The analysis of the UK supermarket and Tesco Introduction: The role of supermarket is becoming far more significantly in daily life. Consumers could see different kind of brands and variable goods. The role of the supermarket is tried to satisfy the consumers’ demands. Since the supermarket came out, the advantages such as low price and cost, much convenience made the supermarket develop quickly. As a consequence of the rapid development, the supermarket plays an important role in the retail industry. It not only saves large amounts of labor capital and operating cost, but improves the shopping environment.
In this essay I will make a specific analysis of the UK supermarket system through economic theories. Firstly, I will analyse the situation of the UK supermarket via Five Forces Model (Michael Porter 1979). And then, I will select the largest supermarket in UK, Tesco, to analyse the strategy of this firm by using the value chain (Michael Porter 1985). Tesco is the largest British retailer both by global and domestic market share. And it is the third largest retailer in the world followed the Wal-Mart and Carrefour.
Tesco opens around 2,440 stores and employing more than 400,000 people. Tesco has entered into areas such as clothes, electronics, financial services, internet services and gas stations. Currently, the market share of the retailer in UK is more than 30 percent. As of March 2008, Tesco could be found in every postcode of the UK. Five forces analysis The aim of the five forces model illustrated by Michael Porter (1979) is to analyze an industry to determine that which forces can influence the industry strongly so that the firm could make the best position in this industry.
And the five forces include: the threat of new entrants; the power of buyers; the power of suppliers; the threat of substitute products and the competitive rivalry among the existing companies. Threat of new entrants Firstly, the threat of new entrants is rather low. It is pretty difficult for new entrants to enter the UK supermarket because of many barriers such as economies of scale, capital requirements of entry, cost advantages, differentiation, etc. There are many supermarkets in UK and the four largest Tesco, Sainsbury’s, Asda and Morrison account for 75. percent of the UK supermarket in the 12 weeks ending 1 November 2009 (Wikipedia). For new entrants, it is difficult to occupy the market share of the UK supermarket in current structure. The first barrier is that small scale of supermarket could not create high margin. It is necessary for the entrants to consider the capital requirement according to the large scale of the operation. Many supermarket firms like Tesco and Asda have the cost advantages in supplication factor and other economic factors.
It makes a large barrier for new firms to enter the market because of the disadvantages in cost requirement. Comparing the existing firms, the new enters need more cost and capital to establish the new brand and the access to marketing channels in order to attract the consumers. The existing supermarkets have built the famous brands, stable consumer groups and distribution channels. The strength of the brand name and channels could be a very powerful mean to build a barrier to entry. In order to keep the market stable, government also has the ability to establish a barrier.
For instance, if the government can make a determination that how many supermarkets could be established in one region, as a result, the entrants will not be limited to build new facilities. And the new entrants may require many licenses from the government of other legal branches in order to operate. That is also a type of barrier for entry. The existing companies will make a specific analysis aim at the threat of the new entrants and then publish relevant measures to prevent the entrants to enter the supermarket system. There are so many barriers for new entrants to enter the supermarket system that the threat of them is rather low.
Power of the buyer Secondly, the power of the buyer is not strong as well. People need their daily life products, so they must do shopping. For the large supermarkets, there are many factures influence the buyers’ selection such as the comfortable shopping environment, convenient transportation, free parking, etc. However, because of the homogeneity of these factors, what the consumers concern more is the price of the products. Different company makes different price strategy based on the respective position. Clubcard of Tesco is the company’s customer loyalty programme – the way of saying ‘thank you’ to consumers.
It is pretty popular that the number of active member increased over 15 million from 13 million at the start of 2008/9. Clubcard is a main reason for consumers who prefer the Tesco rather than other competitors. Power of the supplier Thirdly, the power of the supplier is also low. The majority of the products in different supermarket are homogeneity. Many large firms like Tesco and Asda have the unified operating style and advanced purchase measures. So, there are many suppliers for the supermarkets to choose and purchase products.
And because of the small retailers’ purchasing power is much lower than the supermarkets. At last, most of the products will be sent to the large supermarkets. Threat of the substitute Fourthly, the threat of the substitute is not high. As the substitute of the supermarkets, the small single retailers are pretty convenient for consumers. People could buy fresh seafood, vegetable and fruit from the respective markets instead of the supermarkets. And there are many advantages about the retailers, for instance, many small retailers are built near the residential areas, the range of products is pretty full.
However, since the operating cost is high, if the retailers want to obtain margin, they have to make the price higher than the supermarket. But as the industry leader, there is no doubt that the Tesco Group would not give up the share of small retailer market. So the Tesco Express and One Stop came out. The Tesco Express stores are neighborhood convenience stores whose average size are about 200 m2, stocking mainly food with an emphasis on higher-margin products and everyday essentials. They are established in busy city centre districts, small shopping precincts in residential areas, small towns and illages. And the size of One Stop is much smaller than the Express. At the end of its 2010-2011 financial years, the number of the Tesco Express and One Stop were 1285 and 599(Wikipedia). Because of the famous brand of the Tesco, most people prefer to buy the daily products in the Express or One Stop. According to Datamonitor (2010), there are 960 Express stores which sell approximately 7,000 products and 170 Metro stores which sell a range of food products in villages and city centres.
As a consequence of the brand and more types of products of the supermarket, the threat of the substitute is rather low for the supermarket. Competitive rivalry among the existing firms The last one is the competitive rivalry among the existing firms. And the threat of competitive rivalry is considered very high in the UK supermarket industry. The four largest supermarkets Tesco, ASDA, Sainsbury’s and Morrisons account for 30. 5%, 16. 9%, 16. 3% and 12. 3% of the UK supermarket in the 12 weeks to 27 December 2009. (Wikipedia) And the market share of ASDA increases from to 16. % during the year 2010/ 09, meanwhile, Sainsbury’s share rises to 16. 3% and Morrison’s reaches 12. 3% from 11. 3%(Euromonitor, 2010). The competition of these firms is pretty strong in this industry in order to win the market share and the competition could make the market develop much faster. It is very significant for these firms to create many innovative measures to obtain more market share. Most products are homogeneity for consumers so that the seller should pay more attention to the piece and quality of the products.
Hence, based on the quality guarantee of the goods, firms try to occupy more market through the lower price and better services. By the analysis above, the threat of the competitive rivalry among the different firms is highly strong but other threats are not strong enough. So, the supermarkets in UK should figure out more effective measures to attract consumers in order to occupy the market. Value chain analysis The value chain was developed by Porter (1985) in order to analyze a firm to state the sources of competitive advantage. There are two activities including primary activities and support activities. The primary activities are those that concerned about physically creating the product or service and transferring it to the buyer, together with any necessary after sales service. The support activities are those activities that are necessary to ensure that the primary activities can be completed. The support activities can affect any one or more of the primary activities. ” The primary includes inbound logistics, operations, outbound logistics, marketing and sales and service and the support activities includes firm infrastructure, human resource management, technology development and procurement.
The first primary activity is the inbound logistics. It is considered that the inbound logistics includes receiving goods from suppliers, storing goods, transporting goods and taking goods to the shelves. Tesco uses the leading position as the key power to reduce the costs from the suppliers and keep the stable of consumers’ selection. Meanwhile, it also improves the efficiency and the distribution system. As well, the company provides more effective way to control and reduce the costs of damaged goods. As a result, it could avoid the extra costs be transferred to the consumers.
It needs to think about its operation active. The firm could do many operations such as providing products and service and keeping the shelves full as the daily task. In order to gain more competitive advantages, it is necessary for the company to take a consideration about reducing the operating costs. Tesco makes full use of the intelligence technology (IT) system in order to make the company control the operative cost effectively. This firm has spent more than 76 million pounds on narrowing the operation time by the digital program by the 2010. And during the 2009, the profit of the Tesco was reached 550 million pounds.
The measure of Tesco provides much convenience for staff to operate the service. Accompanied by the operation, they will have outbound logistics problems. It is concentrating on delivering the goods to the customer. Currently, Tesco adds the home delivery service. However, there are many methods need to be improved such as parking facilities, handcarts, staff and systems to get competitive advantage. If it could be implemented more effectively than other firms, it would make their consumers save more time. And the staff could make the facilities available and convenient for consumers to get quickly.
Tesco has the leadership and effective outland logistics. The company has invented many measures to satisfy consumers’ demands like the small Express and one-step stores and fast door-to-door delivery service. It is very important to considering the marketing and sales. The next one is the marketing and sales. As the leading company, Tesco has its strategy to attach to consumers. The Tesco Clubcard is invented to attract more people to go shopping to Tesco instead of other competitors. Consumers who keep the cards can get much discounts and integration. Actually, advertisement is necessary as well.
Tesco could attract more consumers by the advertisement via the television, radio and local newspaper. And they could get much information about the products and discounts. After selling, service becomes the most significant active. As the principle of fast and easy, when the consumers enter into the supermarket, the warm shopping environment may make them relaxed. Various sectors are responsible for their respective responsibilities; staffs provide the best personal service to consumers so that consumers can go shopping easily and comfortably. All of these reflect the intimate service for consumers. Here are the support activities.
The procurement is the procedure of obtaining the various contributions to the primary activities. The key point of the firm infrastructure is planning, finance and controlling the system to improve the firm’s strategic ability. The company should focus on improving the establishment of the infrastructure so that consumers could go shopping more convenient. The human resource management includes recruitment management and staff development. The aim of the Tesco is to add differert types of schemes and develop the recruitment plan, then train more excellent staff to provide the best service for consumers.
The development of technology is a significant competitive advantage for a company. The advanced technological level could add higher brand value. Tesco is the first supermarket that invented the self-checkout in UK. And it provides great convenience to consumers. Conclusion: In this essay, I analyse the UK supermarket industry by using Five Forces (Michael Porter 1979) firstly. Through the analysis, it is clearly that the threat of new entrants, the power of buyers, the power of suppliers, the threat of substitute products are pretty low for UK supermarket industry.
The firms in UK do not pay much attention to those threats above. The power of competitive rivalry among the existing companies is very strong. The competition among the existing supermarkets is rather drastic. All companies need to figure out effective strategies in order to prevent their consumers changing their brand selections. And secondly, I analyse the value chain (Michael Porter 1985) of Tesco. As the largest retailer in UK, Tesco has an excellent industrial chain for supply and demand. The primary activities could ensure the firm can gain more margins by perfect supply chain management, operation, sales and service.
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The support activities like great human resource management, advanced IT system provide support to ensure the primary activities could be operated. With the excellent primary activities and support activities, Tesco obtains more than 30 percent market share in UK. Reference Porter, M E (1980) Competitive Strategy: techniques for analyzing industries and competitors (Free Press) Johnson, G and Scholes, K (2007) Exploring Corporate Strategy (Prentice Hall) Besanko, D Dranove, D Shanley, M and Scharfer, S (2007), Eonomics of Strategy (Wiley) Porter M E (1985) Competitive Advantage (Free Press) Tesco available at ttp://www. slideshare. net/j4g2r/tesco-presentation Growing the UK core available at http://ar2011. tescoplc. com/business-review/growing-the-uk-core. html “Tesco share turnaround (plus an update on grocery price inflation” available at TNS Global http://www. tnsglobal. com/news/news56F59E8A99C8428989E9BE66187D5792. aspx Euromonitor (2010), ‘Industry Profile – Food retailing’, Euromonitor International, 2010 Tesco available at http://en. wikipedia. org/wiki/Tesco Tesco (2010), ‘Annual Report and Review 2010’, Tesco. Available at http://ar2010. tescoplc. com/en/downloads. aspx