Tesco plc is a global retailer headquartered in Chesnutt, UK selling a variety of grocery and general merchandising. With group sales of £62, 537 million and profit of £3,395 million in the financial year of 2009/2010, it is the third largest retailer in the world and the largest in the UK (Tesco, 2010). Since of the foundation of the company in 1929, it has experienced a fast growth path and its store numbers, business operating and geographical coverage have all expanded (Biz/ed, 2010). However on the other hand, the external environment where Tesco is operating is not that positive. The UK retail market is very competitive and because of the economic downturn, customers become prudent in shopping. In this essay, the methods Tesco has used to grow its business and the reasons why it has used these methods will be discussed in the first section.
Next, a detailed PESTEL analysis will be provided to describe the external environment, together with a comment on the current position and a forecast on future performance in the UK.
Over the years, Tesco has applied multiple formats to achieve the growth. According to its Annual Report (2010), there are four key elements in its consistent strategy for growth.
1. To be a successful international retailer
2. To grow the core UK business
3. To be as strong in non-food as in food
4. To develop retailing services
First of all, Tesco has become a successful global retailer with business operated in 14 countries in Europe, Asia and America. Its first store outside the UK was built 15 years ago in Hungry and until now, there are more than 2,600 stores around the world with sales revenue of £19.4 billion in the latest financial year (Tesco, 2010). Despite the negative impact of the global recession, the international sales still grow 8.8% compared to Year 2008/2009 (ibid). Tesco’s international expansion has particularly focused on respond to the need of local customers. The majority of stores were built via joint ventures with local partners and the company appointed a very high proportion of local personnel to join in the management team. For instance, in Thailand customers are used to shopping at traditional wet markets,
talking with vendors and rummaging through piles of products to choose what they want. Therefore, rather than adopting the western approach, Tesco Thailand uses a different store format to meet local customers’ expectations (ibid).
Secondly, in terms of the core UK business, Tesco is definitely the market leader. With 30.7% of the market share, it is well ahead of competitors like Asda, Sainsbury’s and Morrisons (see Figure 1). A distinct feature of UK business is the increasing percentage of Tesco’s own brand. Tesco Value allow customers to afford products in this difficult economic situation, and together with the continuous investment in Tesco Clubcard and a new developed slogan ‘Every Little Helps’, the company is keeping providing value for customers (Corilis Research, 2004). Furthermore, Tesco has stayed ahead of competitors on key customer service measures. Its self-service checkout now accounts for a quarter of all transactions, and the company has trained more than 200, 000 staff to better service customers (Tesco, 2010).
Finally, Tesco provides different store formats to tailor customers’ needs. On one hand, it has over 960 Express stores offering customers great value, quality and fresh food close to their living and working space. On the other hand, it opens Metro stores in town and city centres to serve for busy customers with emphasis on food products such as ready-meals and sandwiches (ibid).
In 1999, Tesco only obtained 1% of the British non-food market share (Corilis Research, 2004). Hence, the company invested a lot to develop its non-food business, aiming to make the non-food as strong as in food. Today, it has made a good progress in this segment and in areas such as electrical, entertainment and toys the company has been quite successful (Tesco, 2010). For instance, 1 in every 4 small-screen TVs sold in the UK is from Tesco. In 2006 Tesco launched Tesco Direct, a new online and catalogue non-food business that consists of over 12, 500 products to compete with Argos. In terms of clothing, Tesco is making effort to make its F&F brand a leading global fashion brand with great value but not compromised by quality and design. Today F&F is sold in 10 countries, especially in Eastern European
counties and the like-for-like clothing sales there have increased 14% (ibid).
Finally, Tesco also runs various kinds of retailing service, such as the Tesco Telecoms, Tesco Bank and Tesco.com to offer customer more than one way to shop. Primarily, driven by Tesco Mobile, customer number from the telecoms business increased 14% in a declining pre-pay phone market. Now Tesco Mobile has also successfully entered the ‘pay monthly’ market and become the third UK operator offering iPhone (Tesco, 2010). In addition, Tesco Bank also achieved a good performance as profits increased by 13% to £250 million. Finally, the online-business through Tesco.com achieves a 14% increase in sales with profits rising 26% to £136 million (ibid).
After discussing the business growth strategy for Tesco, the second part of the essay will focus on the external environment where Tesco operates using the PESTEL Framework. PESTEL stands for political, economic, social, technological, environmental and legal (Oxford University Press, 2011).
Political factors refer to government policies such as tax changes, new laws and regulations and trade barriers that have either positive or negative impacts on the business operation of the company (ibid). Globalization has allowed companies to free trade between different countries. Immersion of 10 countries into the European Union took place in 2004 and promoted the trade between Western and Eastern European countries (BBC News, 2004). This provided Tesco with an opportunity to enter Eastern European countries and expand its retail network across the EU. Also, after China joined the WTO in 2001, Tesco quickly expanded its business to China which has huge market potential.
Economic factors are essential to Tesco because they directly affect customers’ purchasing behaviours. For example, from January 2011, VAT rate was raised from 17.5% to 20% (BBC News, 2011). Because of this, the majority of retailers will be negatively influenced since customers tend to shop less frequently. According to the research conducted by BBC, retail sales will fall by about £2.2 billion in the first quarter of 2011. However on the other hand, scholars also argue that Tesco will be benefited from this change since customers eat out less and cook more at home (Guardian, 2010). It must be noted that food is the last thing that customers will cut spending. Despite the economic downturn in the UK, the percentage of consumer spending on food has risen considerably over the years, as shown below (
UK has entered an aging society. As the office for National Statistics (ONS, 2008) states, for the first time, UK has more people over 60 years old than children under 16 years old. The aging population in general is discouraging for food retailers since older people tend to eat less. In addition, they are travelling to stores less frequently than the youth and are more price-cautious. Hence, Tesco increases the percentage of Tesco Value product range to cope with this phenomenon. Moreover, customers today concern more health and environmental issues than before. Consequently, an increase in the demand for organic food like Tesco Free Range Eggs has been accommodated by Tesco to reflect this change in consumer demand (Tesco, 2010).
Technology has become a key variable that plays a big role in the development of Tesco products. Today customers can easily finish online shopping and then ask for delivery. It is supported by the increased access to broadband internet in the UK. Besides the internet, mobile technology has also been used as another distribution platform. Since 2009 customers are able to buy the selected wine in Tesco directly from their mobile phone (Tomlinson and Evans, 2010). Finally, Tesco develops club card to provide value for customers and thereby discourage them from switching over to competitors.
There has been increased pressure on companies to acknowledge the importance of environment and their responsibility to society. Hence, Tesco introduced a Greener Living Scheme to give consumers advice on keeping fit and saving money, including how to reduce food waste and carbon footprint when preparing meals (Tesco, 2010). In addition, Tesco added carbon footprint data on dairy products, potatoes and orange juice, and aimed at expanding it to bread and non-food items in 2011 (ibid). Finally, customers are suggested to use environmental friendly recycling bags rather than plastic bags, which help to reduce the overall cost of Tesco.
The national minimum wage has risen from £5.80 per hour to £5.93 on 1st October 2010 (BBC News, 2010). It means that supermarket chains like Tesco that normally pay employees a bit higher than the minimum wage will increase their operating costs. Furthermore, as already mentioned before, though the rise in VAT will not have a big impact on food, it will definitely affect more the non-food sectors of Tesco, such as clothing and home general merchandise.
In conclusion, this essay has successfully explained the four main directions Tesco aims to grow, namely international market, core UK business, non-food sectors and retail service. The company is in a strong position in the UK and is developing fast globally. From the PESTEL Analysis it is clear that the company is operating in a difficult external environment. However, as long as it keeps its strength and adjusts strategy according to the changes in environment and customer preference, it is confident to argue that Tesco will continue its success in the next future.
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