Tesco plc

Marketing and Strategic Analysis of Tesco PLC

1.0 Introduction

This study was conducted to obtain understanding about the global retailer of the grocery

and general merchandise; Tesco Private Limited Company. This report consists of marketing

analysis of the company. In order to obtain the specific information about the company different

marketing frameworks were analyzed. The chief ones among them are SWOT analysis, PESTEL

analysis, and Porter’s Five Forces Analysis. The market position of the company was analyzed

with the help of a number of strategic frameworks including analysis of Porter’s Generic

Strategies, Bowman’s Clock and Ansoff Matrix. On the basis of the marketing and strategic

framework analysis, conclusions were made and the future outlook for the company was devised.

2.0 Background of Tesco PLC

Tesco Private Limited Company (PLC) is a retail company that specializes in the grocery

and general items retailer-ship. Among the top retailers in the world, the company, as per its

revenues, holds third position as a retailer in the world (Potter, 2011). According to Deloitte

(2010) it is also among the largest companies by profit in the world and it currently holds second

position in the list of companies that generates highest profits. The company has a wide network

of operations in large numbers of countries across the world including Asia, North America and

Europe. In UK which is the center of its origin, it has over 25 % market share and is a market

leader in the UK as well as in other markets like Malaysia, Thailand etc. (Tesco, 2011; Tesco

Facts Sheet, 2011; Finch, 2010).

Jack Cohen laid the foundation of the company in early nineteen century and first store

was established in 1929. The company stocks are traded in the London Stock Exchange under

the symbol TSCO. It operates in the diverse business segments in retail industry including

grocery, apparel, books etc., as well as services related to financing, DVD rentals and internet

services (Tesco Entertainment, 2011). According to Fortune (2010), among the world’s largest

companies list, Tesco is currently listed at #85 in the list of Global 500 companies.

3.0 Market Position

Tesco is an international retailer operating in diverse markets. The main activities of the

company are in retail markets of UK, USA, Poland, China etc. It also provides financial services

like insurance and retail banking services which are provided to its valued customers through its

subsidiaries. Its ecommerce business offers grocery and direct sales of related items by online

services.

3.1 Market Objectives and Strategies

There are various strategic frameworks and market structuring tools which help to obtain

information regarding the risks involved in doing business and the value trade-off. This analysis

provides the basis on which strategic planning is developed. In case of Tesco it is employing two

strategic plans as its primary market objectives. The first one is to focus on the development of

market through effective partnerships with the other suppliers, companies and customers while

the second one is related to the diversification of products and services by offering new and

innovative products to the customers (Tesco PLC, 2011).

The market development strategy involves joint ventures and strategic alliances with the

other companies operating in the similar industry to excel in the markets (Hitt et al, 2009).

Tesco’s entry in the Chinese and Japanese markets has served as a key growth driver to the

company’s revenues and its expansion strategies. The company’s interest in the Asian markets is

increasing due to growth in these markets and increasing trend of consumer shopping.

The product diversification strategy involves the development of unique and high quality

products with innovation to attract large number of existing and potential customers (Hitt et al,

2009). The ever changing business and consumer environments propel the companies to develop

new and innovative products and services. If the company follows the customer requirements

and wants, then it can offer new product lines in the markets (Johnson and Scholes, 2003).

Tesco, if complies with the customer needs and requirements, will require to pay more attention

to its R&D processes which will help it in retention of its customers.

3.2 Financial Position

By the end of its fiscal year (Feb, 2011), it had acquired over shares of more than two

companies including Greenergy Int’l Limited, Wild Rocket foods LLC etc. (LON:TSCO, 2011).

According to the latest stock quotes and market position of retailer businesses in United

Kingdom, the current market capital of Tesco is over $ 50,000 million in the retail markets with

the stock price over 390 as reported on 27 July 2011 (LON:TSCO, 2011). The current market

capital of the company shows its strong market position as a retailer. In February 2011, the

company had earned revenues of over 65 billion pounds from its business at local and

international level (Tesco PLC, 2011).

The report published by Guardian UK reported that the company has earned high profits

this year. The profits earned by the company were around 4 billion pounds but the company

executives believe that it had potential to earn more. The increased rate of return was mainly

from the Asian markets (12.3%). The company’s growth rate is very strong in Asian markets

where its profits increased by 30%. The total sales of the company were around 70 billion pound

and the sales in UK increased by 6% with increased ratio of profits 4%. The company has also

incurred losses in its operations in US markets which were mainly due to the increasing

acquisition costs (Hawkes, 2011).

4.0 Industry Analysis

4.1 PESTEL Framework

4.1.1 Political Factors

Tesco is currently serving people in 14 countries across the world. The global operations

of the company make it vulnerable to the political and legal frameworks of these countries which

can impact the market position of the company. There are large numbers of legislations passed

by the governments regarding the employment of their own citizens (Balchin, 1994). The

government of the countries these days pressurizes the company to offer job opportunities

ranging from flexible to highly paid skilled jobs to their citizens.

Tesco has to meet the governmental and demographic requirements of these countries by

employing large numbers of local citizens including students, disabled, women and elderly

workers to effectively meet the regulations related to employment.

4.1.2 Economic Factors

The economic factors hold importance for the companies operating in the diverse

locations. These factors can have direct influence on the business operations, customer buying,

demand, cost of production and services, revenues and prices of the merchandise. Moreover, the

high rate of unemployment in the country decreases demand for large number of goods and the

manufacturing capabilities of the companies.

These factors influencing the business capabilities of a company are outside its control

but the effects of these factors on a firm’s performance can be severe. The international business

of Tesco is still growing and generating revenue but the company is mainly dependent on the

economy of UK. So if there is any fluctuation in the economy and the markets of UK, Tesco will

likely to be among the suffering companies.

4.1.3 Social Factors

According to Clarke et al (1994) and Data monitor Report (2003), the current shift in the

British customer buying trends has impacted the business of various firms. The current

customers are usually availing bulk purchase options from one single retailer "one stop option”

which is mainly due to the social changes in the culture. Tesco is more on nonfood items in its

stores than the food items. There are also demographic shifts in the country including aging

people, increased rate of female workers and a declining ratio of home cooked food items. This

social change has led the retailers in United Kingdom to focus more on the products and services

to meet customer requirements. Similarly the retailers are more focusing on their private label

products than offering the other brands as well as on the distribution networks and other

operational improvements. Likewise, the customers are now more interested of the products and

services that meet the health care requisites.

4.1.4 Technological Factors

Technology plays an important role in influencing the company’s performance and its

manufacturing capabilities. Tesco employs latest technological advancements for the retail

business and other services it offers. The latest technologies facilitate the customers and the

company both. According to the Data Monitor Report (2003) the customers feel great ease and

satisfaction due to the availability of more personalized and convenient shopping services which

is mainly due to the technological advancements employed at shopping arenas. The latest

technologies employed by Tesco include wireless equipment, intelligent scale, and electronic

system of product labeling, as well as Radio Frequency Identification system (Tesco, 2011).

According to Finch (2004) technologies like electronic point of sale has enhanced the

quality of services and the operational and business capabilities of the companies by increasing

the efficient distribution and inventory systems.

4.1.5 Environmental Factors

There is a great deal of pressure on the companies to comply with the environmental laws

and to understand their responsibility towards the society (Lindgreen and Hingley, 2003). The

corporate social responsibility of the company states that Tesco tries to adopt business practice

that helps the societies in development (Johnson & Scholes, 2003).

In 2003 the government of United Kingdom has launched a new strategy that is based on

the sustainability of consumption and the production procedures by cutting the level of wastes,

reducing the amount of resources consumed and minimizing the damage the toxic waste has been

causing to the environment. Moreover, a new resolution was passed by the government for the

advertisement of processed and fatty products which has directly impacted the Tesco’s product

ranges and led it to adapt its product offerings which has in turn affected its relationship with the

suppliers and the end users (Graiser & Scott, 2004).

4.1.6 Legal Factors

Since Tesco is a global retailer therefore the level of government legislations and the

policies is very high. The legal framework of the country can have direct impact on the

performance of the company. The Mintel Report (2004) explained the Food Retailing

Commission’s code of Practice. According to the report, the FRC can impose changed rules and

regulations on the retailers with or without prior notice. Similarly, the intense competition in the

markets is regulated by the government to control monopoly and the buyers with various legal

and regulatory frameworks (Myers, 2004).

4.2 Porter’s Five Forces Analysis

4.2.1 New Entrants

The threat of new entrants in the grocery markets of UK is low. The industry is

dominated by the existing market players like Tesco, ASDA, and Safeway etc. which have over

60% market shares along with the number of small companies that further holds around 10

percent market share. This makes it highly difficult for the new entrants to come over and start

their business there. The grocery markets in the UK have evolved from small scale retailers to

huge markets which are a dominating business in the country. The large companies have built

their market shares by efficient operating systems, suppliers, marketing mix etc. these factors

pose strong barrier to the entry of new company in the grocery markets (Ritz, 2005).

4.2.2 Suppliers Power

The level of bargaining power of suppliers in the retail industry can be regarded as

moderate. Tesco has diverse range of suppliers to meet its requirements. Many suppliers have to

give discounts and other incentives in order to remain in business and meet the challenges

imposed by the other suppliers in the market. Through these suppliers, the company is able to

offer products that are of high standards. It can find other suppliers that can provide its supply

needs. Thus the power of suppliers in the industry is cancelled by the availability of substitutes

(Ritz, 2005).

4.2.3 Power of Buyers

The bargaining power of buyers is very high in the case of retail business. Due to the

presence of various similar services providers the customer tends to switch if they find their

product better in terms of quality and prices. There are a number of factors that support this

claim. For instance, buyer power is high as many substitutes are made available to the market.

The buyer power allows the buyers to have a greater control over the manufacturers. Tesco tries

to effectively manage its customers by providing what they want at right price at right time

(Tesco, 2011).

4.2.4 Threat of Substitutes

The threat of substitute products in case of Tesco can be regarded as high. There are

various retailers that are competing with each other through different business strategies. This

factor enhances the degree of availability of products and consumer’s options for similar or

alternative products. They have significant amount of product choices and option available out of

which they can make a choice based on their affordability range. The high rate of substitute

products is then considered a threat for the company. Tesco has been trying to use the strategy of

acquisition to effectively deal with this situation by taking control of the smaller companies and

strengthening its market position (Ritz, 2005).

4.2.5 Competitors

The rivalry amongst the existing competitors in the markets is high. Tesco competes with

diverse range of retailers, stores and related companies that offers the products similar to that of

Tesco’s. It has cut throat competition with the ASDA Group Ltd, Carrefour and J. Sansburry plc

respectively (Hoovers, 2011). The growth is very difficult due to the stiff competition in the

markets due to which many retailers have to add innovative products and services in their

offerings to remain in the business.

5.0 SWOT Matrix

The SWOT analysis lists internal strengths and weaknesses and compares them with the

external opportunities and threats. The full SWOT analysis of Tesco is in Appendix A.

Strengths

Business portfolio Reputation Supplier relationship Technological advancement

Weaknesses

Product recalls Highly dependent of markets of

UK Series of acquisition can reduce

the profitsOpportunities

Commercial networking Nonfood retailing Further market expansion and

penetration

Threats

Competition Growth expenditure Changed governmental policies Price wars

6.0 Strategic Analysis

6.1 Porter’s Generic Strategies

The Porter’s generic strategies provide three strategic options of cost leadership,

differentiation and focus which can be used by organizations to achieve competitive advantage

(Griffin, 2006). In case of Tesco, the company is following both the cost leadership and product

differentiation strategies.

The cost leadership strategy allows Tesco to control the operational costs so that the company

can set the competitive pricing in order to generate high profits. The product differentiation

strategy allows Tesco to offer unique and differentiated products and services to the customers.

This strategy further allows the company to develop brand loyalty from the buyers and the

unique attributes of the products and services allows the company to sell them at a higher prices

in certain markets.

6.2 Ansoff matrix

This framework his helpful for the firm to understand and decide the growth rate of its

products and markets. This framework chiefly consists of four main growth strategies including

product development, market penetration, diversification and market development (Ansoff,

2006). Tesco is employing the mixture of these strategies in domestic and international markets.

In the domestic markets, the untapped markets are tapped with the help of market penetration

strategies and product differentiation strategies while in the international markets, the company

is employing marketing development strategies in order to obtain market shares in these markets.

Existing product New product

Existing

market

Market penetration

Increase its market share in the UK markets

Product development

Expansion abroad Movement in other

store markets

New market Market development

Expansion of petrol business

Offering financial services

Diversification

Innovative and entirely new product range or private label brands of Tesco

6.3 Bowman’s Clock

Bowman’s clock is a type of strategic tool used in the marketing frameworks to analyze

and understand the market position of a company in comparison with its counterparts. This tool

was developed by, using the three generic strategies devised by Porter, Cliff Bowman and David

Faulkner (Bowman and Faulkner, 1997). The competitive advantage of the Tesco lies in the cost

leadership in the domestic and international markets.

Tesco, in the home markets, is competing directly with ASDA while in the international

markets; it has to face cut throat competition with the number of local and international retailers.

The company has become the market leader in the domestic markets by narrowing the price

gaps. The pricing strategies adopted by the company are the main competitive advantage for the

company in these markets (Desjardins, 2005).

7.0 Conclusion

The analysis of marketing and strategic frameworks with reference to Tesco PLC shows

that the company is successful in the markets due to its brand name and serviceability. The

company has strong market position due to its diverse product lines in retailing. In today’s

competitive environment, Tesco is required to adopt latest technological and product

development strategies in order to sustain its market presence. The company is currently working

on the cost leadership and product differentiation strategies and is earning high profits in the

domestic and international markets.

It must adapt its business procedures and operations in order to meet the changing needs

of the customers. The different strategies in different markets, based on the market dynamics,

can give huge potential of success to the company. Moreover, the success of Tesco is highly

dependent on its collaboration with its suppliers, other businesses and employees.

7.1 Future outlook

The future outlook for the Tesco involves strategic alliances with the retailers of the

various host countries. This method will allow the company to develop resources and networking

excellence in these markets. The joint ventures or partnerships will help the company obtain

economies of scale and increased presence in the markets followed by the improved

understanding of the local expertise and skills required to deliver its products and services. The

success of these strategic alliances will be dependent on the acceptability of the strategies and

their results, sustainability of these strategies over long run and feasibility of their relationship.

Understanding the customer needs and wants and then developing innovative products is

a key factor of success in the retail industries; therefore, it is highly important for the company to

develop a competitive advantage in the product differentiation and innovation techniques.

Likewise, Tesco can engage itself in the development of different business portfolios for its

operations in different countries to provide different shopping experience to the customers.

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Appendix A: Detailed SWOT Analysis of Tesco

Strengths

Tesco is currently ranked at #58 in the World’s largest countries list in the Fortune

Global 500.

It is ranked as the world’s third largest retailer of grocery in the world with over five

thousand stores worldwide and has more than four hundred and fifty thousand employees

in its worldwide stores (Tesco, 2011).

It held around 31% market share in the UK retail industry in the year 2010 (euro

monitor, 2010)

The company holds over fifty thousand million market capital in the retail industry,

which makes it the top retailer in UK grocery markets.

For the year 2010, it had earned over 65 billion pounds from its worldwide retail

business.

The market performance of the company has increased many folds over the last decade

(Fame, 2010).

The success of the company is due to the customer loyalty and its ability to customize its

services to cater the needs of every customer.

Weaknesses

There are number of instances that are related to the product recalls at the company

outlets. These product recalls have impacted the market performance of the company as

compared to its counterparts.

The product recalls in the recent years resulted in the financial losses to the company and

serious damage to brand equity (Mintel, 2009).

Most of the business of the company is directed in the markets of UK and constitutes

over 70% of its revenue from these markets. This high level of dependence over these

markets is the key weakness of the firm and it is highly vulnerable to the changing

environments in UK (Tesco, 2011).

Opportunities

The company has a very wide network of commercial portfolio. It has opened over 600

stores recently out of which over 50% stores were in international markets (Mintel,

2009).

Geographic diversification can help the company to obtain economies of scale with

minimum exposure to risks.

The ecommerce business of Tesco has obtained high level of fame over the international

markets (Guardian, 2010). This provides an opportunity to the company to attract more

potential customers.

It can focus on entering Indian markets as well. The entry will further strengthen its

market position.

It can also engage in the food retail business to maximize its profits.

Threats

There is a stiff competition in the global and domestic markets. It faces serious

challenges in the markets to compete with the existing market players to obtain its market

share

The global financial crises have impacted the economies of the world. UK is among the

suffering countries. The economy is contracted over 2 per cent in the recent years and it

is estimated that it will contract even further (Poulter, 2009). This economic shift can

have profound impact on the profitability of the company.

Due to the economic shifts, the customer shopping preferences are also changing due to

the high rate of unemployment. This can adversely impact the sales of the company in

nonfood items