Introduction - An Overview of the Sector
Contemporary business environment and the retail sector specifically have changed dramatically over the past decades. These changes are driven by a number of micro and macro factors, such as the impact of stakeholder attitude, competitive environment, geographic and political influences and other elements of external environment It is evident that consumers preferences and expectations evolve, based on the changes in their lifestyle, globalization and access to technology. The retail market is highly oligopolistic and it will be explained further in this report. This profile of the industry places several pressures, which are not as significant in other sectors, where the competition is more diverse and open.One of the ways of looking at the sector is through the analysis of the external environment based on Political, Economic, Social and Technological factors (PEST). This model allows companies to have a glimpse into the major influences that affect long-term strategy.
Political Factors
Since Tesco is the company, which is no only strong in the UK market, but also operates globally and operates in a global supply chain, political factors greatly influence its operation even in the home country. Political factors include the stability situation in the country as well as a variety of other factors, such as corruption levels, expropriation, tax legislation and others. The review in this document is focused on the UK market, it worth mentioning, however, that the effectiveness of Tesco in the UK is influenced by taxation variations and costs of operations in some of strategic for its supply chain locations.
Some of the major political influences on the retail market, in general, is the exercise of power with regards to the land use and planning systems. While local authorities generally guide retail companies' activities, the national government can also intervene in their decisions to ensure that the national interests are followed. Additionally to the land-use legislation, government affects the activities of retailers in the industry by regulating their operations. While there is no overall trade legislation in the country, politicians still aim at controlling competition and protect consumer interests in a variety of ways.
Social Factors
The changes in consumer lifestyle and their cultural aspects of living, in general, imposed a number of changes in their behavioral patterns and preferences. Socio-cultural factors in the external analysis of the retail industry outline a range of influences,from geographical location and social status, to education, religion, and ethical principles, driving consumers' purchasing and shopping decisions. The diversity is growing nationwide and the modern consumer is significantly more controversial than 20 or thirty years ago. Tesco has to adapt continuously to re-evaluate its marketing strategies and segmentation in order to align its internal policies and strategies with the realities of the contemporary retail market. One of the major influences is the technology. With smartphones, becoming easily available to a wider demographic category and with the increased functionality of these mobile devices, companies in the industry should respond to the growing trend of e-commerce, delivery and service applications. Additionally, access to information made consumers significantly more aware of the opportunities on the market and widened their choice. This drives higher expectations in terms of quality and price balance as well as makes individuals more demanding with regards to the variety and availability of products on the shelves of such hyper and supermarkets as Tesco.
Economic Factors
Economic environment and its influence on the retail sector are crucial. The UK is a country with high level of economic stability and sustainable economic development. The decisions made in the financial market by private and public sector, however, are strong influences on Tesco and its competitors. Economic influences can be seen through the governmental policies with regards to foreign bonds, Eurobonds and credit lines on the corporate level as well as in bank retail sector. LIBOR rates and acceptance of the fixed rates across the institutions influences companies ability to finance its debt and equity.On the other hand, these factors determine the ability of individuals to spend and determine an overall propensity to save, reflecting majorly on the retail sector purchases and price expectations.
Inflation and taxation rates in the country are stable and his government's aim to further build on the sector growth through attracting Foreign Direct Investment (FDI) and creating consumer confidence through effective employment policies. This leverages the slow economic growth, which limits the potential of large retailers to grow domestically.
Technological Factors
The UK government invests a lot in technology research, especially in the sector of the environmental policies and improvement of the renewable energy use. The speed of technological obsolesce is fast, which reflects high responsiveness of the businesses and institutions to technology. It is possible to argue that the changes in digital technology and Research and Development (R&D) from the private sector into upstream and downstream systems drives the investment decisions of Tesco and major market players as well as fosters innovation and operational efficiency.
On the downstream side, increased digital mobility and access to it, along with reduced internet costs drive changes in consumer behavior and force companies to invest in online solutions and e-commerce platforms. This trend also allows further diversification of the market and international growth at a lower cost (Sparks and Burt, 2003).
External Environment Analysis - Findings
Competition Analysis
The UK retail grocery market is recognized by business and academic professionals as being highly oligopolistic. This has created a number of concerns and changes for the government in terms of the ways to control the levels influence and bargaining power of some of the major retailers in the sector. In an oligopolistic market, the large number of bargaining power is concentrated in a relatively small number of retailers. According to Retaileconomics (2014), Tesco occupies the first place in the UK retail market with a total revenue of GBP 64,5 million in 2014, followed by Sainsbury's with GBP 25,4 million and Asda with GBP 23,67 million in sales revenue. Other strong competitors in the list of top ten companies include Morrisons, Kingfisher, The-cooperative and John Lewis, but the size and spread of these companies are significantly smaller than the first three.
The UK market presents the low level of segmentation in terms of market shares on the urban level. That said, London remains the core market for all the major retailers in the industry, accounting for over 24% of the total sales revenue for Tesco alone, indicating 6% increase over the past 4 years (Sparks and Burt, 2003). An insight into the changes in a the market share distribution and companies' size outlines stable competitive situation on the market, with Tesco, Sainsbury's and Asda leading the sector over the period of 1991-2014. Asda and The-cooperative, however, demonstrate the highest rate of growth, comparing to the competition. This growth can be explained by the aggressive pricing strategy that the companies were pursuing over the past decades to gain scale of operations.
Market Development
Overall projection for the retail sector in the UK is very positive First of all, it is expected that the workforce in the sector will grow by 54,800 positions, mainly in the management functions. This trend is explained by the demand for highly skills professionals due to technological complexity, customer behavioral changes and the increased sophistication of the supply chain management among large retailers (Realeconomics, 2014).
Busines environment places a number of pressures on the modern players in the retail sector. These pressures are, on one side, a challenge of the competitive landscape and, on the other, an opportunity for further growth and development. Overall, it is possible to identify three types of drivers of change in the retail environment: concentration of the businesses, price and cost pressures and complication of the business operations. When it comes to concentration, past decades outline continuous growth and market position strengthening of large international market players, such as Tesco, Aldo, and other retailers, outlined in the previous section. Additionally, the driver of concentration should be seen as a geographical pressure of market development, where spatial concentration, driven by land limitations and competition for strategic locations in the UK.
Price and cost pressure in retail sector outlined the direction of the businesses and their long-term strategy for many years. A contemporary business environment with its growing scale and scope of operations, outsourcing of production and distribution outside the UK borders and increased variety of product and services, even further outlines the importance of price and cost in reaching sustainable competitive levels for Tesco.
Finally, the complication of the business operation is one of the distinctive characteristics of the retail sector and Tesco specifically. This driver arises due to increased fragmentation of consumer base as well as the most rapid change of their expectations and price sensitivity. As a result, Tesco has to continuously look for the ways to become more responsive and flexible with regards to handling these external pressures (Sparks & Burt, 2003). Taking into consideration that the market share of Tesco based on the same source is over 24%of the market and Sainsbury's and Asda take over another 32% of the market, competitive environment for smaller market players as well as supplies signs growing pressure of retailers' bargaining power.
An analysis of the competitive environment also illustrates that the development of the retail market illustrates another important trend – the shift of power from manufacturers of products and service providers to the retailers, whose size and scope allowed these market players to a great extent dictate the direction of the market development (Keller & Hor, 2003).
Consumer Spending and Behavior
Burt and Sparks (2003) conducted an interesting study, which allowed the authors outlining the most important factors for consumers when choosing where to make their shopping. The study aimed at counterarguing the academic and business professionals claiming that price is the sole driver behind the choice of brand for grocery shopping. The point that should b made here is that, while the price is one of the key factors in consumers purchasing decisions, it does not by itself explain consumer choice. The factors in include:
Quality of fresh goods;
High-quality products availability;
Good value for money;
Ease of parking;
Special in-store promotions;
Range of products;
Good quality own label products;
The convenience of location.
The research shows that the importance of the factors is significant over time,while the percentage of households, opting for one or another brand based on value or money and quality of fresh goods have increased dramatically while parking and availability of quality products of the own label have drastically reduced. The above indicates that the role of organic and healthy foods is growing among consumers. This trend comes along with the recognition of the quality and price value among clients. The number of consumers, who are ready to pay a little premium for the better quality of products is growing and this places the competition of own label and the importance of in-store promotions on the second plan.
Consumer trends and the changes in individual purchasing behaviors demand the further realignment of customer segmentation strategy. Tesco is subject to a number of micro and macro influences on the company's marketing strategy. The company uses a variety of factors to cluster their clients. Mong others, such geographical factors as density, demographic elements of age, gender, family size, occupation and income and behavioral patterns, such as user status, occasions attitude are the key (Tesco PLC, 2014). Two major segments that Tesco caters for are value-seeking customers and quality-seeking consumer.
Some of the latest trends, influencing consumer behavior in a short and the long-term is the increased use of technology and limited time availability which makes individuals seek for faster and more efficient shopping solutions. With that in mind, e-commerce and mobile shopping have become more important among average UK consumer. Increased availability and reduced price of mobile smartphone devices further push this trend. Additionally, increased interest in green products and healthy lifestyle determines the direction in which consumer market is going. These two trends pressure the companies in the retail sector to review their strategies and address the changes in their major consumer profiles.
Conclusion
There are several drivers for change in the retail sector that will continue affecting the businesses in this segment. Political landscape will change with regards to land regulations, the role of the European Union and Business regulations to control competition and protect the consumer. Economic environment will provide a number of opportunities by building on economic growth and personal disposal income of the UK consumer. Socio-cultural factors will demand further strategic adaptations and changes in the marketing mix and strategy for Tesco as well as its competitors. Finally, technology will continue outlining the newest trends and shaping a profile of a contemporary UK consumer.
It is possible to conclude that the UK will continue to grow and offer expansion opportunities for large retailers. This growth, however, will be limited in terms of organic expansion as the market reached its maturity level. The companies should look for the ways to grow in smaller and more targetted business segments. It I expected that in many locations Tesco Express and Tesco Extra will take space from hypermarket and supermarket formats. Additionally, coming years will signalize the growth of e-commerce in the overall revenue composition of large UK retailers.
Recommendations
An analysis of the current situation and the influence of the external environment that the companies in the retail sector are facing a number of challenges along with opportunities to grow internationally and expand their domestic market through further product differentiation. The overall conclusion that the UK market, being in the maturity stage of the lifecycle offers extremely favorable political and economic environment for the retailers, such as Tesco. At the same time, the size and scale of the operations of the major competitors create oligopolistic competition on the market, which in a short and medium term will limit its potential to grow organically. Technological factors and advancements in the sector, however, offer an opportunity to leverage the risks and challenges of political element, where the land-use legislation drives organic growth. That said, it is recommended that Teso continues investing in the virtual environment and e-commerce segment and focuses further on building on the quality-price balance products for its clients.
An analysis of the consumer psychology allows believing that customers are more perceptive to convenience shopping, offered by Tesco Express as opposed to one-stop-shopping solutions of Tesco hypermarkets and supermarket chain. With that in mind, the company can benefit from expanding Tesco Express concept across the country, rapidly growing its presence in the domestic market.
Finally, it is evident that there is a significant growing segment of a "green consumer". This market, relatively small at the moment, has a great growth potential and the UK is one of the countries with the highest number of "green consumers" in the world. Tesco is currently looking at this consumer segment as a supportive customer group, but should change its focus and build specific "green product" line to strategically target this highly-potential customer segment and remain ahead of the competition, such as Marks & Spencers.
References
Tesco PLC 2014. Tesco – Annual Review and Financial Statements 2014. Tesco Official Website [Online].Available at https://www.tescoplc.com/files/pdf/reports/ar14/download_annual_report.pdf [Accessed 2 May 2016]
Keller, M. & Horn P., 2003. Strategic Management. 2nd Edition. Journal of Literature, 12(5), pp.66-89.
Sparks L.,Burt S. 2003. Competitive Analysis of the Retail Sector in the UK. Institute of Retail Studies. Stirling: Department of Trade and Industry. Print.
Sparks L. and Burt S. 2003. Power and Competition in the UK Retail Grocery Market. British Journal of Management. Available at Available at https://www.tescoplc.com/files/pdf/reports/ar14/download_annual_report.pdf [Accessed 2 May 2016] [Accessed 2 May 2016]
Real Economics. 2014. Top 10 UK Retailers. Available at Available at Available at Available at https://www.tescoplc.com/files/pdf/reports/ar14/download_annual_report.pdf [Accessed 2 May 2016] [Accessed 2 May 2016] [Accessed 2 May 2016] [Accessed 2 May 2016]
