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 Tescos resource
capability on their domestic market in UK.
Tesco is United Kingdoms leading hypermarket. They started out by operating in the food
industry, but as the business grew, they now operate within food, non-food (books, DVDs
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 Tescos business environment
3.0 Microenvironment – Porters 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 Porters five forces model
Digitalisation, globalisation and deregulation have become powerful forces during the last
years, but Porters models rarely take them into consideration. Todays markets are highly
influenced by technological progress, especially in information technology. Therefore it is
not enough to develop a strategy only on this model.
4.0 Macro environment – PESTEL analysis (Johnson et al 2006, p. 68)
4.1 Political (www.food.gov.uk)
UK has several important legislation and food laws. The FSA (The Food Safety Act)
provides the support for all food legislation in Great Britain. Some of these acts are:
* Falsely describing or presenting food
* Rendering food injurious to health
* Selling food to a purchaser which is not of the substance or quality as demanded
* Unsafe * unfit for human consumption
The companies within the food industry must operate under the governments regulations,
such as, the employment laws, Tesco employs over 250.000 people in UK which can be
difficult to control. Also environmental regulations and trade restrictions and tariffs are
something to be aware of. Political changes may affect the food industry if curtain
restrictions appear in the future, for that reason companies need to be flexible and ready to
change quickly. Tesco certainly is a company which has the power and knowledge to
change when difficulties occur.
4.2 Economical
Even though inflation rose to a high level at 3 % and interest rates rising to 5.75 %, the UK
economy is generally healthy (www.bankofengland.co.uk, 2007)
The economic growth is currently at 3,2 % (www.statistics.gov.uk, 2007), unemployment
has been falling since 1992 and the UK housing market continues to be buoyant with rising
house prices being a strong factor in maintaining consumer spending and confidence.
Companies in the UK are making record high profitability.
It is important to have in mind that, the American economy might be entering a harder
economical phase because of housing bubble and large loans – UK economy will then feel
it too. Companies in the food retail industry will suffer. Therefore, last years extremely
