Introduction focus will be Tesco as it

Introduction

This
essay is going to take an in-depth look at the UK grocery industry. The
industry is continuously competing with innovative methods, with the
development of self-checkout machines, smaller but widespread stores etc. More
specifically the focus will be Tesco as it currently holds the largest market
share 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, as
the market is largely dominated by a few companies. A graph of the market share
between 2015 and 2017, is available in the appendix, which shows Tesco holding
27% in this time, the closest competitors with around 16%.

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PESTLE Analysis

There
are many macro-environmental factors in the grocery industry that effect Tesco
as well as its competitors. I will use PESTLE analysis to evaluate them.
Political factors, firstly companies must consider laws, policies and
regulations of the UK government. By law, companies that control large shares
of a specific market are considered dominant, and have their own set of
regulations they must abide by. As government implemented policies and
regulations to protect consumers and boost competitiveness. A current example
of a political factor that will surely affect Tesco, is Brexit. Tesco’s new
Chairman, John Allan said that “the prospect of an EU referendum is causing
uncertainty for investors, and this represents a “heavy pebble” placed in the
scales of the British economy (Dudovskiy J, 2018). Less willing investors will
lead 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 value
of the pound £ drastically dropped, this undoubtedly has led to increased cost
for business such as Tesco importing into the UK. a lower valued £ will likely
reduce consumer spending which will affect business that rely heavily on
consumer spending to generate revenue.

A clear
example of how government and politics can affect a company such as Tesco, is
when the government increased VAT from 17.5% to 20% to increase government
revenue by £13 billion per year (BBC News, 2018). Crossley et al opposed that
an 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 for
Tesco within the UK however, Tesco has had a steady rise of revenue through
2010 to 2012, in 2010 £38 558m, 2011 £40 766m, 2012 £42 800m, with a rise in
stores and employees in the UK (Tescoplc.com, 2011,12,13). This is likely
because grocery foods are near one of the last thing consumers will cut back
spending on, which could lead the rise in VAT helping Tesco raise profits.

Economic
factors directly impact the consumer spending. While the UK economy was in
recession 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 spending
more, 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 readymade
meals, which will be detrimental for sales. However, an optimistic feature of a
recession is that customers are more likely to eat at home, and not go out to
expensive restaurants, though they may opt to buy cheaper fast food, but with
the rise in health awareness it’s likely consumers would purchase substitute
goods and groceries to make a healthier meal, as of now healthy meals are
cheaper to make yourself than to buy from a restaurant, which provides
opportunities for grocery retailers like Tesco to increase their output
(Shales, 2009, cited by Ltd 2018). As I mentioned earlier by considering food is
likely one of the last things consumers will cut back spending on

 

Companies
and entrepreneurs respond to consumer needs and available gaps within the
market. Considering social effects in this industry, through globalisation different
cultures have been brought together, London alone is incredibly diverse, as a
result grocery stores started providing vegetarian, vegan, halal, and other
variety of foods in their stores, because of mixed cultural demand of the
population. Also, because of the rising concerns for health issues, such as
obesity and diabetes, stores are now supplying a variety of healthy and low-fat
foods.

To
consider another social but also technological factor, is that in the UK there
has been an increase in the number of elderly people in recent years. There was
a 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 for
grocery products, take into consideration the mobility issues that the elderly may
have. Eastmen and Iyer found that elderly people view the Internet positively
and are open to the idea (Eastmen and Iyer, 2004).

Shopping
in person becoming less popular, and more individuals are adopting online
shopping, now more than ever. It would be fair to assume that most people in
the UK have smart phones, with smart phones becoming so wide spread, and the
cost of a decent phone getting cheaper, along with the wide use of apps, online
shopping is huge. Tesco may be competitive by offering their customers tools
such 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 likely
to develop an app to stay competitive, as this is likely in an oligopoly
market. For example, another technology that Tesco and its competitors adopted
is the self-checkout machines. With the rise in the use of the internet and
smartphones this has lead supermarkets such as Tesco to offer diverse range of
services, such as mobile services, online shopping, banking and financial
services.

Another
technological advancement that has affected the UK grocery market is the supply
chain machinery which has transformed the production rate and scale hugely of leading
grocery stores. Retailers like Tesco developed supply chain management systems
to attain competitive advantages and enhance cost efficiency (Tan, 2001). Also
with further advancement in data processing technology, it has made possible
the ability to gather large amounts of data on consumer spending and
appropriately promote specific goods based on the analysis.

Now to
consider the environment, with the rise of awareness of issues such as global
warming and c02 emissions, this has encouraged large companies globally to
following eco-friendly policies. By reducing the use of materials, energy, and
increased recycling. Also by assessing operations to minimise the company’s
impact on the environment, that being their carbon footprint. Though it is also
due to government policies fines and subsidies that also encourage big
companies to reduce their carbon foot print. Tesco is committed to reduce the
consumption of energy and utilisation of greenhouse gases (Tesco, 2014).
Management claimed that when they are doing store adjustments they are
considering environmental factors. For example, in Thailand, the organisation
has invested £3.1 million in 49 stores to provide energy savings of
approximately £2 million (Tesco, 2014).

 

 

 

 

 

 

Supply & Demand

Many
factors 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 demand
of grocery stores. Household income greatly effects consumers demand for grocery
store products. Higher income, will lead to higher demand for goods and
services, and large grocery stores will likely meet that demand and increase
their supply. Unless the supply for a specific good is limited, in which case
they 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, as
competitors will likely keep each other in check.  

The
stability of the main market and the stability of the economy has a great
effect on grocery stores supply and demand. When the economy is stable and
doing well, and share prices are going up, people have a more disposable income
to spend. And more income would mean demand rises for grocery goods, as a
result stores will increase their supply.

Seasonal
changes, different foods are being grown or stop being grown. When foods are
being grown they are abundant in stores therefore supply will be high. In
addition, seasonal events such as Easter, Halloween or Christmas even
multi-cultural holidays and celebrations such as Eid, Diwali or Chinese New
Year. These events would mean an increased demand for certain goods, at these
times Tesco, as well as other stores, will highly stock up on and promote these
goods.  For example, Turkey during Thanks
Giving or chocolates and sweets during Halloween. Big retailers will pre-order
and stock up in advance to minimise costs and shipping errors using supply
chain technology, and project demand levels.

Lastly,
unpredictable weather and natural disasters can clearly influence the supply of
goods for grocery stores. For example, if farmers yields aren’t good because of
the weather there will be little supply. In some cases, natural disasters such
as earthquakes and hurricanes have completely wiped out the supply of certain
goods. For example, earthquakes in Chile (2010) and Japan (2011), two major
catastrophic natural disasters that occurred, show that these natural disasters
had an immediate impact on product availability. A large share of goods went
out of stock within days, nearly all categories of goods experienced a drop of
product availability in both countries during the first months (Cavallo,
Cavallo and Rigobon, 2014).

 

 

 

 

 

 

 

 

 

 

Interest Rates

Interest
rates affects all the money that runs within the economy, through cash in
banks, loans and mortgages. In 2009 interest rates were cut to 0.5%, the cut
was done to help climb out of the recession, to increase borrowing by
investors, which would lead to more jobs and more consumer spending, as they
will be less encouraged to save, helping the
economy grow. However, one disadvantage, low rates make it less likely to save money in the UK, and more likely to do so
abroad, as you could get a better rate of return. This means there will be less
demand for the pound, causing a drop in its value. A fall in the exchange rate
makes UK exports more competitive and imports more expensive.

In the
future it’s likely interest rates will rise, this would make it more expensive
for companies to borrow money to finance their operations, payroll, and
purchases. This cost could be passed onto the consumer via inflation
discouraging consumers from buying. However, for Tesco, as it is the largest
grocery store, and to stay competitive, minimised the number of goods that are
affected by inflation, in 2007 during the recession ‘Inflation has been
massively 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 seasonal
and commodity products, but the very competitive nature of UK supermarkets
means the price is the last thing to alter’ (Finch, 2018). As price would be
the last thing to alter for Tesco, the impact of higher inflation could result
in lower wages and slower growth as less money would be put into developing
technologies and opening new stores.

Corporate Governance

A
publicly listed company will need to comply with the UK code on Corporate
Governance. Corporate governance consists of rules that direct the roles and actions
of directors and board members. corporate governance rules focus on creating
better management and fewer ethical or legal problems. Examples of corporate
governance include setting rules for using business funds for personal use, serving
on a board of directors, hiring family members, conflicts of interest,
notifying owners, investors and partners of key meetings and decisions, and
allocating profits (Smallbusiness.chron.com, 2018). 

Following corporate governance
policy’s will help a company’s reputation. Having a level of transparency by
making corporate governance policies and details how they work public, it’s
likely to attract investors. As people will feel more confident you have little
or nothing to hide. Another advantage is that it limits potential bad behaviour
of employees with policies to reduce potential fraud and conflict of interest.
For example, a company might make executives sign a conflict of interest
statement, requiring them to disclose and avoid potential conflicts, such as
awarding contracts to family members or contracts in which an executive has an
ownership interest. External audits or requiring transactions over a certain
amount, to be approved and signed by two people help reduce errors and fraud (Smallbusiness.chron.com,
2018). Tesco outlines their corporate
governance framework well, and have a website clearly describing board roles
and responsibilities, as well as providing access to information on the various
committees such as the audit and corporate responsibility committee.