Analysis of Tesco

Tesco

1.0 Introduction

In my assignment the focus will be on analysing the business environment within the food retail industry in relation to Tesco. Also, there will be an analysis of Tesco’s resource capability on their domestic market in UK.

Tesco is United Kingdom’s leading hypermarket. They started out by operating in the food industry, but as the business grew, they now operate within food, non-food (books, DVD’s and clothes.) and they sell different services like car and travel insurance, telecommunication products and have their online site Tesco.com, where you can buy everything online and get It delivered directly to your door.

Since the mid-90s, Tesco has been investing in new markets overseas like Poland, Hungary, Thailand, China and now USA. The group operates in 13 markets outside the UK and is expanding their business throughout the globe.

2.0 Task A – analysis of Tesco’s business environment

3.0 Microenvironment - Porter’s Five Forces (Porter, M.E - 1980)

3.1 Threat of entry

When a new competitor enters the food retail industry, the entry is low, but there are high barriers to entry, the important factors are seen below.

The newly started company would not be able to get the same cost benefits as the experienced players in the industry like Tesco. When entering the food retailer industry, the capital requirements is quite high. It is needed to rent/buy a store, either take a loan in the bank or use your own capital and arrange a deal with different food suppliers. As a new player in an industry it is hard to know the supply and distribution channels, so the company may not know where to begin and whom to negotiate with.

New players do not have any experience in the specific industry, so experience and knowledge in the food retail industry is gained when the company has been in the game for years, for that reason it is tough for newly started retailers.

3.2 Threats of substitutes

The threat of substitutes in the food retail industry is minimal, people need their everyday groceries. There might be a turnaround in the way people eat, if we look at take-away food and going out for dinner more often. This could have a small influence, but not enough to see a large decrease in the food retail industry.

3.3 Buyer power

The buyer power is high in the industry because the consumer can easily choose between ASDA, Tesco or Sainsbury etc. The importance is often which retailer is closest to the consumer. Since the buyer power is high the cost of switching is very low.

3.4 Supplier power

Supplier power is relatively weak because there are a large number of supermarkets and a small numbers of dominant buyers. But we must have in mind that large suppliers such as Proctor and Gamble or Unilever have countervailing power.

3.5 Rivalry

The rivalry is high in the industry because of a very competitive market industry. As seen in table 1, Tesco is the market leader in UK; however, the five largest players have a market share of 65.6 % which indicate that it is an oligopolistic market. It is a high capital industry and a new market challenger must have financial resources on a very high level.

Because the food retail market in UK is a mature market, growth is achieved by taking market share from competitors.

Table 1 Grocery market shares, 2006-2007

Retailer 12 weeks to 26 March 2006 (%) 12 weeks to 25 March 2007 (%)

Tesco 30.6 31.2

Asda 16.3 16.9

Sainsburys 16.0 16.4

Morrisons 11.3 11.1

Somerfield 4.0 3.7

Waitrose 3.7 2.9

Iceland 1.6 1.6

Netto 0.6 0.6

Lidl 2.1 2.2

Aldi 2.3 2.4

Kwik Save 1.4 0.2

Other multiples 1.5 1.5

Total Coops 4.7 4.7

(www.nfuonline.com, 2007)

Criticism of Porter’s five forces model

Digitalisation, globalisation and deregulation have become powerful forces during the last years, but Porter's models rarely take