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Business environment for Tesco PLC

1. Introduction

Tesco is a British based supermarket engaged in retailing of food and non-food products. The company operates in 12 markets worldwide, having a team of 500,000 employees (Tesco.com, 2014). Tesco was founded in 1919 by Jack Cohen from a market stall in London's East end. Tesco is one of the world's largest retailers, serving millions of customers every week (Tesco.com, 2014). It operates via various store formats such as express, metro, extra and superstores. In 2013, Tesco recorded revenue of £43.6 bn and trading profit of £2,191m in the UK (Tesco Annual report, 2014). In the next section, the report will make use of the PEST framework and Porter's five forces to analyse the external business environment in which Tesco operates. To analyse the internal business environment, the SWOT tool will be used.

2. Business Environment

“ A business firm does not operate in a vacuum but in a given environment, and has to interact and transact its business within this environment” (Fernando, 2011, p33). The two types of business environment are external (macro and micro environment) and internal.

2.1 External Environment

2.1.1 PEST Analysis of Tesco

2.1.1.1 Political

As Tesco operates globally, it has to obey various government regulation and laws where they are operating. In terms of employment, the UK government encourages retail organisations to offer various types of job opportunities ranging from flexible, low wage and locally based jobs to high skilled, high wage and centrally located jobs to cater to the demands of groups such as students and senior citizens (Balchin, 1994). Most governments encourage businesses to employ local people for the development of the local economy. Many laws, regulations, codes of practice and guidance control the manufacturing, processing, distribution, packaging and labeling of food products (FSA, 2014). The Food and safety act provides food legislations acts in areas like hygiene, false description of food, low quality and unsafe food. Various environmental organisations encourage companies to reduce carbon emission in different stages of their supply chain. Tesco is working to achieve its 2020 target to reduce carbon emission throughout its supply chain. For example: using sea and rail modes of transport instead of doing so by road, opening new distribution centres to reduce transportation and hence reduce carbon emissions (Tesco.com, Tesco and society, 2014).

2.1.1.2 Economic

Economic factors like recession, unemployment and GDP are important for Tesco as they influence demand of products in the market. People tend to spend less on goods in times of recession. Due to recession and unemployment, as the disposable income decreases, customers switch to discount stores such as Aldi and Lidl. According to the Office For National Statistics (2014), the number of people out of work declined to a five year low of 6.8 % (BBC News, 2014). Also, the youth unemployment rate declined with 283,000 people finding jobs in the early months of 2014, which is the highest since 1971 (BBC News, 2014). Though Tesco is expanding internationally, the economic indicators like unemployment rate in the UK will be of prime importance to Tesco's profits in the future as the company is highly dependent on its home market.

2.1.1.3 Social

Customer buying behaviour keeps on changing and hence retailers have to keep track of customers' shopping trends. Customers like to shop at the smaller convenience stores rather than large stores (Tesco Annual report, 2014). Thus, Tesco has reduced opening of new stores and is focusing on convenience and online shopping. Shoppers are becoming more health conscious and they are more concerned about the quality of food (Doward, 2014). Thus, Tesco is investing in organic foods to meet the demands of customers.

2.2.1.4 Technological

With the rise in the use of the Internet and digital technology, retailers have an added responsibility to incorporate new technology in their supply chain. According to the chairman of Tesco (2014), the capacity for customers to interact with each other and the organisation is driving different expectations in terms of service, choice and the overall shopping experience (Tesco Annual report, 2014). A major portion of consumers use smartphones for online shopping, comparing prices with competitors and reading reviews (Tesco Annual report, 2014). Tesco is increasing its investment in new technologies to serve customers better. In 2013, Tesco made huge investment to integrate point of cash management SMARTtill technology in over 10,000 UK tills to provide better customer service (Retail technology, 2013)

2.1.2 Porters Five Forces Analysis of Tesco

According to Porter (2008), the five forces that shape industry competition are as follows: threat of a new entry, bargaining power of buyers, bargaining power of suppliers, rivalry between competitors and threat of substitutes (Figure 1).

Figure 1 Porter's Five Forces

(Source: Porter, 2008, p80)

2.1.2.1 Threat of a new entry

The threat of a new entry is

low

. The retail industry demands huge investment from a potential entry in the market (Economics Online, 2014). Many big players such as Tesco, ASDA, Sainsbury are operating in the market. Also, discount supermarkets stores such as Aldi and Lidl are present. Over the years, they have been investing in developing supply chain and efficient technology. It would be difficult for a new entry to compete with the well-established players. Moreover, it would be difficult for a new player to build relationship with suppliers. It should be noted that it would be difficult for a new start-up to compete in the UK retail market, however, for retailers established in other countries, it could be possible to gain a foothold in the UK market, just like Aldi and Lidl. Barriers to entry also include getting government authorisation to establish a new supermarket. This demands significant resources and time.

2.1.2.2 Bargaining power of suppliers

Porter (2008) stated that suppliers have less bargaining power if they deal with big organisations in an industry. There are four leading players such as Tesco, Sainsbury, Morrison and Asda, accounting for 59% of total retail value sales in 2013 (Euromonitor International, 2014). These players are big organisations and can easily switch from one supplier to another due to strong financial resources. Hence, suppliers are dependent on the retail organisations and are keen to maintain long working relationships in order to remain profitable. Tesco, being the market leader can negotiate in terms of price with the suppliers and hence it has a strong position as compared to suppliers. Thus, power of suppliers is

low

.

2.1.2.3 Bargaining power of buyers

There are many retail organisations operating in the UK market, offering standardised and less differentiated products. Buyers can easily switch from one brand to another due to the absence of switching costs. However, loyalty schemes like Tesco's club card plays an important role in retaining customers. There are 38 million club card customers shopping in Tesco stores (Tesco Annual report, 2014). With the help of the Internet, customers can easily compare different prices to help inform their purchasing decisions. Overall, the bargaining power of buyers is

moderate to high

.

2.1.2.4 Rivalry among existing competitors

The rivalry among competitors is

high

. The competitors of Tesco are ASDA, Morrisons and Sainsbury's. The retail organisations compete directly in price wars in their stores such as labeling their product as low cost compared to the competitors. For example: ASDA has a price guarantee, and give a refund if the price offered is higher than other supermarkets. Tesco is also facing competition from low discount stores such as Aldi and Lidl. Tesco's market share experienced a decline from 30.7% in 2012 to 30.1% in 2013, while discount stores Aldi and Lidl increased their market share to 3.6% and 3.1% in 2013 respectively, from 2.9% in 2012 (Neville, 2013).

2.1.2.5 Threat of substitute product or services

Substitutes to supermarkets are the small convenience stores offering products to customers in their vicinity. However, supermarkets are planning to open convenience stores and smaller store formats closer to homes due to the preference of customers to shop more frequently and closer to home (Tesco Annual report, 2014). For food retailing, the threat of substitutes is

low to moderate

whereas for non- food products, it is

moderate to high

as people have various options to buy such as online and clothing stores.

2.2 Internal Environment

2.2.1 SWOT Analysis of Tesco

A SWOT analysis is used to analyse the internal business environment of Tesco to identify strengths and opportunities. In addition, the SWOT tool also results in identification of core competencies of an organisation, and opportunities that the company is not able to exploit due to lack of resources (Wheelen and Hunger, 2011).

Table 1: SWOT analysis of Tesco

STRENGTHS

WEAKNESSES

  • Strong market position in the UK

  • Strong brand name

  • International expansion

  • Clubcard loyalty scheme, owner of Dunhumby (world leader in customer insight)

  • Diversification into other sectors

  • Hypermarket store format

  • Management change

OPPORTUNITIES

THREATS

  • Increase in online shopping

  • Rapidly growing economy – India and China

  • Competitive market

  • Government restrictions

2.2.1.1 Strengths

Strong Market Position In The UK

Tesco is one of the world's largest retailers and has a market leading position in the UK. It is perceived as a strong brand offering great value to customers. The group has 3378 stores and employs about 313,923 staff in the UK (Tesco Annual report, 2014). According to Kantar media (2012), of 1.3 million customers that purchased groceries online during one month, over half of the customers purchased groceries from Tesco online. This shows that a greater number of customers like to purchase via Tesco online as compared to competitors.

International expansion

Tesco has international presence in regions like South Korea, China and Europe. It has been able to expand and build its profitable presence in various countries around the world. The ability to expand in various countries shows that Tesco has strong financial resources.

Club card loyalty scheme

“Clubcard, introduced in 1996, is our way of saying thank-you to our customers” (Tesco.com, Tesco UK, 2014). The company introduced club card scheme as a marketing tool to retain customers and hence increase customer loyalty. Tesco owns Dunhumby, a world leader in customer insight, and it has helped Tesco to understand its customers better (Tesco.com, 2014).

Diversification

The company is also involved in other business sectors such as banking and financial services, thus generating more profit from diversification. Tesco reported an increase by 14 % in main banking products like customer accounts for loan, mortgage, savings and credit cards (Tesco Annual report, 2014).

2.2.1.2 Weaknesses

Hypermarket store format

Tesco operates mainly through big store formats in the UK and internationally. However, customers prefer to shop in small convenience stores (Tesco Annual report, 2014). It is a challenge for Tesco as they have many big stores. The company has stopped its expansion plan of opening hypermarkets (Tesco Annual report, 2014).

Management change

Tesco is facing uncertainty in its management structure that could have an impact on its profitability. The CEO of Tesco cleared out 50 managers from its head office, with reasons unknown (Butler, 2013). It seems odd for a company to fire most experienced mangers in the competitive retail environment.

2.2.1.3 Opportunities

Increase in online shopping

There is a shift in customer trends; they like to do online shopping in the comfort of their homes or while commuting (Rigby, 2014). Tesco has skills and competencies to exploit this opportunity by providing better customer service. Investing in digital technology would be beneficial.

Rapidly growing economy – India and China

There is huge potential for Tesco to grow in developing economies like India and China. Due to rise of upper middle classes and increase in income spending (EY, 2014), Tesco can utilise its resources to tap this opportunity.

2.2.1.4 Threats

Competitive market

The UK retail market is highly competitive. The competitors such as ASDA and Sainsbury also have diversified operations in sectors like insurance and loan scheme and hence they are competing with Tesco in all sectors. Customers can easily switch to discount stores like Aldi and Lidl.

Government restrictions

Tesco is not only affected by the Eurozone crisis but also the problems arising in the Asian market. In terms of international expansion, Tesco is prone to government restriction on opening hours in South Korea (Tesco Annual report, 2014).

3. Conclusion

Tesco is affected by many internal and external business environmental factors. Economic factors like decline in unemployment rate in the UK and increase in income spending in developing countries can be considered as an opportunity for the business. Social factors like changing consumer shopping patterns is a challenge for Tesco. For example: usage of digital media. However, Tesco is investing in new technology to serve customers better. In the retail market, the technology factor is of prime importance for a company to competitively position its product and services. Social factors like customers' opting to shop at small stores is a threat as Tesco operates mainly through hypermarket stores that are located far from city centre locations. However, the company has stopped expansion of its big stores and is focusing on convenience stores to attract customers. In terms of competitive forces, bargaining power of buyers and rivalry between competitors is high. Hence, offering differentiated and great value products is the solution. Tesco has strong resources and capabilities to tap the opportunities like expanding in developing economies and customers' preference towards online shopping.

4. References

Balchin, A. (1994) Part-time Workers in the Multiple Retail Sector: Small Change from Employment Protection Legislation?, Vol. 16, Isuue 7, p 43-57.

BBC News (2014) UK unemployment rate falls to five-year low, Last accessed 22nd June 2004 at:

http://www.bbc.co.uk/news/business-27406457

Butler, S. (2013) Tesco gets rid of 50 top managers as Clarke steps up pace of change, The Guardian. Last accessed 23rd June 2014 at:

http://www.theguardian.com/business/2013/jul/31/fifty-tesco-managers-lose-jobs

Doward, J. (2014) Organic food back in vogue as sales increase, The Guardian. Last accessed 22nd June 2014 at:

http://www.theguardian.com/environment/2014/feb/09/organic-produce-sales-increase

Economics Online (2014) Barriers to entry, Last accessed 27th June 2014 at:

http://www.economicsonline.co.uk/Business_economics/Barriers_to_entry.html

Euromonitor International (2014) Grocery Retailers in the United Kingdom, Last accessed 27th June 2014 at:

http://www.euromonitor.com/grocery-retailers-in-the-united-kingdom/report

EY (2014) Middle class growth in emerging markets, Last accessed 15th May 2014 at:

http://www.ey.com/GL/en/Issues/Driving-growth/Middle-class-growth-in-emerging-markets

Fernando, A.C. (2011) Business Environment, India: Pearson Education.

FSA (2014) Regulation and legislation, Last accessed 22nd June 2014 at:

http://www.food.gov.uk/enforcement/regulation/#.U6bpQI1dUVm

Kantar Media (2012) Online Shopper Intelligence – UK, Last accessed 23rd June 2014 at:

http://www.kantarmedia.co.uk/media/55366/kantar-media-compete-online-shopper-report-grocery.pdf

Neville, S. (2013) Big four supermarkets squeezed by high-end and discount competitors, The Guardian, Last accessed 23rd June 2014 at:

http://www.theguardian.com/business/2013/jul/16/big-four-supermarkets-squeezed-competitors

Porter, M.E. (2008) The five competitive forces that shape strategy, Harvard Business Review, January 2008, Vol. 86, Issue 1, p78-93.

Retail Technology (2014) Tesco updates EPoS cash drawers, Last accessed 22nd June 2014 at:

http://www.retailtechnology.co.uk/news/4764/tesco-updates-epos-cash-drawers/

Rigby, C. (2014) UK shoppers spent £91bn online in 2013 – and look set to spend £107bn in 2014, Last accessed 27th June 2014 at:

http://internetretailing.net/2014/01/uk-shoppers-spent-91bn-online-in-2013-and-look-set-to-spent-107bn-in-2014/

Tesco Annual report (2014) Tesco annual report and financial statements, Last accessed 22nd June 2014 at:

http://www.tescoplc.com/files/pdf/reports/ar14/download_annual_report.pdf

Tesco.com (2014) About us, Last accessed 22nd June 2014 at:

http://www.tescoplc.com/index.asp?pageid=6

Tesco.com: Tesco and society (2014) Reducing our impact on the environment, Last accessed 22nd June 2014 at:

http://www.tescoplc.com/index.asp?pageid=636#tabnav

Tesco.com: Tesco UK (2014) Clubard, Last accessed 27th June 2014 at:

http://www.tescoplc.com/index.asp?pageid=282

Wheelen, T.L. and Hunger, D.J. (2011) Concepts in Strategic Management and Business Policy: Toward Global Sustainability, 13th edition, Prentice Hall.

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