This report will focuses mainly on the £120 billion UK grocery industry and the market leader Tesco’s roles and its methods of success in this market. We will analyse three major points of interest. Using the concept of the PESTLE analysis we will assess the macro factors that have influenced the UK grocery retailing industry since the early 1960’s. Next, with the concept behind Michael Porter’s five forces we shall analyse the current attractiveness of the UK supermarket and superstore segment. Finally we will look at the strategic directions and methods employed by Tesco in the pursuit of growth, its motivations and basis of choices that have made Tesco what it is today.
Macro Factors of the UK grocery market
Over the years there have been many changes in Tesco’s market structure and it is now considered one of Britain’s leading food retailers. In the following section we will be using a PESTLE analysis to examine the macro factors that have influenced the UK grocery retailing industry since the 1960’s.
Political – Since the 1960’s supermarkets have expanded internationally. Retailers in the UK have always been concerned with employment and abiding by the regulations set by the governments of the host countries. Over the years companies operating in the UK grocery industry have had to consider policies and regulations of the UK government in regards to governing monopolies. Under EU law, companies that control large shares of markets are seen as dominant. This has raised concerns of larger firms exploiting consumers due to their control of the market. The government have responded by implementing protect consumers and competitiveness of the industry.
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Economic -After World War Two there was a rise in employment amongst women, this lead to many families living on dual income. Larger multiple stores where families shop to buy in bulk and keep stored in cooling units. However the recession in the mid 1980’s meant that consumers had less money to spent, however this soon picked up by the early 90’s and the UK grocery market picked up with it.
Sociological – Any big organisation responds to consumer needs and in some cases these needs relate to sociological aspects. Globalisation has brought different cultures together; UK grocery stores have started opening Halal/Kosher sections in their stores in response to the mixed cultural needs of the UK population. Also to help the growing concerns of health issues grocery shop have introduced wide ranges of healthy and low fat foods in common brands as well as their own.
Technological – Since the 1960’s many technological advancements have affected the UK grocery market.
Supply chain machinery has revolutionised the production of big supermarket chains around the world.
Cooling units- such as fridge freezers were used in order to store food when bought in bulk on big shopping visits that became more popular since the 60’s.
The boom in the use of the internet has encouraged supermarkets such as Tesco to offer diverse service ranges such as online shopping and financial services.
Legal – Legal issues started occurring in 1964 where suppliers by law were able to force retailers to charge a set price for the products. This was done to protect small shops against bigger retailers that could potentially offer lower prices. Larger stores response to this was to introduce coupons and club cards which customers could replace for cash or gifts to reduce their costs.
Environmental – A rise in eco-friendly awareness has meant that medium to large companies in UK grocery industry have been encouraged to will follow environmental policies. Including:
Minimising their use of materials and energy.
Assessing and minimising the company’s impact on the environment, (carbon footprint.)
Attractiveness of the UK supermarket and superstore segment
With an estimated worth of 88bn, generated by 6,578 stores throughout the country, the UK grocery market is mainly defined by its hypermarkets, supermarkets, and superstores, where the major market holders consist of ASDA, Tesco, Sainsbury’s and Morrison’s, with Co-Op, Waitrose, Marks and Spencer’s, Morrison’s and Somerfield behind with a smaller stake of the segment. [DEFRA, 2006]
Using the theory established by Michael E. Porter, the following will define the UK Grocery industry from a micro point of view, and will assess its general attractiveness.
The Threat of entry into the industry: The threat of entry within the UK supermarket segment rates relatively low, a new entrant will suffer initially due to existing company’s main competences mainly buying power. Larger companies benefit from higher economies of scale due to their brand strength and financial power, thus new entrants will companies will struggle to penetrate the market.
The main supermarkets have excellent supply and distribution capabilities. This is another example of existing superstores having competences that are not easily obtained. TNS data shows that customers tend to follow a pattern when shopping and rarely make a change in their behaviour, therefore attracting new customers within a region where other superstores are easily accessible may be unsuccessful as the shoppers may not want to disturb their routine. Though in order to operate a successful supermarket/superstore previous experience is important, it isn’t vital. Shops, such as, Morrison’s who took over Safeway’s in 2004, have opened many superstores during their expansion, taking their business model from smaller stores and implementing them to larger successful ones.
Companies such as Tesco’s and Sainsbury’s invest large sums of money each year into their marketing and development, which makes it increasingly difficult for other companies to gain a foothold in the market, however in 2005 Tesco was thought to be monopolising the industry which resulted in campaigns being held against the opening of various stores nationwide.
Large superstores in the UK have been known to differentiate their ‘own brand ‘product by using a set colour format in their packaging. This makes it easier for customers looking for them and encourages customers to notice them when looking at different possible brands of the product they want to purchase.
Substitutes to the industry’s product/service – Although many substitutes to superstores are available to consumers, the general consensus in the UK is that consumers will do most of their shopping at supermarkets, due to the access it gives them to a larger number of product and product types. However there are certain niche market such as Farm foods and Neto that offer something different to the consumer, in the form of organic produce or similar produce in bulk.
Supermarkets and superstores sell more than just food and drink, they are also big players in home electronics and even compete in the petrol sector. Therefore the modern day supermarket or superstore is satisfying many segments under one brand.
The power of buyers into the industry: – Consumers have high buying power. With little difference in price or quality between top supermarkets, consumers will consider location, reputation and even habit when deciding which supermarket to go to. This has meant that the majority of the control is shared amongst a handful of companies, who are often involved in price wars, encouraging buyers to follow the cheaper prices.
Power of suppliers into the industry: – The power of suppliers is low as large supermarkets such as Tesco have such a large share of the UK grocery industry. This means suppliers will need to settle suppliers need their product to be sold in these supermarkets in order to reach a wide audience, this leverage gives supermarkets the advantages of achieving greater economies of scale, thus profiting from its market share.
The extent of competitive rivalry: – The extent of competitive rivalry in the Supermarket industry rates medium to high. There are a fair number of companies competing in the UK grocery industry who have a strong presence in the market, however not many smaller companies have made the step up to Supermarkets with over 3000 sq metres sales area.
Supermarkets are indirectly competing against convenience stores. This has drummed up many a dispute with large supermarkets moving close to smaller convenience stores selling food such as Londis and Spar.
Strategic decisions & methods employed by Tesco
This section will evaluate the strategic decisions employed by Tesco, placing Tesco’s objectives and growth strategies into Ansoff’s Matrix in order to show why Tesco wanted to expand, what were the reasons behind strategies and an assessment of their success in implementing these strategies.
As mentioned in the Tesco Company Report, 2006. Tesco’s launched their four part strategy back in 1997, their aims were to:
Further market penetration by expanding the core UK business
Implement a market development strategy through entering new international markets.
Introduce product development and strengthen its position in the non- food market.
To develop diversification through expanding new services within new markets.
Market penetration – Tesco has maintained a stable increase of 10.7% increase in the UK, with total sales of £32.7 million in 2006 increasing by £3.2million in a one year.
Tesco’s market penetration strategy involved the introduction of new technology programme that included installation of ‘self-service’ checkouts in 200 stores to reduce queuing times, and the ‘Step-Change ‘programme involving hand-held computers to increase efficiency in stock management.
More resources were dedicated to selling, and serving the consumer, which was coupled by Tesco’s low pricing strategy to improve Tesco’s position as the best value retailer and make the market less attractive to potential competitors. Tesco’s Club-card was also pivotal in increasing the usage of existing customers and increasing customer loyalty.
Tesco also launched new sub brands such as Tesco Express and Tesco Metro, using refined pricing structures according to the location of the shop. These smaller stores were designed to satisfy the need of “on-the-move” shoppers in the city and in petrol forecourts. With the convenience store sector proving increasingly lucrative, Tesco has attempted and succeeded to gain a foothold in this industry.
The rationale behind these decisions was to increase the market and share by increasing their efficiency and sales, thus increasing turnover and profit.
Market development – Different international expansion strategies were employed, according to what they felt would be the best fit for the new market they were penetrating.
Tesco entered the Korean market in 1999 through a joint venture partnership with Samsung, opening a chain of stores resembling the British concept of Tesco, under the branch name Home plus that typically offered general home products, electronics, clothing, as well as sporting goods. Korea had been labelled to as a huge opportunity for international retailers, and Tesco wasn’t alone in their endeavour to enter the South Korean market. With the lowering of barriers of entry previously that was problematic between Europe and Asia, such as export and import laws. Many Asian countries harboured lucrative opportunities. In 2006 alone Tesco opened eight new hypermarkets as well as 11 new stores using a new express convenience store format, using Home plus as the brand name.
Their partnership with Samsung allowed them to use already existing resources as well as giving them better store locations. It also helped them in understanding the cultural aspects of the Korean Market and applying them to their business plan.
In his theory of market development, Ansoff mentions the idea of a company using different distribution channels. This theory can be related to the way Tesco entered the Irish market at first in the 1980s, which was done through the acquisition of an already present supermarket chain locally known as 3 guys. They continued with their expansion to Ireland through a further acquisition of two well known Irish chains, Quinnsworth and Crazy Prices. Furthermore, in May 1997, Tesco acquired the retailing and supply chain of Associated British foods for 643 million pounds.
Tesco’s decision to employ the method of acquisition when entering this foreign market was fuelled by the concept that this would make it harder for their competitors to beat them to this expansion, and it allowed them to make use of the resources and competencies the existing stores had acquired over time.
Tesco has recently begun to rename these acquired stores to their well known name of Tesco’s and have continued their successful growth well into 2006. They are now considered as Ireland’s biggest supermarket giving them a market share surrounding twenty six percent making up for a big chunk of their total revenue.
Product development- In 1997, Tesco began to introduce non food items to its stores. Whilst smaller stores such as Tesco express and Metro mainly offered the consumer food and drink and general groceries, larger stores have increased their selection of non food items, in some cases stores dedicating similar sales areas to the grocery section of the store.
Tesco’s aim was for non food products range to emulate the success that food products achieved. Tesco have identified that the brand’s image is a very important factor in its future venture. By applying a similar strategy to the original Tesco business model of low prices and great value, consumers were now able to have many needs satisfied under the same roof.
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IGD grocery retailing valued the non food market at £17 billion, and 14% of total grocery sales through UK grocery outlets. Tesco’s non-food customer base continued to grow in 2006 regardless of the negative economic climate. According to Tesco’s financial report of 2006 they have made considerable progress so far in their pursuit of growth, Tesco’s non food market share in 2006 rose to 7% from 6.5% in the previous year, coupled with a 20.6 % share in the grocery market share, this incremental however positive increase in market share shows that Tesco are steadily gaining more market share thus meeting their company objectives.
Product Diversification – Tesco have developed their retailing services in order to increase turnover. This strategy of growth is used by Tesco to market a new product into a new market. Tesco introduced diverse services such as personal finance, online shopping and smaller convenience stores.
Tesco’s personal finance (Tesco Bank) began in July 1997 after one of its competitors Sainsbury’s successful launch of a personal finance program. Tesco Bank is an internet and telephone service based commercial bank in the UK owned by Tesco. They had assumed 2nd mover advantage and could imitate Sainsbury’s strategy whilst fine tuning it to fit in with Tesco’s operations strategy. Thanks to Tesco’s existing customer base, they were successful and reported profits of £65 million in 2006.
In the year 2000, Tesco.com was officially launched, giving customers the chance to pick their groceries which were then hand-picked by an in-store salesperson and delivered direct to the customer’s house. Internet shopping was a great opportunity for Tesco to supply its customers with an easy way of buying products. This allowed them to help consumers purchase Tesco’s products from the comforts of their homes.
Product diversification strategies can be high risk, however if successful could yield great rewards. In Tesco’s case it was reported that in 2006 its profits peaked at around £33.8 million with total revenues of £554 million. This shows that a high base capital was needed to cover costs of new development but in the end a healthy profit was achieved. By the end of 2006 Tesco.com had reached a staggering 750,000 regular online customers and receiving a hefty 220,000 orders a week.
Following the writing of this report, and after conducting a pestle analysis of the UK grocery retailing industry, the key macro factors that have influenced the market are:
Introduction of laws regarding competitiveness and consumer protection.
World War II
Recession of the 80’s.
Technological advances in operations efficiency and ICT.
Increased coverage of environmental issues.
The UK supermarket industry is a very attractive industry for those who have the financial capability and already embedded competencies allowing them to compete with the larger competitors in terms of price and marketing acumen and customer base.
Finally our comprehensive evaluation of strategic decisions and methods employed by Tesco, have resulted in an understanding on how real-life strategies can be applied to Ansoff’s matrix. Tesco’s main motivations for growth were for monetary gain, using a mix of low and high risk strategies, Tesco explored many different strategies from; development of its UK core group, where nationwide strategies were implemented to boost sales and gain a foothold in the convenience store sector to market development strategies where Tesco’s used its brand name and know how to compete successfully in internationally thus increasing its market share, turnover and profit in the mean while.
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Johnson. G., Scholes. K, & Whittington. R. (2009) Fundamentals of Strategy, FT/Prentice Hall
Market & Industry Reports
MINTEL Industry Reports 2005-2007
TNS World panel, March 2006
IGD Grocery Retailing
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