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Higher Diploma in Business Management

Strategic Management Assignment 1

An Internal and External Grocery


Industry analysis
on:

Authors:

Colin Ruttle

Daire Bucke

Gordon Ryan

Mary Anne Flavin


Contents
1. Introduction..............................................................................................................................3
2. Brief company overview...........................................................................................................3
3. Value Chain Analysis:................................................................................................................4
3.1 Inbound Logistics...............................................................................................................4
3.2 Operations........................................................................................................................5
3.3 Outbound Logistics............................................................................................................5
3.4 Marketing & Sales.............................................................................................................5
3.5 Service...............................................................................................................................5
4. SWOT Analysis:.........................................................................................................................7
4.1 Strengths:..........................................................................................................................7
4.2 Weaknesses:......................................................................................................................7
4.3 Opportunities:...................................................................................................................7
4.4 Threats:.............................................................................................................................8
5. PESTLE:.....................................................................................................................................9
5.1 Political.............................................................................................................................9
5.2 Economic.........................................................................................................................10
5.3 Sociocultural....................................................................................................................10
5.4 Technology......................................................................................................................11
5.5 Legal................................................................................................................................12
5.6 Environment....................................................................................................................12
6. Porters Five Forces:.................................................................................................................14
6.1 Threat of substitutes (Weak to moderate force)..............................................................14
6.2 Threat of new entrants (Weak Force)..............................................................................14
6.3 Bargaining power of buyers (Strong Force)......................................................................15
6.4 Bargaining power of suppliers (Weak Force)....................................................................15
6.5 Competitive rivalry (Strong force)....................................................................................15
7. Strategic Issues - Among other recommendations outlined throughout our analysis, the two
key strategic issues facing Tesco Ireland are:...................................................................................16
7.1 Competitors (Market Share)............................................................................................16
7.2 Brexit (UK leaving EU)..........................................................................................................16
8. Conclusion:.............................................................................................................................17
9. Bibliography............................................................................................................................18
1. Introduction
The following report is an Internal and External grocery industry analysis from
the perspective of Tesco Ireland. We will endeavour to identify and analyse the
individual factors which impact positively and negatively on the grocery sector.
Ultimately, we are concentrating our focus on those factors that we identify as
having the greatest potential impact on Tesco’s strategy and performance
within the industry. We will do this by using Value Chain Analysis, SWOT
Analysis, PESTLE and Porter’s Five Forces.

2. Brief company overview

Tesco Ireland is the Irish arm of supermarket group Tesco and controls 21.8% of
consumer spend in the grocery market as of Sept 11th, 2016 (fig. 1 below).
Tesco Ireland was formed by the Tesco Plc 1997 takeover of the Irish retailing
operations of Associated British Foods, namely Powers' Supermarkets Ltd and
its subsidiaries, trading as ‘Quinnsworth’ and ‘Crazy Prices’.

Tesco operates full-sized supermarkets under the main ‘Tesco’ brand,


hypermarkets called ‘Tesco Extra’ and a small number of convenience stores
known as ‘Tesco Express’.

Aldi; 12.70%
Lidl; 13.15%

SuperValu; 25.17%

Dunnes Stores; 24.49%

Tesco ; 24.49%

Figure 1 shows the percentage share of take home grocery consumer spend between Irish supermarkets. 12
weeks to September 11, 2016 [CITATION Kan16 \l 2057 ]
3. Value Chain Analysis:

This is an analytical framework that assists in identifying business activities that


can create value and competitive advantage to the business [CITATION Str \l
2057 ].

[ CITATION Res16 \l 2057 ]

3.1 Inbound Logistics


149 Tesco stores are run through a centralised distribution network reducing
the number of journeys needed to take products to stores. Specialised route
scheduling software is used to maximise delivery schedule. Tesco have invested
heavily in increasing capacity on Double Deck trailers to carry 45% more than
conventional trailers with upgraded delivery vans giving 20% fuel savings.

Tesco also increase logistics efficiencies in the way that they interact with their
suppliers through the use of their own fleet.

The contract for distribution to all 149 stores is currently held by Eddie Stobart
Logistics. Tesco put this contract up for tender every 3 years to ensure they
were getting the best possible deal to remain competitive. DHL has recently
won this contract worth around €45m[ CITATION Ind16 \l 2057 ]

Tesco's chilled and frozen foods distribution has been awarded to Irish owned
Keelings for the next year through a separate tender process.
3.2 Operations
Tesco Ireland uses technology widely and this is visible in many different
sectors of their business. These include Self-service checkouts, full barcode
systems, Clubcard Loyalty and the recently launched ‘Scan as you Shop’ service.

Tesco offers online shopping through its web and app technology platforms
supported by a home delivery service utilising GPS enabled Tesco delivery vans.

Tesco are very aware of the environment and invest heavily in reducing their
carbon footprint through Carbon Neutral (Dublin) and Eco stores (Tramore).

3.3 Outbound Logistics


The key cost in this area relates to the online home delivery service which is
extensive with over 87% population coverage, with a 30% increase in the first
half of 2016 compared to the first half 2015. [CITATION Tes16 \l 2057 ]

3.4 Marketing & Sales


‘Every Little Helps’ is the main slogan used by Tesco. Its marketing strategy is
aimed at brand identification, offering competitive pricing, and a wide selection
of products at the best quality and price. It also continues to restore its brand
image damaged by the horse meat scandal in 2013 and also by the instances of
poor supplier treatment in the past. It is supported by online and offline
channels (TV, Radio etc) to reach its customers; plus its ‘Clubcard’ scheme helps
to identify individual consumer needs and requirements using data analytics.

3.5 Service
Tesco’s business strategy focuses on cost reduction as demonstrated by its
distribution contracts outlined above. Best price wins. When utilising this
model it is difficult to offer the lowest prices and provide an exceptional
customer service experience e.g. Ryanair. For Tesco, customer service
continues to play a major role within their overall strategy.

Through Tesco’s Community Fund they have supported 3,500 local community
groups. Working with ‘Foodcloud’ [ CITATION Tes161 \l 2057 ], Tesco donates
surplus food (two million meals to date) across the country.
4. SWOT Analysis:

This is used to identify Tesco’s internal strengths and weaknesses, as well as its
external opportunities and threats.
4.1 Strengths:
Tesco ‘Clubcard’ is a key Customer retention strategy, which is supported by
strong analytics leading to targeted marketing for better consumer service and
increased spend.

By working with over 480 Irish Food and Drink Suppliers, Tesco is keeping
transport costs down while sourcing and strongly supporting the ‘local’ Irish
Economy to the tune of €3.2 billion each year [ CITATION Tes164 \l 2057 ]
leading to long term sustainable and productive relationships.

It has a strong online platform complemented by its ‘home delivery’ service


that is a key differentiator compared to other grocery retailers in Ireland.

4.2 Weaknesses:
Tesco’s competitive challenges come from low cost retailers i.e. Lidl and Aldi
(11.7% & 11.3%, respectively as per Fig.1)

There has been significant damage to its brand image with the ‘horsemeat’
scandal from 2013 which has affected consumer confidence. [ CITATION
Tes162 \l 2057 ]

There is also uncertainty on the future impact of Brexit [CITATION Tes163 \l


2057 ]

4.3 Opportunities:
Look to maximise online potential while understanding consumer requirements
through analytics to continue to achieve growth (Fig 2)

Look to increase in store sales by maximising Tesco’s ‘fresh food’ promise at


best prices linking in with local Irish suppliers [ CITATION Tes164 \l 2057 ]

Continue to up skill Tesco’s internal digital strategy team to ensure best in class
customer online interfacing, while enhancing online marketing and IT supports
to meet future competitor challenges.

Diversifying its business model by developing the ‘F&F’ clothing brand and non-
retail elements (home & living, mobile), to continue to grow market share.
%
6
M
5.1
A 5
4.5
4.2
R
4 3.8
K 3.3
2.9
E 3
T
2.3
2 1.7
1.5
1.3
1.1
S
1
P

E 0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
N

Figure 2.illustrates the percentage rise year on year of the E-Commerce share of total grocery spend in Ireland
from 2003 to 2013 [ CITATION Kan161 \l 2057 ]

4.4 Threats:
Aggressive competition is an on-going threat to Tesco mainly driven by discount
stores Aldi and Lidl who entered the Irish Market in the last 16 years, and who
gained significant market share during the recent recession. As this grows,
Tesco’s previous reputation of being the leader in price competitiveness has
diminished.

The potential impact of Brexit is a medium to high threat.

Potential state legislative changes while low could also have an impact, e.g.
(Retail tax Poland).

New entrants to the grocery retail market are also a potential yet low threat.

5. PESTLE:
A management method that examines the effect that events or influences from
outside may have on the performance of a company or organization.
[ CITATION Dic16 \l 2057 ].

5.1 Political
Political Stability (Opportunity)

Despite coming through one of the worst recessions in history, the political
system in Ireland is considered stable. As of Budget 2016 its competitive tax
rates remain the same. This ensures it has minimal political threat coming from
the Irish Government at present.

Government National Broadband plan (Opportunity)

The Irish Government’s National Broadband plan [ CITATION Gov16 \l 2057 ]


aims to ensure all citizens and businesses across Ireland will have access to high
speed broadband no matter their location. Their commitment is, once
completed; that all of Ireland will have access to modern and reliable
broadband capable of supporting current and future needs for generations to
come. This should help to support the future growth strategy for Tesco’s online
grocery and delivery sales channels.

Brexit (Potential Opportunity/Potential Threat)

The UK’s decision to leave the EU is possibly one of the most important political
issues facing Tesco both now and into the future. It is impossible to predict the
scale and size of any implications this may have on Tesco Ireland’s future
business model. Tesco should assess how the UK’s decision could impact both
potential opportunities and threats in equal measure.

This external element of our PESTLE presents opportunities to Tesco with the
major unknown of Brexit overshadowing any political opportunity. Precautions
and plans to manage Brexit must be put in place so that emerging threats can
be dealt with. Equally opportunities have to be identified and targeted.
5.2 Economic
Weaker Sterling vs. Euro (Opportunity)

As Sterling decreases in value, Tesco should look at possible ways to increase


trade with Tesco UK. Distribution companies in the UK may have licensing
agreements in place with certain brands, but Tesco UK might not be bound by
the same agreements. A large devaluation of sterling against the Euro may
permit some cost savings on purchases through Tesco UK though this could be
short term rather than long term.

Recovering Economy (Opportunity)

Ireland is now in a period of economic recovery demonstrating consistent


growth in all sectors. The latest Irish supermarket share figures for the 12 week
period ending 14 August 2016; support this by showing stellar growth for the
grocery area with sales increasing by 3.5% compared to 2015. [ CITATION Kan \l
2057 ]

Overall the external economic elements of our PESTLE analysis create


opportunities for future business growth for Tesco.

5.3 Sociocultural
Eco friendly Business (Opportunity)

In today’s world, consumers are not only aware of climate change; they also
have a growing interest in what large companies are doing to play their part to
reduce their carbon footprint. The Irish Food Board [ CITATION Bor16 \l 2057 ]
predicts that pressures from the consumer in the future will increase the
priority of energy and packaging sustainability. Tesco should look to lead the
way in satisfying these priorities, continuing to open more Carbon Neutral and
Eco stores and enhancing their packaging and waste management areas
through initiatives such as Foodcloud.

Increase interest in online shopping (Opportunity)

Online shopping is increasing and is no different in the grocery sector though it


may be progressing at a slightly slower pace than in other sectors. Tesco could
take advantage of this by investing in R&D to develop its online business as
much as possible to meet and exceed demands from consumers in the future
e.g. using personalisation analytics.

Social Media (Opportunity)

The use of social media in Ireland is also increasing. In a recent survey


conducted by Amárach Research on behalf of EMC [ CITATION Tec16 \l 2057 ],
found that 8 out of 10 Irish adults use online social media, mostly on mobile
devices. Tesco could develop targeted social media platforms to maximise
exposure in their marketing campaigns.

Wide Wealth gap in Ireland (Threat)

According to a report from TASC [ CITATION TAS16 \l 2057 ] based on figures


from the CSO; the share of wealth held by Irelands top 10%, equates to 53.8%
of the total wealth in the country, higher than anticipated. As Tesco Ireland
customers are mainly working to middle class, this poses a threat as the overall
wealth available to our typical customer is less than previously thought.

Overall the external sociocultural elements to our PESTLE analysis present


opportunities for Tesco. However a wide wealth gap is a concern as there is less
money in more households and this could be damaging to Tesco’s business
model.

5.4 Technology
Mobile Technology (Opportunity)

Tesco can continue to enhance and develop their user experience and online
interfaces. Continued investment to improve their mobile technology is
important while encouraging loyalty through consumer personalisation.

Broadband (Opportunity)

As before, the Government’s plan to implement the National Broadband plan is


an opportunity to increase online shopping leading to increased market share.
Cybercrime (Threat)

Cybercrime poses a huge threat to both Tesco and its customers. It may act as a
barrier for potential growth to online grocery shopping if future security issues
occur.

This external element of our PESTLE shows the opportunities with technology.
But it also shows a high risk to both Tesco and its consumers. It must secure in
its own and in its consumers, by adequately investing in security software and
hardware technologies.

5.5 Legal
Minimum Wage (Threat)

Budget 2016 has increased the minimum wage in Ireland for an experienced
worker by 10 cents per hour. This increase will come into effect from 1 st January
2017 and will have an impact on Tesco’s labour costs in the future.

Consumer laws and Grocery Goods Regulations (Opportunity)

On 30 April 2016, the Consumer Protection Act 2007 (Grocery Goods


Undertakings) Regulations 2016, known as the Grocery Goods Regulations took
effect, placing obligations on grocery businesses e.g. payment T’s & C’s,
[ CITATION CCP16 \l 2057 ]. In addition, there is environmental packaging and
food waste laws constantly being introduced which are enforced by local
County Councils. [ CITATION Cor \l 2057 ]

Tesco can use this opportunity to continually strive to offer higher quality, safer,
more environmentally friendly products; to satisfy and exceed both the
consumer needs directly, and also consumer and environmental laws
applicable to the grocery sector.

This external element of our PESTLE shows a slight threat from wage increases
as a result of the minimum wage increase; however these are outweighed by
the environmental and food waste management that Tesco is already involved
in (e.g. Foodcloud).

5.6 Environment
Climate Change (Opportunity)
The need to provide environmentally friendly products to the consumer is
increasing. This can be done in a number of ways. Look at ways to reduce
packaging using environmentally friendly materials and reducing store carbon
footprint. Sourcing products and services closer to stores reduces travel
distance. By increasing online sales, Tesco can reduce the volume of consumer
vehicles travelling to their stores to help with carbon footprint.

This external element of our PESTLE presents good opportunities for Tesco.

Recommendations

The external factors identified in the PESTLE analysis of the macro-environment


present good opportunities for Tesco.

Examples;

 Tesco should focus on growing online market share to increase grocery


spend becoming the online market leader.
 Tesco can also improve business operations, sustainability, and market
presence through technology advancements supported by economic
external factors i.e. current economic recovery.
 Tesco must prepare and protect themselves from any threats that may
arise from Brexit, and secure themselves from future cybercrime by
investing in new technologies and software.

6. Porters Five Forces:


This is an analysis tool that uses five industry forces to determine the intensity
of competition in an industry and its profitability level, [CITATION Por85 \l
2057 ].

6.1 Threat of substitutes (Weak to moderate force)


In Ireland the threat of substitutes to the major grocery supermarket groups
consists of smaller type convenience stores, off licenses and organic shops. In
rural areas, the nearest supermarket may be some distance away which is
where the local convenience store holds the market.

These substitutes would be seen as a low threat to retailers like Tesco; who can
offer a much wider range of high quality products at considerably lower prices.

It may be argued that as we come out of recession, households may not be as


price sensitive as before with convenience and location becoming more
important. To that end, the threat from these substitutes could be viewed as
moderate if that happens.

If we consider research completed by Retail Ireland, we see that price is the


number one consideration for 40% of Irish shoppers. [CITATION Ret16 \l 2057 ]

The threat of substitutes is moderate to high in non-food items such as drapery


and home ware, as specialist shops can offer a similar product range and
quality with fewer price differentials.

6.2 Threat of new entrants (Weak Force)


The threat of new competitor entry to the grocery supermarket is low in
Ireland. There are 5 major grocery supermarket retailers in operation here, two
of which are food discount retailers, i.e. Lidl and Aldi.

The latest figures from Kantar Worldpanel [ CITATION Kan162 \l 2057 ] show
that Aldi and Lidl hold 23% of the grocery market spend between them. To
compete with the established brands, a new entrant would have to focus on
differentiating themselves from the existing brands either by a low cost or high
quality business model. Possibly even bigger barriers would be the
considerable initial capital requirement and the extensive marketing and
promotional costs needed to establish the new entrant brand.
6.3 Bargaining power of buyers (Strong Force)
The bargaining power of the buyer in the supermarket grocery industry is high.
Where products are relatively standard with minimal differential, the switching
cost is low and buyers can easily switch from one retailer to another. Tesco
should pay attention to the fact that consumers (buyers) are attracted to low
price and this may lead to greater control on buyer spending.

6.4 Bargaining power of suppliers (Weak Force)


The bargaining power of the supplier in the supermarket grocery industry is
relatively low. In most cases, the supplier is inclined to rely on the larger
grocery retailer and is fearful of losing contracts, stock positioning, product
range and ultimately sales volume/revenue. Larger retailers such as Tesco have
greater negotiation powers to drive lower cost prices from suppliers.

6.5 Competitive rivalry (Strong force)


Possibly the strongest force of all on Tesco’s market share within the
Supermarket grocery industry is competitive rivalry. Tesco is now joint second
largest grocery retailer in Ireland, equal to Dunnes Stores with 21.8% of market
share, just behind the market leader SuperValu with 22.4%.

The newest entrants to the grocery market have healthy market share with Aldi
claiming 11.3%, and Lidl 11.7%. The largest threat to Tesco right now is coming
from both of these. Considered discount stores, they have increased their
growth value of sales to 10.7% and 4.5% respectively for the 12 weeks up to
11th September 2016 [CITATION Kan16 \l 2057 ]
7. Strategic Issues - Among other recommendations outlined throughout
our analysis, the two key strategic issues facing Tesco Ireland are:

7.1 Competitors (Market Share)

This is an on-going issue for Tesco Ireland. There have been ‘positive like-for-
like sales growth (in Ireland) for the half of 2016 for the first time since
2010/11, driven by sustained volume growth’ [ CITATION Tes166 \l 2057 ],
however this have been driven purely by volume with Tesco offering a much
wider range of high quality products at lower prices.

Recommendations:

Tesco has unique strengths compared to its competitors. It utilises modern


technology very well and is focused on delivering high quality products and
services. Past issues have dented consumer confidence and it seems that Tesco
have been focused on getting their ‘house in order’ [ CITATION Tes166 \l 2057 ]
while managing the competitive challenge at a more moderate level.

Tesco’s main competitive advantage is their online/home delivery service. They


are ahead of all their competitors and with today’s busy lifestyle; this is the
future in shopping.

Through Tesco’s online capabilities, they can also develop better data analytics
to understand existing customers and entice potential customers. With this,
they can continue to enhance customer service to maintain loyalty.

7.2 Brexit (UK leaving EU)

The UK’s decision to leave the EU is possibly one of the most important political
issues facing Tesco. Predicting the implications that this may have on Tesco
Ireland’s future business model is very difficult. Already we have had an initial
standoff on pricing Tesco Ireland and Unilever. While this was resolved within
24 hours of being made public, there has been speculation Unilever were
looking to increase prices by 10% [ CITATION Reu16 \l 2057 ]. This could happen
with other supplier areas for Tesco Ireland and if so, what impact will it have?
Recommendation:

Tesco Ireland must prepare and protect themselves from threats due to Brexit
and have a risk management strategy and team in place to manage issues that
arise. In addition, they need to look at potential opportunities they could gain
in market areas outside the UK, and within the EU.

8. Conclusion:

From our internal and external analysis, the major strategic issues we have
identified are competitive rivalry and Brexit. Tesco Ireland can respond to these
by investing further in their online capabilities while ensuring they have a risk
management strategy in place to review the impacts of Brexit on their future.
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