FACULTY OF BUSINESS AND MANAGEMENT

Case Study

Subject Code & BBMN 3413 & Strategic Subject Lecturer Salbeha Bt Ibus
Management
Subject Title

Level of Study Degree Year and Semester 2019 sem C

Weightage 10% Submission Date 31 Oct 2019

NO NAME ID COURSE

1. Aw Lee Ki B180262C BBA18-C2

2. Kong Pei Min B170198B BMK17-B1

3. Tan Chee Yew B170264C BACC18-A2

4. Khoo Yee Chee B160271C BAC16-C2

5. Ng Jia Min B170338C BMK17-C1

Summary Question

This case study examines UK largest retailer Tesco in the key changes taking place in the
grocery retailing sector, how to adopt an appropriate strategy for its environment. How have
Tesco’s recent strategies affected the financial position of the company and what implications
might this have for future strategy.

In UK food retailing has evolved rapidly over the last decade. Since 1995 the multiples have
seen 20% growth, but this slowed down to only 3.3% for 1999. However, five major buying
supermarkets (Asda, Safeway, Sainsbury’s, Somerfield and Tesco) their scale of company
distorted competition in the supply market. This is because exerting substantial advantages
over smaller retailers. It cause a barrier to entry to smaller retailers enter market. Therefore, a
code of practice has been established which will improve the multiples relationships with
suppliers but likely increase their costs and reduce flexibility. Due to the reason, both
Sainsbury and Tesco have, or intend to, spend heavily on store refurbishment and extensions
to compete for market share.

Furthermore, the firms expect through seek ever more innovative ways to maintain their
customer loyalty. Such as people more attention and demand organic foods or chilled
convenience foods. The firms through the new demand can provide multiples with new
opportunities for growth in market share via development of their own organic brands.
Besides that, this case study also found that non-food sales within the sector are rising this in
part is due to the more attractive margins offered as compared to food. Online sales of
groceries have the potential to become one of the largest business-to-consumer sectors with
home shopping now available to 90% of the UK population.

The sectors’ need to grow coupled with technological advances, deregulation and an
expanding consumer market has seen the move toward overseas expansion. These global
forces will change the competitive environment and the successful retailers will be those that
establish themselves worldwide and achieve new competences that will generate a self-
reinforcing competitive advantage though scale and technology deployment on a global scale.
However, the growth opportunities offered by globalisation will also generate threats to the
UK multiples.
Answer Question

1. What do you see as the key changes taking place in the grocery retailing sector?

The industry is characterized by price competition at present. Due to consumer more sensitive
to the price, they will compare the price with several famous supermarkets. That’s why I
always saw many consumers will go together to the same supermarkets at the same time,
because of the reason of falling prices of big sales. Beside, those goods are fresh and new
because they clear stock as fast as possible, hence there are making those consumers trust and
more confidence to the supermarket.

The growth opportunities are limited and are being achieved through consolidation at the
expense of discounters like Aldi and Netto rather than through overall market growth.
Nowadays, the trend of business model in retailing businesses need to be consolidated
because of the influential of network industry. The trend become quickly and faster. A lot of
retailing businesses must make consumers much convenience, because many people will not
willing to wait and queue up for a long time. For example, the Taobao or Amazon do the
online retail industry business, they merge a lot of resource together within their platform to
provide the retail service with network. So, they can globalization easily and avoid that the
limited growth opportunities. So, Tesco focus on the food retail supply industry, Tesco have
good price from their business partners, then they can have good competitive advantages in
pricing to other competitors. One important reason is that the Tesco have success to build up
the ‘Every little helps’ slogan to their customers’ awareness.

Globalization is also a consequence of limited growth in domestic markets. For example, the
very efficient firms are seeking to take share from the less efficient firms in other countries.
For example, Wal-Mart was entering the European industry. The small-medium enterprises
will also certainly have a certain market share. Then the profit will be limited within the
domestic environment. Sometime, one company want to earn more growth opportunities
must be globalized to other countries. There will be need to seeking the new market.

Consumers are promiscuous meaning firms have to work hard to retain them as switching
costs are low due to the sheer number of available supermarkets in all areas. The marketing
strategy is very important to help for providing the product and service to the consumers. If a
company want to build up the loyalty of the customers, must be provide the much special
service in the trend such as the Tesco can sell their food within their website and deliver to
the customer’s home, then the customer will feel more convenience and they will no need to
be crowded on the road, it will help them to save a lot of time.

Consumers are educated and concerned about food safety following many scares and this is
leading to growth in organic food demand with consequent impact on the food supply chain
as intensive farming is questioned. At the beginning, the buyers order the food within the
online food store, they may to suspect the food is fresh or not because that the customers
can’t to see and touch the reality products. However they can see the food picture only seem
like fresh and attractive within the online food store. The trust and the loyalty will be built up
if the retailer can be built up the ‘fresh’ image. If the customers’ problem can be solved then
there is also the chance to win the customers’ trust and loyalty at the same time. Tesco is a
very good example, they only sell those fresh vegetables, fruits and some else in long-term.
Therefore, many loyalty Tesco customers will to be the influential to the newbie who are the
first time to buy from the Tesco online food store.

Scale economies and efficient use of technology to manage operations are keys to
competitive advantage especially with falling prices. Beside the company will consolidate the
business with online network but they still to need develop more fields and strategies for
opening the sales ways. That is sure the online retailing ways have to save a lot of cost.
Within the advanced technology era, many industries are highly competitive. However,
which companies were getting the latest technology then can win the market first. Many
industries are substituted by AI Robot or machine to reduce the cost and increase the profit.
Even so the human still are important to provide the service to customers. Humans have
feeling, machines don’t have. All customers are preferred the better product and better
service. The company must be intelligent to create extra budget for big sales.
2. Do you believe Tesco has adopted an appropriate strategy for its environment? Give
reasons.

We believed Tesco has adopted an appropriate strategy for its environment. There are few
reasons to support our idea. Firstly, product mix is under constant review to address changes
in consumer tastes or preferences. This is because consumers have a lot of power when it
comes to what businesses do. The reason makes the consumer have this kind of power is
consumer is the source of revenue. Business will changed what it offers just because the
tastes of its customers have changed. In this case, increased reporting around pesticides,
pollution, GM food, foot and mouth, ‘mad cow disease’, etc. have led to consumer concern
about the safety of food products and this in turn has led to a demand for organic foods. This
new demand can provide multiples with new opportunities for growth in market share via
development of their own organic brands. So, Tesco is responding to consumer concerns
about food quality, setting up a university research department at Newcastle to investigate
new farming techniques and best practice, and developing a new organic range of products.

Secondly, internationalization is very important for all business organizations operating in the
international market. This is because it plays an important role in determining the
opportunities present in the international market and how to exploit them. The local UK
market of Tesco had reached saturation and maturity making it very difficult to grow without
exploiting overseas opportunities. Internationalization was therefore the only viable solution
for the company if it was to remain relevant for the economy in the long run.

Thirdly, the main role of online business strategy is to develop the new channel to market as a
way of tapping into customers who are time pressured, such as professional women. Online
sales of groceries have the potential to become one of the largest business-to-consumer
sectors with home shopping now available to 90% of the UK population, however, unknown
is how the home shopping channel will develop in the UK. In 2001, the online businesses of
Tesco generated an average of £6m+ in sales per week. The venture benefits from the Tesco
group infrastructure.

Fourthly, Tesco has defended of its UK core business through aggressive pricing, loyalty
schemes and serving all segments with different store formats. In terms of aggressive pricing,
Tesco pricing strategy can be described as cost leadership. Tesco management aims to reduce
the cost of purchase and operational costs through economies of scale and a set of other
measures in order to pass the cost advantage to customer as the main brand value. Next,
Tesco pursue a variety of loyalty strategies in addition to its loyalty card scheme, for
example, ‘Computers for Schools’. It is claimed the scheme has 67% public awareness and
has seen 2,500 schools benefiting over five years. Moreover, Tesco has developed a new
organic range of products in order to maintain brand loyalty. In addition, Tesco is trying to
improve the retailing experience of customers by offering new shopping experience through
Tesco.com. For example, it offers high levels of fulfillment to the online consumer from
initial promise to delivery at the door. This will involve controlling customer data, delivering
goods on time and at the customers’ convenience and the ability to handle returns.

Lastly, Tesco had expanded its business by diversification into non-food sectors in order to
compete with its competitors. The company began stocking electronic products, toys, sports
equipment, cookware, and home furnishings in its stores. For example, in September 2002,
the company added the Cherokee clothing brand to its U.K. stores, giving a substantial boost
to the company’s non-food business. If store space is not enough for the non-food sector, it
may still be exploited via virtual stores online. This area is seen as an important element in
the product mix in the future.
3. How have Tesco’s recent strategies affected the financial position of the company and
what implications might this have for future strategy?

Trading conditions in the grocery retail sector have involved Tesco in aggressive price
cutting strategies (especially following the entry of Wal-mart as new owner of Asda). This is
reflected in the ratios by the declining returns on net assets (i.e. down from 11.05 in 1998 to
8.31 in 2002). Increases in the asset base due to store building and acquisition has also
depressed the ratio.

Tesco’s diversification into higher priced goods such a clothing and household items (fridges,
TVs, etc.), which are typically purchased on credit cards may explain the rise in the debtor
collection period from 3 days in 1998 to 7 days in 2002. Still a very low figure though. The
rise in creditor payment period may be due to a corresponding shift in the supplier base
whose credit terms involve longer payment periods rather than any consciously reduced
speed of paying creditors on Tesco’s part.

Tesco’s store expansion in the late 1990s, its launch of new store formats and overseas
acquisitions are likely sources of its higher gearing and reduced interest cover.
Generally speaking, investor ratios have remained relatively constant 1999-2002 showing a
solid performance in difficult trading conditions. The healthy PE ratio shows investors have
confidence in the Tesco management teams’ who have delivered excellent results in recent
years.

It should be clear from the above that Tesco’s trading conditions and strategies are reflected
in the ratio. The reduced margins mean efficiency is of greater importance to maintain
profitability.