Tesco Barriers to Entry

Tesco PLC is a British international merchandising retail chain. It is the largest British retailer in global sales and domestic market share. Their profits exceeded £3 billion in 2009 and employ around 440,000 employees. It is the third largest global retailer based on revenue and second largest in profit

Tesco operates 923 in national and international circuit, it gives them access to a population over 260 million across nine markets in different continents. Over the past five years, Tesco have expanded from a traditional UK supermarket into providing a variety products and services, including food, non-food business, personal finance and internet shopping. The increasing scale and globalization of their operations has provided significantly contributed to their efficiency and profitability.

Even though it has been a very for consumer the company’s confidence has fallen as people worry about unemployment and are struggling to manage their household budgets. At Tesco there has been a shift in priorities of the customers Tesco constantly monitored their prices on their food items and changed their value chain strategy to cut cost , cater to the needs of the customers and eventually to make profits.

TESCO MARKET ENTRY STRATEGY

The plank of Tesco’s entry strategy has been the use of their own-brand product. These are divided into three categories

PRODUCT RANGE

Finest: High quality food with highest price rages

Mid-range Tesco brand : Medium quality and average price range

Low-price Value brand: Low quality products with lower price value

These product ranges of items are available to the consumer market in their retail format stores

Tesco Extra: These are significantly large out of town hypermarkets which stock all of Tesco’s product ranges; the minimum shop floor is of 119,000 sq feet.[‘

Tesco Superstores: They are standard supermarkets stocking primarily groceries and other smaller non food goods.

Tesco Metro: They are stores which functions between superstores and express stores, they are mainly located in city centers and high-street, they cater ready to eat food, refrigerated food and deli food to working class consumers.

Tesco Express: Tesco Express stores are neighborhood convenience shops, they stocking mainly food with particularly on higher-margin products.

Tesco Direct: Tesco Direct is an online store, where consumers can purchase items online and can collect it from a store or choose to deliver at home.

OBJECTIVES OF MARKET ENTRY STRATEGY

• To cater to variety of food products at different price level satisfying different income levels
• To operate at an economy of scale there by able to have a control over the price
• To be accessible in all levels of the geography
• To gain significant market share
• To be able to compete in the highly significant technological and infrastructural environment.

BARRIERS OF ENTRY

Market Structure

The market in which Tesco operates are in daily grocery market. Although, this is a highly competitive segment Tesco holds a huge proportion of market share, This type of market structure is highly volatile, continuous development and innovation is required by Tesco to keep the market share.

Threats of substitutes

The fear of substitutes in the food retail industry is minimal, but with higher number of super markets and convenient stores people have variable option to choose their product from.

Buyer power

The buyer power is high in the industry because the consumer can easily choose between ASDA, Tesco 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.

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.

Rivalry

The rivalry is high in the industry because of a very competitive market industry. As seen in table, 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.

ANALYSIS

The strategy used by Tesco in UK and Europe has been largely successful because of home territory advantage and supply chain control, the organization can control price of variable and change the price of food accordingly and this gives them a successful edge of other competitors like Asda and Sainsburry.

With the plan of expansion significantly towards the east, Tesco has been struggling to gain momentum in these markets. The following are the recommendations for Tesco entering foreign markets

Identify the market opportunities: Tesco has to understand the retail structure of the country and understand other elements such as suppliers, transport, home grown facilities.

Market to enter: Which region to focus their market depending on their variables such as, competitors, standard of living

Nature of food product: The variety of food product available within the company and international food supply.

Understanding buying behavior: Understanding buying behavior is an psychological task, behavior has to be monitored and market research has to be setup to provide products that are best suited to consumer of that country.

PESTEL ANALYSIS

The analysis provides a framework for macro-environmental factors that used in the environmental scanning. It is a part for monitoring macro variable factors while understanding a strategic analysis. It is a useful strategic tool for understanding market growth or decline, business position, potential and direction for operations.

PESTEL analysis for TESCO

(P)olitical (www.food.gov.uk)

UK has a variety of important legislation and food laws. The FSA (The Food Safety Act) provides 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 government’s regulations, such as, the employment laws.

Tesco’s Impact

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.

(E)conomical

Even though inflation rose to a high level at 3 % and interest rates rising to 5.75 %, the UK economy is rising the fallen (www.bankofengland.co.uk, 2008)

The economic growth is currently at 3,8 % (www.statistics.gov.uk, 2009), unemployment has been falling and the UK housing market continues to be buoyant with rising house prices being a strong factor in maintaining consumer spending and confidence but retail companies in the UK are making record negligible profitability.

It is important to have in mind that, with the American economy entering a harder economical phase because of housing bubble and large loans – UK economy is feeling is feeling the heat too. Companies in the food retail industry are suffering the consequences. Therefore, profit are increasing because consumers are tending to be thrifty.

Tesco’s Impact

Even though with the financial turmoil Tesco’s has been able to hold an upper hand, the company uses its value product more efficiently to cater to their customers need and budgeting procurements. Higher interest rates and rising labor costs have adversely impact Tesco’s margins negatively

(S)ocio-cultural factors

The annual income in UK has been increased since 2001 and is expected to increase even more in the future (www.euromonitor.com, 2007) which is connected with an healthier economy predicted in UK.

Another important factor is lifestyle changes, it has big impact on consumer habits and expenditure, some of these factors are weight loss and dieting, which increases focus on health products in the food retail industry.

“It is not so much a question of developing new products but increasing dietary information and educating consumers on a healthy lifestyle in a way that is more actionable for them “The early adopters of this approach include British retailers like Sainsbury and Tesco, both of which have ‘diet’ ranges that do not include this word on packaging. Instead their ranges are branded as ‘healthy’, often emphasizing heart health, a major issue associated with obesity”. (www.nutraingredients.com)

Also consumerism is central, it is linked to consumer expenditure, as you see below the forecast is showing increasing spending in the UK from 2006-2013, which is essential to the food retail industry

Tesco’s Impact

Tesco has been analyzing variety of consumers through their market research campaign; the stores have catered not only to consumer’s income levels but their diversities. Tesco’s has special aisles dedicated to Chinese and Indian consumers.

(T)echnological

UK government spent approximately 22bn on technology in 2005 (www.zdnet.co.uk) which is double as much as ex. Germany. It indicates that UK is willing to spend a large amount on the future within the technology area. The speed of the technology transfer in the UK rises while internet users increase every year, see forecast below

Tesco’s Impact

The technological development in Tesco and other retail industry is emerging. New technologies such as self-service technology are becoming popular. The dependence on human services in Tesco retail is fast reduced by machines, this help the company reduce the prices of goods and cut operational cost. The technology gives the consumer the possibility to check-out by them self and it gives the retailers cost advantage because of less till employees – it is a win-win situation.

Environmental

The green issue is becoming more and more relevant in society. Especially businesses needs to take part in the future of recycling and waste programs set up by the government. The framework of this is: (www.defra.gov.uk, 2007)

Tesco’s Impact

• Phase out the use of free disposable bags in store and bag free delivery from the online shop. (www.tescocoporate.com)
• Reduce food packaging – use in-store devices to deliver product information instead. (Retail Week, 2007)
• The Business Resource Efficiency and Waste program -Tesco advises and help other businesses on how to reduce and recycle their waste, with £4 saved by business for each £1 of government money.

Legal

Retail companies like Tesco needs to be aware of commercial and consumer laws like Sale of Goods Act 1979 which regulates contracts in which goods are sold and bought , food safety laws mentioned before and consumer protection laws, which protect the consumer against unfair and deceptive practices. Also fair trading which makes markets work well for consumers ex. The Office of Fair Trading (www.oft.gov.uk). These laws and acts can have a negative effect if not researched or taken into consideration.

Tesco’s Impact

Over the years Tesco has aided legal laws regarding consumer behavior including government legislations the company follows their own set of standard rules and regulations which enhance customer satisfaction.

VALUE CHAIN ANALYSIS AT TESCO

(using Potters principals)

Inbound Logistics

The inbound logistics is of critical importance in the Tesco value chain, because of the strong bond between Tesco and its suppliers.

Tesco needs to make sure that the stores get the right products at the right price, the right quality, the right quantity and of course at the right time. Balance between these elements is central, so at the end, the consumers get what they want. The inbound logistics is one of Tesco’s competitive advantages and deals with reception of products, staff scheduling, facilities planning, stock control and storing.

Operations

The operation within the Tesco organisation is in fact all the different products arriving to the store and placed in-store. Tesco buy large amounts of groceries, clothes, electronics etc. so they get the advantage of economies of scale, then they increase the price and sell it direct to the consumer with a positive margin. That is very simplified how Tesco’s operation works, of course there are things to be done before they sell it, like packaging, machining, testing of products, assembling, till operations and store operations.

Outbound Logistics

The outbound logistics is a smaller area in the organisation because Tesco do not have to send things out of their stores; customers come into the store and pick up their groceries, pay at the till and go out again. However, queuing management is important, so the customer gets a quick and efficient check-out. The location of the store and the car park outside the store is also central and linked closely to the consumer when they leave the store.

Customer management is essential for the reason that Tesco is customer driving and the company needs all the information they can get about their customers to develop customer relations.

Marketing and Sales

Because of Tesco’s size, the company uses many marketing tools like Public Relations, advertising, promotion and in-store layout which “hit” the consumer on all senses when they shop. Tesco also have many in-store sales techniques, from different price schemes like expensive, less expensive and cheap areas in the store, in addition to price comparison with ASDA and J. Sainsbury etc. They do everything there is to capture the customer while they shop at Tesco’s and try their best to make sure people will come back. Another marketing scheme is their vouchers, you can actually use an ASDA voucher in the Tesco store and that is a perfect example of the sales techniques and Tesco’s willingness to capture customers.

Service

Tesco has many employees working all around the store, if you cannot find a special article at the store and asks an employee, they will either show you where it is or find somebody who knows about the article. Another service is when people check out and pay the employee at the till always asks the costumer if they need any help with packaging.

Service outside the store is provided by the effective www.tesco.com where people can buy groceries, clothes and electronics online. Furthermore Tesco has a service and repair group who concentrates on everything that evolves service and repairs of product.

Support activities – Firm Infrastructure

When a company grows as big as Tesco, the management structure will be divided into several areas as they do not only operate in their domestic market but are a global company. That is why Tesco now has a manager in all the major areas. The organizational structure is centralized at Tesco because it gives greater control, better goal congruence and greater expertise. In addition, Tesco has a multidivisional organization structure which is clear because they have so many different directors working in different divisions around the organization.

Tesco also has a large legal department where they focus on the treatment of new suppliers.

Human Resource management

Tesco employs over 250.000 in the UK only, so dealing with recruiting the right people and developing the right teams in the stores has a huge impact on the firm. Tesco educate the employees by sending them to employment-training programs and some of the managers to management and leadership courses, to prepare them for the problems that often occur in the company and in the stores.

Technology Development

Tesco make use of many technological tools like information systems and use IT for stock control. They have IT systems about customer satisfaction and databases with information about the club card holders. To develop check-out satisfaction they use self check-out tills.

The internet is becoming more and more important and www.tesco.com is a good example of another technology initiative which has become a success since they launched their online shopping service in 1997.

Procurement

Tesco deals with a lot of procurement like the buildings they operate their stores in, the IT equipment and buying tills for the stores. Things people do not think about when shopping at Tesco’s like the lightning in the store, air-conditioning, ovens for the bakery and the take-away food, cleaning machines etc. A huge corporation like Tesco operates so many machines and spends millions on procurement which needs to be controlled by the management.

FINANCIAL STATEMENTS

Good financial management and being the leader in market positions has served Tesco well during the year to face the challenges of consumer environment. The objective of the organization is to continue the pursue long-term strategy which would help the management to be in a much stronger position once the markets emerge from the economic meltdown.

BALANCE SHEET ANALYSIS

From the balance sheet we can understand the development of Tesco over the years; the company has increased their fixed asset by increasing their level of plant and property. This is largely due to the new hypermarkets and supermarket which Tesco guaranteed to provide by the end of 2008. Investment and joint ventures decreased of the company, last year the company recognized a joint venture in India with Tata group to support a retail store under the brand name “STAR-BAZAR”, this was one of Tesco’s entry strategy to method to flag ship the Indian market. Loans and advances to customers increase, this was result to “pay back later” strategy issued by Tesco in their retail format.

INCOME STATEMENT ANALYSIS

Revenue for Tesco has increased over the past years, even with impact of recession but the profit was marginal. Along with the revenue, the cost of sales has increased too. Tesco over the year used certain promotional activities to increase revenue, one of their tactical methods was issuing promotional coupons but a part of the revenue mentioned includes unredeemed coupons.

CASHFLOW STATEMENT

Tesco derives most of their cash from their operating activities; their core business involves a lot of inflow and outflow of cash. Most of the cash flow out flow is for purchase of building, equipment and purchase of land, Tesco has significantly increased their joint ventures as a technique to capitalize international market.

FINANCIAL ANALYSIS

The operating profit of the firm has reduced marginally from 5.9% in 2008 to 5.4 percent in 2009. It shows that the firm has been controlling their cost in generating profit from sales especially at the times of recession; this also resulted in the fall of net profit margin. The first quarter improvement in 2010 has proved the company has got out of recession and growing into greater strengths and better economic times await the firm.

BENCHMARKING

Tesco is second largest retail in Europe in terms of revenue, with the company growing rapidly it is a growing threat for other large retailers. Wal-Mart and CarreFour have strategically emerged into global leaders, the variable factors which these company focused to grow big are

Location: Wal-Mart and CarreFour has a total of 7,262 and 5643 stores respectively worldwide. Each and every store that Wal-Mart and CarreFour have opened in the past have been strategically assessed through the stages of macro location. The choice of a supermarket location is considered to be the single most important decision a retail organization has to make and is critical factor of success include

• Mobility and Time constraints
• Access to infrastructure
• Convenience for customers, suppliers and employees

Tesco should understand location will impact on sales and distribution costs and competitive intensity may vary if there are strong local competitors in some regions. By implementing their location in apt geographic location the management can take advantage of lower distribution, assembly, raw materials or energy costs, and institutional factors such as government regulations. Cost may outweigh the benefits of owning a store in certain locations.

Store Layout: Store design is a vital role to any successful retailing company around the world. There are three factors that come into play when you analyze store design through the customer’s point of view. The essential idea of store design is to make all customers feel comfortable and enjoy the area they shop in. The three important factors of store design are:

• Ambient dimension
• Social dimension
• Design dimension

The above factors can be used to analyse in which way Wal-mart, Carrefour and Tesco operate with their own store design, focusing on their pacific target audience. Another way to analyse both Wal-mart and Tesco is by using the Mehrabian-Russell Model (1974). ” Mehrabian-Russell Model (1974) introduces the concepts of approach (positive) and avoidance (negative) behaviour, as well as pleasure and arousal.” (retail marketing by Malcolm Sullivan and Dennis Adcock)

Marketing Performance: According to Nielson Media Research, Tesco Spent £62.9m on marketing which includes marketing for their own brand products as well. Wal-Mart spent £34.8m on advertising; their marketing performance is commonly reflected by their ability to promote their own-brand as best as possible to increase the customer retention and not disappointing the shopper. They usually aim to get the customers in the stores by advertising well-known brand names and then focus the customer’s attention on own-brand goods. They attempt to attract the customers interest the moment they and to point-of-sale (PoS) as it’s a very cost effective way to promote own-brand products at a minimal cost.

Overall the advantage of Wal-Mart and Tesco operating own-brand products allows the retailers to have larger profit margins compared to selling brand products as well as allows the retailers to enforce the relationship between them and the shopper. Own brands offer a point of difference to the competition, which can increase store reputation and customer loyalty. However the problem with own brand product is that many shoppers and influenced by brand goods and unwilling to buy own-brand goods as they can be seen as an inferior product. Nevertheless during an unstable economic climate such as the current recession, own brand goods are less vulnerable to the fluctuations of economical factors such as currency rates and inflation

Customers: Tesco’s USP is it knowledge about their customers. Tesco has signed up 12 million of their customers for their Club card program, providing members discounts in exchange for their name’s, address and other personal information. The data collected let’s Tesco give tailor made promotions for consumer and decide quickly new innovations initiatives employed are working. The Club-card has helped Tesco boost market share in groceries up to 31% double the 16% to Wal-Mart in the Uk.