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, Porters
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 Tescos 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
Tescos performance:
Political

Chinas 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 worlds 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 Tescos international
business segment is on the rise and it is predicted to account for one quarter of
the companys 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 governments 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 Tescos 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 Tescos 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.

Porters 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, Porters 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, Sainsburys 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,
Sainsburys, 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 Sainsburys 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 Tescos
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

Sainsburys 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

Tescos 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 companys 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 UKs economy by 2.4% in 2009 which is estimated to contract further by
4.2% by the International Monetary Fund (IMF) ( Poulter, 2009). Tescos
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 companys 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, Sainsburys 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 companys 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 companys 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 selfservice kiosks, financial services, focused direct marketing and promotions.
In order to put Tescos 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, Sainsburys 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.
References
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Audretsch, D. B. (1995), Innovation and Industry Evolution, (Cambridge: MIT Press)
BBC (2009), Czech, Greek presidents support Turkey's EU bid, BBC Monitoring
Europe, December 2, 2009. Available at cant find link, post link here [accessed
07/07/2010]
Daily Mail (2010), Tesco starts Pounds 1bn price war, Daily Mail, Jan 18, 2010. p.7
Datamonitor (2010), Company Profile Tesco, Datamonitor Europe, 2010, Ref
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