SWOT, PESTEL, Porter's Five Forces and Value Chain Analysis of Tesco

Introduction
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 Datamonitor (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 I nternet 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 (Datamonitor, 2010).  The comparative positioning of
Tesco’s market share with respect to other leading players in the market has been illustrated
as follows (Euromonitor, 2010):

Fig 1: Share of Leading Players in UK Food Retail Market

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):

Fig 2: UK Spending on Food as % of Overall Consumer Spending 2004 to 2008

The economic downturn has been brought to light with the assistance of the following GDP
growth graph since 1989 (Mintel, 2009):
Fig 3: UK GDP Growth 1989-2009

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 G overnment.

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
bagless deliveries are being rewarded through Tesco’s green Clubcard points (Tesco,
2009; Datamonitor, 2010).

Legal

 It has been predicted that VAT would have to rise to 20% since the G overnment 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 (Euromonitor, 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

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

 Drawing upon Datamonitor (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
(Euromonitor, 2010).
 A strong financial performance has been shown by the company over the years, which
underlines its strategic capabilities.  According to Datamonitor (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):

Fig 4: Tesco – Yearly Growth in Key Performance Indicators

 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 Clubcard’ .  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 (Euromonitor, 2010).  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 Morrisons
respectively.
In light of the above key points, the abridged SWOT
analysis of Tesco can be summarised in the following
illustration:
Fig 5: Tesco Abridged SWOT Analysis
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:

Fig 6: Value Addition in Value Chain of Tesco

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 Homeplus, which are
segmented according to the target population.
Marketing and Sales
Loyalty programs like Tesco Clubcard 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
Morrisons has been provided as follows:
Fig 7: Benchmarking Analysis: Cost as a Percentage of
Sales
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.
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