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 Porters Five Forces Analysis. The market position of the company was analyzed with the help of a number of strategic frameworks including analysis of Porters Generic Strategies, Bowmans 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 worlds 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). Tescos entry in the Chinese and Japanese markets has served as a key growth driver to the companys revenues and its expansion strategies. The companys 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 Intl 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 companys 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 firms 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 companys 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 Tescos 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 Commissions 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 Porters 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 consumers 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 Tescos. 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 y y y y Business portfolio Reputation Supplier relationship Technological advancement Opportunities y y y Commercial networking Nonfood retailing Further market expansion and penetration y y y y y y y Weaknesses Product recalls Highly dependent of markets of UK Series of acquisition can reduce the profits Threats Competition Growth expenditure Changed governmental policies Price wars

6.0 Strategic Analysis 6.1 Porters Generic Strategies The Porters 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

y y

New market

Market development Expansion of petrol business Offering financial services

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

y y

6.3 Bowmans Clock Bowmans 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 todays 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
y

Tesco is currently ranked at #58 in the Worlds largest countries list in the Fortune Global 500.

It is ranked as the worlds 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
y

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
y

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
y

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