Tesco was founded about 1919 by a person call Jack Cohen in London’s East End. In this year as well he Jack Cohren started was selling groceries in the markets of the East End. After about 5 years the name TESCO started to appear on labels because Jack Cohen brought a large shipment of tea from a company called T.E. Stockwell. Due to this he put the first two letters of the supplier of tea along with the first two letters of his surname and this spelt out TESCO. The first Tesco store opened in 1929 and now it has 1,800 stores just in the UK and its present felt in 12 countries.
Tesco now is the largest British retailer, both by global sales and by domestic market share, and the fourth largest retailer in the world behindWal-Mart of the United States, Carrefour of France, and The Home Depot of the United States. Tesco used to only sell food but now it has moved into areas such as clothes, consumer electronics, consumer financial services, selling and renting DVDs, compact discs and music downloads, internet service and consumer telecoms.
Tesco over the years is UK’s most popular retailer with over 13 million customers a week, number of non – food products/services available has gradually increased, Tesco.com is the world largest home delivery service in the world and it is operating in 12 different countries with further expansion in other countries. The reason for all these success mentioned above is all down to one thing, which is the approach taken by Tesco on customer focused. Tesco is unique in this way because many retailers would tend to focus only on profits. However, Tesco as well as making profits would like to “create value for customers, to earn their lifetime loyalty”. ( Tesco Interim report, 2005) This can be seen in Tesco mission statement and the way this is achieved is through corporate strategy. The corporate strategy of this retailer consist of four parts; UK Core Business, Retail Services, Non-Food and International. It can be seen from the annual report that the profits in each of these four strategies have gone up. In the UK Core Business profits went up 14.9% compared with few years back where there was an increase of 12.7% , Retailing Services was £40 million pounds but now it is £70 million pounds, Non – food was expected market share to only be 6% but it is actually 7% and the operations in overseas market is now in 12 countries.
The success of this strategy needs to be broken down in order to provide evidence to show how effective Tesco as been and in what way.
1) UK Core Business – Tesco has got a strong UK Core Business because this is where everything started from and gradually as the years went on the retailer was able to exploit opportunities. This was done through innovation and having the energy in finding ways to expand. After five years there were only 728 stores in the UK (Tesco Account Watch, 2002). However, now that numbers has dramatically increased to 1,800 stores (Tesco, 2006) with more then 260,000 employees. From this it can be seen that Tesco idea of expansion was a huge success and this is reflective in the profitability where the sales are £32.7 billion pounds and the operating profits are £1.788 million pounds.
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2) Non-Food – This is seen as being important for Tesco because in the future they would like be in front of their competitors. This can be seen in an annual report of 2002 where it state that “..in the long term would like to be as strong as it is in food to have 6% market share within the next three years.” (Tesco Account Watch, 2002)However Tesco have succeeded the expected market share by gaining a market share of 7%. (Tesco,2006) The main reason why this has gone up is due to the fact that Tesco has been able to offer over 100 new products including CDs, electrical goods, clothes etc at low prices and at good quality. By doing this, it will allow this retailer to keep customer loyalty for a long time as well.
3) Retailing Services – The effective way of implementing this according to Tesco is through joint ventures with major players in the sector they want to operate. Bu doing this it allows Tesco to the ability to contribute it customer base as well as brand strengths to the partnership and vice versa. This has been done exceptionally well since Tesco were able to “follow customer” (Tesco Account Watch, 2002) by offering a wide range of products/services not just to existing customers but to new one as well. Tesco offer three things so far; Tesco Personal Finance (TPF), Tesco.com and Tesco telecom. All these have done well with the increase profits of £70 million pounds for TPF, Tesco.com sales nearly £1 billion pounds and the telecom is serving over half a million customers.
4) International – The expansion of Tesco overseas first took place in 2004 where it was decided that Central Europe and the Far East would be first to have a Tesco. Since this retailer was so successful in the UK it did not enter the market in the Western European and USA because it was not ready since it didn’t know the market, culture, etc. However expanding in Central Europe and Far Eastwas a good choice to start off with because it allowed them to use the best practice suitable for them for developing stores efficiently and at minimum cost. It also allowed them build the store as soon as possible since “a range of store formats that can be rolled out quickly as required” (Tesco Account Watch, 2002). Ever since the first expansion in 2004 Tesco now is operating in 12 different countries with further expansion going on in Western Europe and in USA. The expansion occurred through six different steps: 1st – Being Flexible – Approaching market differently since all markets are unique 2nd – Act Local – Need to get the attention of the local and build relationship with them as well. 3rd – Keep Focus- It always take time to establish in a market therefore need to always be focus on the tasks in hand. 4th – Be Muli-format – Need to be able to adapt a number of different store format since only format will not reach the whole market. 5th – Develop Capability – Need to be able to train people and develop relationship with others and share the information is vital for the chance of success. 6th – Build Brands – This allow establishing long relationship with customers.
From the above it can be seen that the strategy that Tesco have are very much related to giving customers the best service by offering a range of products at low prices and at different places. By putting all their attention on customers would allow them to exceed expectations in terms of profitability.
From examining Tesco strategy it can be concluded that Tesco follow deliberate strategy which can de defined as “â€¦quality of acting intentionallyâ€¦they ‘think’ before they ‘do’, (Wit & Meyer,2004). Tesco follow this strategy because they intend to do something which is realised afterwards. For example one of Tesco strategy is about UK which involves frequent contact with customers and building new stores which meet different customer’s needs. From these the profitability for the UK has gone up therefore it was realised that this strategy is working well. Similar to this is that the other strategy about international, non food products and services have all seen an increase in the profitability.
Tesco tend to have a plan for each strategy which further illustrate that Tesco follow deliberate strategy. When Tesco started off it the strategy was “pile it high and sell it cheap”. This was unsuccessful and a plan was put together and a new strategy came which was about achieving customers loyalty for a lifetime. This is a success and if the fundamental purpose of Tesco.
Tesco on the other hand strategy may fall in the category of emergent strategy. This can be seen from the non food products. Tesco offering telecoms, internet etc falls here because the opportunities were there which needed to be exploited. Similar to this is that if Tesco did not take these opportunities with both hands the threat was that other supermarkets would take full advantage of this. Also a threat was that if a competitor does something the supermarket “must follow to remain competitive” (Elsevier bookshop, 2006).
Overall the approach taken by Tesco is a rational planning approach. The reason for this is because Tesco knows the direction it went to go, the main purpose of the business is known and the objectives are established. All these are done differently through different analysis such as External/Internal environment, assessing current position etc.
The following ratios compare Tesco Store Plc and WM Morrsions Supermarkets PLC.
Return on Investment
WM Morrisons Supernmarkets PLC
20.08% (Anuual Report 2006)
5.55% (Annual report, 2006)
The above ratio shows how management use the company assets to generate revenue. In the above ratio it can be seen that Tesco Plc, 20.08% earning are much higher compared to WM Morrisons Supermarket PLC which is 5.55%. Due to the big gap between these two companies it clearly shows that Tesco’s operational management is more efficiently making full use of the company’s asset to generate more sales.
WM Morrsions Supermarkets PLC
7.7% (Annual report, 2006)
The above ratio is an important measurement in terms of profitability since it basically measures the trading effectiveness and basic profit earning capability of a company. From the above ratio it quite strange that WM Morrsions Supermarkets PLC ratio is much better in comparison with Tesco Stores PLC. Therefore it shows that the production and distribution efficiency of WM Morrisons Supermarket PLC that it manages to earn a greater percentage of gross profit than Tesco Stores PLC.
Net Profit Ratio
WM Morrisons Supermarkets plc
5.7% (Annual report, 2006)
This figure above shows the companies profit after taking all the expenses off and other costs as well from the gross profit. Tesco PLC net ratio is 5.7% whereas WM Morrisons Supermarket PLC is 2.6%.
Earning per Share (EPS)
WM Morrisons Supermarkets plc
20.07p (Annual report,2006)
9.46p (Annual report 2006)
The investment in a company tend to be made in stocks/shares therefore the above ratio is essential in the assessing the market value of the company’s shares. Tesco’s share is much greater than WM Morrisons Supermarkets Plc therefore it can offer more to its stockholders. The above figures were taken from annual reports 2006. Also the above shows that investors have trust in Tesco using the money is used to it full capacity.
WM Morrisons Supermarkets plc
1.98% (Annual report 2006)
1.23% (Annual report 2006)
Just like mentioned above this ratio also allows investors to assess the investment potential in a company’s shares. Tesco offer greater dividend yield therefore investors will be interested in this company rather than WM Morriosns Supermarkets. It also shows that investors would be more attracted to Tesco and not to WM Morrisons Supermarkets.
WM Morrisons Supermarkets plc
2 times (Annual report, 2006)
The Dividend Cover ratio shows how many times the ordinary dividend could be paid out of current earnings. In the case of Tesco it is paying our half of its earning as ordinary dividend.
WM Morrisons Supermarkets plc
1.09:1 (Annual Report – 2006)
0.45:1 (Fame analysis)
The current assets are required to meet the company’s debt as they are due. The above ratio indicates this relationship especially for both supermarkets. It shows that both companies are able to turnaround stock into cash. However, from the above figures it shows that Tesco are much better prospects for lenders as compared to WM Morrisons Supermarkets whose current assets are less than current liabilities.
Acid Test Ratio
WM Morrisons Supermarkets plc
0.68:1 (Annual report-2006)
The above ratio is used to compare the current asset without the stock with current liabilities. The ratio itself does not actually provide any assurance that both these companies will meet futures payments. Due to this both the above ratio show the level of stock each company holds because has retailers they are expected to keep certain amount of stocks.
Stock Turnover Ratio
WM Morrisons Supermarkets plc
25 times (Annual report, 2006)
30 times (FAME- analysis)
The Stock Turnover Ratio shows the average amount of times stock is held before being sold. Since Tesco is big it is expected that stock would be sold more quickly than compared to WM Morrsions Supermarkets PLC.
Fixed assets turnover ratio
WM Morrisons Supermarkets plc
2.12 (Annual report, 2006)
1.83 (FAME- analysis)
Fixed asset enable a company to function more efficiency therefore with Tesco having a high fixed asset ratio compared with WM Morrions Supermarkets are able to generate more sales.
Trade debtor collection period
WM Morrisons Supermarkets plc
0 days (Fame analysis)
2.53 days (Fame- analysis)
The ratio is about debtor and this is the time taken to receive a payment from customers. Tesco get the money straight away with no problems whereas WM Morrsions Supermarkets PLC tends to get the money after couple of days. This may be down to Morrisons having a policy where it takes cheques a couple of day to be cleared or other policies related to cash.
Trade creditor payment period
WM Morrisons Supermarkets plc
26.60 days (FAME – ANALYSIS)
36.24 days (Fame-analysis)
This shows that it takes on average a month for a supermarket to pay back to creditors. Tesco are able to do this quicker than Morrisons because of it ability to turn stock into cash very quickly.
All the above refer to Appendix 1 which is related to Tesco, Appendix 2 which is related to WM Morrison and Appendix 3 which is related to calculations.
Value Chain Analysis
The Primary Activities
Within the primary activities it can be seen that a key element of Tesco’s strategy is to have a relationship with suppliers which is quick and cost effective. The reason for this is due to the fact that “..the greater the number of participants, the greater the synergy opportunities and the greater the change of leveraging action within the logistics and network services provider community.” (Fernie & Sparks, 1999) By having a strong relationship with suppliers will enable Tesco to exchange information with suppliers which will result in having a greater opportunity to adapt to the changing environment. The approach taken by Tesco is an important aspect especially achieving competitive advantage. However, Tesco should do it not only with cost in mind but bearing in mind that the highest quality goods are produced more quickly and efficiently. The transformation of its distribution operations has over the part 10 years seen the introduction of Tesco own brands which mean that these goods will stay in Tesco’s control longer than other goods.
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The decisions of management along with the introduction of effective technology such as software and IT systems, laser scanning which automatically re-orders goods, have all helped Tesco to position itself in the market place. One of the reasons for Tesco success is due to technology in all parts of the business because technology has a “powerful effect on competitive advantage in either cost or differentiation.” (Porter, 1998)
Tesco work very closely with suppliers to extend growing seasons for particular crops like strawberry which is available throughout the year. In this situation Tesco do depend on the suppliers making the crops during the year. However, in the longer period Tesco will be able to save costs. By extending growing season there is a lower dependency on the warehouse and JIT production of goods.
The need to work closely with suppliers and transport services is critical and using local producers wherever possible results in Tesco dealing with a number of companies and according to Christopher,1998 “effective logistics management can provide a major source of competitive advantage – a position of enduring superiority over competitors in terms of customer preference.” The main thing is being innovative and looking at how to improve things constantly as well as considering the environment impact of its action. This again will reinforce the competitive position as Porter, 1998 suggested “companies achieve competitive advantage through act of innovation”. It is very difficult for a supermarket like Tesco to produce the same success again therefore Tesco must continue to re -invent itself to stay ahead in this market.
The Supporting Activities
The company’s infrastructure is based on decisions of management which help communication and control. Support functions such as accounting, administration, public relation and marketing. There are many people who deal with investigation and sourcing products for example, for non food products there are over 100 people. Tesco “employs over 260,000 people”, (Tesco, 2006) which is a huge cost especially in terms of minimum wage. The other costs which are involved are recruitment, training and development. Other things such as planning, public affairs, quality assurance are all time consuming.
Technology development is important because it allows Tesco to be able to adapt to its changing environment. Tesco on line shopping is a huge success along with other things like financial service, mobile phone, clothes and electrical goods.
Tesco recognizes regional differences when it comes to procurement. They have established dedicated buying teams In the UK. Tesco have also made arrangements not only with large producers or manufacturers of goods, but also individual farmers. Their Fairtrade policy ( Tesco CR , 2006) ensures that the farmers receive a fair price and that consumers pay a fair price. Long term relationships with suppliers are important, with over 1500 suppliers working with Tesco for five years. Tesco works with suppliers and encourages them to develop regional offices in line with Tesco’s own distribution centres.
In Tecso it can be seen that “the value chain for competing in a particular industry is embedded in larger streams of activities..” (Porter, 1998).
The primary activities for Tesco can be seen in Appendix 4 and the supporting activities can be seen in Appendix 5.
There are many external influences which affect Tesco like local business taxes as well as government introducing taxes on different products. When Tesco decide to build new stores it will not be straight forward to do because the local and regional planning policy is extremely costly and time consuming. Complying with government legislations is a must for Tesco since it relates to food hygiene, employment, health and safety. Tesco is also under the pressure on a number of different issues. For example Friend of the Earth who believe that “Tesco is using every trick in the book to dominate the retail market and coerce local authorities.” ( Friend of the Earth, 2006) and also from something call “Tescopoly.” Tescopoly is to “challenge the negative impacts of Tesco’s behaviour along its supply chains both in the UK and internationally, on small businesses, on communities and the environment” (Tescopoly, 1995) It also makes sure that the products are made from recycle items and protecting the environment is the key.
This is a major focus not just for Tesco but for all businesses in the UK as well as overseas. The issue of global warming and climate change affects everyone. Tesco is addressing the issue by “minimizing waste and recycling, by rewarding customers for re using bags” (Tesco Report, 2006). They have also spent over £100m on a range of products from wind turbines to gasification plants. Another thing Tesco is trying to do is “reduce energy consumption” (Tesco Report, 2006) with the introduction of improved heating and ventilation systems.
The social impact of opening new stores is immense. By opening new stores Tesco are creating new employments for many people and also they are using local suppliers rather then getting suppliers from different part of the UK. Tesco is a very dedicated supermarket which always gives money to a charity every year. It also encourages healthy eating with their healthy option menus therefore encouraging the nation to get healthier and fitter combined with charitable activities like the “Race for Life”. (Tesco corporate, 2007)
Technology has improved massively over the years and it has dramatically affected Tesco. By introducing on line shopping, improved refrigeration techniques, sophisticated software for monitoring customer loyalty shoppers and their buyers pattern and new services being offered have all together improved customer service, reducing costs and sustaining competitive advantage.
The main legal issue here is related to what was mentioned above. Since the introduction of new products/services there is a chance of customers being exposed to credit card fraud. The legal department within Tesco is kept busy with the need to respond to customer complaints and compensation claims, such as the recent fuel issues. Another thing is complying with any rules or regulations which are set out from the government to the Competition commission.
The main issues which have been talked about recently are fuel costs, congestion or mileage charges will also affect Tesco profitability. On the other hand some positives can be taken for example charitable donations made by Tesco to local and regional areas. Tesco by using local suppliers will also have an impact on the economy. Tesco is promising “lower prices” (Tesco Report, 2006) because it want to provide a range of products which are of high quality to all customers especially those families with low income.
The PESTLE Analysis for Tesco can be seen in Appendix 6
Porter’s Five Forces Model
The supermarket industry is high competitive in the UK with four supermarkets dominating the market; Tesco, Asda, Sainsbury and Morrisons. This market has “…never been more ferocious in the battle to capture the customer’s loyalty” (Bevan, 2005). The one which is leading the other supermarkets in the UK is Tesco with “32% market share” (Wekepedia, 2005) whilst the rest of the supermarkets have each got less then 20% markets share.
The competitive rivalry in the UK is not based on the types of products sold because all supermarkets sell the same products. However, the rivalry is based on “pricing and value for money” (Seth & Randell, 2001).
The use of technology allows this market to be more competitive because the use of technology allows a number of advantages including quicker way to speed up stock replenishment. For example in Tesco they use Electronic Point Of Sale (EPOS) not just for checkout but for a range of things like fully integrated accounting, inventory management, open to buy forecasting, customer relation management (CRM), service management, rental, and payroll modules. (Thompson,2003). Another thing which Tesco also use is EDI(Electronic Data Interchange ) which is a set of standards for structuring information to be electronically exchanged between and within businesses, organizations, government entities and other groups. Other supermarkets use the above as well but the way Tesco use this is why Tesco is the largest supermarket in the UK.
The competitve rivalry may get evenmore tense if for example other global competitors like Carrefour decide to come into the UK market by acquisition of weaker companies.
Threat of new entrants
Since the UK industry is dominated by four major supermarkets the threat of new entrants is high. This is due to enconomies of scale in terms of shopping area and length of distribution channels. These two are important factors especially in the UK however, the cost of these two are very high and a new entrant would suffer. Similar to this is that new entrant have limited access to distribution channels in the UK because the supermarkets have already got control of these. Another problem for a new entrant is that it will be difficult to achieve cost adavntage. The reason for this is due to the fact that the four major supermarkets in the UK have occurred cost advantage through continually development in studying customers (buying patterns, money spent etc) and competitors. The important part is regard to building relationship with suppiers and customers because it takes time to gain someone trust. Due to this trying to change customers brand loyalty is very difficult to achieve.
The main problem for Tesco and other supermarkets is related to the fact that large european supermarkets may decide to set up stores in the UK. This can be seen from Lidl which is a German company which has got a number of stores opened in the UK.
Threat of substitute
In the UK alone there many substitutes because a lot of small stores like newsagent, local shops, etc sell the same products like supermarkets but the difference is that these small stores can offer discounts. Due to this it is said that supermarkets are vulnerable. One of the reason for supermarkets being vulnerable is about discounts and the other reason is that small stores can steal customers from supermarkets. For example Argos- The Catalogue Shop can get a percentage of customers from the supermarkets from under their noses. This is done by offering customers the chance to have catalogue delivered to their doors and collection of orders by post, telephone or internet. For some supermarkets this is a problem but for Tesco it is not. The reason for this is that Tesco has a number of different stores opened across the whole UK and offers a range of products includind non food products through the internet at reasonable prices. (Tesco direct,2006). By offering non food products Tesco is in competition with Argos as well as Currys and Comet over electrical goods. From this it can be seen that Tesco are being tuff because they want to be the best in all departments.
Bargaining power of buyers
In the UK the bargaining power buyers is strong especially for supermarkets in the UK since the buyers are the customers. The power of these buyers is high because of the availability of several alternatives. The switching cost from one to the other is low because if a customer is not happy he/she can go to the other supermarkets. For the supermarkets Asda, Morrisons and Sainsbury this is true but for Tesco it is not since it is the other way around, Tesco are able to influence the buyers. Tesco are able to do this by having different stores Express, Metro etc in the UK all different to one another.
Porter’s five forces model for Tesco can be seen in Appendix 7
Tesco is the UK is a well established and recognised retail brand in the UK offering a range of products and services from food to non food items. Tesco has grown in the four areas it wanted to grow with a 7% market share in the non food items. They provide fresh food at great value with many special offers being made each week. They support fair trade and local products with over 7000 products being supplied in the UK. The culture of Tesco is important to its success. Also the focuses on people, from the customers to the staff are essential for the smooth running of the organisation.
Tesco just like many businesses in the UK will have problems which need to be overcome. Since Tesco is big it has 260,000 employees which would result in Tecso paying a lot of money in term of wages and also training and development. Also costs related to sickness and absenteeism will also affect Tesco. Similar to this is that “..80% of group sales come from UK” (Tesco, 2006) and could be more globally focused. Another weakness is that increase in the cost of fuel may result in loss of profitability and also an increase in the local business taxes will be bad.
The opportunities existing for Tesco is further product introduction more opticians and pharmacies into the stores. There also opportunities for Tesco to expand and increase market share. Since Tesco is very popular in the UK and should turn their focus on the international market. The acquisition or merger of a competitor would provide SYNERGY in terms of cost reduction, improved productivity, expanded range of products, although it may well be that because of Tecso dominant position in the market already the commission may not agree to such development.
The current problem which has occurred over the last few weeks was related to problem with the fuel since it was claimed that it is contaminated. Due to this poor quality fuel may be suppl
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