Tesco Plc

COMPETITIVE FORCES

Tesco PLC is the market leader in the UK food and grocery sector. The grocery sector in the UK is one of the most competitive sectors in retailing. A few companies that trade nationally through larger supermarkets and superstores lead the market. The larger supermarket chains such as Tesco’s Sainsbury’s, Asda nd Safeway (who have recently merged with Morrison’s for an estimated Ј2.9 billion) have considerable buying power and influence on the food market as a whole, due to their retail supremacy. Due to this, the number of companies in the superstore market is fairly small. There are few regional companies and the smaller operators tend to compete in the market from smaller premises. Such operators are often classified as specialist foods stores or convenience retailers, which are not in direct competition to the supermarket chains.

The UK grocery market was valued at an estimated Ј103.4bn in 2001. (Source: Keynote) The food market is one of the most recession-proof in the economy. During the last recession spending on food maintained as other sectors suffered, as consumers seen food as an affordable necessity.

The core business of supermarkets is food sales and expenditure on food in the UK has been growing every year for over a decade. The increase in travel and cookery media has gone some way towards educating consumers in food and encouraging them to be more experimental. The supermarkets and food suppliers have observed this and have provided an extensive range of convenience foods, which take less time to prepare. This added value can then be retailed at a premium.

In order to carry out a structural analysis of the sector, Michael Porter’s Five Forces Model will be used. This is the most significant analytical model for assessing the nature of competition in an industry. See figure 1.

Figure 1: Source: Competitive Strategy: Techniques for Analysing Industries and Competitors. (M.E Porter)

As can be seen from the diagram above Porter has identified five key elements. This framework assists in identifying the sources of competition within in an industry or sector. At this point it is important to note that the forces are not independent of each other and the framework should be used for specific business units (strategic level) and not the organisation as a whole.

THREAT OF NEW ENTRANTS

Threat of new entrants depends largely on the barriers to entry and is the number and quality of potential competitors that may enter the industry. This varies from industry to industry and in the case of the supermarket sector it would be extremely difficult to enter in order to compete successfully as entry barriers are high.

BRAND LOYALTY

In order to boost brand loyalty and profitability Tesco’s have engaged in additional roles, such as pharmacies, newsagents, clothes stores, and petrol retailing. In recent retail analysts it uncovered that approximately Ј15 billion was spent on non-food items in the leading supermarket chains in 2002. This is seen as a potential growth area for Tesco’s and will bring Tesco’s closer to the “one stop” shop. Supermarkets are also engaging in new fields such as insurance, banking and Internet shopping. In 1997 Tesco’s united with the Royal Bank of Scotland to offer a wide variety of financial services, including the Tesco Visa card.

ECONOMIES OF SCALE

Economies of scale may occur at store or company level for Tesco’s. At store level it would depend on factors such as:

• How the location and region impact on stores costs and

• Whether there are economies of scale at company level for e.g. (in operating an efficient distribution system) which might act as a barrier to any potential new entrants.

At company level factors to consider would include:

• Buying in large quantities and improved supply chain efficiently.

• Using more efficient distribution and

• Spreading fixed costs over a large sales volume.

The cost of providing retail services will differ across regions and countries due to differences in property costs, staffing and transport costs, variations in the degree to which economies of scale are achievable, and differences in pricing strategies.

CAPITAL REQUIREMENTS AND EXPERIENCE

The capital requirements in entering the supermarket industry are huge. “The requirements vary accordingly in relation to technology and scale.”(Johnson and