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Pan-UK Supermarket Retail Industry (Tesco)
 

Pan-UK Supermarket Retail Industry (Tesco)

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An analysis of the UK retail industry focusing on Tesco plc.

An analysis of the UK retail industry focusing on Tesco plc.

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    Pan-UK Supermarket Retail Industry (Tesco) Pan-UK Supermarket Retail Industry (Tesco) Document Transcript

    • Business StrategyTesco Plc. – Pan UK Supermarket Retail“The key drivers of change will be economics based in theshort-to-medium term and technological in the long-term.”“Tesco’s overall strategy should focus on the “delivery” ofits services”Macawa7th May 2012
    • Macawa Tesco Plc.Table of ContentsExecutive Summary ................................................................................................................................ 2Macro-Economic Analysis...................................................................................................................... 3 Pestel Analysis .................................................................................................................................... 3 Five-Forces Matrix.............................................................................................................................. 5Strategic Analysis ................................................................................................................................... 7 Foundations of Strategic Capability .................................................................................................... 7 SWOT Analysis .................................................................................................................................. 8 Strategic Drift...................................................................................................................................... 9Strategic Evaluation .............................................................................................................................. 10 Value Curve ...................................................................................................................................... 10 Benchmarking ................................................................................................................................... 11 Strategic Clock .................................................................................................................................. 12 Conclusions ....................................................................................................................................... 12Recommendations ................................................................................................................................. 13 Strategy of Delivery........................................................................................................................... 13 SBU Strategy...................................................................................................................................... 13 Clubcard ............................................................................................................................................ 13 New Technology................................................................................................................................ 13 Dual Delivery Stream ........................................................................................................................ 13References ............................................................................................................................................. 14Signatories............................................................................................................................................. 15Word Count/Word Limit 2991/3000Macro-Economic Report and Strategic Analysis Page 1
    • Macawa Tesco Plc. Executive Summary Tesco’s short-term macro-economic concerns are economics based. This includes fallingcustomer purchasing power driven by high inflation and falling incomes. In the long-term, theseconcerns will be more social and technologically based. This includes changing consumer lifestylesand the impact new technology is having on both, the consumer and Tesco. This includes usingtechnology to cut staffing costs and increasing revenue streams through use of the internet. Power of suppliers remains low, but the power of customers is relatively strong when actingas a collective. This means Tesco must make effective use of its “Clubcard” to understand currentcustomer trends and adapt its strategy as appropriate. Threats of new entrants and substitutesrelate largely to the rise of the internet, but due to the current economic environment, the rise ofdiscount stores has also become an issue of concern. Tesco has recently experienced strategic drift which saw its UK sales decline in 2011. This isdue to placing increasing focus on its growth in the US and Asian markets which distracted it from itsUK operations. This caused Tesco to announce a £1bn investment into “revamping” its UK stores toimprove the “customer experience”. Tesco has no overriding strategy that sets it apart from its competitors. However, Tescodoes have different SBU’s with their own distinct markets and competitors. Tesco’s “Finest” brandfocuses on quality and competes with the likes of Sainsbury on Focused Differentiation. This is whileTesco’s “Value” brand competes on price and competes with the likes of Asda in a no frills strategy. Tesco’s overall strategy should focus on “Delivery” to the customer. This includes usinginformation gathered from its “Clubcard” to redesign both its online and in-store retail outlets toimprove customer convenience utilising new innovative technologies.This is while Tesco’s specificSBU’s maintain their current strategies with “Tesco Value” focusing on price and Tesco’s “Finest”focusing on Quality. This diversified approach will help ensure Tesco’s long-term success andsustainability.Macro-Economic Report and Strategic Analysis Page 2
    • Macawa Tesco Plc. Macro-Economic AnalysisPestel AnalysisPolitical The main political issues for Tesco relate to changing employment law and tax changesbrought in by HM Treasury. In the 2012 budget, Chancellor George Osborne announced a reduction in corporation tax to24% with further reductions of 1% a year until April 2014 ending at 22%. This will save Tescoapproximately £25m in the financial year 2011/2012.(Tesco, 2011a) (HM Treasury, 2012) It was also announced that future increases in the national minimum wage will be belowinflation. This will reduce, in real terms, the cost of employing lower-level operational staff such ascheckout assistants. (HM Treasury, 2012)Economic The main economic issues affecting Tesco’s UK operations are the high inflation andunemployment rates seen in the country. The CPI rose to 3.5% in March fuelled by rises in food and clothing costs, two of Tesco’s keyproduct ranges. This has subdued growth in UK consumption, slowing Tesco’s growth in thecountry.The UK unemployment rate currently stands at 8.3%. A fall from the previous month, butsignificantly higher than the rate pre-economic crises. This has further subdued UK consumption,restricting company growth. However, this also increases the talent pool for future recruitment,reducing hiring costs. (BBC, 2012a)Social The main social issue is that of changing customer tastes, especially in regards to peopleleading healthier lifestyles.In terms of food, last year, Tesco sold £33m worth of its “Free from”range, emphasising the need to take advantage of this change in customer tastes. (Tesco, 2011b) In order to take advantage of this change, Tesco first has to keep track of it. Tesco has donethis through the use of its “Clubcard”. This level of market research will help keep Tesco informed ofthese changing customer trends allowing them to tailor corporate activities specifically to currentcustomer tastes. (Tesco, 2011a)Technological Technology has significantly changed the way supermarkets compete in recent years. Thefirst of these is the increasing role the internet is playing in shaping customer spending habits. Thisincludes Tesco’s online sales increasing 15.2% in 2011. However, this not only acts as a newMacro-Economic Report and Strategic Analysis Page 3
    • Macawa Tesco Plc.distribution channel, but as a new line of scrutiny allowing customers to more easily compare Tescowith its competitors in regards to price and products offered. Another consideration is the introductionof self-service checkouts which will significantly reduce long-term staffing costs. This will helpsupport the long-term sustainability of Tesco’s corporate activities. (Tesco, 2011a)Environmental As a major retailer, Tesco recognises its obligation “to create more sustainable ways of doingbusiness”. This saw Tesco open its first “zero-carbon supermarket” in 2009 with the aim of becominga zero-carbon business by 2050. Tesco has similarlyreviewed its supply chain allowing it to source£1bn of its product sales from local sources. Tesco also announced a £1bn investment in “revamping”its UK stores to provide “a better shopping environment” for its customers. This will involveredesigning stores to better improve customer convenience and improving energy efficiency. (Tesco,2011a)(BBC, 2012b)Legal One of the legal issues affecting Tesco in recent years has been that of competition law. Lastyear, Tesco, along with eight other companies, was fined £10.4m for collaborating in the increase ofmilk and cheese prices, costing customers £270m. Asda and Sainsbury’s were also fined a total of£20.4m. This issue has affected the industries ethical standing and goes against Tesco’s idea of“responsible trading” as set out in its Corporate Responsibility Report. This includes selling its goods“responsibly” and “ethically” and has negatively affected Tesco’s credibility with its customers.(Tesco, 2011b)(BBC, 2011)Macro-Economic Report and Strategic Analysis Page 4
    • Macawa Tesco Plc.Five-Forces MatrixCompetitive Rivalry Tesco has three main competitors in the industry, these being Asda, Sainsbury’s andMorrison’s. These companies each utilise different strategies in appealing to the consumer. Asda’sstrategy focuses on providing value for customers while Sainsbury focuses more on providing a betterquality service. Adapting to this shifting competitive environment, Tesco has changed its strategyfrom that of “pile it high, sell it cheap” to a “hybrid” strategy balancing both, price and quality.(Which?, 2012)Power of Buyers In terms of individuals, Tesco’s customers have little power in regards to Tesco’s overallcorporate strategy. However, as a collective, customers wield significant power due to the low costand ease of switching retailer. This is why Tesco has placed so much effort into understanding itscustomers through the use of its “Clubcard”. This allows Tesco to accurately track changing customertrends and adapt its strategy as appropriate.This has resulted in a significant increase in customerloyalty to the Tesco brand over recent years. (Tesco, 2011a)Power of Suppliers History has shown suppliers to be relatively weak in regards to working with Tesco. This hasincluded Tesco forcing their suppliers to “share the pain” in relation to cutting prices on the shopfloor. This is due to Tesco working with multiple farmers rather than a single large supplier. Thisallows Tesco to adapt their supply chain and change supplier with relative ease. This is compared tomany farmers who often rely on Tesco’s custom for their very survival. This means Tesco’s suppliershave little power in regards to pricing and the products they offer. (Independent, 2012)New Entrants In is becoming increasing difficult for small retailers to survive in the retail market. This isdue to the sheer dominance of the “Big Four” supermarket chains with Tesco controlling 30.7% of themarket. This has led to many new entrants changing the way they do business including the increasingrole of co-operatives. These co-operatives increase the threat of new entrants and will be a keyconsideration in determining Tesco’s future competitive strategy. (Telegraph, 2012)Macro-Economic Report and Strategic Analysis Page 5
    • Macawa Tesco Plc.Substitutes Substitutes for Tesco’s main business model includediscount stores and online retailing. Thishas given rise to companies such as Ocado. Due to the current financial situation many consumers arefacing, the use of discount stores has grown significantly. This is the business model previously usedby Tesco, but in recent years, Tesco has broadened its strategy to include its “Finest” quality-basedproduct rangealongside its “Value” products aimed at the price sensitive market. (Tesco, 2012) Tesco is also extending into online retailing, but its main focus still remains the physical storeformat. Therefore, online retailing will remain an increasing threat which will have to be mitigated.This will involve Tesco integrating this new business format into its overall business strategy. (Tesco,2011a)Macro-Economic Report and Strategic Analysis Page 6
    • Macawa Tesco Plc. Strategic AnalysisFoundations of Strategic CapabilityPhysical Resources Tesco “endeavours” to management its property around the needs of its customers with theaim of creatinglong-term value for shareholders. This sees Tesco own stores of multiple formats fromits small “Metro” stores to its large “Extra” stores built in line with local demand. (Tesco, 2011a) Tesco’s main other physical resource is inventory. Tesco had £3bn worth inventory at the endof 2011, enough to last roughly 3 weeks. Due toswift inventory turnover, this resource has to becarefully managed and maintained to ensure customer demand is saturated with minimalwastage.(Tesco, 2011a)Financial Resources In 2011, Tesco’s cash balance fell 34% to £1.9bn. This fall can be of concern if sustainedover a long period of time. However, it can be argued that this money may be better investedelsewhere. Therefore, as long an appropriate level of cash is maintained, this should not be an issue ofserious concern.(Tesco, 2011a) Liabilities also fell to 53% of assets as compared to 57% in 2010. Due to the currenteconomic environment, this is positive news as it gives Tesco more room to manoeuvre in times offuture economic uncertainty. (Tesco, 2011a)Human Resources UK unemployment has risen in recent years, this sees the pool of potential candidates forfuture recruitment increase in regards to lower level operational roles such as checkout assistants. Thisgreater choice in candidates may allow Tesco to reduce long-term staffing costs. This is due to thepower Tesco has a potential employer to reduce staff pay and benefits.(Tesco, 2011a)Intellectual Resources As with any business, intellectual property isof significant importance to Tesco. Tesco’sFinest and Value brands both currently generate over £1bn in revenue each year. This means thatthese two brands are now the two largest food brands in the UK, ahead of brands such as Coca-Cola.This level of brand loyalty has helped Tesco maintain high levels of growth ensuring long-termshareholder value. (Tesco, 2011a)Macro-Economic Report and Strategic Analysis Page 7
    • Macawa Tesco Plc.SWOT AnalysisStrengths Strong growth in product diversity and international expansion reduces Tesco’s reliance on asingle market or product line. This creates stability in the long-term which has become increasinglyimportant in the uncertain economic environment. This is coupled with strong customer retentiontechniques such as Tesco’s “Clubcard” creating long-term customer loyalty. (Tesco, 2011a) Tesco has also seen its debt liabilitiessteadily fall over the last three years. This increases thelevel of credit available to fund future expansion. Due to Tesco’s size, it can also benefit fromeconomies of scale. (Tesco, 2011a)Weaknesses Tesco is heavily reliant on its UK market in which 60% of its sales are made. This iscompared to Wal-Mart and its British arm Asda. This is why in recent years;Tesco has put much morefocus on its international growth rather than in the UK where the market is already heavily saturatedwith a highly competitive environment. This growth in customer base and product range has alsoreduced the clarity as to what Tesco actually does and what it stands for, distancing itself from its corecustomer base.(Tesco, 2011a)Opportunities The retail industry has increasingly utilised technology to boost sales and cut costs. This includescustomers being able to buy their shopping online rather than in-store. This increase in customerconvenience can significantly boost sales if implemented effectively. This has also boosted Tesco’sproduct range into more heavy goods such as dishwashers. Tesco has done this through the launchingof its “Tesco Direct” catalogue. Staffing costs have also been kept down with the integration of self-service checkouts into Tesco’s stores which now account for 10m transactions per week. (Tesco,2011a)Threats Threats include the stagnation in future growth opportunities for Tesco in the UK. Thisincludes low growth figures for the UK retail industry. There is also the issue of EU competition lawwhich has limited company growth in the past when Tesco tried to acquire the British retailerSafeway. (This was blocked by the European Commission) Therefore, new growth opportunities willeither have to come from new markets or expansion into new industries such as banking. (NYTimes,2003)Macro-Economic Report and Strategic Analysis Page 8
    • Macawa Tesco Plc.Strategic Drift Tesco has encountered recent strategic drift in the UK due to their increasing focus on theirUS and Asian operations. This has contributed to the recent decline in Tesco’s UK sales which fell by1.2% in 2011. In the company’s view, this was partly down to the aggressive sales strategy of theircompetitors. (BBC, 2012b) Therefore, Tesco has started to refocus their UK strategy. This will involve investing £1bninto “revamping” their UK stores and hiring 8,000 new staff to improve customer service. This willform part of their strategy of “overhauling” rather than expanding their UK operations. (BBC, 2012b)Macro-Economic Report and Strategic Analysis Page 9
    • Macawa Tesco Plc. Strategic EvaluationValue Curve Value Curve - Supermarkets 5 4 3 2 1 0 Customer Value & Delivery Substitutions Placing the Quality of Service Special Offers order Fresh Food Sainsburys Tesco Asda (Which?, 2012) Value Curve - Online 6 5 4 3 2 1 0 Customer Value & Delivery Substitutions Placing the Quality of Service Special Offers order Fresh Food Ocado Waitrose Tesco (Which?, 2012) These value curves show that customer perception of Tesco is poor in comparison to itscompetitors. Here, Asda’s strategy is more price-based while Sainsbury’s is quality-based. This iswhile Tesco appears to have no clear differentiation strategy in regards to customer perception. This ismore apparent when comparing Tesco to its online competitorswho have clearly defined theirdifferentiation strategies. Therefore, Tesco needs to consider how it intends to differentiate itself inthe future in regards to customer perception.Macro-Economic Report and Strategic Analysis Page 10
    • Macawa Tesco Plc.Benchmarking (Tesco, 2011a) As we can see, Tesco’s growth rate in recent years has far exceeded that of its competitors.This increase in custom has been matched with a high customer loyalty rate. This helps ensureTesco’s long-term viability. Overall Customer Score 5 4 3 2 1 4 3.95 4 2.9 3.5 2.45 3.2 2.45 2.95 3.2 0 Ocado Waitrose Sainsburys Tesco Asda M&S In-Store Online (Which?, 2012) In regards to overall customer satisfaction, Tesco has performed relatively poorly comparedto the rest of the industry. This is surprising in relation to the high customer loyalty we saw earlier.Therefore, Tesco should use the time it has to improve customer satisfaction ensuring long-termcustomer retention.Macro-Economic Report and Strategic Analysis Page 11
    • Macawa Tesco Plc.Strategic Clock Tesco Tesco Finest Tesco Value (Marketing Teacher, 2012) Here, it is important to distinguish the different SBU’s within Tesco. Tesco’s “Finest” brandis more quality based focusing on customers with greater purchasing power. This fits the category ofFocus differentiation with a perceived added value leading to a price increase. In contrast, Tesco’s“Value” brand focuses on low cost alongside low perceived value, appealing more to the price-sensitive customer. This fits more with the low frills category on the Strategic Clock. (Tesco, 2012)This suggests that overall;Tesco has a Hybrid strategy, focusing on both, price and strategy.Conclusions In conclusion, the key drivers of change will be economics based in the short-to-medium termand social and technologically based in the long-term. The economic issues include the reduction in purchasing power of its UK customers leadingto a slowdown in industrial growth. This will prevent natural growth for all companies involved in theindustry, both Tesco and its competitors. This means the only way to grow in the UK market is to takemarket share from competitors. This will require an understanding of customer needs and wants,which is where Tesco’s “Clubcard” comes into use. In terms of technological change, if utilised effectively, technology will help keep control ofTesco’s long-term running costs and increase the range of revenue streams available to Tesco. Thisincludes the use of self-service tills, reducing the need to hire new staff. This is significant as staffingis generally the largest cost faced by many companies. Also, the increasing use of Tesco’s “Clubcard”and online retailing service will help Tesco understand current customer trends. This will help it adaptquickly and effectively to changing customer needs, giving it a key competitive advantage.Macro-Economic Report and Strategic Analysis Page 12
    • Macawa Tesco Plc. RecommendationsStrategy of “Delivery” As we saw in the Strategic Evaluation, Tesco’s competitors focus either on price or on thequality of their products. Therefore, in order for Tesco to differentiate itself from its competitors, itwill have to develop a much broader strategy. Based on the Value Curve, Tesco’s overall strategyshould focus on the “delivery” of its services, both online and in-store, improving the customerexperience.SBU Strategy This is while the different strategies utilised bythe different SBU’s within Tesco, it’s Valueand Finest brands,maintain their focus on price and quality respectively alongside this new “delivery”strategy. This will broaden Tesco’s customer base ensuring long-term stability.Clubcard& Redesigning Stores Tesco’s “Clubcard” will play an important role in this “delivery” strategy. The “Clubcard”will provide Tesco with information regarding how to plan the different aspects of such a strategy.This will include improving the layout of its stores to improve customer convenience and reduceshopping times. This redesigning of stores will also give Tesco the opportunity to reduce its impact onthe environment. This will improve the company’s long-term sustainability, reduce long-term costsand improve stakeholder perception of the company.New Technology This will include utilising new technologies as they are developed to help control long-termcosts and promote growth. These technologies will include extendingthe use of self-service checkoutsto reduce staffing costs. This reduction in staff recruitment should be implemented naturally over timeas to avoid the negative publicity associated with making short-term redundancies. This should seestaffing levels grow at a much slower rate as compared to revenue.This strategy should also extendinto Tesco’s online retailing. This will include making it easier for customers to use its online servicesand should be coupled with a reduction in delivery times.Dual Delivery Stream This dual delivery stream will differentiate Tesco from its competitors who generally havespecialisms in either online or in-store retailing. This broadening of retail streams will extend Tesco’sappeal to a wider customer base allowing Tesco to increase its market share in a stagnant UK market.Macro-Economic Report and Strategic Analysis Page 13
    • Macawa Tesco Plc. ReferencesBBC (2011) Tesco to fight dairy price-fixing fine from OFTAvailable at:http://www.bbc.co.uk/news/business-14473931[Accessed: 20th April 2012]BBC (2012a) Economy Tracker. Available at: http://www.bbc.co.uk/news/10613201[Accessed: 14thApril 2011]BBC (2012b) Tesco unveils profits rise and £1bn investment in UK. Available at:http://www.bbc.co.uk/news/business-17752194 [Accessed: 14th April 2012]BBC (2012c) David Cameron says UK must build a better economy. Availableat:http://www.bbc.co.uk/news/uk-politics-16626707[Accessed: 25thApril 2011]HM Treasury (2012) Budget 2012 [Online]. Available at:http://www.hm-treasury.gov.uk/budget2012_documents.htm[Accessed: 28th March 2012]Independent (2012) Tesco suppliers in price warning.Available at:http://www.independent.co.uk/news/uk/home-news/tesco-suppliers-in-price-warning-2361187.html[Accessed: 25th April 2011]Marketing Teacher (2012) Bowman’s Strategic Clock. Available at:http://www.marketingteacher.com/lesson-store/lesson-bowman.html# [Accessed: 25th April 2011]New York Time (2003) Britain Blocks Big Chains From Taking Over Safeway. Available at:http://www.nytimes.com/2003/09/27/business/international-business-britain-blocks-big-chains-from-taking-over-safeway.html [Accessed: 25th April 2011]Telegraph (2012) Tesco recovers UK market share. Available at:http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/9224301/Tesco-recovers-UK-market-share.html[Accessed: 25th April 2011]Tesco (2011a) Annual Report 2011 [Online]. Availableat:http://ar2011.tescoplc.com/pdfs/tesco_annual_report_2011.pdf[Accessed: 14th April 2012]Tesco (2011b) Corporate Responsibility Report2011 [Online]. Available at:http://www.tescoplc.com/files/pdf/reports/tesco_cr_report_2011.pdf[Accessed: 14th April 2012]Tesco (2012) Our Brands. Available at: http://www.tescorealfood.com/our-food/our-brands.html[Accessed: 25th April 2011]Which? (2012) Grocery prices: what you need to know. Available at:http://www.which.co.uk/money/bills-and-budgeting/reviews-ns/grocery-prices-what-you-need-to-know/top-of-the-online-supermarkets/ [Accessed: 25th April 2011]Macro-Economic Report and Strategic Analysis Page 14
    • Macawa Tesco Plc. SignatoriesWe commend this report to Ipag to be delivered on or by 7th May 2012 and laid out on 10th May 2012.Jason CatesIsaac ArjonaMaria Teresa RomanSabrina BorzaInmaculada GalvanMacro-Economic Report and Strategic Analysis Page 15