SWOT, PESTEL, Porter’s Five Forces and Value
Chain Analysis of Tesco
Introduction
This report is aimed at critically analysing the macro, meso and micro business
environment of Tesco, one of the largest food and grocery retailers in the world,
operating around 4,331 stores. Strategic evaluation tools such as PESTEL, Porter’s
Five Forces, SWOT and Value Chain analysis have been used by researchers in order
to achieve this aim.
Tesco – Company Overview
Tesco is among the largest food retailers in the world with revenue in excess of £54
billion in 2009 and employing over 470,000 people . They operate approximately 4,331
stores in 14 countries around the world. The company operates primarily in the USA,
Europe and Asia and their Head Office is based in Hertfordshire, UK. According to
Datamonitor (2010), the commercial network portfolio of Tesco comprises : over 960
Express stores which sell approximately 7,000 products including fresh foods at suitable
localities ; 170 Metro stores which sell a variety of food products in town and city
centres; and 450 superstores which sell both food and non-food items including books
and DVDs. Tesco also provides online retailing services through their website
tesco.com and Tesco Direct . In addition, they provide broadband I nternet connections
and financial services through Tesco Personal Finance (TPF). Tesco was founded in
1919 and launched its first store in Edgware, London, UK in 1929 (Tesco, 2010);
however, over the decades it has evolved to become the market leader within the UK
food retail segment (Datamonitor, 2010). The comparative positioning of Tesco’s
market share with respect to other leading players in the market has been illustrated as
follows (Euromonitor, 2010):
Fig 1: Share of Leading Players in UK Food Retail Market
3. PESTEL Analysis
The PESTEL framework below analyses the dynamic and unpredictable environment in
which Tesco operates by identifying the forces that have the most impact on Tesco’s
performance:
Political
 China’s accession to the WTO has promoted a free flow of foreign trades by
removing all barriers encouraging Western companies, including Tesco, to
make way into the world’s most profitable market encompassing over 1.3
billion people (Straits Times, 2010). In 2009 an agreement was signed by
Tesco to set up a premeditated series of joint ventures for the development of
shopping malls in China. This joint venture included three malls: Anshan,
Fushan and Qinhuangdao. Furthermore, 18 new hypermarkets are expected
to open in China by 2010 (Tesco, 2009). The growth of Tesco’s international
business segment is on the rise and it is predicted to account for one quarter of
the company’s profit.

Promotion of free trading blocs by governments to benefit from globalisation
has been presented in the literature (Lynch, 2003). Immersion of 10 further
countries into the European Union (EU ) took place in 2004 promoting trade
between Western and Eastern European countries (BBC, 2009). This has
provided Tesco with a platform to expand its retail network across the EU.
Economic
 Economic factors are a matter of concern for Tesco since they impact directly
on the buying behaviour of customers. Although the UK economy was
declared officially under recession in 2008, the government’s substantial
reduction in interest rates helped to minimise further rises in unemployment
during 2009 (Euromonitor, 2010). As a result of this, the spending power of
consumers is again on a steady rise as they are more confident about their
current financial situation. However, there is still a lot of financial uncertainty
meaning that consumers are likely to spend less on premium products,
encompassing organics and ready prepared meals, which will adversely affect
both sales value and margins (Keynote, 2010).

However, the positive aspect of recession is that the customers eat out less
and eat more at home which provides opportunities for grocery retailers like
Tesco to increase their output (Guardian, 2010). It must be noted that food is
the last thing that customers will cut back on. The percentage of overall
consumer spending on food has risen considerably over the years, as shown
below (Euromonitor, 2010):
Fig 2: UK Spending on Food as % of Overall Consumer Spending 2004 to 2008
The economic downturn has been brought to light with the assistance of the following
GDP growth graph since 1989 (Mintel, 2009):
Fig 3: UK GDP Growth 1989-2009
Social


An analysis of the UK population shows that there are more retired people than
children representing the Baby Boom generation (Herald Scotland, 2010). The
ageing population is discouraging for the food retailers older people tend to eat
less . They are less likely to travel to supermarkets to shop compared with the
younger generation. Although internet literacy level drops over the age of 65
years within the population (Turban et al., 2001), it has nevertheless been
predicted that the ageing population would find online shopping more
convenient. However, small deliveries are considered to be ineffective and
expensive.
Consumers’ attitude towards food is incessantly changing as they have
become more health- conscious . An increase in the demand for organic food
has been accommodated by Tesco to reflect this change in demand. Payment
by cheques and cash at the checkout was first made possible by Tesco .
Technological
 One of the key macro-environmental variables that have directly influenced the
supply chain, operations and processes of grocery and food retailers is
technology. The operation of supermarkets is being affected by the use of the
I nternet through online grocery retailing, which is showing steady
growth. Subscriptions to the I nternet have grown by over 50% and it has been
estimated that the I nternet is being used by 70% of the population in the UK
( Office for National Statistics, 2010).

Loyalty programs are being introduced through information technology which
discourage customers from switching over to their competitors (Sun, 2009).

Mobile technology has also taken off as a platform for distribution within food
retailing. New Wine App developed by Cortexica Vision Systems, for example,
has been used by Tesco since 2009 via which the customers are directed to
Tesco Wine enabling them to buy the selected wine directly from their mobile
phone ( Tomlinson & Evans, 2010).

Online retail shopping has gained considerable popularity due to the increased
access to broadband internet in the UK. It has been highlighted by Keynote
(2010) that the number of broadband users in the country is 15.5 million which
accounts for 70% of the overall market.
Environmental
 Environmentally friendly, reduced packaging is being promoted by the G
overnment. It has been found by the Office for National Statistics (2010) that
the percentage of consumers using reusable bags has risen from 71% to 74%
and that those trying to cut down the number of plastic bags they take from the
shops has risen from 65% to 68%. This assists in reducing the overall cost
and is good for Tesco’s corporate social responsibility image.

Due to the consumer awareness of the carbon footprint of the firm (Wood,
2009), Tesco has added carbon footprint data on dairy products, potatoes and
orange juice, and aims at expanding it to bread and non-food items in 2010
(Tesco, 2010).

Tesco has introduced its Greener Living Scheme to give consumers advice on
environmental issues, including how to reduce food waste and their carbon
footprint when preparing meals (Yuthas, 2009 ).

Consumers reusing bags, recycling mobile phones and aluminium cans and
preferring bagless deliveries are being rewarded through Tesco’s green
Clubcard points (Tesco, 2009; Datamonitor, 2010).
Legal

It has been predicted that VAT would have to rise to 20% since the G
overnment has to finance a huge budget deficit (HM Treasury, 2010). This will
affect the non-food sectors of Tesco, such as clothing.

Drawing upon the Low Pay Commission Report (National Minimum Wage,
2009), the 2008 and 2009 combined up-ratings have resulted in an increase in
the minimum wage of 15.5%. This will result in an increase of operating costs
of supermarkets.
Porter’s Five Forces Analysis
An analysis of the structure of the industry should be undertaken in order to find
effective sources of competitive advantage (Porter, 1985). Therefore, in order to
analyse the competitive environment of Tesco, Porter’s five forces analysis has been
used by the researcher as follows:
Threat of substitute products and services
 The threat of substitutes in the grocery retail market is considerably low for
food items and medium to high for non-food items.

In the food retail market, the substitutes of major food retailers are small chains
of convenience stores, off licences and organic shops which are not seen as a
threat to supermarkets like Tesco that offer high quality products at
considerably lower prices (Financial Times, 2009). Moreover, Tesco is further
getting hold of these shops by opening Express stores in local towns and city
centres creating a hurdle for these substitutes to enter the market.

However, the threat of substitutes for non-food items , for instance clothing, is
fairly high. It should be noted that so long as the economic recession prevails ,
customers will be inclined towards discounted prices hence Tesco is a threat to
the speciality shops.
Threat of entry of new competitors
 The threat of entry of new competitors into the food retail industry is low.

It requires huge capital investments in order to be competitive and to establish
a brand name. Major brands that have already captured the food retail market
are Tesco, Asda, Sainsbury’s and Morrisons and they account for 80% of all
shopping in the UK (Mintel, 2010). Therefore, new entrants have to produce
something at an exceptionally low price and/or high quality to establish their
market value.

Gaining planning authorisation from local government takes a considerable
amount of time and resources to establish new supermarkets and this is
therefore a considerable barrier to new entrants.
Intensity of competitive rivalry
 The intensity of competitive rivalry in the food and grocery retail industry is
extremely high.

Tesco faces intense competition from its direct competitors, including Asda,
Sainsbury’s, Morrisons and Waitrose, which are competing with each other
over price, products and promotions intermittently. It should therefore be
highlighted that Asda is one of the key competitors in this segment with an
increase of market share from 16.6% to 16.8% during the fiscal year 2010/ 09,
while Sainsbury’s has shown an increase to 16.1% from 15.8% and Morrisons
to 11.6% from 11.3% through the same period (Euromonitor, 2010). The slow
market growth essentially means that these increasing market shares from
competitors have intensified the market rivalry, which is threatening Tesco’s
market leadership position.

In rural areas where the nearest superstore can be some distance away, some
primary consumers are attracted by retailers like Somerfield and Co-op.

Hard discounters like Aldi and Lidl have taken over the market in times of
recession. During 2008 they recorded a growth of sales of over 25% (Keynote,
2010).
Bargaining power of buyers
 The bargaining power of buyers is fairly high.

In cases where products have a slight differentiation and are more
standardised, the switching cost is very low and the buyers can easily switch
from one brand to another.

It has been proposed that customers are attracted towards the low prices, and
with the availability of online retail shopping, the prices of products are easily
compared and thus selected.
Bargaining power of suppliers
 The bargaining power of suppliers is fairly low.

It should be noted that the suppliers are inclined towards major food and
grocery retailers and dread losing their business contracts with large
supermarkets. Hence, the position of the retailers like Tesco, Asda, and
Sainsbury’s is further strengthened and negotiations are positive in order to get
the lowest possible price from the suppliers.
Detailed SWOT Analysis
A strengths, weaknesses, opportunities and threats (SWOT) analysis of Tesco has
been provided below.
Strengths
 Drawing upon Datamonitor (2010), Tesco is ranked third largest grocery retail
company in the world, operating over 4,331 stores primarily within the USA,
Europe and Asia. The company held 30.7% share of the UK grocery retail
market in 2010 (Euromonitor, 2010).

A strong financial performance has been shown by the company over the
years, which underlines its strategic capabilities. According to Datamonitor
(2010), Tesco is a £ 54billion turnover company recording an increase of
14.9% when compared to 2008. The foremost strategy that has been adopted
by the company is the product and services customization in accordance with
the market demands. The efficiency in performance of the company over the
last decade can be summarised with the help of growth in following key
indicators ( Fame, 2010):

Fig 4: Tesco – Yearly Growth in Key Performance Indicators

Tesco’s strategy aims to focus on product affordability which ensures that
customer gets the product to suit their budget without compromising on the
quality. During 2009 the sales from online non-food retail company Tesco
Direct have increased by over 50% (Tesco, 2010).

Tesco has a proven customer retention strategy with the help of its loyalty
scheme called ‘ Tesco Clubcard’ . Drawing upon DunnHumby (2008), the
company uses data collected from this loyalty scheme in its powerful CRM
systems named Crucible and Zodiac, and this information is then used for
effective direct marketing and various other promotional techniques.
Weaknesses

Tesco has not been able to perform well over the last year as compared to its
competitors. According to Mintel (2010), a number of products were recalled
by Tesco in 2009 that has resulted in a financial loss as well as damage to its
brand image. These included company’s value lines, which have been
marketed as high quality cheaper alternatives to key brands.

The key operations of the company are concentrated within the UK retail sector,
where it recorded more than 75% of its revenue during the fiscal year 2009
(Tesco, 2010). This lack of geographic diversification can be seen as a key
weakness for the firm as it is subjected to systemic risks of the UK market.

Opportunities

The commercial network portfolio of Tesco is on the rise . They opened over
620 stores in 2009 of which 435 were international (Mintel, 2010). This
geographic diversification will help the company in improvising its economy of
scale, while minimising its systemic risk exposure.

The popularity of Tesco.com is growing rapidly, accounting for over 1 million
customers in 2010 (Guardian, 2010), which has provided an opportunity to the
company to attract new customers and reduce the overall cost resulting in
more profit.

Company focus is on global expansion as is evident by its entry into the Indian
market. This entry will strengthen its global market position. A limited
franchise agreement has been signed by Tesco with Trent, retailer of Tata
group, which is one of the largest industrial corporations of India (Daily Mail,
2010).

It has been predicted that there will be a rise from £125 billion in 2009 to £145
billion in 2014 in the food retail market segment (Euromonitor, 2010). This is
mainly due to the fact that even during times of recession, food retail is the
toughest segment since having enough to eat is the priority.
Threats

The commencement of a global financial crisis has resulted in a contraction of
the UK’s economy by 2.4% in 2009 which is estimated to contract further by
4.2% by the International Monetary Fund (IMF) ( Poulter, 2009). Tesco’s
concentration in the UK market can therefore have a detrimental impact on its
financial standings.

The decline in income and the rise in unemployment have affected the
discretionary buying behaviour of consumers which has adversely impacted
the company’s sales, in particular the non-food items.

There has been fierce competition in the UK grocery market . Tesco though
has been leading this sector for 15 years (Mintel, 2010), but is now faced with
intense competition from its competitors which are gaining in market
share. These include the rest of the ‘ big four’ i.e., Asda, Sainsbury’s and
Morrisons respectively.
In light of the above key points, the abridged SWOT analysis of Tesco can be
summarised in the following illustration:
Fig 5: Tesco Abridged SWOT Analysis
Value Chain Analysis
According to Lynch (2003), value chain is defined as the links between key value adding
activities and their interface with the support activities. Value chain has been implied as
a strategic evaluation tool used for distinguishing the strengths and weaknesses in
value adding processes (Audrestsch, 1995). The value chain of Tesco has been
demonstrated in the following diagram:
Fig 6: Value Addition in Value Chain of Tesco
Inbound Logistics
The overall cost leadership strategic management of Tesco is exhibited in its lean and
agile inbound logistics function. Drawing upon Abeysinghe (2010), the company uses
its leading market position and economies of scope as key bargaining powers to
achieve low costs from its suppliers. The analysts have also highlighted the constant
upgrading of their ordering system, approved vendor lists, and in-store processes to
induce effectiveness and efficiency into the company’s inbound logistics operations.
Operations Management
Tesco has been praised by a number of supply chain management critics for its
effective use of IT systems that facilitate the company’s low cost leadership
strategy. According to Tesco (2010), the company has invested over £76 million in
streamlining its operations through their Tesco Digital program, which is a third
generation ERP solution for the company. The company has achieved £550 million in
increased profitability during 2009 alone due to the introduction of this system. This
company -wide ERP system has also facilitated the minimisation of stock holdings
within the company.
Outbound Logistics
Tesco holds leadership position in online and offline food retail segments, which is due
to its efficient and effective outbound logistics. Drawing upon Mintel (2010), the
company has developed a range of store formats and types, which are strategically
placed to achieve maximum customer exposure. These formats include Express, Metro,
Superstores, Extra and Homeplus, which are segmented according to the target
population.
Marketing and Sales
Loyalty programs like Tesco Clubcard are being introduced through information
technology advances which dissuade the customers from switching over to their
competitors. Tesco has introduced its Greener Living Scheme to give consumers
advice on environmental issues, including how to reduce food waste and their carbon
footprint when preparing meals .
Services
Tesco has been pursuing a dual strategy of cost leadership and differentiation, which
has led to an increased importance placed on customer service. Drawing upon Keynote
(2010), this dual strategy is exhibited through the development of self-service kiosks,
financial services, focused direct marketing and promotions.
In order to put Tesco’s value chain analysis into perspective, it should be noted that
despite cost leadership strategy the company has been able to create a high degree of
value in comparison with its key competitors. The relative analysis of the value created
by the big four supermarket chains, i.e., Tesco, Asda, Sainsbury’s and Morrisons has
been provided as follows:
Fig 7: Benchmarking Analysis: Cost as a Percentage of Sales
Conclusion
In light of the above analysis, it can be concluded that Tesco continues to hold its
leadership position within the highly turbulent retail segment, where companies are
required to pursue both cost leadership and differentiation strategies. Tesco has been
able to achieve both with the help of a lean and agile supply chain management, along
with the strategic use of information technology. The core competencies of Tesco have
been seen to be aligned with the business environment, therefore highlighting a positive
future outlook for the company.