Tesco Analysis

1. MARKET STRUCTURE

The market in which Tesco operates is supermarkets. Although this is a highly competitive one Tesco holds a disproportionate amount of power. The figures below indicate that Tesco holds over a third of the market share, and even double the amount of Asda’s market share, the second leading supermarket. Market share is ‘the percentage or proportion of the total available market or market segment that is being serviced by a company’ (Wikipedia 2006).

SUPERMARKET SHARE

Tesco: 30.6%

Asda: 16.6%

Sainsbury's: 16.3%

Morrison's: 11.1%

Somerfield: 5.4

Waitrose: 3.7%

Iceland: 1.8%

(Source TNS cited by BBC 2006)

Therefore it may give a more accurate picture in saying that the market structure in Tesco’s case is oligopoly meaning there is a ‘small number of large producers’ (Britton et al 2005, p221) whereas a perfect competitive market would mean that it would be characterised as being price takers dependant upon supply and demand. Tesco is the market leader in the UK and 5 international countries (Tesco 2006).

Due to the fact that they are in an oligopoly market, Tesco’s decisions would be mainly influenced by the decisions that their other few competitors, such as Sainsbury, are making too as well as how they are likely to respond to Tesco’s actions, which include their expansion into other product ranges, integration, and price strategies.

2. BARRIERS TO ENTRY AND PRICE STRATEGIES

Barriers to entry within this market have proven to be very difficult to overcome. Examples can be seen in the past such as when Morrison bought Safeway out. However the outcome has proven not to be as successful as hoped as currently Morrison’s market share is actually falling from 11.3% to 11.1% over the period (BBC 2006)

However, Tesco attempted to buy Safeway but their bid was rejected as it was feared that they would become a monopoly as they already hold a large percentage of the market. This would mean that Tesco would gain so much power that they would become a price setter instead of taker. This would make it almost impossible for other new firms to enter the market and current ones to compete at the same level. Tesco is able to offer low prices due to its power especially with their suppliers who have little choice but to offer the products at a lower price than they may really want to, but are forced to because of the high orders placed by the supermarket. There has been a lot of media coverage over their ethics in this department. Tesco can then pass this low price onto their customers by setting their prices at low value and even do price checks.

‘Every week we check over 10,000 prices in Asda, Sainsbury’s and Morrisons stores to guarantee you low prices every day’.

See how our products compare on price this week:

Against Tesco is cheaper Tesco is the same price Tesco is more expensive Based on no. of lines found

NO. OF PRODUCTS NO. OF PRODUCTS NO. OF PRODUCTS NO. OF PRODUCTS

Asda 1547 5435 1177 8159

Sainsbury's 5485 3663 552 9700

Morrisons 3400 2601 357 6358

(Tesco 2007)

Barriers of entry are also high because of the market structure. Supermarkets are price setters meaning they are able to use entry preventing pricing. According to Bain (1947), (cited Britton, p280, 2005), this price strategy ‘brings the possibility of abnormal profit which existing firms are eager to protect’. This means that supermarkets, especially Tesco due to its high market share, use this to prevent other firms trying to enter their market, which could be a threat to the amount of profit that they would make.

A characteristic of oligopolies is that they use strategies in order to maximise their profit. Due to Tesco’s power, it is able to set the prices in the market, allowing other companies to follow.

Tesco provides substitute products such as ‘Tesco Value’ as an alternative to customers with a lower income in order for them to decrease the level of competition. Therefore customers need not change their supermarket if their income falls, so the level of customers will remain constant. This also means