Case study example

Tesco PLC1

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TESCO AND THE SUPERMARKET INDUSTRY IN THE UK

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Tesco PLC2


Tesco PLC

Background

Tesco Company is a multinational general merchandise and grocery retailer that

was founded in 1919 by Jack Cohen (UK essays, 2014) the foundation of Tesco Plc was

from a market stall in the East end of London. From 1919, the company has thrived and

expanded to cover twelve countries in which it operates over the world. The company

employs over 530,000 people and serves tens of millions customers in the regions in

which it operates. Tesco is committed to delivering the best customer experience in

shopping and focuses on doing the right thing to the customers and the countries in which

they serve.

In the last twelve years, Tesco sales and profits have been falling with the fastest

rate being in the grocery industry. The reason to the fall has been explained as due to the

changes in consumer trends that has seen Tesco pricing not to compete favorably with the

competitors. The local competitors that have been on the rise are Aldi and Lidl. The

pricing of the two companies has seen the fall of the sales in the Tesco Company. Tesco

sales in the last twelve weeks prior to October 12 had fallen by 3.6 percent (Ruddick

2014)




Tesco PLC3

http://www.casestudywriting.com/ According to Kantar word panel, the decline in sales reduced the market share of

Tesco Company from 30.1 percent where it had been a year ago to 28.8 percent. HSBC

analysts reported that it would cost $3 billion in the UK to turn around Tesco. The

strategies to be used would involve lowering of the prices by about 56 percent to

compete favorably with the local key competitors, Aldi and Lidl. The number of the staff

would need to be increased by 2025 percent in the stores. Five hundred million dollars

would also need to be used in elevating the quality of the food to attract back the lost

customers.

Strategic Purpose




Tesco PLC4


Tesco Company prides itself in providing foodstuffs and groceries to its

customers in the regions where it operates. In the many years that it has been in




Tesco PLC5

http://www.casestudywriting.com/ operation, it has managed to build customer loyalty in the consumer market. The

company has a vision that set it out from the rest and defines what it is. A clear direction

is crucial in any organization. Tesco vision guide it in making decisions and determining

the direction they take in ensuring better providence of goods and services to the

customers. Tesco Company is built around its customers and colleagues. The company is

built around highquality assets across the globe and provides many opportunities for

growth. These characteristics are the basis for the vision of the company. Tesco strives

and desires to be the most highly valued company by the customers, the countries and

communities in which it operates its colleagues and its shareholders. Tesco’s strategic

purpose is defined by the company’s vision that is defined in five elements. Each of the

five elements defines what Tesco company strives to be.

The first of the elements states that the Tesco Company wants to be needed and

wanted across the globe. The company it is not essential to be the place of choice for the

consumers shopping but also the business should be a place people would want to work.

The company seeks to establish itself in a manner that communities and nations will

welcome it. The company also wants to be a retailer outlet in which every shareholder

would like to invest in. The second element sets the company as a growing institution that

is full of opportunities. Tesco Company has a wide range of products and services it

avails to its customers and colleagues.




Tesco PLC6

http://www.casestudywriting.com/ Tesco has food and general merchandise, digital entertainment, books, eating out

and banking. Tesco Company is full of opportunities in these sectors for its customers

and colleagues. The company strives to provide something new every time.

The third element that defines what the company is and wants to be is that it is modern,

innovative and so full of ideas. The company attempts to understand the needs of the

customers better than anyone else does. The better understanding of the customers has

seen its success since 1919 until recently. After understanding the needs of the

customers, Tesco Company then employs innovation to make the lives of the customers a

little easier and better. It was through this customer understanding and innovation that

saw the company comes up with extended shopping hours and online grocery shopping.

The fourth component of the strategic purpose of Tesco Company is that it aims

to be the local winner while applying their skills globally. The derivation of the

component was that retail was local due to the regional differences in culture, regulations

and climates in different regions. Regardless of these differences from place to place, the

skills learned and gained from one place can be used in another place. (Tesco plc 2014)

The knowledge about setting up grocery stores in the UK has enabled the company set up

many more in other different countries. The fifth component of the Tesco Company is

that they are inspiring, earn loyalty and trust from their customers, colleagues and the

communities in which they operate. The company aspires to earn not only respect but

trust inn everything that they do. The respect and trust is extended in all the company




Tesco PLC7

http://www.casestudywriting.com/ business operations from instore shopping trips, determination of the quality assurance

of the foodstuffs given to the customers and their price promise. The company wants to

set itself out as a business that the customers, communities and colleagues trust and are

loyal to (Alt 2014)

Industry Analysis: Tesco`s strategic Priorities

To understand the industrial analysis some theories like the P. Sergeant Florence’s Industrial

Localization Theory are vital to be analyzed. In the theory it states clearly the importance of

collecting data in order to establish the performance of any given company in a specific industry.

The theory is based on collection and interpretation of data. It is vital to use both the location

factor statistics, and coefficient of localization statistics with the aid of both PESTE and Porters’

models of industry analysis.




Tesco PLC8


Fig. Graphical presentation of the five porters’ industrial analysis model

The company in analyzing its industrial performance the porters five forces model is

vital to be used. The model calls for pure competition which implies that risk adjustment rates of

the returns to be constant between firms and industries and the relevant firms. From the analysis

it is clear that the industries are able to sustain different levels of their profitability. Michael

porter introduced this industrial analysis model in order to explain the scenario of profitability

levels in the industries like the Tesco. In order for the manager to develop an efficient business

strategy for the company he/she has to focus on staying on the edge over all the competitors. To

be fully conversant with the industry’s internal and external environment in which they operate

the manager of the company will adopt the porters’ industrial analysis model.

In order for the Tesco Company to compete successfully with its competitors the following main

areas of the industrial model are relevant to its operations.




Tesco PLC9

http://www.casestudywriting.com/ Rivalry

In the normal business operations the competition among rival industries, the profit is

pushed to a zero level. But since the competition is never perfect and the firms do not just take

prices passively they compete to gain an advantage of their competitors all the time. The Tesco

Company in the food industry it has the sole mandate in maintaining a steady state to stay at the

edge all the time. The intensity of rivalry is measured by to what extend the company has

acquired the industry known as industrial concentration. Tesco Company has successfully

acquired a great share of the industry of the shares of the industries in UK. The Tesco Company

has secured a good position to have a great market share in UK. In the previous years since 2008

to 2012 it has the following share of the market in percentage; 25.3%’ 25.8%, 26.6%, 30.5%, and

29.9% respectively. The trend is impressive which shows the power Tesco has over its rivalry.

sales pretax

profit

revenue

per

employe

e

sales per

square

foot

profitabilit

y %

UK market share




Tesco PLC10


2008 51773 2803 0.17984 0.00132

7

5.4 25.3

2009 59426 2917 0.193436 0.00132

2

4.9 25.8

2010 62537 3176 0.19612 0.00131

6

5.1 26.6

2011 67074 3641 0.199621 0.00130

2

5.4 30.5

2012 72035 3835 0.207907 0.00129

8

5.3 29.9

Table showing the performance of the company in five consecutive years




Tesco PLC11


In order to Tesco to win the counter attack enforced by the rivalry the following

strategies are put in place to pursue an advantage over rivals and maintain a competitive edge

position;

The company is able to lower or raise prices since most of the products are seasonal to

gain a temporary benefit over the competition.

In the manufacturing process and the products quality, the company is able to bring in

new innovations and implement new features to improve and differentiate the products.

Tesco Company has well creatively created channels of distribution to make sure all the

integration modes are standardized. The company provided door to door delivery services as a

way of maintaining high touch with consumers all the time.

Tesco company is keen on the quality of the products the suppliers are willing and able

to supply them in the long run. Their main target is to meet the customers’ specification as much

as possible.

Threats of substitutes

Threat of close substitute of Tesco products is well maintained to a low level as

possible. It is hard to completely combat the effect caused by these external powers of the

substitutes. The company compensates the losses that may arise from these close substitutes

through offering a range of products in the same line but in different forms. Even when threat of

substitutes impacts the company there is always an escape route through which the losses can be




Tesco PLC12

http://www.casestudywriting.com/ absorbed. The products supplied will always gain competitive prices if customer trust and the

company’s reliability are retained. The sales are maintained at a commendable level as shown

Graph showing the volume of sales volume due to effect of substitutes

Buyer power

The power of buyer is defined as the total impact the prospective customers have on a

manufacturing or producing industry. Since most of Tesco products are food stuffs the buyer

power is low so they are able to fix the prices. The company’s price is not dictated by the

customers so the buyer power is relatively low.

Supplier power




Tesco PLC13

http://www.casestudywriting.com/ Tesco company managerial body is keen on establishing the best competitive

supplier environment in order to maintain its prices steady. The market analysis of who to supply

raw materials is crucial in creating a viable relationship between the company and the raw

material suppliers. The power of the supplier determines the level of profit the company makes at

the end of production. Tesco Company has recorded steady profit as indicated in the graph

below.

Graph of profit in consecutive years.

Threat of new entrants and entry barriers




Tesco PLC14

http://www.casestudywriting.com/ Tesco Company is well prepared to combat the possibility of being competed by

an entering firm in the industry. It offers very competitive services to the customers which

is hard for the incoming firms to maintain. The entry and exit of the industry is free even

though the company has some protective measures which inhibit other entering the

industry; the barriers of entry. One of the entry barriers Tesco uses is the assets specificity

and internal economies of scale. Tesco enjoys great economies of scale since it is a large

company able to produce products at low prices and sale even at lower prices. The case

forces other competing companies entering to exit. Tesco Company has a large market

share.

Tesco uses PEST to be up to date with the changes of its environment. The pest

stands for: P political, E economic, S social, and T technological. The success of using

porter model is crosschecked by the use of PEST to know which area needs adjustment all

the time.

The social part of the analysis the company makes sure that the practices in the

community are up to the standards of the social value of the people. The social factors that

can affect sale like religion and culture are considered carefully. The role of social factors is

able to help Tesco to know what to change in respect to population composition and size.

The company uses the PEST to know the role the political influence plays. It is through the

political stability on the side of business practice that leads to good economy. Tesco ensures

that it is in line with the legal business practices of the country. The economics deals with




Tesco PLC15

http://www.casestudywriting.com/ the prevailing exchange rates, inflation, interest rates and economic growth which are vital

in planning. Tesco uses this to define the economic paths to use in order to minimize

negative impact on the company production. Technological factor is vital in any industry.

It is through the analysis a company knows how to adopt new advancement in technology

to avoid being competed out of operation.

Business and Corporate strategies

Since Philip Clarke took the leadership of Tesco firm in the year 2011, the

business has witnessed a dwindling in the profits. It registered a 92.6 percent drop in gain

in the half of the year 2014. Clarke took the leadership of the company as the group chief

executive after retirement of Sir Terry Leahy on his fiftyfive birthday. Sir Terry had led

the company for fourteen years, a period when the profits of the enterprise had risen from

$750 million to $3.4 billion pounds at the time he retired. At the time he was retiring, the

company had a market share of 30.5%. After Clarke had taken the leadership, Tesco

announced the first profit warning in over twenty years trading. The warning in profits

was attributed to poor Christmas sales, and this saw its shares drop by 15%. The warning

came in January 2012 due to the competition from the discounting retailers, Aldi, and

Lidl.




Tesco PLC16


Graph showing profit and the taxation phenomenon in 2008 up to 2012.

In April 2012, Tesco Company pulled in a onebillionpound scheme to redeem

its operations in the United Kingdom. The plan included upgrading of the stores,

recruitment of more staff coupled with better value and prices. The improvement sought

to improve the quality and diversity of the company`s products. The company also aimed

to change its approach to marketing and embark on brandmarketing to reclaim its

position as the dominant retailer in the United Kingdom. Marketing strategies were

changed, and an online selling platform was created. Grocery click and delivery service

was introduced to over 260 locations. The move came from the claim that had put that the

company’s 2,800 stores were cold and industrious with inadequate services. In April




Tesco PLC17

http://www.casestudywriting.com/ 2013, Tesco Company reported its fall in profits that was a drop of almost 96% from that

of the previous year. The drop was hit by the US fresh and Easy chain of around two

hundred stores that confirmed it was leaving the country. The announcement slapped

Tesco Company with a 1.2 billion pounds charge. At the same time, Tesco Company

suffered an 804 million pounds write down in property that it had bought during the

property boom in the United Kingdom, and it was not being developed.

The company comes up with a 200 million pounds plan to lower the cost of the

basic products in February 2014. The company also devised a plan to rein in annual

capital spending to not in excess of 2.5 billion pounds for the next three years. The

decision was arrived at following the spending of over 4.7 billion pounds in the years

2008/9 in store renovation and expansion. In April 2014, Clarkes one billion pound plan

to revive the company has born little fruits and the future is not certain. The company

profits for the year fall by 6.9% and likeforlike sales drop by 3% and the company

United Kingdom share decreases to 28.6 percent in the last twelve weeks from the

previous 29.7% in March the previous year. In June 2014, Kantar World panel figures

show that the firm`s market share had decreased to 29% and likeforlike recorded a fall

of 3.7%. In June 2014, Mr. Clarke steps down, and Unilever executive Dave Lewis takes

over (Alt 2014)

The change in the top management is given a month to allow the new CEO to

look into every aspect of the running of the group. The delay in one month is reached




Tesco PLC18

http://www.casestudywriting.com/ when the company announces another profit warning and cuts the shareholders’

dividends by 75%. 250 million pounds had overstated the previous month’s profits. The

reason was due to the time that the United Kingdom stalls presented their data for

calculations. In October 2014, the company suspends eight senior executives and the

financial conduct Authority issues a probe into the running of the company. At this time,

an American investment guru named Warren buffet withdraws his investment from Tesco

and claims it was a mistake in the first place. When the Financial conduct Authority

publishes the final figures, Tesco profits have dropped by 91.9 percent and it reveals that

the earlier overstatement was of 263 million pounds. The group chairperson Sir Richard

Broadbent announces his wish to retire.

To turn the company round, analysts have proposed several methods. One of the

things that the Company needs to do is to close one in every five stores in the United

Kingdom (Zoe 2014).The second proposition has been derived from the fact that, Tesco

stores are large stores that wastes space and resources. It is important to reduce the size of

these stores and rent out the excess spaces. The top management will need to develop

new products and cut down the prices of their commodities immediately. The group

chairperson should not come from the United Kingdom retail. The company has also sent

senior workers back to the shop floor. The company will need to change its culture and

reinvent new brands if it has to remain in the market (Alt 2014) The HSBC analysts says

that the company will need 3 billion pounds to turn it round.




Tesco PLC19


Fig. Graph of revenue per employee.

The revenue per employee is shown in the graph above in respect to their number

in 2008 to 2012

The strategies to be used would involve lowering of the prices by about 56

percent to compete favorably with the local principal competitors, Aldi, and Lidl. A

number of the staff would need to be increased by 2025 percent in the stores. Five

hundred million dollars would also need to be used in elevating the quality of the food to

attract back the lost customers.




Tesco PLC20


Table showing the performance of the company for five consecutive years

sales pre-tax profit

revenue per employee

sales per square foot

profitability %

UK market share

2008 51773 2803 0.17984 0.001327

5.4 25.3

2009 59426 2917 0.193436

0.001322

4.9 25.8

2010 62537 3176 0.19612 0.001316

5.1 26.6

2011 67074 3641 0.199621

0.001302

5.4 30.5

2012 72035 3835 0.207907

0.001298

5.3 29.9




Tesco PLC21


Reference List

Barry, S. 2014,Tesco timeline: How the once mighty champion of the UK supermarket sector has

seen its crown slipAvailable from:

<http://www.walesonline.co.uk/business/tescotimelinehowoncemighty798408>. [24

August 2014].

Graham, R. 2014,Five predictions for Britain's battered supermarket industry in 2015. Available

from:

http://www.telegraph.co.uk/finance/newsbysector/retailandconsume. [05 February 2014].

Elisa, A. 2014,strategic Management Analysis: Tesco and the supermarket industry in the

UK.Available from:

<http://www.scoop.it/t/strategicmanagementbyelisaalt>. [16 March 2014].



http://www.walesonline.co.uk/business/tesco-timeline-how-once-mighty-798408

http://www.telegraph.co.uk/finance/newsbysector/retailandconsume

http://www.scoop.it/t/strategic-management-by-elisa-alt




Tesco PLC22


Zoe, W. 2014,One in five UK supermarkets must close to restore profit growth, say

analystsAvailable from:

<http://www.theguardian.com/business/2014/nov/17/tescouksupermarketsclosureindust>. [22

February 2014].



http://www.theguardian.com/business/2014/nov/17/tesco-uk-supermarkets-closure-indust


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