What was Tesco business strategy that made it the #1 retailer in the UK? In this analysis, you will learn about strategy of Tesco, its management plan, and other aspects. Don’t miss the best recommendations for the Tesco company that could lead to the international expansion.
Introduction
Tesco, Plc is a giant British retailer with a strong presence in two industries, namely, retail and banking. The retail industry covers grocery, Tesco direct, and clothing while the finance segment includes Tesco bank and insurance (Datamonitor 2010). It is headquartered in Hertfordshire in the UK, but has other outlets in Europe and Asia. In Europe, Tesco has a presence in France, Hungary, Poland, Slovenia, Ireland, and the Czech Republic (Datamonitor 2010).
This report analyses Tesco’s retail segment in its primary market of the UK, the competitiveness of the retail industry, its strategic positioning in this market, and potential marketing strategies, using Porter’s five forces analysis and SWOT analysis. Based on the findings, recommendations on the best competitive strategy will be provided.
Competitiveness of the Industry
Tesco’s primary industry is retail, which entails the sale of commodities in small quantities for “consumption by the buyer, not for resale” (Johnson, Scholes & Whittington 2008, p. 17). The retail sector thus occupies a terminal point in the downstream supply chains. The Porter’s five forces analysis applied to Tesco can determine the competitiveness of the industry.
Porter’s Five Forces Analysis
The Porter’s five forces are useful in evaluating industry structure to determine the “sources of competitive advantage” (Thompson et al. 2012, p. 149). Applying this tool to Tesco will reveal the firm’s competitive position in the industry.
Threat of Substitutes
The grocery retail sector has no direct substitutes for food products. However, organic and other specialty shops can compete with large retailers by offering discounted prices. For non-food segments, such as clothing, the threat of substitutes is high due to the large number of players. Retail segments may also substitute each other, e.g., online stores can replace general stores (Powell 2001). Overall, the threat of substitutes in this industry is not high, which means that Tesco’s can compete effectively in this sector.
Threat of New Entrants
The retail industry requires massive capital investment and resources to create brand equity, conduct market research, and set up convenience stores. The UK retail sector is dominated by four major players, namely, “Tesco, Asda, Sainsbury’s, and Morrisons”, which together control about 80 percent of the market (Retail Economics 2014, p. 4). New firms face the challenge of providing superior quality products at cheap prices to compete with the established retailers with economies of scale advantages and online stores. In addition, according to Thompson et al. (2012), stringent and lengthy registration process for setting up a retailer restricts new entry. For these reasons, the threat of new entrants is small in this industry.
Competitive Rivalry
Competition in the grocery retail segment is stiff. Tesco competes directly for the UK market with big retailers, such as Asda and Morrisons, on prices and product offerings (Brand Finance 2014). In particular, Asda, Sainsbury’s, and Morrisons, with a market share of 17.3%, 16.6%, and 11%, respectively, are the key competitors of Tesco, which controls 28.7% of the market (Wood 2009). The growth in the market share of small players, such as Aldi, is a threat to Tesco’s market dominance. In addition, some retailers, such as Co-op, dominate the rural market. Thus, competitive rivalry is relatively high in the UK retail industry.
Buyer Power
The retailers differentiate themselves on price and product offerings. According to Euromonitor International (2016), the UK consumers consider prices and online retail services when making shopping decisions. The retailers offer standardised products and loyalty programs to consumers. Shoppers can easily change retailers because of low switching costs. However, the large size of the retail market means that the loss of few customers has an almost negligible effect on sales (Datamonitor 2010). In this view, shoppers have a low bargaining power over the big retailers.
Supplier Power
Big retailers, such as Tesco, account for a large percentage of the revenue made by grocery suppliers. In addition, the number of suppliers competing for the retailers is high. Thus, the retailers can switch between suppliers without incurring significant costs (Thompson et al. 2012). This scenario places the supermarkets in a favourable position in negotiating with suppliers for lower prices. However, some providers with strong brands have significant supplier power because the retailers have to offer their products. Thus, supplier power can be considered moderate.
Tesco Strategic Positioning
Evaluating a firm’s strategic position focuses on the external environment, i.e., opportunities and threats, and internal environment, i.e., strengths and weaknesses (Kotler et al. 2013). A SWOT analysis evaluates the internal strengths and weaknesses of a firm as well as the external threats and opportunities.
SWOT Analysis of Tesco
Strengths
Tesco is a big global brand in the retail industry with a strong presence in Europe and Asia. It owns more than 4,300 stores worldwide, runs online stores, has a strong brand name and streamlines supply chains, and offers wide-ranging customised portfolio that it can leverage on to compete effectively in this sector (Datamonitor 2010). Its dominant position in the UK (28.7% market share), strong growth, and quality standards are a source of competitive strength for the firm (Tesco 2015). Tesco runs a loyalty program dubbed ‘Tesco Clubcard’ for its customer relationship management. It has deployed CRM systems for market research to inform its marketing strategies.
Weaknesses
Tesco recorded a loss of £6.38bn in 2015, an indication of declining performance. According to Pearce and Robinson (2012), high recall rate contributes to sales decline and dents the firm’s reputation and quality perceptions. The firm has a strong presence in the UK with minimal operations in other countries. The limited regional diversification is a constraint to Tesco’s global competitiveness and growth. In addition, Tesco has diversified into banking and insurance, a strategy that has reduced its revenue due to huge bad debts and claims (Ma, Ding & Hong 2010). The firm’s limited experience in these areas is a weakness of its diversification efforts.
Opportunities
Tesco has opportunities in regional markets in emerging economies. The firm should consider diversifying into Asian markets, such as India, Malaysia, and Thailand, to spread operational risks and benefit from the economies of scale (Schiraldi, Smith & Takahashi 2012). Online stores, e.g., Tesco.com, provide an opportunity for Tesco to grow its sales, minimise costs, and attract customers beyond its geographical reach. Franchise agreements could also provide overseas expansion opportunities to Tesco. The retailer has franchise agreements with Trent, a conglomerate whose operations are limited to the Indian market (Schiraldi, Smith & Takahashi 2012). Digital entertainment is another attractive sector that Tesco can diversify into through branded tablets and phones.
Threats
Direct competitors, such as Asda, and discounters like Aldi pose a significant threat to Tesco’s dominance of the UK retail sector (Bunn & Ellis 2012). International brands, such as Wal-Mart, have made inroads into the UK through partnerships with Asda (Bunn & Ellis 2012). In addition, the increasing preference of out-of-town stores, such as Co-op, may reduce Tesco’s sales because it has its outlets in cities. Economic slowdowns and unemployment may affect the purchasing power of consumers and lead to a reduction in Tesco’s sales. Tesco’s non-food (clothing) segment also faces competition from providers of luxury and fashion products in Europe.
Tesco Potential Business Strategies
Tesco is poised to promote its future competitiveness through diversification and product differentiation strategies. The firm may use its diversified retail strategy to attract more customers to its online stores, physical stores, and digital entertainment segment. The diversification strategy will enable Tesco to overcome the current challenges and risks. According to Kotler et al. (2013), flexibility enables firms to remodel their plans in a way that mitigates the risk of failure.
Tesco’s decision to close down its Fresh & Easy stores in the US in 2013 was motivated by adverse market changes (Ma, Ding & Hong 2010). With a diversified retail strategy, the company can leverage on well-performing segments to continue operating when other brands are not performing well.
Besides product diversification, Tesco is likely to use geographical diversification to avoid risks inherent in the UK market. This may involve franchise agreements with small players in emerging markets in South East Asia and Latin America. A franchise entry mode centred on quality customer service, fair pricing, good choice selection, and use of local suppliers will enable Tesco to make a successful entry into these markets. Tesco recently contracted Trent to run its franchise in India in a bid to diversify into the India market (Ma, Ding & Hong 2010). Tesco is likely to pursue the same mode to enter other emerging markets.
Tesco may also use a strategic business unit (SBU) to enhance its competitiveness in its product segments. Koen, Bertels, and Elsum (2011) state that a strategic business unit covering a firm’s operations, financial targets, supply chains, and geographic reach, among others can help a firm strengthen its competitiveness in its market segments. Tesco utilises four SBUs, namely, the “UK Core, Tesco International, Non-Food, and Retailing Services” (Wood & McCarthy 2014, p. 134).
The UK Core focuses on the domestic market while Tesco International controls the firm’s overseas operations. The Non-Food segment manages the sale of household items, such as clothing and machinery, while the Retailing unit controls online stores, banking, and insurance (Tesco 2015).
The retailer is likely to pursue the international SBU to maintain flexibility and support foreign operations. Such a strategy includes the creating effective supply chains within the host-country, compliance with regulations, broad product offerings, brand development, and CRM (Lynch 2006). This approach will enable the retailer to tailor its products to the characteristics of the local customers. Tesco entered the US market with the Fresh & Easy brand in a bid to resonate with the local market tastes and culture. The company is increasingly exploring other markets in India and China to benefit from economies of scale.
The SBU structure will give the retailer the flexibility to diversify into non-traditional segments. In particular, Tesco can develop branded gadgets, such as smartphones, that expand its primary services. The retailer can use vertical integration to expand its non-food segment, which includes clothing lines, by collaborating with fashion designers. Tesco will also pursue a custom-tailored marketing strategy when entering new markets.
In entering California, the firm developed a new brand, Fresh & Easy, which reflects the local values and preferences. As Piercy, Cravens, and Lane (2010) put it, the in-city stores offered fresh groceries and organic food that were highly sought-after items in this underserved market. Therefore, the firm is likely to offer custom-tailored products to integrate into the local culture and establish a footprint in the industry.
Strategic Recommendations for Tesco
For Tesco to compete effectively in the global retail industry, an international expansion strategy is recommended. The retailer should look for opportunities for expansion in emerging markets to avoid systemic risks in the domestic market that is increasingly becoming crowded with local and international players, such as Wal-Mart. The expansion strategy should entail five elements. First, the strategy should be flexible to adapt to market changes and meet local customer needs. Second, the product offerings should reflect local tastes and preferences.
As indicated earlier, Tesco’s entry into the US market used the Fresh & Easy brand that resonated with the local tastes and expectations (Rijamampianina, Abratt & February 2003). In this view, Tesco should consider the characteristics of local consumers when developing brands as opposed to offering the same products in all markets.
The third element of the recommended strategy is the use of multiple formats. To compete beyond Tesco’s geographical reach, the firm should use a wide spectrum of outlets, including physical stores and online stores. Tesco utilises a differentiated store format in its UK operations. These include “Express, Metro, Superstore, Extra, and Homeplus” to cater for diverse client needs (Blythman 2012, p. 67). The multi-format approach should be part of the international expansion strategy. Franchise agreements with local players in overseas markets will also boost Tesco’s expansion efforts. In addition, backward integration with local suppliers and financial institutions can help strengthen Tesco’s non-food segment.
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