PESTLE and SWOT analysis of Tesco 2016-17
Kush, J. & Nanjekhe, P. (2018) "A PESTLE and SWOT analysis of Tesco 2016-2018" 123 Writing [Online] at https://www.123writing.com/free-sample/pestle-and-swot-analysis-of-tesco-2016-17
Analyse the internal or external environment of Tesco using Pestel, Swot, Porters Five Forces and BCG Matrix and give personal recommendations for Tesco’s future strategic practice
...................updated 10 July 2018..................
Tesco is the biggest supermarket group in the UK with a market share of 27.8% ahead of main competitors Sainsbury’s, Asda and Morrison’s who together make up the UK Big Four (Mintel 2017). Started as a vegetable stall in 1924 in London’s East End by Sir Jack Cohen, it has gone to become an international retailer now ranked third in the world behind Walmart and Carrefour. While Tesco is mostly engaged in grocery retailing, it has also expanded into retail banking, mobile and insurance services and non-grocery such as clothing, electronics and many household goods. Tesco is synonymous with having some of the largest superstores (Extras) often reaching 100,000 sq ft. But as will be seen later, it is cutting back on the large store format in favour of the much smaller 3,000 sq ft the C-store formats known as Tesco Express and the mid-level 10,000 sq ft city centre based Metro stores selling groceries and convenience foods (Mintel 2017).
An overview of Tesco's current performance 2016-2018
All is not well with Tesco at the moment. Since 2013, the company has posted declining UK sales. The food retailing giant has also been losing market share in the UK from a high of 30.9% in 2012 to the current 27.6% as of 2018 (Statista 2017; Eley 2018).
Using Pestle, Swot and Porters Five Framework, we examine the factors behind Tesco’s poor performance such as the rise of hard discounters Aldi and Lidl, who have benefited from a significant rise in consumer frugal shopping habits since 2009. Both Aldi and Lidl have doubled their market share in five years (Mintel 2017).
Using SWOT, we shall see however how much of Tesco’s decline is also due to a combination of internal weaknesses as well as external factors (Mintel 2017).
2.0 Tesco Pestel Analysis 2016-2018
The current business environment which is affecting the UK grocery retailing industry is made up of both the macro environment and micro environment. The macro environment is the most general layer of the business environment consisting of broad environmental factors that impact all the supermarkets operating in the UK. Many macro level factors will directly impact both Tesco as well as rivals and thus it is important for management to find what these factors are. The starting point for analysing macro-level influences is the PESTLE framework which can be used to identify how future trends in the political, economic, social, technological, legal and the environment will impact on an industry and all individual firms (Johnson et al 2005).
2.1 Political factors (government action)
2.1.1 The impact of Brexit on UK supermarkets
- One of the key tangible effects of Brexit has been the effect it has had on food prices, which have steadily increased since September 2016 and together with the resulting devaluation of the pound sterling, limited not just supermarket growth in general but it made food imports more expensive for food retailers. UK Supermarkets like Tesco have are being forced to seek expensive based UK suppliers rather than EU suppliers especially for core grocery items, one of the reasons UK food prices have seen dramatic price increases going from pre-brexit deflation to post-Brexit inflation (Mintel 2017).
2.2 Economic factors
- In terms of the economic consequences of Brexit, is the decline in consumer spending due to a combination of many factors primarily rising inflation and slow wage growth post-Brexit. The result is UK consumer price inflation (CPI) hit a five year high in September 2017 at 3.0% while wages haven’t kept pace. It is little wonder consumer discretionary spending has been hit too and it is these spending cut backs that have also hit supermarkets hard especially the Big Four supermarkets. Only the lowest priced discounters, Aldi and Lidl have benefited the most from post Brexit economic fallout (Mintel 2017).
- Merger of Sainsbury’s and Asda (Sainsdas) if approved will create the biggest supermarket group in the UK, even more dominant than Tesco. The impact on Tesco may be even more squeeze on margins and loss of market share in an all-out price war (Eley 2018b).
2.3 Social factors
2.3.1 Health and dietary trends
- The macro social environment can include changes in people’s lifestyles, fashion, labour composition, or other demographic trends that have the potential to be threats or opportunities for businesses. One of the biggest lifestyle changes that is already affecting the global food and drinks industry in the UK and other major markets and already affecting industry sales dramatically is consumer-focus on healthy foods and beverages with particular focus on sugar. According to a Mintel (2017b), 62% of UK adults are concerned about sugar in food and non-alcoholic drink products with a further 53% stating they are actively taking steps to limit or reduce sugar in their diet. This trend is a serious threat to supermarkets such as Tesco who stock a lot of processed foods and drinks that are high in sugar content or use a lot of artificial sweeteners unless they increase their healthy foods offer
2.3.2 Rise in weekly top-up shopping
- Consumer grocery shopping habits are changing the face of food shopping. Due to changing demographics in the UK, home ownership continues to fall, particularly among under-55s as a result of rising house prices, hence reducing first-time home buyers. Private renters have now become the fastest growing housing segment. This demographic segment lives in urban areas characterised by a lack of space, and their shopping habits coupled with shifts toward online, are beginning alter grocery shopping trends. According to Mintel (2017), 47% of UK consumers increasingly prefer to carry out smaller top-up shops cutting back regular big basket shopping. This preference favours smaller urban based convenience formats and online, a trend that threatens the fate of superstores and big box supermarket formats designed for big-basket orders (Mintel 2017; 2018). Unfortunately, Tesco has the biggest and largest number of super stores in the UK. In fact, Tesco is synonymous with having some of the largest superstores (Extras) often reaching 100,000 sq ft. These are fast becoming an albatross around its neck in an environment that increasingly favours smaller nimble and agile shopping formats such as Aldi and Lidl. This may explain why the supermarket giant bought wholesaler Booker Group (owners of Budgens and Londis convenience stores) for £3.7bn in March 2018.
2.3.3 Growth of plus size fashion
- According to the NHS (2015), the UK is now referred to as the “fat man of Europe” with almost 7 out of 10 British men and 6 out of 10 women now being classed as obese or overweight. Rising obesity levels do in fact present a major gap market opportunity for retailers (including Tesco) who can cater to plus-size consumers (Mintel 2017). With half the UK population predicted to be obese by 2050, Tesco can target this rising demographic through its F&F clothing range.
2.4 Technological factors
2.4.1 Automated delivery
- As automobile and transport companies roll out driverless technology, some firms including Ocado.com are already trying out automated home delivery that eliminates people altogether-for better or worse for both consumers and supermarkets (Mintel 2017).
2.4.2 Superfast delivery
- All the major food retailers are locked in a competitive bid to see who can offer consumers the fastest delivery. Marks & Spencer, Sainsbury’s, and Tesco have all launched a one-hour grocery delivery service to customers in London, a trend Mintel predicts is likely to make speed of home delivery a key differentiator in a very competitive space (2017).
2.4.3 Rise of planet of the Apps
- Device apps are taking over shopping and altering how consumers shop for their food. The trend includes voice controlled shopping that lets shoppers add items to their online baskets using voice recognition apps such as Alexa or Siri. It has already been initiated by Ocado
- Different supermarkets are also trialing payments using mobile payment through via apps, as well as fingerprint technology removing the need for cards altogether.
2.5 Environmental factors
- Recent trends that are influencing UK clothing retail industry include the rise of ethically and environmentally conscious consumers who continually demand firms to adopt practices such as paper packaging and use of recycled materials. A new environmental trend facing the food retail industry is consumer demand for zero waste supermarkets as food waste increasingly becomes one of the greatest environmental challenges facing the food retail industry (Mintel 2017). In response, zero waste supermarkets have already started opening in the UK. Food.Love in Totnes, Devon and At The Clean Kilo, Birmingham.
- Three former Tesco executives face retrials by the Serious Fraud Office (SFO) over the company’s 2014 accounting scandal where it overstated its profits. The scandal resulted in one of the worst periods of Tesco’s100-year history and damaged its reputation, only beginning to recover until recently (Croft 2018)
- New “sugar tax” levy introduced by UK government aims to reduce content in sugary drinks by 20% by 2020 will impact supermarket own brand products
- New rules banning advertising of high-fat, salt and sugar (HFSS) food or drink products to children under 16 introduced in the UK will restrict marketing and promotional efforts
3.0 SWOT Analysis of Tesco 2018
- Tesco is still the biggest and most popular supermarket in the UK. A Mintel (2017) survey found that 60% of UK grocery shoppers use Tesco, compared to rivals Sainsbury’s (44%) and Asda (42%).
- One of the top 10 most valuable brands in the UK.
- Tesco boasts the highest trust rating of any of the grocery retailers in a Mintel survey carried out last year, having now largely repaired the reputation and brand image damage arising from debacle such as the accounting scandal of 2014 (Mintel 2017)
- Loss-making Tesco Direct, the website, which sells items including toys, consumer electronics and household goods, will cease trading on July 9 and the fulfilment centre that handles Tesco Direct orders will also close with 500 staff at risk of redundancy (Eley 2018).
- Purchase of wholesaler Booker Group for £3.7bn is opportunity to increase Tesco’s buying power, revenue and cost synergies and further extend its reach into food and drinks retailing
- Current consumer-focus on healthy foods and beverages can be opportunity or threat depending on how Tesco reacts
- Growth of plus size fashion an opportunity for Tesco’s F&F clothing offer
- Rise of superfast delivery is fast becoming the norm and opportunity to create competitive differentiator
- Merger of Sainsburys and Asda (Sainsdas) will squeeze market share and put pressure on Tesco margins
- Current consumer-focus on healthy foods and beverages can be opportunity or threat depending on how Tesco reacts
- Rise in weekly top-up shopping is opportunity for convenience but a major threat for Tesco’s superstore format
- Consumer demand for zero food waste is putting pressure on supermarkets to change
- New UK “sugar tax” levy is threat
- New living wage regulations adding costs
4.0 Porters Five Forces Analysis 2018
4.1 Threat of substitutes
The threat of substitutes in the grocery market is very high for both grocery and non-grocery items. This is because Tesco’s potential food substitutes can come from retailers in other markets that can offer not just food and drinks directly to consumers but also non-food products such as clothing, electronics, furniture etc. For example, these can include department stores, and non-food retailers with both scale and distribution to compete with Tesco. Such companies include BHS, Primark, House of Fraser, Debenhams etc
4.2 Competitive rivalry
Tesco supermarket faces intense competition from fellow big four supermarkets like Sainsbury, Asda, and Morrisons that provide similar products such as food items, clothing, electronics, extra at relative costs which makes product switching costs low, hence a buyer can easily switch from Tesco products and purchase products from other supermarkets which affects its sales. This had led to cut-throat price wars, intensive product advertisement and product innovation especially among the “Big 4". In addition, Tesco faces major competition from German discount stores Aldi and Lidl that offer up to 40% discount on their products which has greatly affected Tesco’s market share. This has forced Tesco to scheme a discount supermarket chain to attract more customers and increase sales (Brignall 2018)
4.3 Threat of entry/Barriers to entry
This is perceived as a low threat by Tesco because given the retail market structure where 69.8% of the grocery market share is controlled by the ‘big four’ supermarkets, there is intense competition between other small supermarkets like Aldi, Lidl, Waitrose, Iceland trying to gain a larger market share which would not give room for a new entrant to prosper. In addition, the new entrant would have to offer very high-quality products associated with competitive prices to attract customers of which Aldi and Lidl already offer products with up to 40% price discounts compared to other supermarket product prices. Thus, the new entrant would have to offer even cheaper products which would eventually put it out of business (Hance 2017).
4.4 Bargaining power of buyers
Tesco’s customers have a relatively high bargaining power due to availability of other supermarkets like Sainsbury, ASDA, Aldi, extra that offer similar products at related costs. This makes product switching prices low which gives the customer power to choose between a varieties of products in the same price range. And since customers like high-quality products associated with low prices, customers are opting to buy products from discount stores Aldi and Lidl which has led to a 0.3% decrease in Tesco’s market share (Cox 2017).
However, Tesco has slashed prices of over 2000 fruit and Vegetable products to promote healthy eating and promote sales (Christine 2017).
4.5 Bargaining power of suppliers
Tesco suppliers have a low bargaining power due to existence of many suppliers in the supermarket retail industry hence non-compliant suppliers can easily be replaced with other suppliers which gives Tesco supermarket power to get products from suppliers at the lowest possible prices to improve their profit margins which has led to losses on the side of suppliers (Rodionova 2017).
5.0 Conclusion and recommendations
The above analysis highlights different points at which competition has affected Tesco supermarket showing various market opportunities, challenges and threats. Tesco faces a lot of major threats from traditional competitors like Sainsbury’s and but also Asda hard discounters Aldi and Lidl that offer cheap products. In addition, threats from the environment including rising consumer demand for zero food waste, new UK “sugar tax” levy and new living wage regulations are all putting pressure on Tesco.
Nevertheless, Tesco can improve its sales through capitalizing on emerging opportunities such as current consumer-focus on healthy foods and beverages, and growth of plus size fashion for its F&F clothing offer.
It has already bought wholesaler Booker Group for £3.7bn, a deal many analysis’s state will increase Tesco’s buying power, revenue and cost synergies and further extend the reach of Tesco in food and drinks retailing (Vandevelde et al 2018)
Tesco is also rising to the challenge of the price war in the UK food retailing industry by introducing its value Farm product lines, as part of its recovery, which has led to consumers now branding it as good value for money, ahead of Asda for the first time
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Cox Josie (2017) “Discount supermarkets pile pressure on Tesco and Sainsbury’s” The Independent [online] at https://www.independent.co.uk/news/business/news/tesco-supermarkets-discount-competition-profits-lidl-aldi-sainsbury-morrisons-asda-a7905981.html
Croft, Jane (2018) “Former Tesco executives to face re-trial over accounting scandal” Financial Times [Online] at https://www.ft.com/content/e50c416e-1e10-11e8-aaca-4574d7dabfb6
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Mintel (2017b) “Attitudes towards Sugar & Sweeteners - UK - January 2017”
Mintel (2018) “Equity Release Schemes - UK - May 2018” Mintel Publications
Rodionova Zlata (2017) “Supermarket suppliers underpaid ‘millions of pounds’ every year by UK’s biggest retailers, says watchdog” The Independent [online] at https://www.independent.co.uk/news/business/news/supermarket-suppliers-underpaid-millions-pounds-groceries-farmers-groceries-code-adjudicator-a7677831.html
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Statista (2017) “Supermarkets in the UK” Statista.com
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