Value Chain Analysis Of Tesco Business Essay

This report is aimed at critically analysing the macro, meso and micro business environment of Tesco, one of the largest food and grocery retailers in the world, operating around 4,331 stores. Strategic evaluation tools such as PESTEL, Porter’s Five Forces, SWOT and Value Chain analysis have been used by researchers in order to achieve this aim.

Tesco – Company Overview

Tesco is among the largest food retailers in the world with revenue in excess of £54 billion in 2009 and employing over 470,000 people. They operate approximately 4,331 stores in 14 countries around the world. The company operates primarily in the USA, Europe and Asia and their Head Office is based in Hertfordshire, UK. According to Data monitor (2010), the commercial network portfolio of Tesco comprises : over 960 Express stores which sell approximately 7,000 products including fresh foods at suitable localities 170 Metro stores which sell a variety of food products in town and city centres; and 450 superstores which sell both food and non-food items including books and DVDs. Tesco also provides online retailing services through their website tesco.com and Tesco Direct . In addition, they provide broadband Internet connections and financial services through Tesco Personal Finance (TPF). Tesco was founded in 1919 and launched its first store in Edgware, London, UK in 1929 (Tesco, 2010); however, over the decades it has evolved to become the market leader within the UK food retail segment (Data monitor, 2010). The comparative positioning of Tesco’s market share with respect to other leading players in the market has been illustrated as follows (Euro monitor, 2010):

3. PESTEL Analysis

The PESTEL framework below analyses the dynamic and unpredictable environment in which Tesco operates by identifying the forces that have the most impact on Tesco’s performance:

Political

China’s accession to the WTO has promoted a free flow of foreign trades by removing all barriers encouraging Western companies, including Tesco, to make way into the world’s most profitable market encompassing over 1.3 billion people (Straits Times, 2010). In 2009 an agreement was signed by Tesco to set up a premeditated series of joint ventures for the development of shopping malls in China. This joint venture included three malls: Anshan, Fushan and Qinhuangdao. Furthermore, 18 new hypermarkets are expected to open in China by 2010 (Tesco, 2009). The growth of Tesco’s international business segment is on the rise and it is predicted to account for one quarter of the company’s profit.

Promotion of free trading blocs by governments to benefit from globalisation has been presented in the literature (Lynch, 2003). Immersion of 10 further countries into the European Union (EU ) took place in 2004 promoting trade between Western and Eastern European countries (BBC, 2009). This has provided Tesco with a platform to expand its retail network across the EU.

Economic

Economic factors are a matter of concern for Tesco since they impact directly on the buying behaviour of customers. Although the UK economy was declared officially under recession in 2008, the government’s substantial reduction in interest rates helped to minimise further rises in unemployment during 2009 (Euromonitor, 2010). As a result of this, the spending power of consumers is again on a steady rise as they are more confident about their current financial situation. However, there is still a lot of financial uncertainty meaning that consumers are likely to spend less on premium products, encompassing organics and ready prepared meals, which will adversely affect both sales value and margins (Keynote, 2010).

However, the positive aspect of recession is that the customers eat out less and eat more at home which provides opportunities for grocery retailers like Tesco to increase their output (Guardian, 2010). It must be noted that food is the last thing that customers will cut back on. The percentage of overall consumer spending on food has risen considerably over the years, as shown below (Euromonitor, 2010):

The economic downturn has been brought to light with the assistance of the following GDP growth graph since 1989 (Mintel, 2009):

Social

An analysis of the UK population shows that there are more retired people than children representing the Baby Boom generation (Herald Scotland, 2010). The ageing population is discouraging for the food retailers older people tend to eat less . They are less likely to travel to supermarkets to shop compared with the younger generation. Although internet literacy level drops over the age of 65 years within the population (Turban et al., 2001), it has nevertheless been predicted that the ageing population would find online shopping more convenient. However, small deliveries are considered to be ineffective and expensive.

Consumers’ attitude towards food is incessantly changing as they have become more health- conscious . An increase in the demand for organic food has been accommodated by Tesco to reflect this change in demand. Payment by cheques and cash at the checkout was first made possible by Tesco .

Technological

One of the key macro-environmental variables that have directly influenced the supply chain, operations and processes of grocery and food retailers is technology. The operation of supermarkets is being affected by the use of the I nternet through online grocery retailing, which is showing steady growth. Subscriptions to the I nternet have grown by over 50% and it has been estimated that the I nternet is being used by 70% of the population in the UK ( Office for National Statistics, 2010).

Loyalty programs are being introduced through information technology which discourage customers from switching over to their competitors (Sun, 2009).

Mobile technology has also taken off as a platform for distribution within food retailing. New Wine App developed by Cortexica Vision Systems, for example, has been used by Tesco since 2009 via which the customers are directed to Tesco Wine enabling them to buy the selected wine directly from their mobile phone ( Tomlinson & Evans, 2010).

Online retail shopping has gained considerable popularity due to the increased access to broadband internet in the UK. It has been highlighted by Keynote (2010) that the number of broadband users in the country is 15.5 million which accounts for 70% of the overall market.

Environmental

Environmentally friendly, reduced packaging is being promoted by the government. It has been found by the Office for National Statistics (2010) that the percentage of consumers using reusable bags has risen from 71% to 74% and that those trying to cut down the number of plastic bags they take from the shops has risen from 65% to 68%. This assists in reducing the overall cost and is good for Tesco’s corporate social responsibility image.

Due to the consumer awareness of the carbon footprint of the firm (Wood, 2009), Tesco has added carbon footprint data on dairy products, potatoes and orange juice, and aims at expanding it to bread and non-food items in 2010 (Tesco, 2010).

Tesco has introduced its Greener Living Scheme to give consumers advice on environmental issues, including how to reduce food waste and their carbon footprint when preparing meals (Yuthas, 2009 ).

Consumers reusing bags, recycling mobile phones and aluminium cans and preferring bag less deliveries are being rewarded through Tesco’s green Club card points (Tesco, 2009; Data monitor, 2010).

Legal

It has been predicted that VAT would have to rise to 20% since the      Government has to finance a huge budget deficit (HM Treasury, 2010). This will affect the non-food sectors of Tesco, such as clothing.

Drawing upon the Low Pay Commission Report (National Minimum Wage, 2009), the 2008 and 2009 combined up-ratings have resulted in an increase in the minimum wage of 15.5%. This will result in an increase of operating costs of supermarkets.

Porter’s Five Forces Analysis

An analysis of the structure of the industry should be undertaken in order to find effective sources of competitive advantage (Porter, 1985). Therefore, in order to analyse the competitive environment of Tesco, Porter’s five forces analysis has been used by the researcher as follows:

Threat of substitute products and services

The threat of substitutes in the grocery retail market is considerably low for food items and medium to high for non-food items.

In the food retail market, the substitutes of major food retailers are small chains of convenience stores, off licences and organic shops which are not seen as a threat to supermarkets like Tesco that offer high quality products at considerably lower prices (Financial Times, 2009). Moreover, Tesco is further getting hold of these shops by opening Express stores in local towns and city centres creating a hurdle for these substitutes to enter the market.

However, the threat of substitutes for non-food items , for instance clothing, is fairly high. It should be noted that so long as the economic recession prevails , customers will be inclined towards discounted prices hence Tesco is a threat to the speciality shops.

Threat of entry of new competitors

The threat of entry of new competitors into the food retail industry is low.

It requires huge capital investments in order to be competitive and to establish a brand name. Major brands that have already captured the food retail market are Tesco, Asda, Sainsbury’s and Morrisons and they account for 80% of all shopping in the UK (Mintel, 2010). Therefore, new entrants have to produce something at an exceptionally low price and/or high quality to establish their market value.

Gaining planning authorisation from local government takes a considerable amount of time and resources to establish new supermarkets and this is therefore a considerable barrier to new entrants.

Intensity of competitive rivalry

The intensity of competitive rivalry in the food and grocery retail industry is extremely high.

Tesco faces intense competition from its direct competitors, including Asda, Sainsbury’s, Morrisons and Waitrose, which are competing with each other over price, products and promotions intermittently. It should therefore be highlighted that Asda is one of the key competitors in this segment with an increase of market share from 16.6% to 16.8% during the fiscal year 2010/ 09, while Sainsbury’s has shown an increase to 16.1% from 15.8% and Morrisons to 11.6% from 11.3% through the same period (Euro monitor, 2010). The slow market growth essentially means that these increasing market shares from competitors have intensified the market rivalry, which is threatening Tesco’s market leadership position.

In rural areas where the nearest superstore can be some distance away, some primary consumers are attracted by retailers like Somerfield and Co-op .

Hard discounters like Aldi and Lidl have taken over the market in times of recession. During 2008 they recorded a growth of sales of over 25% (Keynote, 2010).

Bargaining power of buyers

The bargaining power of buyers is fairly high.

In cases where products have a slight differentiation and are more standardised, the switching cost is very low and the buyers can easily switch from one brand to another.

It has been proposed that customers are attracted towards the low prices, and with the availability of online retail shopping, the prices of products are easily compared and thus selected.

Bargaining power of suppliers

The bargaining power of suppliers is fairly low.

It should be noted that the suppliers are inclined towards major food and grocery retailers and dread losing their business contracts with large supermarkets. Hence, the position of the retailers like Tesco, Asda, and Sainsbury’s is further strengthened and negotiations are positive in order to get the lowest possible price from the suppliers.

Detailed SWOT Analysis

Strengths, weaknesses, opportunities and threats (SWOT) analysis of Tesco have been provided below.

Strengths

Drawing upon Data monitor (2010), Tesco is ranked third largest grocery retail company in the world, operating over 4,331 stores primarily within the USA, Europe and Asia. The company held 30.7% share of the UK grocery retail market in 2010 (Euro monitor, 2010).

A strong financial performance has been shown by the company over the years, which underlines its strategic capabilities. According to Data monitor (2010), Tesco is a £ 54billion turnover company recording an increase of 14.9% when compared to 2008. The foremost strategy that has been adopted by the company is the product and services customization in accordance with the market demands. The efficiency in performance of the company over the last decade can be summarised with the help of growth in following key indicators ( Fame, 2010):

Tesco’s strategy aims to focus on product affordability which ensures that customer gets the product to suit their budget without compromising on the quality. During 2009 the sales from online non-food retail company Tesco Direct have increased by over 50% (Tesco, 2010).

Tesco has a proven customer retention strategy with the help of its loyalty scheme called ‘Tesco Club card’. Drawing upon DunnHumby (2008), the company uses data collected from this loyalty scheme in its powerful CRM systems named Crucible and Zodiac, and this information is then used for effective direct marketing and various other promotional techniques.

Weaknesses

Tesco has not been able to perform well over the last year as compared to its competitors. According to Mintel (2010), a number of products were recalled by Tesco in 2009 that has resulted in a financial loss as well as damage to its brand image. These included company’s value lines, which have been marketed as high quality cheaper alternatives to key brands.

The key operations of the company are concentrated within the UK retail sector, where it recorded more than 75% of its revenue during the fiscal year 2009 (Tesco, 2010). This lack of geographic diversification can be seen as a key weakness for the firm as it is subjected to systemic risks of the UK market.

Opportunities

The commercial network portfolio of Tesco is on the rise . They opened over 620 stores in 2009 of which 435 were international (Mintel, 2010). This geographic diversification will help the company in improvising its economy of scale, while minimising its systemic risk exposure.

The popularity of Tesco.com is growing rapidly, accounting for over 1 million customers in 2010 (Guardian, 2010), which has provided an opportunity to the company to attract new customers and reduce the overall cost resulting in more profit.

Company focus is on global expansion as is evident by its entry into the Indian market. This entry will strengthen its global market position. A limited franchise agreement has been signed by Tesco with Trent, retailer of Tata group, which is one of the largest industrial corporations of India (Daily Mail, 2010).

It has been predicted that there will be a rise from £125 billion in 2009 to £145 billion in 2014 in the food retail market segment (Euro monitor2010). This is mainly due to the fact that even during times of recession, food retail is the toughest segment since having enough to eat is the priority.

Threats

The commencement of a global financial crisis has resulted in a contraction of the UK’s economy by 2.4% in 2009 which is estimated to contract further by 4.2% by the International Monetary Fund (IMF) ( Poulter, 2009). Tesco’s concentration in the UK market can therefore have a detrimental impact on its financial standings.

The decline in income and the rise in unemployment have affected the discretionary buying behaviour of consumers which has adversely impacted the company’s sales, in particular the non-food items.

There has been fierce competition in the UK grocery market . Tesco though has been leading this sector for 15 years (Mintel, 2010), but is now faced with intense competition from its competitors which are gaining in market share. These include the rest of the ‘big four’ i.e., Asda, Sainsbury’s and Morrison’s respectively.

In light of the above key points, the abridged SWOT analysis of Tesco can be summarised in the following illustration:

Value Chain Analysis

According to Lynch (2003), value chain is defined as the links between key value adding activities and their interface with the support activities. Value chain has been implied as a strategic evaluation tool used for distinguishing the strengths and weaknesses in value adding processes (Audrestsch, 1995). The value chain of Tesco has been demonstrated in the following diagram:

Inbound Logistics

The overall cost leadership strategic management of Tesco is exhibited in its lean and agile inbound logistics function. Drawing upon Abeysinghe (2010), the company uses its leading market position and economies of scope as key bargaining powers to achieve low costs from its suppliers. The analysts have also highlighted the constant upgrading of their ordering system, approved vendor lists, and in-store processes to induce effectiveness and efficiency into the company’s inbound logistics operations.

Operations Management

Tesco has been praised by a number of supply chain management critics for its effective use of IT systems that facilitate the company’s low cost leadership strategy. According to Tesco (2010), the company has invested over £76 million in streamlining its operations through their Tesco Digital program, which is a third generation ERP solution for the company. The company has achieved £550 million in increased profitability during 2009 alone due to the introduction of this system. This company -wide ERP system has also facilitated the minimisation of stock holdings within the company.

Outbound Logistics

Tesco holds leadership position in online and offline food retail segments, which is due to its efficient and effective outbound logistics. Drawing upon Mintel (2010), the company has developed a range of store formats and types, which are strategically placed to achieve maximum customer exposure. These formats include Express, Metro, Superstores, Extra and Home plus, which are segmented according to the target population.

Marketing and Sales

Loyalty programs like Tesco Club card are being introduced through information technology advances which dissuade the customers from switching over to their competitors. Tesco has introduced its Greener Living Scheme to give consumers advice on environmental issues, including how to reduce food waste and their carbon footprint when preparing meals .

Services

Tesco has been pursuing a dual strategy of cost leadership and differentiation, which has led to an increased importance placed on customer service. Drawing upon Keynote (2010), this dual strategy is exhibited through the development of self-service kiosks, financial services, focused direct marketing and promotions.

In order to put Tesco’s value chain analysis into perspective, it should be noted that despite cost leadership strategy the company has been able to create a high degree of value in comparison with its key competitors. The relative analysis of the value created by the big four supermarket chains, i.e., Tesco, Asda, Sainsbury’s and Morrison’s has been provided as follows:

Conclusion

In light of the above analysis, it can be concluded that Tesco continues to hold its leadership position within the highly turbulent retail segment, where companies are required to pursue both cost leadership and differentiation strategies. Tesco has been able to achieve both with the help of a lean and agile supply chain management, along with the strategic use of information technology. The core competencies of Tesco have been seen to be aligned with the business environment, therefore highlighting a positive future outlook for the company.