Tesco Company Analysis: Introduction
Tesco, PLC is one of the leading grocery supermarkets in the world with over 4,330 stores spread in 14 different countries in Europe, America, and Asia (Datamonitor 2010). The company’s first store was established in 1919 in the United Kingdom (Tesco 2010). It is currently a market leader in the United Kingdom (UK) with a market share of 29.2% against its closest competitor’s (Sainsbury’s) 17.7% (Ruddick 2014). Its product portfolio comprises of about 7000 fresh foods sold in over 900 stores and non-food commodities such as books, clothing, and DVDs (Tesco 2010). Tesco, in 2005, introduced the fair-trade cotton clothing and became the first retailer to market this product. The retailer also sells its products online through the company’s website and Tesco direct platform. Additionally, Tesco, through the Tesco Personal Finance, offers banking and insurance services to its customers.
The UK market presents Tesco with many opportunities for expanding its consumer base. This report analyses Tesco’s fair-trade clothing and its opportunities for growth in the UK market. The aim of the report is to evaluate Tesco’s strategic positioning and competitiveness in the UK market by using tools such as SWOT, Porter’s Five Forces, and PESTEL analysis.
The Fair-Trade Clothing Sector
Fair-trade clothing is a product line produced from cotton that has been obtained through a way that is not only friendly to the environment but also friendly (Tesco 2010). The fair-trade policies ensure that cotton farmers from Asia and Africa are paid well for their produce. Tesco markets its products with fair-trade labels, including school uniforms for children, women’s and men’s clothes, and bags (Tesco 2010). The products come in distinctive designs and brands that appeal to people of different ages. Tesco’s popular brands include “Stone Bay, Cherokee, Florence and Fred, and Green Baby for Tesco” (Tesco 2010).
Tesco offers these products in various styles and designs. Currently, besides the online market, the company has a presence in 14 other market segments. Tesco needs to capitalize on its heavy market presence to promote its fair-trade cotton products. However, the company should create stylish clothing through value addition to attract clients from the fashion industry (Dess, Eisner, Lumpkin, & McNamara 2011). Moreover, Tesco should reduce the price of its fair-trade products to attract more customers.
Tesco Competitive Advantage Analysis
The fair-trade market is increasingly becoming popular across Europe. The number of people purchasing fair-trade goods is expected to rise in the next few years, as these products ensure that “disadvantaged producers in developing countries get reasonable prices for their goods” (Booth & Whetstone 2007, p. 32 ). Moreover, consumers in the UK tend to prefer environmentally friendly products. This heralds a bright future for the fair-trade cotton market.
In the UK, the market for Fair-trade products is low. Thus, Tesco can emerge as a trendsetter in this market by diversifying its products to include cotton products that have been certified by the fair-trade international organization. Presently, Tesco sells about 1,000 fair-trade products (Booth & Whetstone, 2007). However, in recent years, many competitors like Monsoon, Asda, and M& S, among others, have invested in this market (Edwards, 2010). The competitors employ various strategies in a bid to dominate this emerging market. In this regard, Tesco must identify innovative ways of creating a sustainable competitive advantage in this market.
SWOT Analysis
SWOT analysis is an important strategic tool for evaluating a firm’s competitive environment in the industry it operates (Lynch 2006). It involves assessment of an organization basing on the internal strengths, opportunities, weaknesses, and threats, which are variables that determine its ability to dominate a certain market. Tesco’s SWOT analysis is provided in the following section.
Strengths
- Large market share – Currently, Tesco enjoys a market share of 29.2%. In comparison, its closest competitor in the UK market, Sainsbury, has a 17.7% market share (Ruddick 2014). Its large market share allows the company to introduce new brands into the market
- Market leader – Tesco is currently a leading grocery supermarket in the UK. Its strong market position helps Tesco to enjoy the benefits of economies of scale (Tesco 2010).
- A strong brand – Tesco has a good reputation among its customers because of the quality of its product offerings. It provides quality products at low costs to its customers.
- Diversification – Tesco has diversified its product offerings and expanded its business to overseas markets. This gives the company a competitive advantage over the other players (Constantinides 2006).
Weaknesses
- Low ROI – In 2009, Tesco reported a decline of returns on its investments. Its ROI currently stands at 4.2% (Tesco 2010). This low ROI may affect the company’s future growth in overseas markets, as few investors will seek to invest in the company.
- Low turnover – Tesco reported a low turnover ratio is 2010. This implies that the company’s inventory system is inadequate.
- Limited market diversification – Tesco generates much of its revenue from the UK market. This may limit its future expansion into new markets.
Opportunities
- Overseas markets – Given its strong brand, Tesco has the potential to expand into new markets in Europe and Asia.
- Retail in Non-food products – Tesco can do well in the marketing of non-food products, including fair-trade clothing, because it is a well-known brand.
Threats
- Stiff competition – In the UK, the competition within the food retail sector is very high. Thus, a new product may not do well in this market despite Tesco’s strong brand image.
- Labor Laws – In the UK, the minimum wage stands at 58% (NMW 2009). This may affect Tesco’s profit margins, as much of the revenue will be spent to pay employees.
- Low-cost products –Tesco’s focus on providing quality products at low costs to its consumers has cemented its leading position in the market. However, low prices significantly reduce the company’s profit margin.
It is evident from the analysis that, in the UK, Tesco has a competitive advantage. Since people are increasingly becoming conscious of fair-trade clothing, Tesco has the potential of creating a sustainable competitive advantage in this sector. Moreover, its market dominance as the leader in the UK food retail sector will allow the company to provide affordable, fair-trade products (clothing) that will not only raise its market share but also increase its profit margin.
Analysis of Tesco’s Strategic Positioning
To compete effectively in the global market, a firm must adopt marketing strategies that help it create a sustainable competitive advantage. In order to determine Tesco’s specific strategic positioning, the writer will analyze the company using Porter’s five forces and PESTEL as described in the following sections.
Porter’s Analysis
According to Porter (1985), the analysis of the industry that a company operates in determines its competitive strategy. Thus, this analysis will help illuminate Tesco’s strategies in the UK’s fair-trade clothing sector.
Substitute Products
Since trade-in fair-trade clothing is relatively new in the UK, substitutes for these products are few. The only clothing that lacks the fair-trade mark presents a threat to Tesco’s product line. Additionally, the company’s pricing strategy deters the entry of new substitutes into this market.
Competitors
None of the “Big Four” has ventured into the fair-trade clothing sector. Only small retailers, Morrison’s, Asda, and M & S sell clothing that has a fair-trade label (Mintel 2010). These do not present a big threat to Tesco. Moreover, Tesco has several Express stores located in most towns, which increase its market presence.
Business Rivalry
Clothing sector experiences minimal competition when compared to other industries like the food retail industry. Although competitors such as Asda, Waitrose, and Morrison are common in the clothing industry, the brand name and image of Tesco surpasses them and thus offer a competitive advantage.
Buyers
Consumers in the UK have the power to influence prices. They often go for low-cost, standardized goods and easily substitute one brand with another. According to Tomlinson and Evans (2010), consumers prefer quality but affordable products. Tesco is reputed to sell quality products, which can be bought online via its website.
Suppliers
Suppliers also have a big influence on this market. However, Tesco, being a reputable brand, has an advantage during price negotiations and thus, can buy supplies at a low price.
PESTEL Analysis
The PESTEL analysis will identify the external and internal forces that may affect Tesco’s performance in the fair-trade clothing sector in the UK.
Political
The global economic downturn of 2007 led to massive unemployment, which resulted in reduced consumer spending in the UK (Tomlinson & Evans 2010). In this regard, consumer spending on fair-trade cotton products may decrease during recessions.
Social
Consumers’ attitudes towards clothing and fashion are fast changing as more people begin to prefer ethically produced goods. Thus, Tesco stands to benefit from the expected increase in demand.
Technological
Technology has revolutionized Tesco’s supply chain. The company allows customers to shop online via its website. This has become a preferred mode of shopping by many consumers.
Environmental
Tesco promotes environmentally friendly consumption through its CSR activities, reusable bags, and Greener living scheme (Tesco 2010). Moreover, fair-trade clothing is also promoted as ethically and environmentally friendly cotton products.
Legal
Tesco’s clothing business may be affected by the government’s VAT, which was raised to 20% for non-food products (HM Treasury 2010). Additionally, the company’s operating costs will increase because of the rise in minimum wage payable to employees.
From this analysis, it is evident that Tesco can do well in the fair-trade clothing sector. Its pricing strategy, which relies on the evaluation of the market needs and the consumer’s income, will help the company consolidate its strategic position in this emerging market. According to Costanzo (2010), high prices reduce consumer demand, while low prices erode a company’s profit. Tesco uses a pricing strategy that ensures that consumers get adequate benefits from the products, and the company maintains a high-profit margin. The company distributes its clothing products through its subsidiaries and convenient stores that are spread across the country. The lack of many intermediaries ensures that its prices remain relatively stable.
Analysis of the Potential Strategies
To conquer the clothing sector in the UK, Tesco should seek to expand the accessibility of its products in this market. One of the strategies the company can use is the adoption of an elaborate channel or distribution network. A channel strategy will enhance the availability of Tesco’s cotton line in the UK, which will increase the company’s return on investment from its businesses (Kotler & Keller 2007). Currently, Tesco distributes its cotton brands through its Express stores spread across the country, although they have not increased the accessibility of its products. Therefore, Tesco should consider using intermediaries to help distribute its brands in a quick and cost-effective manner.
One of the potential channel strategies that Tesco can use to increase its brand presence is the push marketing strategy. The company can use “trade promotion funds to entice intermediaries” who will market its cotton brands (Kotler & Keller 2007, p. 71). Currently, competition in the fair-trade cotton brands is low, but it is gradually increasing. Thus, a second strategy would be to emphasize on value addition and eco-friendliness of these products. This marketing strategy would increase consumer awareness about the benefits of fair-trade cotton products.
One-level marketing is another potential strategy that Tesco can use to increase its presence. To achieve this, the company should reduce the number of distribution levels. One-level marketing will allow Tesco to interact indirectly with the consumers, identify consumer tastes and preferences with respect to fashion, and create customer loyalty. It will also allow Tesco to control the sale and supply of its products to consumers. Tesco can also implement both intensive and exclusive distribution approaches to increase its market presence and reduce costs (Kotler & Keller 2007).
Tesco Company Analysis: Conclusions and Recommendations
Tesco’s entry into the fair-trade cotton product sector was well-timed. In this paper, the competition analysis revealed that Tesco’s reputable brand and image, online presence, and extensive outlets give it a competitive advantage over other retailers. The analysis also showed that Tesco’s pricing strategy has contributed to strategic positioning in the UK market. However, as the company seeks to diversify into the non-food product line, a marketing strategy that would expand its distribution channels is important. The recommended strategy for Tesco’s fair-trade cotton products is the one-level marketing strategy. This strategy will help the company cut its distribution costs and expand its customer base in the UK.
References
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