The organization decided for this task is Tesco Plc. The purpose of this report is to examine the type of market structure Tesco operates in, as well as, the factors that dictate their free market activity. The writer also intends to address their current long haul financial plan, macro-environmental factors and the probable impact on Tesco’s performance. Lastly, the writer will provide a recommendation as to whether Tesco is a good investment to potential investment partner.
Tesco & the FTSE 100
Tesco, founded in 1919 by Jack Cohen, is a British multinational grocery and general merchandise retailer. They are headquartered in England, and currently operate with a total staff of over 500,000 personnel. According to Tesco Plc. (2016), it is the largest retailer in the United Kingdom and the third most profitable retailer in the world, whilst it ranks second in the world as a retailer measured by revenue. It has stores in twelve (12) countries across both Europe and Asia. According to Statista, Tesco holds a current market share of 28.2%, up from 28.1% in 2015 (statisticas.com, 2017).
Tesco Plc. is ranked 30th on the Financial Times Stock Exchange (FTSE) 100 Index. It began operating in January of 1984, and focuses on measuring the value of the top 100 listed companies on the London Stock Exchange (LSE) (London Stock Exchange, 2016).
The chart below shows Tesco’s current stock price at 198.30 as of last close: 20th January 2017. The graph also shows how the share price fluctuates from March 2016 to January 2017 of which it could have been affected by several internal and external factors.
(Londonstockexchange.com, 2017)
Tesco’s Market Structure
Tesco operates in an Oligopoly market structure. According to ‘Investopedia’ an oligopoly can be defined as a market structure that is controlled by a small number of firms who inhabit it. The firms have a large majority of the market share; and though very similar to a monopoly, the number of dominating firms consists of two (2) or more.
The diagram below shows the UK grocery market share (2016).
(Kantaworldpanel.com, 2016)
There are a few firms who dominate and operate in the oligopoly market such as: Tesco, Asda, Morrisons and Sainsbury’s, but there are also many smaller firms such as Co-op and Aldi that also provide the same service. These firms are interdependent on each other as they compete and react to their ‘peers’ market strategies, to gain and retain customers. An example of this is, if Sainsbury’s wishes to increase its market share by reducing its prices on select products, they will have to take it into account that their competitors will most likely act accordingly. This is usually by offering the same promotion or an alternative/substitute at a lower price.
An oligopoly has a restricted freedom of entry, mainly because it is very risky for a potential rival to compete and gain market share. Secondly, high set up research and development costs deter new firms from entering the market at free will. In this market structure, Tesco uses an array of tactics to compete; such as pricing strategies of oligopolies and Non-price strategies i.e. predatory pricing, limit pricing, cost-plus pricing and advertising. These techniques are what attract and convert consumers, resulting in a high volume of sales, profit and market share.
Factors affecting Tesco’s supply and demand
Supply and demand is “the relationship between the quantity of a commodity that producers wish to sell at various prices and the quantity that consumers wish to buy. It is the most popular method of price determination used in economic theory”. (Britannica, 2016)
According to Ehrbar, the law of demand states that volume of the requested good decreases as the price increases, and vice versa. (The Concise Encyclopedia of Economics, 2008)
Although this has been proven on many occasions, there are still other factors that affect the demand of Tesco. Another factor that plays a key part in determining the demand for goods is also the price of related products, such as: alternative or complementary goods, taste, income, quality and expectations. For instance, Tesco have implemented pricing strategies that have affected the demand and supply of their products, such as: penetration pricing, psychological pricing and product line pricing to target its consumer’s tastes and emotions. In 2015, Tesco reduced prices by up to 25% on 380 items under brands including Coca-Cola, Tetley and Hovis. This was due to Asda implementing price cuts on 2500 “essentials”, such as fruit, vegetables and even nappies. (The Guardian, 2015)
The diagram shown below displays the influence of the improvements Tesco made. As seen on their group cash flow statement, they had a very positive turn around in their operating profit, increasing from (5,750) £m in 2015 to 1,046 £m in 2016.
(Tescoplc.com, 2016)
Also; diminishing expense in advertising and investing resources into innovative work, has played a noteworthy part in deciding the supply and demand of Tesco. By introducing new ways for customers to have a better experience, Tesco, in fact, made shopping more enjoyable. The increased staff presence, as well as, improved store facilities gave consumers the full package, allowing Tesco to increase sales, gain and also retain customers. The picture below shows that Tesco has decreased its advertising budget by -30.21% from 2014 to 2015.
(Cityam.com, 2015)
Tesco Current long-term finance
One of Tesco’s current long-term finance plans is to increase the volume of sales in the United Kingdom and Republic of Ireland. They also plan to increase earnings per share and cash flow growth, whilst reducing the company’s debt. The chart beneath demonstrates that Tesco has made the correct stride in enhancing their business execution.
(Tesco.com, 2016)
From the 3rd Quarter in 2014/15 at (5.1)% to the 4th Quarter in 2015/16 at 0.9%; Tesco have made an exceptionally positive impression on their shareholders, investors and personnel, displaying that they have made the correct stride in turning the business around. Shoppers have also reacted well to the progressions achieved by Tesco.
Lastly, by having a high earning per share, Tesco is allowed to act with more financial freedom to invest in development, repaying debts, high returns on investments and incentives to employees. The diagram below shows Tesco’s earning per share from 2012 of 0.5% to (0.5)% in 2015 to 0.09% in 2016.
(Markets.ft.com, 2016)
(Markets.ft.com, 2016)
Macro-environmental factors affecting Tesco
Macro-environmental factors are large-scale external and uncontrollable factors that influence an organisation’s decision making, affecting its performance and strategies (Business dictionary, 2016).
Examples of macro environment influences include competitors, changes in interest rates and government regulations. The PESTLE analysis framework is incorporated by Tesco to scan their macro environment and make crucial improvement to the company. The PESTLE acronym stands for Political, Economic, Social-cultural, Technological, Legal and Environmental.
Political Factors:
These can be referred to as the political environment such as tax policies or trading agreement. Tesco currently trade in 11 Countries such as the United Kingdom, India, Malaysia, Lotus, Hungary and Czech Republic. They also have an e-commerce, bank, petrol stations and support several charities. Tesco will have to abide by the politically enforced policies and laws set out by the each country’s government in order to allow for trading and growth. For example, In the United Kingdom; Tesco have to pay a ‘Cooperation Tax of 20% for company profits’. (Gov.co.uk)
As of 27 February 2016, ‘Tesco has paid a total cash Taxes of £1.3 billion of which £1 billion was paid in the UK’. This shows that Tesco are abiding by the government’s rules by paying the required Corporation Tax rate. (Tesco.com)
Economic Factors:
Tesco is the largest food retailer in the United Kingdom, with a market share of 28.2% (Tesco.com). Tesco are not only specialised in food retail, but are also involved in clothing, household goods, electronics and mobile network services..
Tesco operates in an oligopoly market structure, where there are few competitors, however, they have still managed to dominate the market, in a way that resembles oligopolistic market features.
Social-Cultural Factors:
Active participation and awareness are extremely important to Tesco as age, gender, education and household income are all vital social-cultural factors. An increase in the birth rate of a specific area or country, for example, the United Kingdom, allows Tesco to make, outline and market certain items, for example, toys, uniform and essential family items for parents and children. Tesco additionally draws in their objective shoppers by making an extensive variety of adverts to engage diverse sort of group of onlookers.
Technological Factors:
Technology has played a vital part in Tesco’s success and they’re always investing and updating their technology in all aspects of their business.
Tesco saw an increase in the demand for online deliveries because they have invested on making their website safe, secure, easy to use, attractive and it stands out from their competitors. As the trends change and consumers are turning towards online shopping, Tesco have adapted and implemented innovative ways to appeal to customers’ convenience, which are either too busy to shop in-store or prefer not to leave the comfort of their own home.
Legal and Environmental Factors:
These are likewise, fundamental elements that could influence Tesco’s image and notoriety. Tesco are putting resources into their own in-house products, by obtaining the suitable matierals from dependable fair-trade sources. Likewise, Tesco are additionally ensuring that they accomplish zero release of dangerous chemicals into their water to enhance the quality. Through investing adequately into supply preparation and consistent testing, they ensure that all their water products meet the required standard.
Conclusion
Tesco most certainly have redirected their efforts and focus to their own success, instead of worrying about the actions of its competitors. From revamping their shopping experience to maintaining a good public brand image, we can see that Tesco has executed crucial changes that have had a positive outcome to their market share, sales and expanded success. Based upon the writer’s findings, they recommend Tesco as a good investment to any future investors.