ULMS 270

The critical analysis of Tescos

development and the opportunity of
furthering international growth

Olivia Maloney
200987842

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Table of Contents

Title Page 1
Introduction 3
Company background 3 -4
Competition 4-5
Development and Analysis 5-9
Conclusion 9-10
References 11-12
Appendices 13-15

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Introduction

This repost contains a critical analysis of the UK company, Tesco. Firstly, I

will briefly cover the background of the company, how the company was

established and grew and where it stands today, including their current

values, visions and goals. I will then move on to discuss the competition

which Tesco faces today, including the up and coming rivals of discounted

retailers known as Aldi and Lidl, and how their success has impacted

Tesco. As well as over the years and present times Tesco has also been

influenced by many factors, in particular I will look at the effect of the

economy, how the recession forced Tesco to changed their strategy and

also consumer tastes, how Tesco needs to be flexible in order to remain on

top. Due to unfavourable trends and high dependency on the UK I

specifically focus on the opportunity for further international growth for

Tesco, ultimately in the worlds largest economy, the USA. I will critically

analyse Tesco re-entering the market with their original idea of health

focused convenience stores on the concentrated food retail industry.

Company background

Tesco is a successful global food retail brand, in 2015 the company was

ranked number 56 in highest sales worldwide, with sales totalling $102.64

billion (Forbes, 2015). The company was first founded in 1919 by Jack

Cohen, starting out selling surplus groceries on a stall in East London. Five

years on from this the Tesco brand was established, the name was formed

from the first three letters of the suppliers name (TES) and the first two

letters of Cohens surname (CO). Cohen opened the first store in 1929, the

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growth of Tesco flourished throughout the early 90s with the company

owning over 800 stores by 1960. Worldwide, Tesco now owns

approximately 6,814 stores with over 480,000 collegues in 11 countries. In

2015 the company appointed new CEO Dave Lewis, and chairman John

Allan. The company is governed by a board of directors who is led by the

chairman. The board is responsible for the company values, long term

visions and strategic direction. The chief executive is responsible for and

leads the development of strategy and manages the performance of the

group, including ensuring effective communications between shareholders

and also key stakeholders by regularly updating and informing them of

their business strategy and performance (Tesco plc, 2015).

The main market the company operates in is the UK, totalling over 3500

stores and rivalling alongside the other top 3 supermarkets; ASDA,

Sainsburys and Morrisons (Tesco plc, 2015). Whilst competing against

these dominating firms Tesco prides themselves on putting the customer

first, they use their customer focused values to differentiate themselves

from their competitors. Tescos core purpose states Serving Britains

shoppers a little better every day (Tesco plc, 2015), their vision is solely

on heightening every customers experience, making each visit better than

the last. Originally the firm concentrated on specialising in food and drink

but now they have diversified themselves in multiple areas such as

clothing, mobile networks and insurance.

Competition

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Tesco holds the greatest market share of the grocery industry with the

company holding 28% of total market share from the last 12 weeks ending

6th December 2015 (Kantar Worldpanel, 2015, appendix 1), this is

followed by Sainsburys , ASDA and Morrisons with, 16.7%, 16.2% and

11% of total market share, respectively. The UK food retail industry is an

oligopolistic market, this means that the market is highly concentrated

and firms are interdependent. In the last 24 months Tesco along with the

big 4 have seen little or no growth in their market share. The main reason

for this is the up and coming discount retailers such as Aldi and Lidl. Since

the recession impacted the economy in 2008 consumers have been

shopping at cheaper discounted stores due to their lower disposable

incomes. This has resulted in competitors Aldi and Lidl soaking up market

share (Appendix 2). In the last 24 months alone we can see that both

stores have had positive, steady market share growth which shows no

sign of changing. For Tesco this is a huge threat, we can see from

appendix 2 that their market share has had no positive growth, which in

turn will have had impacted their profits. Tescos turnover from the year

before February 2015 was 62.2 million, this is 1.3 million less than the

year previous (CityWire, 2015). It is clear that Tescos development is

threatened by its competition, especially those of Aldi and Lidl, this has

resulted in Tesco offering further discounts on products, but Tesco fail to

show any signs of innovation or differentiation to set them apart from

these favoured discount retailers.

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Development and Analysis

The food retail industry is a vast market, totalling a 177.5 billion worth

from the year to March 31st 2015 (IGD, 2015), with being such a large

market firms can be easily affected by numerous factors around them.

One factor which I believe is important to the food retail industry,

particularly their growth and development is cultural factors. For example

the in recent years we have seen a change in consumer lifestyles.

Consumers are becoming more conscious and aware of their health, in

regards to this there has been a decline in the demand for ready meals

and unhealthy products. To accommodate this change Tesco has been

able to adapt their product mix to increase the availability of organic

products, the company also launched their Healthy living food range in

2014 which focuses on two concepts; low calorie dishes and balanced

nutritional dishes (Tesco plc, 2014). It is clear that one of Tescos

strengths is monitoring and being aware of the changing tastes in the

market, Tescos shows flexibility by being able to adapt to these changes

quickly before sales and market share is negatively affected, thus keeping

a tight control on their development.

In addition to the cultural factors affecting the industry one factor which

cannot be controlled which affects Tescos growth and development is the

economy. The economy affects the retail market through their consumers,

as the economy fluctuates the average propensity to consume fluctuates

alongside. A specific example we could use for this is the impact of the

recession which began in December 2007. During the recession the UK

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saw a rise in unemployment and consumers having less disposable

income to spend. Due to this consumers tastes shifted towards cheaper,

more affordable products. During 2008 Tesco reported growth of 2%,

proving to be their worst growth rate in 15 years (Daily Mail, 2008). This

poor growth showed how the economy affected consumer spending,

prompting them to look elsewhere for cheaper goods which they could

find at discount retailers. For these discount supermarket chains such as

Aldi who accommodated for this demand for affordable goods the switch

in consumer tastes showed only positive results on their sales and growth.

Responding to this Tesco has fought back with price cuts of 100s of items,

stating Prices down and staying down in order to compete with such

discounted retailers and not lose out on further market share and

development. Tesco invested 500 million in the Big Price Drop in 2011,

the aim was to help families struggling in the economic downturn, and

thus influencing customers to stay loyal to their brand rather than switch

over to rivals.

Although the recession came to end in 2012, the demand for discounted

goods remained present. The demand for these discounted groceries

seems to only be steadily on the incline, which we can see from the

continuing growing success of the German-discounted retailers Aldi and

Lidl. In 2013 Aldi alone increased its sales growth rate by 36.1%, despite

the market growth for food retailers being at its lowest level in 11 years

standing at 1.9% (Kantar Worldpanel, 2016). We can see now how

consumers expect more for their money. As a result, this has stunted the

development and growth of the big 4 competitors, including Tesco as

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consumers shift to other competitors. The vast majority of the period

between the beginning of 2014 and the end of 2015 has been spent

having negative market growth rates for all the top 4 firms (Appendix 3).

Tescos main market is situated in the UK, it could be argued that their

profits and successes are heavily dependent on this sole market. Looking

at the recent trends of the UK market, I believe it is important for Tesco

not to solely rely on the UK for profits due to recent patterns of the firm

struggling to compete. This dependency could present many challenges

for Tesco if the market was to decline or trends carry on in favour of their

competitors sales. Overseas stores account for only 20% of Tescos total

sales (BBC, 2014), I believe in order to decrease this dependency Tesco

should be looking towards further increasing their geographical spread.

Tesco so far have done well overseas, their growth has been limited to

Europe and Asia, there are still numerous opportunities for Tesco to further

their international growth in other areas. For example, one market which

the company could attempt to tackle is the USA. One main country I

believe that Tesco should focus on is the USA. Despite already failing to

withstand in this market, I believe the stable economy and encouraging

market trends are not one to be unnoticed by Tesco. With sales in 2014

alone totalling $365.4 billion, an increase of 2% from the previous year

the size of this growing US grocery market is not one to be missed

(Euromonitor, 2015).

Tesco has previously tried to compete in this market with the launch of

Fresh & Easy in 2007, however despite the extensive consumer research

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which was undertaken the chain was negatively affected by the economy.

The main areas where the chain was focused were badly hit by the

economic downturn and recession in the launch and growth stage of this

chain, this resulted in consumer tastes changing. Due to consumers

having less disposable income, they were less inclined to purchase fresh,

more expensive goods and switched to cheaper products which were sold

at hypermarkets provided by competitors such as leading US grocery store

Wal-Mart. However, this was not all failure for Tesco, the firm succeeded

when recognising the growing trend for healthier lifestyles in America and

the importance of fresh organic produce. Although they entered the

market when the economy was at its worst, thus wants and needs were

shifted I still believe that this idea could thrive in the current health-

obsessed country if the brand was to enter in a more stable economy,

presenting less risk. Americas GDP has been growing at a steady 2.3%

(average) since 2012 (Trading Economics, 2015, appendix 4), this could

prove to be an opportunity for Tesco if they began looking to re enter the

market. With the economy stable and consumer tastes focusing on a

healthier lifestyle I believe that Tesco could flourish in the market if they

rebranded their original idea.

Although the US economy has been stabilised showing positive signs for

retailers such as Tesco wishing to enter the market, it has to be noted that

the fierce competition could prove to be a threat. In 2014 Wal-Mart held

24.5% of market share of the grocery market (Statista, 2015) this large

rival may be difficult for Tesco to break, as loyal customers may prove

difficult to try a new unknown brand. However, income per capita is

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steadily rising with the past 4 years showing the countries GNI has

increased by 12% (Appendix 5) this means that alongside steady GDP

growth rates the economy is becoming richer, thus the individuals. As the

individuals have greater spending power they begin to demand more

luxiourious items such as organic, fresh produce. This growing economy is

already affecting marketing trends with US organic food sales totalling

35.9 billion in 2014, a 11% increase on the previous year according to

Organic Trade Association (Food Navigator, 2015), the positive results

mean that stores are predicting to have strong growth periods for the

future. I believe that if Tesco was to stick with the niche idea of solely

focusing organic fresh produce and healthier food this may act as a

unique selling point for Tesco, therefore having a competitive advantage

over such competitors as Wal-Mart. Recent trends it has also been

recognised that sales at hypermarket stores are slowing, the hypermarket

channel is becoming increasingly saturated as stores have difficulty

entering urban cities because of their size (Euromonitor, 2015). There has

been a shift towards demand for smaller convenience stores, Tesco could

use this to their advantage as it provides a great opportunity for their idea

of smaller organic food stores.

Conclusion

If Tesco was to be encouraged by entering the market when the economy

was much more favourable I do believe that they could be very successful,

targeting the US market in particular offers remarkable growth and

development thus improving profits. With the US market being so large if

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Tesco were to begin to succeed and grow in particular in this market it

could take away the dependency on the UK market, where Tesco is

struggling to grow their market share much further.

To conclude, I believe that Tescos mainly affected by the economy and

this in turn influences competitors actions. Tesco is becoming too

dependant on their main market situated in the UK, with discount

competitors stunting their growth and development I believe it is now

time that Tesco look for opportunities elsewhere to advance themselves.

From their previous ventures in countries across Europe and Asia we can

see that Tesco have the ability to adapt their stores to local needs and

become successful. I ultimately believe in their idea of healthier organic

produce due to the rising health conscious trend, and unfortunately in the

past I believe this idea failed in the USA mainly because of the economic

downturn. Despite previously failing, I am confident that the USAs steady

economy and growing health trends will favour this niche idea and help

Tesco to further their success and become less reliant on their home

profits.

Word Count: 2,386

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References

Citywire.co.uk, (2015). Tesco PLC Share Factsheet | Money | Citywire.

[online] Available at: http://citywire.co.uk/money/share-prices-and-
performance/share-factsheet.aspx?InstrumentID=3069 [Accessed 2
Jan. 2016].

Euromonitor.com, (2015). Grocery Retailers in the US. [online] Available

at: http://www.euromonitor.com/grocery-retailers-in-the-us/report
[Accessed 7 Jan. 2016].

FoodNavigator-USA.com, (2014). US organic food market to grow 14%

from 2013-18. [online] Available at: http://www.foodnavigator-
usa.com/Markets/US-organic-food-market-to-grow-14-from-2013-18
[Accessed 8 Jan. 2016].

Google.co.uk, (2016). World Development Indicators-Google Public Data

Explorer. [online] Available at:
https://www.google.co.uk/publicdata/explore?
ds=d5bnppjof8f9_&met_y=ny_gnp_pcap_pp_cd&idim=country:USA:RU
S:CAN&hl=en&dl=en#!
ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gnp_pcap_pp_cd&s
cale_y=lin&ind_y=false&rdim=region&idim=region:ECS&idim=country
:USA&ifdim=region&tstart=1262822400000&tend=1389052800000&
hl=en_US&dl=en&ind=false [Accessed 7 Jan. 2016].

Forbes.com, (2016). Forbes Welcome. [online] Available at:

http://www.forbes.com/companies/tesco/ [Accessed 3 Jan. 2016].

Igd.com, (2015). UK Grocery Retailing. [online] Available at:

http://www.igd.com/Research/Retail/UK-grocery-retailing/ [Accessed 6
Jan. 2016].

Kantarworldpanel.com, (2016). Grocery Market Share - Kantar Worldpanel.

[online] Available at: http://www.kantarworldpanel.com/en/grocery-
market-share/great-britain/snapshot/06.12.15/ [Accessed 2 Jan. 2016].

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News.bbc.co.uk, (2016). BBC News | Tesco's global growth, Big ambitions.
[online] Available at:
http://news.bbc.co.uk/1/shared/spl/hi/pop_ups/06/business_tesco0s_glo
bal_growth/html/8.stm [Accessed 4 Jan. 2016].

Statista, (2016). Food market share grocery retailers United States, 2014 |
Statistic. [online] Available at:
http://www.statista.com/statistics/240481/food-market-share-of-the-
leading-food-retailers-of-north-america/ [Accessed 6 Jan. 2016].

Tradingeconomics.com, (2016). United States GDP Growth Rate | 1947-

2016 | Data | Chart | Calendar. [online] Available at:
http://www.tradingeconomics.com/united-states/gdp-growth [Accessed
4 Jan. 2016].

Appendix 1: market share of UK food retailers from 12 weeks ending 6th

December 2015 (Kantar Worldpanel, 2015)

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Appendix

2: market share growth rates of

Aldi, Lidl and Tesco (Kantar

Worldpanel,

2015)

Appendix 3: market share growth rates of the big 4 competitors, (Kantar

Worldpanel, 2015)

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Appendix 4: US GDP growth rate from the period 2012-2015, (Trading
Economics, 2015)

Appendix 5: US GNI growth rate compared to Europe and Central Asia

from the period between 2010 2014 (Google World Bank, 2015)

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