A Report On SWOT Analysis Of Tesco Company

Executive Summary

Tesco has the highest market share in the supermarket food industry of 27%. This report will highlight the opportunities, threats, strengths and weaknesses of Tesco via a SWOT analysis indicating ways Tesco has become successful in overpowering its competitors. Ways it has done so is through alliances, having high economies of scale, using their land as a barrier to entry and more ways which shall be illustrated further on in the report. Tesco has also faced challenges, for example scandals, but they still managed to overcome this with the help of CEO Mr Lewis who is resigning which may be an internal management weakness. Many models including competitor analysis, porters’ generic strategies, PESTEL, and Ansoff’s product market matrix have been used in the SWOT analysis to help validate points. Moving on to a financial analysis of Tesco, highlighting key areas of financial strengths and weaknesses using ratios which can be found in the appendix. Finally, recommendations which Tesco can use to maintain the highest market share and increase its brand along with customer loyalties will be underlined.

Company Overview

Tesco was founded in 1919 in the East End of London. It started off as a small company with penetrative pricing which was advantageous for a new company to attract and retain customers. They now have 6,800 stores around the world; UK, ROI, central Europe and Asia with 450,000 employees. Tesco’s key competitors in the UK are Sainsbury’s, Asda and Morrisons these companies profoundly compete. Globally however Tesco’s competitors are Carrefour and Walmart. They sell a variety of products including food, electronics and clothes.

Expanded and conquered via acquisition of rival stores. They are constantly developing and looking for ways to improve and compete against its competitors. For instance, by differentiating, opening petrol stores in 1974 or to become the ‘UK’s largest food retailer’ launching the Clubcard scheme to takeover Sainsburys in 1995.

Key Opportunities and Threats

Opportunities

Tesco’s takeover of Booker had resulted in a combined sale of £60bn in comparison to other UK wholesalers amounting a total of £25bn. This takeover resulted in a launch of 30 new stores already which may increase. Booker is the largest UK food wholesaler with more than 30% of its sales in the catering department. Tesco does not supply catering and they could differentiate from other supermarkets by doing so. As they have been successful with the takeover as stated in the BBC article with Tesco’s share prices increasing by 5.7% and Booker’s by 6.1%. This opportunity can allow them to have some originality considering they do their market research well.

Tesco are considering launching new stores selling their ‘finest products’ to compete with M&S simply foods and John Lewis’s little Waitrose formats. They have an existing customer base but it’s a new product range that will try to succeed in its competitors, (M&S, and Waitrose) markets using penetrative prices. Tesco achieves market development by entering an existing market with new products, competing head on head with their rivalries. Tesco has been in operation since 1919, giving them credibility and assurance. This may be an opportunity for Tesco being able to lure in customers of M&S and Waitrose as Tesco is a more well-known brand globally. Tesco may be using this as a defence to get new market shares.

Tesco and Carrefour have a three-year alliance. Allowing them to increase volumes on commoditised items in return of lower prices from their supplier Carrefour. This may be advantageous for them with Brexit occurring allowing them to safeguard themselves from possible harsh supplier price rises. When the alliance ends Tesco can have an established foundation on how they have progressed allowing them to find opportunities with new alliances to benefit from supplier prices and bulk buying.

Threats

Britain imports 30% of food from the European Union (EU). There may be reduced suppliers of certain fresh foods. Hence, for Tesco its suppliers may have the greater bargaining power becoming more vulnerable and dependent on suppliers (Stewart and Walker, 2019). Leaving the EU, creates problems for Tesco as they are dependent on imported foods. Higher import costs may result in customers having to pay extra for items. This threat may have a potential future impact on Tesco and how it operates, as they may lose customers to rivalries such as Aldi as 75% of what they sell come from British suppliers or local British markets that have fresh food which have a greater life span than those imported from EU.

The Telegraph had sent shoppers to compare products within supermarkets. A shopper stated that Waitrose had higher costs but better-quality products. Waitrose cheapest sausage was £1.40 and was ‘decent’ whereas Tesco’s cheapest sausage was 66p ‘grim and nasty looking’. This portrays that Waitrose has more cost leadership by ensuring costs are low, but they are not sacrificing their quality of products. Whereas, Tesco is more cost focus ensuring their prices are low with less care. This can potentially impact Tesco’s customers as they can have the bargain power of where to shop if they can get substitute products elsewhere for a better price and quality.

Tesco’s carelessness behaviour of having an ‘inadequate alarm system and poor emergency services’ had resulted in an oil leakage in Haslingden petrol station. The leakage continued over two days killing fishes, putting people at risk nearby both living and working forcing them out of their homes nearby for 0.6 miles. Tesco was fined £8m and had costs of £55,000. This was the second largest fine given in the UK for pollution to the environment. According to the environmental agency 23,500 litres of petrol leaked into sewages. This is a threat to Tesco as there is a rise of peoples concerns for the environment.

Key Strengths and Weaknesses

Strengths

Aldi are planning to open 200-250 stores in London which may be deemed as competition to other big supermarkets but not as much for Tesco. Tesco’s annual reports show they have property, plant and equipment of £18,521m in 2018 which increased to £19,023m in 2019. Aldi are putting their stores close to big supermarkets throughout London managing to attract 800,000 new customers last year increasing sales by 11%. However, there’s a less chance for Aldi to affect Tesco because they own their lands thus being a strength for Tesco. There’s less chance for them to take over Tesco if they don’t sell their land acting as a barrier to entry and access to channels of distribution.

Tesco has a high economy of scale, thus benefiting from buying in bulk, marketing and technology. They have the biggest market share of 27% and their monopoly market share is 25%. Tesco uses Clubcard’s as a loyalty card for customers, having access to 21 years’ worth of customer behaviour therefore, giving them the advantage to learn and grow with the information they retain. With the use of technology and having a high economy of scale, Tesco can have a higher output. Perhaps even getting discounts from suppliers, leading to a lower average cost and lower prices for their customers. Companies with lower market shares and economy of scale cannot do so, such as Aldi and Lidl, therefore they cannot affect them as much.

Tesco had the honour of being awarded the audit partnership best grocer award in 2018. They had increased sales and profits, winning back the minds and hearts of their customers. For two consecutive years they have been recognised as the top Irish workplace. They have also been named as one of the best workplaces for women fulfilling their aim to bring about equal opportunities. These accomplishments are uplifting Tesco’s brand image which will draw in shareholders as well as stakeholders such as employees and customers. People like to shop and work in companies with a positive image. Shareholders benefit from this, allowing them to get a greater dividend with an increase of 92.3% year on year.

Weaknesses

Tesco’s first venture in the US ‘Fresh and Easy’ had declined ever since its opening in 2007. As it was their first venture in the US, they should have done more market research. Perhaps they did not choose the right location, since shoppers said they had many supermarkets nearby. Fresh and easy had a tough competition of Target and Costco. They were constantly increasing their chains to 200 stores despite being unprofitable. Due to insufficient cash and being unable to obtain finance to continue its operation they had failed. Tesco tried to enter but failed to adapt to new market. Either they didn’t do research or aren’t good at it, maybe they’re good at promotions and advertising but not at market research maybe that’s why they’re based solely in the UK. Perhaps this is a reason why Jacks has been closing due to their poor market research.

Tesco have encountered many scandals. Mr Lewis the CEO of Tesco was appointed after the 2014 accounting scandal of profits being overstated by £250m. Mr Lewis had good leadership qualities of a CEO. He had ‘rebuilt’ Tesco including customer and supplier trust and simplified Tesco’s business by selling ventures. Their net assets have been increasing since 2017 of £6,414m to 2019 of £14,834m. Mr Lewis is leaving after he brought up and improved the store which may potentially be an internal management weakness. The new chief executive may not perform as well, which could affect institutional investors resulting in less funding.

The clothing brands at supermarkets are aimed to be affordable, stylish and useful. Asda have the upper hand in the market, having the cheapest items within the £4-6 price band and 72% of their clothing’s are below £10. Tesco, on the other hand, are not as cost effective with most items being in the £8-10 price band and with 58% of clothing below £10. This gives customers the bargaining power of shopping elsewhere which reduces Tesco’s customers. Therefore, they may lose customers to other competitors such as Asda unless they find a way to decrease costs of items.

Financial Analysis

Tesco’s growth has slowed down; however, it still has been outperforming other big supermarkets; Asda, Sainsburys and Morrisons. Which may imply that there are new price cuts by Tesco or a strong shift to discount brands putting pressure on competitors. The article states, in central Europe Poland, stores opening hours on Sundays have changed leading to fallen sales by 5% to £1.3bn. This indicates that customers prefer to shop on weekends perhaps they have more time then but with store hours changing its affecting sales, thus Tesco should use this to reflect their opening hours elsewhere. Tesco’s debts have reduced from £(22)bn in 2015 to £(12)bn in 2019, the cost base has also reduced and they generated a £2.5bn of retail operating cash.

Profitability has been improving with net profit margins increasing from -0.10% in 2017 to 2.07% in 2019 as shown in the appendix. This shows Tesco is becoming better at turning their sales into profit. Sales have been increasing this may be due to ‘customers recognising improvements in both quality and value’ of products.

Return on capital shows how efficiently a company is using its capital to generate profits. Tesco has a high proportion of debt to equity as shown in their gearing ratios 3.85% in 2017 increasing to 7.59% in 2019 as shown in the appendix. An increase in debt can result in investors to pull its funding from the business. This is a financial weakness for Tesco as investors may decide to invest in companies with a lower debt to equity proportion thus funding for Tesco may reduce. They are becoming less efficient in using their capital to generate profits and if this continues it can become a grave problem for Tesco.

Recommendations

Develop its Strengths

To strengthen more, Tesco could create synergies for instance, getting rid of duplicate activities. Or cutting people off to reduce costs and train staff in multiple departments. Although it may be costly, it would be beneficial in the long term. Having good trained staff, allowing the business to expand and have a competitive advantage to competitors. Being ready for unexpected or hectic situations such as Christmas sales.

Resolve its weaknesses

Tesco has weaknesses such as a lack of market research which may have resulted in their failures of venture. They can improve those weaknesses by spending more resources on its research and development allowing them to progress from future ventures in other countries. Additionally, with Mr Lewis the CEO leaving the new CEO may not be as trained or experienced which can affect potential or current institutional investors. Tesco can get Mr Lewis to train the new CEO, so they do not just enter unprepared thus giving investors the satisfaction that the business is in good hands.

Exploit Opportunities

Tesco can differentiate in the supermarket field by supplying catering services, therefore expanding its customer base. The takeover of Booker can help them to do so as 30% of its sales are from the catering department. They can do this via keeping up to date with the customer needs by understanding the external macro environment analysing and studying customer behaviour.

Making new alliances is a great opportunity which Tesco could continue in order to gain a competitive advantage over its rivalries. For instance, as they have a high economy of scale already, they can use this along with their alliances to get discounts from suppliers by bulk buying. They have land to store products they bulk which they could ensure they don’t have too much inventory left over they can improve on their online services as more consumers are becoming reliant on technology.

Avoid or Mitigate Threats

Environmental aspects of a business are crucial. Tesco’s petrol leakage being the second biggest fine in the UK had a detrimental effect on its image. As consumers and institutional investors are concerned about the potential impact on the environment on how businesses operations can affect them negatively. Tesco can try being more environmentally friendly perhaps by using techniques such as charities or using more resources that decompose easily.

Focus more on working towards being cost leadership (ensuring costs are low without sacrificing quality) than cost focus (low prices without focusing on the quality) to attract and retain customers. Also, since other supermarkets focus on good quality for lower prices if Tesco does that too it reduces their chance of losing customers. It allows the threat of losing customers.

Conclusion

To conclude, Tesco is a well-established brand which has managed to use its strengths to such as owning land and not selling it as a barrier to entry for competitors. Additionally, they have a high economy of scale thus being able to bulk buy. They have encountered many scandals. But, have managed to overcome them, however with CEO Mr Lewis leaving there may be an internal management weakness he could train the new CEO to satisfy shareholders that an effective management.