Porter’s 5 Five Forces Analysis of Tesco
Key Facts
| Name | Tesco PLC |
| Industry | Retail Industry |
| Founded | 1919 |
| Headquarters | Welwyn Garden City, United Kingdom |
| CEO | Ken Murphy |
| Revenues | US $ 75.022 billion, 2021 |
| Profit | US $ 5.139 billion, 2021 |
| Competitors | Walmart, Kroger, Costco |
Company Overview
Tesco is one of the largest grocery and general merchandise retailers in the world (Rosnizam, et al., 2020). It was founded by Jack Cohen in the East End of London in 1919. The headquarters of the company is in Welwyn Garden City, United Kingdom. In 2021 the total revenue of Tesco was 75.022 billion USD, while the profit of the company was 5.139 billion USD. As of November 2022, the net worth of Tesco is 21.01 billion USD. Around the world, there are 4752 stores of Tesco. It is operating in many parts of the world, including the UK, Ireland, Hungry, and Malaysia. Thailand, etc. Tesco entered the market of USA in 2006 and made an exit in 2013.
Porter’s Five Forces Analysis of Tesco
In 1979, Micheal E. Porter developed the framework of Porter’s five forces which helps companies in forming better strategies for businesses by getting an insight into the industry to increase profits.
Tesco Rivalry among Existing Competitors
Basic Idea and Background: This force is related to the presence of competitors in the industry and their competitive positioning and the action plans of the companies toncra4se the sales. The grocery and retail industry has intense competition as there are a lot of players in the industry.
Tesco: The competitors of Tesco are Walmart, Kroger, Costco, etc. All these firms have a strong supply chain network and are barely different from one another.
Retail Industry in the USA: The USA has one of the largest retail industries. The total sales of the retail industry of the USA have increased from less than 3 trillion USD in 2000 to 6.6. trillion USD in 2021 (P. Smith, 2022). Walmart holds one-fifth of the share of the total grocery market of the USA, which is 21.3% (Business Insider, 2022). The share Kroger is 10.2 while Costco holds a 7% share in the grocery market of the USA.
Walmart: Walmart is an American multinational retail company, and it has a chain of department stores, grocery stores and hypermarkets in the USA. The headquarters of Walmart is in Bentonville. The annual revenue of Walmart was 559,151 billion USD in 2021, which was 6.72% more than that of 2021 (Ozbun, 2022).
Kroger: As of 21 November 2021, the total numbe5 o grocery stores of Kroger in the USA is 1349. The annual revenue of the company was 137.9 billion USD in 2021, while it was 132.5 billion USD in 2020.
Suggested Strategy: As the products of Tesco and other grocery and retail brands meet the basic needs of the customers, a price war exists among companies. The competition in the grocery industry is increasing both in-store and online (Kestenbaum, 2022). The companies in the retail industry offer almost the same type of product at almost the same prices. The only difference that Tesco can create is through advertising and marketing activities. Companies use marketing techniques to differentiate themselves from their competitors and to attract customers.
Tesco The threat of New Entrants
Basic Idea and Background: The second force is related to the evaluation of new entrants in the industry, as they can impact the industry environment. In 2021, the global retail industry generated sales f more than 26 trillion USD, which is expected to reach 30 trillion by 2024 (Sabanoglu, 2022).
High Capital Investment: For new entrants setting up a store as huge as Tesco and having a wide range of products requires a large amount of capital. The average cost of purchasing a grocery store franchise in the USA is 80,000 USD (Profitable Venture, 2022).
Competition from Local Market: Tesco is an established giant and to compete with it means going against the sales and marketing efforts of such a huge company. The existing players in the retail industry have their own economies of scale and offer discounts to customers (Reardon &Berdegué, 2002). Tesco has to wind up its operations from the retail industry of the USA due to the big giants of the industry.
Barriers to Entry: It is difficult for a new entrant to offer huge discounts and offers to customers. For new entrants, it is difficult to access the supply chains and distribution networks already dominated by big players in the industry. Due to fierce competition in the retail industry, the existing players impose entry barriers. Existing players impose entry barriers due to their cost leadership strategies and by gaining a cost advantage (Tanwar, 2013). The labor force and management of big companies like Tesco also provide them with an upper hand. Thus the threat of new entrants is low.
Suggested Strategy: In order to maintain its position Tesco have to offer huge discounts to the customers in order to increase the volume of sales.
Tesco Bargaining Power of Suppliers
Basic Idea and Background: This force analyses the power of the suppliers and their influence on the pricing of products.
A large number of Suppliers: The suppliers of the grocery and retail industry have comparatively less bargaining power. The suppliers of the grocery and retail industry are vast in number as supermarkets buy different products from different suppliers. Tesco has many vendors for beverages and beer, including Pepsi, Coke, Schweppes, etc. A large number of suppliers compete for limited room in the grocery and retail industry. Tesco buys products from more than 2500 suppliers (Mohapatra & M. V., 2021).
Switching Cost: Switching costs from one supplier to the other is not a big task for big retailers like Tesco, which further reduces the bargaining power of the suppliers. The negotiation power comes from the hand of the retailers, and they have the upper hand in deciding the price of the products (Yenipazarli, 2017). Each store has multiple suppliers of the same product. This enables retailers to choose products from vendors who offer them at the lowest cost by keeping the quality the same.
Tesco’s Digital Sales: The total sales of the company have 15-20% of digital sales, which the company makes through its official website.
Suggested Strategy: Tesco has the ability to negotiate with the suppliers, which will increase the profit margin of the company.
Tesco Bargaining Power of Buyers
Basic Idea and background: This force analyses the bargaining power of the buyers, which refers to the total number of buyers and the considerable purchase of one buyer.
Large number of competitors: One of the major factors that affect the bargaining power of the buyers is the larger number of competitors. There are approximately 60 thousand supermarkets and grocery stores in the USA (Obzun, 2022). The high competition in the grocery and retail industry increases the bargaining power of the customers.
Fulfills the basic needs: As the products of Tesco fulfill the basic needs of the customers, the customers prefer stores that provide them with maximum economies of scale. All the competitors offer the same type of products, and the switching cost of the buyer from one store to the other is low, which further increases the bargaining power of the buyers. The bargaining power of the buyers of the grocery and retail industry is high as they have a lot of options available to choose from. Due to high bargaining power, customers are able to get huge discounts and offers on different products (Mills, 2003).
Suggested Strategy: Tesco has to work on its customer loyalty and customer satisfaction by improving the quality of its products and services.
Tesco The threat of Substitutes
Basic Idea and Background: this force analyses the threat of substitutes that have an impact on the operational strategies of the company. The changing consumption patterns and the change in lifestyle scan shift customers to substitutes.
Year-Round Demanded Products: The existence of substitutes impacts the attractiveness of the industry and lowers profits. The availability of substitutes affects the prices and demands of the products in any industry. The threat of substitutes is low for Tesco as it sells products that meet the basic needs of its customers. Tesco sells groceries, clothing, books, electronics, etc. The products of Tesco have year-round demand and Tesco keep on stocking the products to meet the demands of the customers.
Food Items: The threat of substitutes for food items is low for Tesco as people have options for small chains of convenience stores and organic shops.
Other Retail Products: The threat of substitutes for other products like clothing is moderate for Tesco.
Suggested Strategy: Price is the major factor that makes customers switch from Tesco to any other grocery and retail seller (Munusamy&Hoo, 2008). Tesco is known for its finest product line, which gives the company an upper hand. The differentiation factor of a limited selection of substitutes makes it difficult for customers to switch from one superstore to the other.
Conclusion
Overall, the grocery and retail industry has moderate attractiveness as a large amount of capital is required by new entrants to compete with the big giants of the industry. There is fierce competition in the industry as the competitors are also offering the same products to the customers. To compete in the industry companies, reduce their profit margin. The bargaining power of the buyers is also high due to low switching costs and high competition. While the suppliers have low bargaining power as there are a lot of suppliers for a limited number of supermarkets.
References:
- Business Insider, 2022. The grocery wars are intensifying with Walmart and Kroger in the lead and Amazon poised to ’cause disruption’, s.l.: Business Insider. Available at: https://www.businessinsider.in/tech/news/the-grocery-wars-are-intensifying-with-walmart-and-kroger-in-the-lead-and-amazon-poised-to-cause-disruption/articleshow/73781449.cms
- Kestenbaum, R., 2022. The Grocery Business Is Going To Get Much More Competitive, New York: Fobes. Available at: https://www.forbes.com/sites/richardkestenbaum/2021/09/27/the-grocery-business-is-going-to-get-much-more-competitive/
- Mills, G., 2003. Buyer Power of Supermarkets. A Journal of Policy Analysis and Reform, 10(2), pp. 145-162. Available at: https://econpapers.repec.org/article/acbagenda/v_3a10_3ay_3a2003_3ai_3a2_3ap_3a145-162.htm
- Mohapatra, P. & M. V., N. K., 2021. Accounting Scandal at Tesco..Journal of Accounting Research, 20(4), pp. 428-449. Available at: https://web.p.ebscohost.com/ehost/detail/detail?vid=0&sid=1204653e-5c5b-4a17-81e9-c33b13ea66fe%40redis&bdata=JkF1dGhUeXBlPWNvb2tpZSxpcCxjcGlkJmN1c3RpZD1zNjIyMjA2OCZzaXRlPWVob3N0LWxpdmUmc2NvcGU9c2l0ZQ%3d%3d
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