Introduction focus will be Tesco as it
IntroductionThisessay is going to take an in-depth look at the UK grocery industry.
Theindustry is continuously competing with innovative methods, with thedevelopment of self-checkout machines, smaller but widespread stores etc. Morespecifically the focus will be Tesco as it currently holds the largest marketshare in this industry with group sales of £49.9bn 2015/16 which is up by 1.1%by 2017 (Tescoplc.com, 2018). It is a great example of an oligopoly market, asthe market is largely dominated by a few companies.
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A graph of the market sharebetween 2015 and 2017, is available in the appendix, which shows Tesco holding27% in this time, the closest competitors with around 16%.PESTLE AnalysisThereare many macro-environmental factors in the grocery industry that effect Tescoas well as its competitors. I will use PESTLE analysis to evaluate them.Political factors, firstly companies must consider laws, policies andregulations of the UK government. By law, companies that control large sharesof a specific market are considered dominant, and have their own set ofregulations they must abide by. As government implemented policies andregulations to protect consumers and boost competitiveness.
A current exampleof a political factor that will surely affect Tesco, is Brexit. Tesco’s newChairman, John Allan said that “the prospect of an EU referendum is causinguncertainty for investors, and this represents a “heavy pebble” placed in thescales of the British economy (Dudovskiy J, 2018). Less willing investors willlead to reduced capital, that could have been used further develop the company.Also, when the results were announced, that the UK will leave the EU, the valueof the pound £ drastically dropped, this undoubtedly has led to increased costfor business such as Tesco importing into the UK.
a lower valued £ will likelyreduce consumer spending which will affect business that rely heavily onconsumer spending to generate revenue.A clearexample of how government and politics can affect a company such as Tesco, iswhen the government increased VAT from 17.5% to 20% to increase governmentrevenue by £13 billion per year (BBC News, 2018). Crossley et al opposed thatan increase in the VAT leads to lower customer spending (Crossley et al, 2009).Revenue is a crucial source of income and holds a significant effect on profits(Atrill, 2009), one would assume this rise in VAT would reduce revenue forTesco within the UK however, Tesco has had a steady rise of revenue through2010 to 2012, in 2010 £38 558m, 2011 £40 766m, 2012 £42 800m, with a rise instores and employees in the UK (Tescoplc.com, 2011,12,13).
This is likelybecause grocery foods are near one of the last thing consumers will cut backspending on, which could lead the rise in VAT helping Tesco raise profits. Economicfactors directly impact the consumer spending. While the UK economy was inrecession during 2008, the government placed a policy of lower interest rates,this was done to minimise continued rise in unemployment during 2009 (Graiser& Scott, 2010, cited by Ltd 2018). This also likely led to consumers spendingmore, as they feel more confident about their existing financial circumstances.
As there is still a lot of financial doubt, especially following Brexit,consumers are expected to spend less on luxury goods, such as organic and readymademeals, which will be detrimental for sales. However, an optimistic feature of arecession is that customers are more likely to eat at home, and not go out toexpensive restaurants, though they may opt to buy cheaper fast food, but withthe rise in health awareness it’s likely consumers would purchase substitutegoods and groceries to make a healthier meal, as of now healthy meals arecheaper to make yourself than to buy from a restaurant, which providesopportunities for grocery retailers like Tesco to increase their output(Shales, 2009, cited by Ltd 2018). As I mentioned earlier by considering food islikely one of the last things consumers will cut back spending on Companiesand entrepreneurs respond to consumer needs and available gaps within themarket. Considering social effects in this industry, through globalisation differentcultures have been brought together, London alone is incredibly diverse, as aresult grocery stores started providing vegetarian, vegan, halal, and othervariety of foods in their stores, because of mixed cultural demand of thepopulation. Also, because of the rising concerns for health issues, such asobesity and diabetes, stores are now supplying a variety of healthy and low-fatfoods.Toconsider another social but also technological factor, is that in the UK therehas been an increase in the number of elderly people in recent years.
There wasa decrease in the birth-rate and an increase in the life expectancy of people(Independent, 2010). The use of online shopping by Tesco and other retailers forgrocery products, take into consideration the mobility issues that the elderly mayhave. Eastmen and Iyer found that elderly people view the Internet positivelyand are open to the idea (Eastmen and Iyer, 2004). Shoppingin person becoming less popular, and more individuals are adopting onlineshopping, now more than ever. It would be fair to assume that most people inthe UK have smart phones, with smart phones becoming so wide spread, and thecost of a decent phone getting cheaper, along with the wide use of apps, onlineshopping is huge. Tesco may be competitive by offering their customers toolssuch as, online pre-order of goods or online ordering of delivery. However, Asda,Sainsbury, and Morrisons all have an app for online shopping, Tesco is likelyto develop an app to stay competitive, as this is likely in an oligopolymarket.
For example, another technology that Tesco and its competitors adoptedis the self-checkout machines. With the rise in the use of the internet andsmartphones this has lead supermarkets such as Tesco to offer diverse range ofservices, such as mobile services, online shopping, banking and financialservices.Anothertechnological advancement that has affected the UK grocery market is the supplychain machinery which has transformed the production rate and scale hugely of leadinggrocery stores. Retailers like Tesco developed supply chain management systemsto attain competitive advantages and enhance cost efficiency (Tan, 2001). Alsowith further advancement in data processing technology, it has made possiblethe ability to gather large amounts of data on consumer spending andappropriately promote specific goods based on the analysis.Now toconsider the environment, with the rise of awareness of issues such as globalwarming and c02 emissions, this has encouraged large companies globally tofollowing eco-friendly policies. By reducing the use of materials, energy, andincreased recycling. Also by assessing operations to minimise the company’simpact on the environment, that being their carbon footprint.
Though it is alsodue to government policies fines and subsidies that also encourage bigcompanies to reduce their carbon foot print. Tesco is committed to reduce theconsumption of energy and utilisation of greenhouse gases (Tesco, 2014).Management claimed that when they are doing store adjustments they areconsidering environmental factors. For example, in Thailand, the organisationhas invested £3.1 million in 49 stores to provide energy savings ofapproximately £2 million (Tesco, 2014).
Supply & DemandManyfactors can affect the supply and demand of the grocery industry. This includes,income levels of households, the state of the economy, and seasonal changes.The combination of these aspects as well as others, make the supply and demandof grocery stores. Household income greatly effects consumers demand for grocerystore products. Higher income, will lead to higher demand for goods andservices, and large grocery stores will likely meet that demand and increasetheir supply. Unless the supply for a specific good is limited, in which casethey will have greater pricing power as the demand is high and cannot be met,but this is rare in an oligopoly market such as the supermarket industry, ascompetitors will likely keep each other in check.
Thestability of the main market and the stability of the economy has a greateffect on grocery stores supply and demand. When the economy is stable anddoing well, and share prices are going up, people have a more disposable incometo spend. And more income would mean demand rises for grocery goods, as aresult stores will increase their supply.Seasonalchanges, different foods are being grown or stop being grown. When foods arebeing grown they are abundant in stores therefore supply will be high.
Inaddition, seasonal events such as Easter, Halloween or Christmas evenmulti-cultural holidays and celebrations such as Eid, Diwali or Chinese NewYear. These events would mean an increased demand for certain goods, at thesetimes Tesco, as well as other stores, will highly stock up on and promote thesegoods. For example, Turkey during ThanksGiving or chocolates and sweets during Halloween. Big retailers will pre-orderand stock up in advance to minimise costs and shipping errors using supplychain technology, and project demand levels. Lastly,unpredictable weather and natural disasters can clearly influence the supply ofgoods for grocery stores. For example, if farmers yields aren’t good because ofthe weather there will be little supply.
In some cases, natural disasters suchas earthquakes and hurricanes have completely wiped out the supply of certaingoods. For example, earthquakes in Chile (2010) and Japan (2011), two majorcatastrophic natural disasters that occurred, show that these natural disastershad an immediate impact on product availability. A large share of goods wentout of stock within days, nearly all categories of goods experienced a drop ofproduct availability in both countries during the first months (Cavallo,Cavallo and Rigobon, 2014). Interest RatesInterestrates affects all the money that runs within the economy, through cash inbanks, loans and mortgages. In 2009 interest rates were cut to 0.5%, the cutwas done to help climb out of the recession, to increase borrowing byinvestors, which would lead to more jobs and more consumer spending, as theywill be less encouraged to save, helping theeconomy grow. However, one disadvantage, low rates make it less likely to save money in the UK, and more likely to do soabroad, as you could get a better rate of return.
This means there will be lessdemand for the pound, causing a drop in its value. A fall in the exchange ratemakes UK exports more competitive and imports more expensive. In thefuture it’s likely interest rates will rise, this would make it more expensivefor companies to borrow money to finance their operations, payroll, andpurchases. This cost could be passed onto the consumer via inflationdiscouraging consumers from buying. However, for Tesco, as it is the largestgrocery store, and to stay competitive, minimised the number of goods that areaffected by inflation, in 2007 during the recession ‘Inflation has beenmassively overblown’ said Higginson a chief executive from Tesco at the time.
‘It’s only in a few products. There has been genuine inflation in some seasonaland commodity products, but the very competitive nature of UK supermarketsmeans the price is the last thing to alter’ (Finch, 2018). As price would bethe last thing to alter for Tesco, the impact of higher inflation could resultin lower wages and slower growth as less money would be put into developingtechnologies and opening new stores.
Corporate GovernanceApublicly listed company will need to comply with the UK code on CorporateGovernance. Corporate governance consists of rules that direct the roles and actionsof directors and board members. corporate governance rules focus on creatingbetter management and fewer ethical or legal problems. Examples of corporategovernance include setting rules for using business funds for personal use, servingon a board of directors, hiring family members, conflicts of interest,notifying owners, investors and partners of key meetings and decisions, andallocating profits (Smallbusiness.chron.com, 2018). Following corporate governancepolicy’s will help a company’s reputation.
Having a level of transparency bymaking corporate governance policies and details how they work public, it’slikely to attract investors. As people will feel more confident you have littleor nothing to hide. Another advantage is that it limits potential bad behaviourof employees with policies to reduce potential fraud and conflict of interest.
For example, a company might make executives sign a conflict of intereststatement, requiring them to disclose and avoid potential conflicts, such asawarding contracts to family members or contracts in which an executive has anownership interest. External audits or requiring transactions over a certainamount, to be approved and signed by two people help reduce errors and fraud (Smallbusiness.chron.
com,2018). Tesco outlines their corporategovernance framework well, and have a website clearly describing board rolesand responsibilities, as well as providing access to information on the variouscommittees such as the audit and corporate responsibility committee.