Critical Issues
Tesco is among the leading grocery retailers in the global market, but the company is facing numerous challenges including an accounting scandal and growing business disadvantages. On September 22nd, Tesco revealed that it had overstated its profits for the first quarter of its latest financial year. The company recorded £850m ($1.4 billion) as profit but recorded £1.1 billion in its financial disclosures. The accounting scandal affected the company’s share price and business reputation. The company’s share price dropped by 15 percent and investors lost confidence in the company.
The other critical issue that Tesco faces is growth in its disadvantages. The company is increasingly driving away customers because of a number of reasons. First of all, Tesco is more expensive than most of its peers including Aldi and Lidl. The company faces stiff competition from “hard discounters” and the high cost of its products is worsening its situation (Wright, 2014, p. 1). The implication is that an increasing number of customers are leaving the store with cheaper options. Secondly, it is cumbersome for customers to shop at Tesco because the retail company offers more than 40,000 products. Customers waste a lot of time at the store trying to access their products of choice. Discounters are increasingly becoming a threat because they offer goods at lower prices than Tesco and are expanding rapidly into new regions. Consequently, Tesco is losing a significant number of its customers to discounters. The reason is that the company failed to cut its prices a long time ago thus hard discounters are staying ahead of the market.
Recommendations
In light of the critical issues that Tesco faces, it is important to develop a comprehensive SWOT analysis of the company before outlining the recommendations that will assist the company in addressing the issues.
SWOT Analysis
- Strength
According to Wright (2014, p. 1), Tesco is the third largest grocery store in the global market. The company operates more than 4,000 retail stores in Europe, US, and Asia. Secondly, the company has been reporting a strong financial performance in recent years. Such an impressive performance underlines the company’s capabilities. Tesco has maintained its position in the market by offering customized products and services. The company also has a customer loyalty program named ‘Tesco Clubcard’ that has been effective in retaining customers in the face of growing competition.
- Weakness
Tesco’s greatest weakness is that it has been unable to record better performance than its peers and competitors. The company has suffered major blows in recent years including product recalls and financial losses. Additionally, the company lacks geographical diversification because most if its stores are located in the United Kingdom. Lack of diversification exposes the retail company to market risks associated with a focus on a single market. The recent accounting scandal reveals that Tesco has weak internal controls.
- Opportunity
Tesco is rapidly increasing its network portfolio because the company has opened more than 1000 stores in the last five years. More than three-quarters of the new stores are located outside the United Kingdom. The expansion into new markets enables the company to minimize its exposure to risks. Additionally, Tesco.com has been recording rapid popularity among consumers thus presenting the company with the opportunity to attract new customers. The other opportunity is the rise of the global food retail market segment in the past five years.
- Threat
The biggest threat is the stiff competition from convention food retail chains and hard discounters. Tesco has been losing its customers to competitors who offer quality products at lower prices. Additionally, there has been a decline in income and employment opportunities. These changes have affected consumer purchasing behavior because most of the consumers have cut down on the purchase of non-food items.
Based on the analysis of the critical issues facing Tesco and the company’s SWOT analysis evaluation, the following recommendations will assist Tesco in addressing critical issues:
a. Improving internal controls
Tesco should enhance its internal controls because internal fraud control is not a fire-and-forget affair. The company should promote collaboration and continuous improvement so that it can avoid incidences of accounting malpractices in the future. The company should also change its attitude towards accounting malpractice, ethical organizational culture and internal controls (McLoughlin and Aaker, 2010, p. 67). Senior managers, the audit committee and the Board of Directors should promote an ethical and transparent environment. The company can enhance its internal controls by collaborating with auditors in the fight against accounting malpractice. The company can also enhance its internal control. The company’s department should interact regularly so that senior managers can identify problems early enough to prevent it from escalating into a scandal.
b. Localization and marketing
The presence of retail grocery chains in many parts of Europe, Asia and America represents the society’s culture. It represents the culture of people valuing food as a necessity. Tesco can outperform its peers and competitors by focusing on localization and adopting more proactive marketing strategies. The company should be culture sensitive to ensure that its product offerings complement with the cultures of its customers. An example of an innovative marketing strategy is expanding the scope of the ‘Tesco Clubcard’ beyond consumer purchasing behavior (McLoughlin and Aaker, 2010, p. 92).
c. Regaining focus
Wright (2014) notes that Tesco got it wrong in its efforts to expand in the international market. The company lost its focus in its UK market thus losing a significant market share to competitors. The company should regain focus on the UK market.
d. Expansion into new international markets
The SWOT analysis reveals that the food retail market is on the rise thus the company can seize the opportunity by expanding into new markets, especially the BRIC countries.
Justification
a. Internal controls enhance a company’s capability to detect and prevent accounting malpractice. It is the best option for Tesco to enhance its internal controls because it is an ongoing process that will prevent fraud in the future. Furthermore, strict internal controls will restore the waning investor confidence.
b. The company has been detached from its customers in recent years. Localization and innovative marketing strategies will enable Tesco to offer products that complement customer needs and preferences.
c. The UK is Tesco’s core market, and it contributes almost 75 percent to the company’s annual sales. The company has the potential of regaining market share and even record more than the 75 percent share of sales from the UK market.
d. BRIC countries are experiencing rapid growth with regards to the retail industry, employment opportunities, and income. There is also the expansion of the middle-class consumer segment (Haerifar, 2011, p. 90).
References
Haerifar, P. (2011). Performance Management in Tesco. New York: GRIN Verlag.
McLoughlin, D. and Aaker, D. A. (2010). Strategic market management: Global perspectives. Hoboken, N.J: Wiley.
Wright, S. (2014). ‘Tesco’s crisis: A hard rain’. The Economist, 27 September, 10-11.
