The Critical Analysis of Tesco’s Development and the Opportunity of Furthering International Growth

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ULMS 270

The critical analysis of Tesco’s development and the opportunity of furthering international growth

Olivia Maloney
200987842

Table of Contents    

Title Page 1

Introduction 3

Company background 3 -4

Competition 4-5

Development and Analysis 5-9

Conclusion 9-10

References 11-12

Appendices 13-15

Introduction

This repost contains a critical analysis of the UK company, Tesco. Firstly, I will briefly cover the background of the company, how the company was established and grew and where it stands today, including their current values, visions and goals. I will then move on to discuss the competition which Tesco faces today, including the up and coming rivals of discounted retailers known as Aldi and Lidl, and how their success has impacted Tesco. As well as over the years and present times Tesco has also been influenced by many factors, in particular I will look at the effect of the economy, how the recession forced Tesco to changed their strategy and also consumer tastes, how Tesco needs to be flexible in order to remain on top. Due to unfavourable trends and high dependency on the UK I specifically focus on the opportunity for further international growth for Tesco, ultimately in the worlds largest economy, the USA. I will critically analyse Tesco re-entering the market with their original idea of health focused convenience stores on the concentrated food retail industry.

Company background

Tesco is a successful global food retail brand, in 2015 the company was ranked number 56 in highest sales worldwide, with sales totalling $102.64 billion (Forbes, 2015). The company was first founded in 1919 by Jack Cohen, starting out selling surplus groceries on a stall in East London. Five years on from this the Tesco brand was established, the name was formed from the first three letters of the suppliers name (TES) and the first two letters of Cohens surname (CO). Cohen opened the first store in 1929, the growth of Tesco flourished throughout the early 90’s with the company owning over 800 stores by 1960. Worldwide, Tesco now owns approximately 6,814 stores with over 480,000 collegues in 11 countries. In 2015 the company appointed new CEO Dave Lewis, and chairman John Allan. The company is governed by a board of directors who is led by the chairman. The board is responsible for the company values, long term visions and strategic direction. The chief executive is responsible for and leads the development of strategy and manages the performance of the group, including ensuring effective communications between shareholders and also key stakeholders by regularly updating and informing them of their business strategy and performance (Tesco plc, 2015).

The main market the company operates in is the UK, totalling over 3500 stores and rivalling alongside the other top 3 supermarkets; ASDA, Sainsbury’s and Morrisons (Tesco plc, 2015). Whilst competing against these dominating firms Tesco prides themselves on putting the customer first, they use their customer focused values to differentiate themselves from their competitors. Tesco’s core purpose states ‘Serving Britain’s shoppers a little better every day’ (Tesco plc, 2015), their vision is solely on heightening every customers experience, making each visit better than the last. Originally the firm concentrated on specialising in food and drink but now they have diversified themselves in multiple areas such as clothing, mobile networks and insurance.

Competition

Tesco holds the greatest market share of the grocery industry with the company holding 28% of total market share from the last 12 weeks ending 6th December 2015 (Kantar Worldpanel, 2015, appendix 1), this is followed by Sainsbury’s , ASDA and Morrisons with, 16.7%, 16.2% and 11% of total market share, respectively. The UK food retail industry is an oligopolistic market, this means that the market is highly concentrated and firms are interdependent. In the last 24 months Tesco along with the big 4 have seen little or no growth in their market share. The main reason for this is the up and coming discount retailers such as Aldi and Lidl. Since the recession impacted the economy in 2008 consumers have been shopping at cheaper discounted stores due to their lower disposable incomes. This has resulted in competitors Aldi and Lidl soaking up market share (Appendix 2). In the last 24 months alone we can see that both stores have had positive, steady market share growth which shows no sign of changing. For Tesco this is a huge threat, we can see from appendix 2 that their market share has had no positive growth, which in turn will have had impacted their profits. Tesco’s turnover from the year before February 2015 was £62.2 million, this is £1.3 million less than the year previous (CityWire, 2015).  It is clear that Tesco’s development is threatened by its competition, especially those of Aldi and Lidl, this has resulted in Tesco offering further discounts on products, but Tesco fail to show any signs of innovation or differentiation to set them apart from these favoured discount retailers.

Development and Analysis

The food retail industry is a vast market, totalling a £177.5 billion worth from the year to March 31st 2015 (IGD, 2015), with being such  a large market firms can be easily affected by numerous factors around them. One factor which I believe is important to the food retail industry, particularly their growth and development is cultural factors. For example the in recent years we have seen a change in consumer lifestyles. Consumers are becoming more conscious and aware of their health, in regards to this there has been a decline in the demand for ready meals and unhealthy products. To accommodate this change Tesco has been able to adapt their product mix to increase the availability of organic products, the company also launched their ‘Healthy living’ food range in 2014 which focuses on two concepts; low calorie dishes and balanced nutritional dishes (Tesco plc, 2014).  It is clear that one of Tesco’s strengths is monitoring and being aware of the changing tastes in the market, Tesco’s shows flexibility by being able to adapt to these changes quickly before sales and market share is negatively affected, thus keeping a tight control on their development.

In addition to the cultural factors affecting the industry one factor which cannot be controlled which  affects Tesco’s growth and development is the economy. The economy affects the retail market through their consumers, as the economy fluctuates the average propensity to consume fluctuates alongside. A specific example we could use for this is the impact of the recession which began in December 2007. During the recession the UK saw a rise in unemployment and consumers having less disposable income to spend. Due to this consumer’s tastes shifted towards cheaper, more affordable products. During 2008 Tesco reported growth of 2%, proving to be their worst growth rate in 15 years (Daily Mail, 2008). This poor growth showed how the economy affected consumer spending, prompting them to look elsewhere for cheaper goods which they could find at discount retailers. For these discount supermarket chains such as Aldi who accommodated for this demand for affordable goods the switch in consumer tastes showed only positive results on their sales and growth. Responding to this Tesco has fought back with price cuts of 100’s of items, stating ‘Prices down and staying down’ in order to compete with such discounted retailers and not lose out on further market share and development. Tesco invested £500 million in the ‘Big Price Drop’ in 2011, the aim was to help families struggling in the economic downturn, and thus influencing customers to stay loyal to their brand rather than switch over to rivals.