of grocery market deflation (Butler and Walsh, 2015), which led to a further decrease in profits. However, after 2016, its sales increased again and it paid dividends to its shareholders for the first time in 3 years (BBC News, 2017).

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This essay will discuss the different business-level and corporate level strategies that helped Tesco to make this turnaround and emerge as a market leader. Tesco PLC operates through two business lines i.e. retailing and associated activities and Tesco Bank in Europe and Asia (Tesco PLC, 2018). The essay will focus on Tesco’s most important division i.e. the business activities related to food retail in the UK as it is the highest contributor towards its revenue.

 

 

1. INDUSTRY AND MARKET ANALYSIS:

The five forces analysis devised by Michael E. Porter has been used to analyse the industry and the market that Tesco operates in to understand the different aspects of the U.K. food retail industry and what makes it attractive.

 

 

A) Threat of new entrants

Supermarkets and Hypermarkets account for approximately 69% of the U.K. food retail industry (Marketline, 2016). This suggests that the industry is reasonably concentrated and large-scale retailers, that benefit from economies of scale and the ability to implement aggressive pricing strategies, have a significant advantage over small retailers. 

However, this doesn’t mean that the large retailers are not vulnerable to threat from new entrants. Change in consumer tastes and preferences and a recent rise in inflation, have given an opportunity to the discounters (Aldi and Lidl) and online shopping, to not only compete with the local retailers, but also with likes of the big four (Tesco, Asda, Sainsbury’s and Morrisons). Overall, the plausibility of new entrants is evaluated to be moderate.

 

B) Bargaining power of buyers

The buyers in the retail industry are end-consumers (Marketline, 2016). This suggests that a loss in any single consumer does not have a significant effect on any player’s revenue. Nevertheless, collectively consumers symbolise a large variety of interests and no retailer can ignore the consumer’s sensitivities.

A buyer’s choices can be affected by many factors. Despite the loyalty schemes and incentives encouraging customers to return, a recent study suggests that convenience, location and prices are a consumer’s top priority (Chahal, 2017). Food retailers need to accommodate the diverse consumer interests which also increases buyer power to some extent. Overall, bargaining power of buyers is evaluated to be moderate.

 

C) Threat of substitute products and services

The current threat to the UK food retail industry is the online food delivery system. More and more customers are getting attracted towards online channels for grocery shopping. Ocado and the recently launched Amazon Fresh could emerge as a significant threat to the already existing food retailers in the market.

 

 

 

D) Bargaining power of suppliers

Previously, suppliers hardly had any power as compared to the huge food retailers. Problems faced by the retailers were also felt by the suppliers. One of the most recent examples is the reduced supplier margins due to the price war between supermarkets, that reduced grocery prices by 1.7% in one year (Jones, 2015). But now, with the initiation of the Groceries Code Adjudicator (GCA), there has been some progress. GCA has forced supermarkets to consider the reputational hazard of mistreating suppliers. Even though the supplier complaints have fallen down by a small number, it can be seen that supermarkets are trying to improve their relationships with farmers and other businesses which is a definite improvement (McClean, 2016). Overall, the bargaining power of supplier can be evaluated as moderate.

 

E) Rivalry among existing competitors

 

The U.K. food retail industry has a number of large competitors which face stiff competition from each other (Marketline, 2016). The industry is also quite responsive to the changes in consumer tastes and preferences. The consumers are increasingly becoming price sensitive, which has led to the growth in market share of discounters, particularly Aldi and Lidl. Amazon has also launched a limited food delivery service in the U.K.  (Thomas and Vandevelde, 2016). This has resulted in a decrease in market share of the big four as seen from the graph by McKevitt (2017). All these attributes contribute towards high rivalry among competitors in the U.K. food industry.

 

 

2) BUSINESS LEVEL ANALYSIS

After analysing the industry and the market, the essay will now focus on analysing Tesco’s business-level strategies using the resource based strategy and VRIO framework by Barney and Hesterly (2008).

 

The following resources have been identified through the resource based framework: –

 

A) A wide range of products

Tesco sells a large variety of high to low end products. This helps it to establish a competitive advantage by capturing different market segments and developing an inclusive product offering. Tesco has also launched seven new brands under its own label that will provide seventy-six new product lines (Hobbs, 2016). HSBC retail analyst David McCarthy explains that this strategy of providing high quality food at low prices will give them a big advantage over its contemporaries and help it compete with the discounters.

 

Valuable

Rarity

Yes, helps Tesco to capture different market segments

Yes, the strategy is unique among current competitors

Difficult to imitate

Can the Organisation exploit the resource?

No, the big four can imitate this strategy

 

 

Through this VRIO analysis, it can be seen that Tesco has a temporary competitive advantage.

 

 

B) Multi-channel approach

Tesco has a multi-channel distribution strategy which includes small to large shops and a growing online business (Tesco PLC, 2017). It has more than 1750 click and collect points and 260 drive-thrus in UK (Marketline, 2015). The rapidly growing online business enables Tesco to further increase its market share. Tesco have a very extensive supply chain and distribution network. They could leverage this extensive network and online expertise to provide a convenient shopping experience to its customers and also shape trends (Marketline, 2015).

Valuable

Rarity

Yes, helps Tesco to provide convenient shopping experience and shape market trends

Yes, the strategy is unique among current competitors

Difficult to imitate

Can the Organisation exploit the resource?

Yes, imitating is costly and would require proper infrastructure

Yes, exploits this resource through its infrastructure e.g. website, analytics etc.

 

Through this VRIO analysis, it can be seen that Tesco has a sustained competitive advantage.

 

 

C) Convenience Stores

Convenience stores are very important players in the UK food market. They account for almost 21 percent of the total grocery sales of the UK food market which is predicted to increase by another 11.7 percent in the next five years as their demand amongst Britons increases, who prefer frequent top-up shops over weekly shopping trips (Wood, 2017). Tesco has opened many convenience stores to exploit this consumer trend. It has recently announced a take-over bid of cash-and-carry giant, Booker. Tesco already makes up almost 30 percent of the UK grocery market and this deal could further increase it by 2 percent (Wood, 2017).

Valuable

Rarity

Yes, helps to capture market share.

No, many convenience stores already exist

Difficult to imitate

Can the Organisation exploit the resource?

No, can be replicated by not only the big firms but small retailers as well.

Yes, through its existing supply network and a deal with Booker.

 

Through this VRIO analysis, it can be seen that Tesco has a competitive parity.

 

 

 

 

3) CORPORATE STRATEGY

After looking at Tesco’s resources and capabilities, the essay will now focus on the corporate level analysis of the firm and its businesses.

Tesco operates through two business lines i.e. retailing and associated activities and Tesco Bank (Tesco PLC, 2018).

Under retailing and associated activities, Tesco operates stores that offer grocery items, general merchandise as well as other non-food items such as electric products, health and beauty products and apparel and jewellery among others (Marketline, 2016). The retailing activities exist in Europe and Asia.

On the other hand, Tesco Bank operates only in the UK. It was introduced in 1997 with the vision “to be the bank for people who shop at Tesco” (Tesco PLC, 2018), and has worked ever since keeping the best interests of its customers in mind. It offers retail banking and insurance services to more than 7 million accounts across its different financial products and services (Tesco PLC, 2018).

Apart from these two businesses, Tesco operates dunnhumby, which uncovers and applies consumer insight to create a more personalised retail experience (Tesco PLC, 2018). These insights are then used by its clients to prepare business strategies.

Tesco has already established itself as the biggest food retailer in the UK and is among the top 10 retailers in the world (Deloitte, 2018). Tesco’s businesses and subsidiaries are not very similar to each other in terms of their business operation. Having said that, they are based on the same core value i.e. do what is best for the customers and “serve shoppers a little better every day” (Tesco, 2017). Tesco’s businesses also rely largely on the same set of resources and capabilities that Tesco has already built up over the years through its food retail business. These include its extensive supply and distribution network, its stores, its brand image (even though Tesco is working towards rebuilding it after the accounting scandal in 2014) and its customers. Tesco’s integrated retail services offer it a competitive advantage over its contenders. Customers want an integrated multi-channel offer so that they can choose between the different delivery channels and Tesco’s services provide this advantage. Tesco is also looking to expand its retailing activities globally which would contribute towards increasing margins and revenue (Marketline, 2016).

 

 

4) STRATEGIC CHALLENGES AND SUGGESTIONS.

start with how current strategy has enabled it to become an industry leader. But…

After looking at Tesco’s strategies, it is clear that these strategies have helped it to emerge as a market leader in the UK food retail industry. Tesco’s 3 main resources: wide range of products, multi-channel distribution system and large number of convenience stores, provide it a competitive advantage over its contenders. However, a few challenges have been identified, that Tesco is currently facing. These challenges and suggestion to deal with them are as follows:

 

A) Dealing with price sensitive customers

One of the major challenges that Tesco is facing right now is how to deal with parsimonious customers. Grocery inflation has turned positive after more than 2 years and a weaker sterling suggests that most of the gains will go to Tesco’s suppliers (Foley, 2017). Tesco will also be under pressure to cut its prices at the cost of decreasing its profit. 

To decrease the level of price sensitivity among its customers, Tesco should emphasize its product’s value over its cost. It should try and make customers see how its products will stream line their bottlenecks and how effective and convenient their products and services are. According to a research, 74% percent of the customers drop their baskets due to the high delivery charges, when they shop online (Ratcliff, 2015). Tesco can monitor and check if their delivery charges are reasonable or not.

 

B) Rebuild the brand

Tesco’s 2014 accounting scandal is still quite fresh in the minds of its customers. It has also initiated several product recalls recently, e.g. a batch of its oriental Kitchen Chicken Chow Mein due to manufacturing erroring in 2017 and decorative flocked penguins due to manufacturing defect (Marketline, 2016). All these events have dented Tesco’s brand image and it needs to work towards improving it. Tesco need to form a strategy that is not just about advertising and PR, although both of them will be quite important (Butler, 2015). It needs to identify the market trend, figure out how the customer tastes and preferences have changed and provide them with what they actually care about and value.