~ 1 ~ Introduction This report is aimed at critically analysing the macro, meso and micro business environment of Tesco, one of the largest food and grocery retailers in the world, operating around 4,331 stores. Strategic evaluation tools such as PESTEL, Porter’s Five Forces, SWOT and Value Chain analysis have been used by researchers in order to achieve this aim. Tesco Company Overview Tesco is among the largest food retailers in the world with revenue in excess of £54 billion in 2009 and employing over 470,000 people . They operate approximately 4,331 stores in 14 countries around the world. The company operates primarily in the USA, Europe and Asia and their Head Office is based in Hertfordshire, UK. According to Datamonitor (2010), the commercial network portfolio of Tesco comprises : over 960 Express stores which sell approximately 7,000 products including fresh foods at suitable localities ; 170 Metro stores which sell a variety of food products in town and city centres; and 450 superstores which sell both food and non-food items including books and DVDs. Tesco also provides online retailing services through their website tesco.com and Tesco Direct . In addition, they provide broadband I nternet connections and financial services through Tesco Personal Finance (TPF). Tesco was founded in 1919 and launched its first store in Edgware, London, UK in 1929 (Tesco, 2010); however, over the decades it has evolved to become the market leader within the UK food retail segment (Datamonitor, 2010). The comparative positioning of Tesco’s market share with respect to other leading players in the market has been illustrated as follows (Euromonitor, 2010): Fig 1: Share of Leading Players in UK Food Retail Market 1 ~ 2 ~ 3. PESTEL Analysis The PESTEL framework below analyses the dynamic and unpredictable environment in which Tesco operates by identifying the forces that have the most impact on Tesco’s performance: Political China’s accession to the WTO has promoted a free flow of foreign trades by removing all barriers encouraging Western companies, including Tesco, to make way into the world’s most profitable market encompassing over 1.3 billion people (Straits Times, 2010). In 2009 an agreement was signed by Tesco to set up a premeditated series of joint ventures for the development of shopping malls in China. This joint venture included three malls: Anshan, Fushan and Qinhuangdao. Furthermore, 18 new hypermarkets are expected to open in China by 2010 (Tesco, 2009). The growth of Tesco’s international business segment is on the rise and it is predicted to account for one quarter of the company’s profit. Promotion of free trading blocs by governments to benefit from globalisation has been presented in the literature (Lynch, 2003). Immersion of 10 further countries into the European Union (EU ) took place in 2004 promoting trade between Western and Eastern European countries (BBC, 2009). This has provided Tesco with a platform to expand its retail network across the EU. Economic Economic factors are a matter of concern for Tesco since they impact directly on the buying behaviour of customers. Although the UK economy was declared officially under recession in 2008, the government’s substantial reduction in interest rates helped to minimise further rises in unemployment during 2009 (Euromonitor, 2010). As a result of this, the spending power of consumers is again on a steady rise as they are more confident about their current financial situation. However, there is still a lot 2 ~ 3 ~ of financial uncertainty meaning that consumers are likely to spend less on premium products, encompassing organics and ready prepared meals, which will adversely affect both sales value and margins (Keynote, 2010). However, the positive aspect of recession is that the customers eat out less and eat more at home which provides opportunities for grocery retailers like Tesco to increase their output (Guardian, 2010). It must be noted that food is the last thing that customers will cut back on. The percentage of overall consumer spending on food has risen considerably over the years, as shown below (Euromonitor, 2010): Fig 2: UK Spending on Food as % of Overall Consumer Spending 2004 to 2008 The economic downturn has been brought to light with the assistance of the following GDP growth graph since 1989 (Mintel, 2009): Fig 3: UK GDP Growth 1989-2009 3 ~ 4 ~ Social An analysis of the UK population shows that there are more retired people than children representing the Baby Boom generation (Herald Scotland, 2010). The ageing population is discouraging for the food retailers older people tend to eat less . They are less likely to travel to supermarkets to shop compared with the younger generation. Although internet literacy level drops over the age of 65 years within the population (Turban et al., 2001), it has nevertheless been predicted that the ageing population would find online shopping more convenient. However, small deliveries are considered to be ineffective and expensive. Consumers’ attitude towards food is incessantly changing as they have become more health- conscious . An increase in the demand for organic food has been accommodated by Tesco to reflect this change in demand. Payment by cheques and cash at the checkout was first made possible by Tesco . Technological One of the key macro-environmental variables that have directly influenced the supply chain, operations and processes of grocery and food retailers is technology. The operation of supermarkets is being affected by the use of the I nternet through online grocery retailing, which is showing steady growth. Subscriptions to the I nternet have grown by over 50% and it has been estimated that the I nternet is being used by 70% of the population in the UK ( Office for National Statistics, 2010). Loyalty programs are being introduced through information technology which discourage customers from switching over to their competitors (Sun, 2009). Mobile technology has also taken off as a platform for distribution within food retailing. New Wine App developed by Cortexica Vision Systems, for example, has been used by Tesco since 2009 via which the customers are directed to Tesco Wine 4 ~ 5 ~ enabling them to buy the selected wine directly from their mobile phone ( Tomlinson & Evans, 2010). Online retail shopping has gained considerable popularity due to the increased access to broadband internet in the UK. It has been highlighted by Keynote (2010) that the number of broadband users in the country is 15.5 million which accounts for 70% of the overall market. Environmental Environmentally friendly, reduced packaging is being promoted by the Government. It has been found by the Office for National Statistics (2010) that the percentage of consumers using reusable bags has risen from 71% to 74% and that those trying to cut down the number of plastic bags they take from the shops has risen from 65% to 68%. This assists in reducing the overall cost and is good for Tesco’s corporate social responsibility image. Due to the consumer awareness of the carbon footprint of the firm (Wood, 2009), Tesco has added carbon footprint data on dairy products, potatoes and orange juice, and aims at expanding it to bread and non-food items in 2010 (Tesco, 2010). Tesco has introduced its Greener Living Scheme to give consumers advice on environmental issues, including how to reduce food waste and their carbon footprint when preparing meals (Yuthas, 2009 ). Consumers reusing bags, recycling mobile phones and aluminium cans and preferring bagless deliveries are being rewarded through Tesco’s green Clubcard points (Tesco, 2009; Datamonitor, 2010). Legal It has been predicted that VAT would have to rise to 20% since the Government has to finance a huge budget deficit (HM Treasury, 2010). This will affect the non-food sectors of Tesco, such as clothing. 5 ~ 6 ~ Drawing upon the Low Pay Commission Report (National Minimum Wage, 2009), the 2008 and 2009 combined up-ratings have resulted in an increase in the minimum wage of 15.5%. This will result in an increase of operating costs of supermarkets. Porter’s Five Forces Analysis An analysis of the structure of the industry should be undertaken in order to find effective sources of competitive advantage (Porter, 1985). Therefore, in order to analyse the competitive environment of Tesco, Porter’s five forces analysis has been used by the researcher as follows: Threat of substitute products and services The threat of substitutes in the grocery retail market is considerably low for food items and medium to high for non-food items. In the food retail market, the substitutes of major food retailers are small chains of convenience stores, off licences and organic shops which are not seen as a threat to supermarkets like Tesco that offer high quality products at considerably lower prices (Financial Times, 2009). Moreover, Tesco is further getting hold of these shops by opening Express stores in local towns and city centres creating a hurdle for these substitutes to enter the market. However, the threat of substitutes for non-food items, for instance clothing, is fairly high. It should be noted that so long as the economic recession prevails, customers will be inclined towards discounted prices hence Tesco is a threat to the speciality shops. Threat of entry of new competitors The threat of entry of new competitors into the food retail industry is low. It requires huge capital investments in order to be competitive and to establish a brand name. Major brands that have already captured the food retail market are Tesco, Asda, Sainsbury’s and Morrisons and they account for 80% of all shopping in the UK 6 ~ 7 ~ (Mintel, 2010). Therefore, new entrants have to produce something at an exceptionally low price and/or high quality to establish their market value.