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UNIVERSITY CENTRE COLCHESTER

SCHOOL OF BUSINESS AND MANAGEMENT

BUSINESS ENVIROMENT

ASSIGNMENT ONE-REPORT

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Word Count: 2769

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Contents1.0 Introduction.....................................................................................................................................4

2.0 Overview of Supermarket Sector.....................................................................................................4

3.0 Tesco within the supermarket industry...........................................................................................5

3.1 Core Values and Purpose.............................................................................................................5

4.0 Financial Analysis.............................................................................................................................6

5.0 Rivalry in industry............................................................................................................................6

6.0 Main businesses and market share.................................................................................................7

Figure 1: Grocery market share November 2016 (Kantar Worldpanel 2016)....................................7

7.0 Technology Advancements..............................................................................................................8

8.0 Environmental Issues.......................................................................................................................9

9.0 Impact of EU Referendum...............................................................................................................9

10.0 Political changes..........................................................................................................................10

11.0 Conclusion...................................................................................................................................10

12.0 Reference list...............................................................................................................................12

13.0 Appendices..................................................................................................................................14

13.1 SWOT Analysis Tesco (1)..........................................................................................................14

13.2 PESTEL Analysis Tesco (2)............................................................................................................14

Political............................................................................................................................................14

Economic Factors.............................................................................................................................15

Social Factors...................................................................................................................................15

Technological Factors......................................................................................................................15

Environmental Factors.....................................................................................................................15

Legislative Factors...........................................................................................................................15

13.3 Porters Five Forces for Tesco (3)..................................................................................................16

14.0 Appendix 4...................................................................................................................................16

14.1 Glossary of Terms....................................................................................................................16

Tertiary industry..............................................................................................................................16

Oligopoly.........................................................................................................................................17

SWOT analysis.................................................................................................................................17

PESTEL analysis................................................................................................................................17

Porters Five Forces..........................................................................................................................17

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1.0 Introduction

The aim of this report is to research and demonstrate understanding of the business

environment with regards to the supermarket sector, outline the supermarket industry,

highlight the main competitors within the industry, establish market share, outline the

products and services supplied by the, the impact of the EU referendum and to establish

where Tesco fits in to the industry overall. SWOT analysis, PESTEL analysis and Porters

Five Forces analysis will be carried out to underpin understanding of the subject area.

(Perks, 2015) outlines the state of the superstore struggles,

“The grocery superstores are losing market share. The main reasons are underlying socio-

economic changes and the growth of the hard discounters. These changes are not reversible

in the foreseeable future and we think the underlying decline in superstores will continue”

2.0 Overview of Supermarket SectorThe supermarket industry, which is a tertiary industry operating as an oligopoly market (see

Appenix 4 for definition) is currently in a state of change with new smaller discount retailers

such as Aldi and Lidl offering lower prices with higher levels of convenience to its

customers. This has severely impacted the profit of the larger supermarkets and resulted in a

price war in order to attract higher volume of customers back to their stores (Marketlilne,

2016).

The overall purpose of the supermarket industry is to provide services in the forms of sales of

food and groceries along with non-food items such as homeware and electrical items. Over

the last ten years the supermarket industry has seen major changes with the larger scale stores

being scaled back in favour of smaller convenience stores and online sales. Sales and market

share of the so called ‘big’ supermarkets have decreased significantly over this period as

consumer trends have changed with consumers finding they have a far stronger position

within the market (Marketlilne, 2016) ( Appendix 3 Porters Five Forces, see Appendix 4 for

definition).

Consumers are searching for lower prices and higher levels of convenience (IGD Online

2015A). Being one of the largest sectors in the retail industry supermarkets find themselves

in fierce competition with one another shown by the Porters Five Forces analysis (Appendix

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3). Most people use supermarkets for large volume shops and may visit them once a week or

less frequently (Perks, 2015). However, through PESTEL analysis (Appendix 2, see

Appendix 4 for definition), it is clear to see customers are becoming increasingly aware of

health issues. As a result the larger supermarkets have an advantage over smaller ones with

the ability to stock larger product ranges often including healthy options (Appendix 1, SWOT

Analysis, see Appendix 4 for definition).

Tesco has recently found its sales plummeting, a change in management structure and the

turmoil of an accounting scandal. Dave Lewis was appointed the new CEO of the company in

2014, joining from the highly successful Unilever Company, he was tasked with turning the

sinking ship around.

Figures from Marketline (2016) have shown Tesco is having some success with an increase

in its volume of transactions up 2.8 per cent and sales up 0.1 per cent on 2014/15. Incentives

such as its brand guarantee scheme are helping to attract customers back to its stores.

However, there is still a long way to go for Tesco to regain its once proud status as the giant

of the supermarket industry.

3.0 Tesco within the supermarket industry Tesco was established in 1919 with its first store opening in 1929 in Burnt Oak, Edgeware

UK. Tesco operate stores that offer grocery items, general merchandise, and apparel and

jewellery among others. The company operates in Europe and Asia. Retailing is the

company’s main activity, however, Tesco has recently ventured into the world of banking. At

the end of the 2016 financial year Tesco operated in six thousand nine hundred and two stores

employing four hundred and seventy six thousand people (Tesco, 2016)

3.1 Core Values and Purpose In their annual report (2016) Tesco mention that one of the most important changes made

over the last year to be its new core purpose which is, ‘serving shoppers a little better every

day’. Tesco’s core focus guides all their decisions and shapes every action they take.

Alongside their core purpose Tesco has three core values which are: no one tried harder for

our customers, we treat people how they want to be treated and every little helps makes a big

difference. SWOT analysis shows Tesco operate a business model aimed at simplicity, stating

that their business model is organised around three pillars of customers, product and channels

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(Appendix 1). Through these changes Tesco have recently seen growth at its fastest rate in

three years with year on year sales up 0.8 per cent (Worldpanel, 2016).

4.0 Financial AnalysisThe supermarket industry is a major contributing factor to the UK economy. Research carried

out by the IGD (2015A) shows supermarket sales where £178 Billion in 2015 accounting for

51 per cent of total retail sales. The supermarket industry has shown its resilience with sales

post-recession growing 0.5 per cent annually compared with 0.2 per cent in the wider

economy. However, PESTEL analysis shows, with Britain voting to leave the European

Union the economic future is uncertain, this is demonstrated by the drastic fall in the price of

Sterling which now stands at a near all-time low with Sterling dropping 20 per cent against

the Dollar and 15 per cent against the Euro. As a result imports may become more costly

putting pressure on the price of food and commodities (York, 2016).

Total sales in the industry have continued to grow with sales in 2015 of £178 billion

compared to £163.8 billion in 2011. It must be mentioned that, although sales have continued

to grow the year on year increase has not followed this trend with year on year sales falling to

0.4 per cent in 2015 compared with 4.7 per cent in 2011. However, research carried out by

IGD (2015) shows a more positive trend for the coming years with year on year sales

predicted to increase to 2.2 per cent by 2020. Contrasting research shows less optimism,

Perks (2015) shows sales of £157.7 billion in 2015 with minimal growth to £164 billion in

2020.

5.0 Rivalry in industry Due to changes within the industry, particularly consumer trends, Porters Five Forces

analysis shows emerging supermarkets such as Aldi and Lidl are starting to pose a threat to

the larger supermarkets market share and sales (Appendix 3). Both Aldi and Lidl have seen

market share increase to 5.5 per cent (2015) and 3.7 per cent (2015) respectively (Perks,

2015), this threat is highlighted in the Porters Five Forces analysis and SWOT analysis

(Appendix1 and 3, see appendix 4 for definition). Aldi and Lidl have seen a surge in growth

as consumer trends have changed with consumers now focused on price and convenience

(Mintel, 2016),(Appendix 2). These two ‘budget’ supermarkets have had much of their

success by keeping focus on low prices yet maintaining high levels of quality. Research by

Perks (2015) demonstrates how Aldi and Lidl very much focus attention on sales of grocery

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items rather than general merchandise, just 0.3 per cent of sales in both supermarkets where

through general merchandise in 2014, in contrast at Tesco sales in this area were 3.6 per cent.

This is also reflected in how Aldi and Lidl allocate space within their stores with Lidl

allocating 8.7 per cent and Aldi 9.7 per cent of store space to general merchandise. Contrast

this to Sainsbury’s who allocate 43.6 per cent of store space to general merchandise (Perks,

2015). It must be considered each individual supermarket has a different focus, for example,

Aldi and Lidl are highly focused on the sale of food items, whereas, Sainsbury’s has been

putting more emphasis on the sale of homeware and non-food items (Perks, 2015). However,

in light of the vast and rapid success the most recent market research has shown that growth

of market share for both Aldi and Lidl has slowed significantly (Worldpanel, 2016).

6.0 Main businesses and market shareWithin the supermarket industry there is currently a growing amount of competition as

highlighted by the Porters Five Forces analysis (Appendix 3). This competition is not only

among the big supermarket i.e. Tesco, Sainsbury’s and Asda but also between the budget

supermarkets that are rapidly increasing their market share by eating into the bigger

supermarkets market share via competitive prices and offering higher levels of convenience .

The table below shows the market share of the main supermarkets

Figure 1: Grocery market share November 2016 (Kantar Worldpanel 2016)

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Source:http://www.kantarworldpanel.com/global/grocery-market-share/great-britain

[accessed 7/12/2016].

The chart above shows Tesco, although perceived to be in crisis, is still the leader in the

market by a considerable margin, however, their market share fell from 29.9 per cent in

January 2014 to 28.2 per cent in November 2016 (Worldpanel, 2016).

A SWOT analysis pinpoints several high profile scandals over the past several years; firstly

the horsemeat scandal which hit Tesco hard and caused a lot of controversy over where their

products were sourced from resulting in a loss of consumer confidence. Moving forward in

2014 Tesco was at the centre of an accounting scandal, profits were overstated by £250

million, shares at the time where hit hard falling almost 8 per cent to an eleven year low

wiping of £1.5 billion in value (Farrel, 2014), (Appendix 1). More recently Tesco has drawn

criticism with their new farm brands range which states meat products are sourced from local

farms however the farms where the produce is supposed to be coming from are fake causing

further customer dissatisfaction.

The chart also shows how the main supermarkets are suffering in relation to the budget

supermarkets with Aldi increasing profit share from 4 per cent to 6.2 per cent in the same

time period. When considering why certain supermarkets have lost market share and why

some have gained consideration must be given to the environment the supermarket operates

in. Through SWOT analysis (Appendix 1) it is clear that Tesco has lost market share through

the horsemeat scandal and the accounting fix. However, Tesco has many opportunities such

as e-commerce and multi-channel approach.

7.0 Technology Advancements Tesco is recovering some loss of sales through the opportunity in technology via online sales

through Tesco direct and there online grocery service, also through technological invention

Tesco has managed to reduce labour cost by introducing self-service checkouts into its stores

(Appendix 1 SWOT analysis and appendix 2 PESTEL).

Online grocery sales have boomed over the last ten years with Tesco representing 40 per cent

of the overall market. However, recent research has shown that online growth at Tesco has

slowed, yet like for like sales have increased (Rigby, 2016). Mintel (2016) states online tills

are ringing as a result, with online grocery sales forecast to reach £9.8 billion in 2016, up 13

per cent from an estimated £8.6 billion in 2015. Further to this, sales are forecast to grow a

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further 73 per cent to reach £15 billion by 2020. The main reason consumers cite for

shopping online more is convenience, with 60 per cent of consumers shopping more online

doing so because it is more convenient than visiting stores showing further trends in changing

consumer habit (Mintel, 2016). SWOT analysis shows Tesco to be capitilising on one of its

strengths.

8.0 Environmental IssuesTesco has to be very aware of the environment and as a result has recently decided to give its

waste food to charities rather than to simple throw it away. Tesco is to work with five

thousand local charities in an aim to eradicate all food waste by 2017. It said the plan

followed a "farm to fork" commitment to tackle food waste by its suppliers. Tesco’s

commitment to the environment is shown by its CEO Dave Lewis.

“We believe no food that could be eaten should be wasted”. (Dave Lewis, cited in Mortimer

2016).

9.0 Impact of EU Referendum Tesco’s financial performance has been highly criticised of late, however, when the latest

numbers are analysed it is not as bad in context, when compared to other supermarkets.

Market research carried out by Kantar Worldpanel (2016), Tesco’s sales have increased 0.8

per cent in the twelve weeks ending sixth November 2016 in comparison, sales at Asda fell

by 5.0 per cent and Sainsbury’s sales fell by 0.7 per cent contributing to an actual fall in

overall market share. It must be mentioned that although these figures are after the EU

referendum and the sharp fall in the sterling the bleed through is still unlikely to be felt by

supermarkets due to the current price war. These factors will take a while to impact the

possible price of food and commodities as supermarkets often have long standing price fixes

with suppliers (Perks, 2015).

Tesco are likely to fight prices rises with robust force in an attempt to stop consumers

jumping ship to the cheaper alternatives such as Aldi and Lidl, in the current climate

consumers are finding they have an increasing amount of power over the supermarkets as

they all battle each over in order to gain market share (appendix 3). Through SWOT and

PESTEL analysis (Appendix 1 and 2) it is clear the EU referendum has cast uncertainty over

the supermarket industry as 40 per cent of food we consume is sourced from overseas, any

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long term change in exchange rates may threaten the current period of cheaper groceries, with

this in mind food prices could rise (York, 2016). This change in exchange rates has attracted

attention in recent news with the battle between Tesco and ones of its suppliers Uniliver.

Porters Five Forces analysis highlights supplier power, Uniliver asked supermarkets to raise

the cost of its products by 10 per cent, with the company blaming the drop in Sterling as the

reason behind its price increase. However, this attracted criticism as most of its products are

made in the UK (Butler, 2016) (Appendix 3).

This is where the threat of new entrants (Porters Five Forces Analysis) comes in as high

prices often lead consumers to seek out cheaper alternatives, this can be seen by Aldi and

Lidl now accounting for a combined 10.5 per cent of the market with Lidl increasing sales by

13.8 per cent and Aldi by 11.5 per cent on a year ago (Worldpanel, 2016).

10.0 Political changes With the recent announcement of Phillip Hammonds first Autumn Statement Tesco will be

impacted slightly by some of the economic policies within the statement (Appendix 2,

PESTEL). Firstly, the national Living Wage will be increased from April 2017 from £7.20 to

£7.50 (ACAS, 2016). This will mean Tesco have to pay its employees this higher earnings

rate. As a result one of two things could occur within Tesco, firstly and most obvious is,

Tesco will suffer reduced profit margins due to the increased labour costs. However, Tesco

could look to offset this by increasing prices and passing the cost onto consumers, this is

unlikely to happen due to the previously mentioned price war within the industry.

Secondly and possibly more likely is Tesco could either reduce its staffing numbers or stop

recruiting new staff in order to cover the cost of the new wage. A reduction in staff numbers

or keeping staff numbers stagnant could have an adverse impact on the customer experience

which if at all possible Tesco would very much like to avoid this as the customer experience

is one of the company’s core beliefs (Tesco, 2016)

11.0 ConclusionIn conclusion it is clear that Tesco, although still the leader in the supermarket sector, has a

long way to go to return to its former glory. Research has shown that Tesco is still the leader

in the market and has survived multiple high profile incidents that could have easily derailed

a smaller organisation. However, the treat form emerging discount retailers is impacting upon

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sales and profit at Tesco and this threat is being taken very seriously with the emergence of a

price war within the industry. Tesco is regaining some of its profit loss through the

emergence of online, home delivery and click and collect of which it is the market leader and

continues to develop and grow this area of its business through technological resource. In the

long term Tesco is continuing to adapt, as shown by changes in store layout and the opening

of more smaller convenience stores to satisfy the need of the consumer, to the environment in

which it operates in and is showing that even the biggest of organisations have to change the

way in which it operates in order to not only continue to grow but in order to survive. The

impact of the EU Referendum is slowly beginning to emerge evidenced by the price battle it

has recently had with one of their supplier, however the full impact will not been seen until

article 50 has been invoked by the Government.

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12.0 Reference list ACAS, 2016. Nation minimum wage and Nation living wage. [Online] Available at: http://www.acas.org.uk/index.aspx?articleid=1902[Accessed 7 12 2016].

Boten, N., 2009. Enterprise Stratergy. Paper E3 ed. Oxford: Cima Publishing .

Butler, S., 2016. Tesco and Unilever settle Marmite dispute. [Online] Available at: https://www.theguardian.com/business/2016/oct/13/tesco-unilever-resolve-marmite-dispute-price-supermarket[Accessed 2 11 2016].

Distribution, T. I. o. G., 2015 (A). Key industry facts. [Online] Available at: http://www.igd.com/About-us/Media/Key-industry-facts/[Accessed 6 10 2016].

Distribution, T. I. o. G., 2015. What is the size of the Uk grocery market. [Online] Available at: http://www.igd.com/Research/Retail/UK-grocery-retailing/[Accessed 6 10 2016].

Farrel, S., 2014. Tesco suspends senior staff and starts investigation in overstated profit. [Online] Available at: https://www.theguardian.com/business/2014/sep/22/tesco-investigators-overstating-profit-250m[Accessed 9 11 2016].

Guardian, T., 2016. Tesco and Unilever settle Marmite dispute. [Online] Available at: https://www.theguardian.com/business/2016/oct/13/tesco-unilever-resolve-marmite-dispute-price-supermarket[Accessed 2 11 2016].

Marketlilne, 2016. Company profile Tesco PLC, Marketline.

Mintel, 2016. 29% of UK grocery shoppers are shopping for groceries more online now than an year ago. [Online] Available at: http://www.mintel.com/press-centre/retail-press-centre/29-of-uk-online-grocery-shoppers-are-shopping-for-groceries-more-online-now-than-a-year-ago[Accessed 10 11 2016].

Mortimer, C., 2016. Tesco to give all unsold food to charity after finalising deal. [Online] Available at: http://www.independent.co.uk/news/business/news/tesco-to-give-all-unsold-food-to-charity-after-finalising-deal-a6925971.html[Accessed 7 12 2016].

Perks, R., 2015. Supermarkets at a glance, UK: Mintel.

Pettinger, R., 2007. Introduction to management. 4th ed. Hampshire: Palgrave.

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Rigby, C., 2016. Online grocery growth slows at Tesco but overall sales rise. [Online] Available at: http://internetretailing.net/2016/06/online-sales-growth-slows-tesco/[Accessed 10 11 2016].

Tesco, 2016. Annual Reports and Financial Statements, Hertfordshire: Tesco .

Worldpanel, K., 2016. Aldi and Lidl hit 10.5% combined market share. [Online] Available at: http://uk.kantar.com/consumer/shoppers/2016/july-kantar-worldpanel-uk-grocery-share/[Accessed 13 10 2016].

Worldpanel, K., 2016. Grocery market share. [Online] Available at: http://www.kantarworldpanel.com/en/grocery-market-share/great-britain[Accessed 13 10 2016].

Worldpanel, K., 216. Tesco continues to grow market share. [Online] Available at: http://www.kantarworldpanel.com/en/Press-Releases/Tesco-continues-to-grow-market-share- [Accessed 13 11 2016].

York, C., 2016. Pound to Euro exchange rates plunge is good news for manufacturing exports. [Online] Available at: http://www.huffingtonpost.co.uk/entry/pound-to-euro-exchange-rate_uk_5818967be4b0672ea68a0e25[Accessed 1 11 2016].

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13.0 Appendices

13.1 SWOT Analysis Tesco (1)Strength

Multi-channel approach

Significant presence in the private

label market

Service portfolio complementing

core retail business

Strong buying power

Simple business model

Large product range

Weakness

Bad accounting denting Tesco’s

image and resulting in an

investigation

Several product recalls

New farm brands criticism

Horsemeat scandal

Opportunity

New joint venture with Tata

group

Growing e-commerce

Growing online sales

Reducing product scale

Simplifying store layout

Threat

Intense competition with discount

retailers

Increase in labour costs

Decreasing profitability

Brexit impact

Fall in price of Sterling

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13.2 PESTEL Analysis Tesco (2)

PoliticalTesco operate worldwide therefore political influences impact on their performance. Things

such as tax rates, changes of law and instability in the political scene. Also changes in the

economic environment mean governments encourage retailers to create jobs. With the recent

decision to exit the European Union Tesco if currently fighting with suppliers (Uniliver) who

want Tesco to increase its prices. Also certain food products are frowned upon and even not

sold in certain countries, therefore Tesco need to be aware of any religious/political views.

Economic FactorsEconomic factors are a main concern for Tesco, therefore Tesco need to be aware of any

changes in legislation such as tax changes. Also due to households having less disposable

income Tesco has shifted its advertising more to its value products in order to attempt to

boost sales. The Brexit vote will change the way in which Tesco operate as some of its

suppliers are based in Europe add this t the fall in the price of the sterling prices ae likely to

rise (York, 2016).

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Social FactorsDue to a variety of social changes, trends show consumers have moved towards larger shops

and one-stop shopping. Therefore, Tesco has increased the number of non-food items offered

for sale. With customers becoming more aware of health issues, their approach to food is

changing, Tesco is adapting to these changes by accommodating the demand for organic

products. Increase in the minimum wage in 2017. Convenience has become key for

customers (Mintel, 2016) (ACAS, 2016).

Technological FactorsThe advancements in technology have brought several new opportunities for Tesco. Two of

the most obvious ones include, firstly, the development and introduction of online shopping

with facilities for home delivery in which they are the market leader. Secondly, self-service

checkouts have provided more convenience for customers, which in turn has reduced labor

costs (Mintel, 2016)

Environmental Factors

As pressure on companies increases to address environmental issues they must adopt ways of

operations which benefit society. Tesco has recently introduced a scheme to give all waste

food to charities (Mortimer, 2016)

Legislative FactorsGovernment policies and legislations also impact the performance of Tesco. For example, the

Food Retailing Commission suggested a Code of Practice should be introduced which would

ban some current practices, such as changing prices without notice or demanding payments

from suppliers.

13.3 Porters Five Forces for Tesco (3)

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No buyer switching costs

Similar products offered

Lower prices

Smaller convienience stores

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14.0 Appendix 4

14.1 Glossary of Terms

Tertiary industryThe part of a country’s economy that is concerned with the provision of services.

Oligopoly

Oligopoly is a market structure in which a small number of companies have a large majority of market share.

SWOT analysisA study undertaken by an organization to identify its internal strengths and weaknesses, as well as its external opportunities and threats (Pettinger, 2007)

PESTEL analysisA tool used by marketers to analyse and monitor the macro-environmental (external marketing environment) factors that have an impact on an organisation (Pettinger, 2007)

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Rivalry: Tesco, Asda, Sainsburys, Morrisons, Aldi,

Lidl

Large scale supplier can exert power

Low switching cost for Tesco

Limited amount of suppliers for certain products

Large number of buyers

Supermarkets cannot afford to lose customer

Buyer sensitive to price change

Buyer has access to substitutes

Highly competitive market

Tough to gain market share

Large market available

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Porters Five ForcesA tool used to understand how profitable a target industry might be and to understand the forces impacting upon the current industry’s profitability (Boten, 2009).

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