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     Copyright: Taranjeet Gill MBA
(a)     Background


        Tesco was founded in 1924 by Jack Cohen and opened its first store in 1929 in
Middlesex. In 1947, its shares were traded at London Stock Exchange as Tesco Stores
(Holdings) Ltd. Through acquisitions, it grew to more than 800 stores in the 50s and 60s. In
1973, Cohen resigned and was replaced by Leslie Porter and he abandoned the philosophy of
“pile it high and sell it cheap”. In 1977, Tesco resorted to price reduction and centralised
purchasing by launching “Operation Checkout”. Terry Leahy became CEO in 1997 and
introduced “The Tesco Way” with more focus on people. Tesco currently has 5 store formats;
Tesco Extra, Tesco Superstore, Tesco Metro, Tesco Express and One Stop. It operates in the
food and non food retailing, property development, financial and telecommunication services.
Its market share of 31.35% in food retailing segment making it the market leader in the UK.


        Sainsbury’s was established in 1869 by John James and Mary Ann Sainsbury and it is
the oldest retailing business in UK. In 1973, its shares were traded at London Stock Exchange
as J Sainsbury Plc. Sainsbury’s currently has 3 store formats; regular stores, local stores and
central stores. It operates in food and non-food retailing, property development and banking.
It was the market leader in UK up till 1995 when it lost its place to Tesco and currently is
holding about 16.37% of market share.

(b)     External Analysis

(i)     General environment analysis (PESTLE)

Political-      As international expansion strategies are adopted by Tesco (operation in 13
                countries) and Sainsbury’s, political factors as well as globalization greatly
                affect the expansion. In the retailing business, political stability and support
                is important. Some of the political powers may object to setting new stores as
                it will deprive income of small groceries. Apart from that, the EU has been
                known to be stringent especially in food retailing to protect consumers and
                food retailers has to comply with various standards in place, Therefore, the
                retail industry has been known to have low profit margin which may hamper
                future growth with rising inflation.

Economic-       Being in the retailing industry, economic factors greatly influence the buying
                decisions of consumers. Recent economic recession and high unemployment
                rate around the world in 2008 has affected the industry profitability as the
                effect on supply and demand has been profound. The retail industry is highly
                susceptible to any negative economic condition as price and cost can be
                significant determinant during that time making it difficult to forecast the
                future growth and profitability in the industry.
Social-        Social and cultural and demographic trend has switched significantly as
               nations are becoming more developed. High consumer debt levels and
               negative saving rate in the UK has decreased the purchasing power of
               consumers who are finding it hard to make the ends meet partly due to
               inflation and decreased value of currencies.
                      The type of goods and services demanded by consumers is a function
               of their social conditioning and their consequent attitudes and beliefs.
               Consumers are becoming more and more aware of health issues, and their
               attitudes towards food are constantly changing and the retailers have to quick
               to adapt to the change in trend. The strategy employed by Tesco of having
               joint ventures with local partners may be the correct strategy for market
               penetration as these partners may be more understanding of local culture.

Technological- The adoption of online retailing by retailers has expanded their market share
               and coverage. The trend of online shopping has gained popularity among
               British consumers and also consumers around the world. With the use of
               technology, Tesco and Sainsbury’s has increased their sales tremendously.
                      Among other use of technology to complement business processes are
               in supply chain management for effective distribution as employed by
               WalMart, internet marketing and customer relationship management as is
               being employed by Tesco and Sainsbury’s to collect customer data by using
               customer loyalty cards. The adoption of Electronic Point of Sale (PoS) and
               electronic scanners have greatly improved the efficiency of distribution and
               stocking activities and increased consumer satisfaction as goods are readily
               stocked and available.
                      Despite the technological advancement, retailers have to cautious as
               the technological competitiveness gained is highly replicable

Legal-         Various government legislations and policies have a direct impact on the
               performance of players in the retail industry. For instance, the Food Retailing
               Commission (FRC) suggested an enforceable Code of Practice should be set
               up banning many of the current practices, such as demanding payments from
               suppliers and changing agreed prices retrospectively or without notice
               (Mintel Report, 2004).
                      Legislation around the world also prohibits the use of ethically wrong
               methods of intelligence as used by Tesco when it did its Bond style
               intelligence to collect information in US market and competitors.
               Other legal aspects that impact retailers include employment laws, business
               laws and retailing laws.

Environment- The major societal issue threatening retailers has been environmental issues, a
             key area for retailers to act in a socially responsible way. Advocating
             sustainable environmental development is the way most businesses operate in
             this era as consumer awareness on environmental issues are increasing.
             Among the key steps taken by the retail industry are waste reductions such as
             plastic bags which are non-biodegradable, reducing consumption of natural
             resources and minimising environmental damage to increase the reputation
             and image of retailers.
(ii)   Industry analysis (Porter’s 5 Forces)

Threat of new entry (Low)

UK retail industry has become highly concentrated in particular the food category. It is
primarily dominated by 4 major players; Tesco, Sainsbury’s, Asda and Morrison, dominating
75% of market share. These large players has over time has ensured that the barriers to entry
become higher as they have achieved economies of scale and highly established distribution
network, control over suppliers and operating efficiency. The last entry into the market was
Lidl in 1994 who tried competing in terms of pricing with these giants. For a new entrant to
penetrate the market, they have to raise sufficient capital to account for high fixed cost,
technological and operating efficiency.

Threat of substitution (High)

In the retail industry, substitution can be seen as product for product substitution. Anything
that is sold in one store is available at other stores and the pricing of these consumer products
are highly elastic as the product range is homogenous. The trend of consumers combining
bargain shopping with luxury products has blurred the boundaries of segmentation leaving
retailers to compete mainly on pricing. Distance and availability are major considerations for
consumers buying consumer products and therefore, differentiation in retailing does not help
to retain customer loyalty.

Supplier power (Low)

Intense competition in the industry has forced the retailers to compete on pricing and this will
force them to negotiate lower price from the suppliers with their already squeezed profit
margin. As Tesco and Sainsbury’s are major retailers with high market share in the retailing
business in UK, they dictate the pricing and offerings of their suppliers as the suppliers fear
of losing the big business from retailers. Suppliers in retailing are not unique with low
switching cost to the retailer and therefore having low bargaining power as compared to

Buyer power (High)

As the players in retail industry compete mostly on prices and promotion, it is evident that
buyer has got higher negotiation power as compared to retailers mainly because the switching
cost is low. Customer loyalty and retention is extremely low as the industry is monopolistic
competition with slight differentiation in terms of offering (private labels and promotion) but
insufficient to retain customers. Expecting this, both Tesco and Sainsbury’s reacted with
loyalty cards to collect customer data for rewards and cross selling to retain customers.
Apart from that, Lidl and Aldi who entered the market later in 90s manage to compete with
the major players as hard discounters, putting price reduction pressure on major players and
proving that buyers has high negotiation power in purchasing.
Competitive rivalry (High)

With the retail industry fully saturated in the UK, the competitive landscape is intense. New
strategic direction are always crafted in order to retain market share which otherwise will be
snatched. Tesco and Sainsbury’s has diversified and acquired small players in order to sustain
the competitive advantage. Operating in low profit margin industry with low customer
loyalty, competitors constantly try to innovate and formulate new strategies to gain
competitive advantage. The fierce competition among the players as evident by the rapid
response to one another’s strategy shows high competitive rivalry among the retailers.

(iii)    Competitor analysis

       Competitor analysis is done within the strategic group whereby these retailers have
similar set of strategic dimensions. Tesco must understand their competitors’ (in this case
Sainsbury’s) future objective, current strategies, assumptions of competitors of the industry
and the Tesco’s capabilities as measured against competitors. Tesco’s future objective will be
to maintain growth and expand its market share in the UK as the competition is extremely
intense whereas Sainsbury’s will readily challenge the status quo by aggressive following.
With the change of leadership at Sainsbury’s, they achieved 9 quarters of sales growth up till
2007 and this is a cause of concern for Tesco. Since the retail industry in the UK is saturated,
Tesco is now moving to diversification into financial, telecommunication services and
property to complement its existing services with new services with Sainsbury’s closely
following behind. Therefore, innovation has to be a major driver for Tesco's product and
services development to create value for its customers.

(c)      Internal Analysis

(i)      Value chain analysis

        Value chain analysis is an analysis of the firm’s internal activities to identify activities
that create values and those that do not. In the retail industry, the retailer has to create value
that customers perceive as valuable and this value has to be created with minimal costs to
gain sustainable competitive advantage. These activities are then compared with competitor’s
value chain to identify strengths, weaknesses, opportunities and threats.

  Primary activities                   Tesco                         Sainsbury’s
  Inbound logistics       - Regional distribution centre - Fully       automated     depots
                            for delivery to stores.          (required heavy maintenance
                          - Factory date pricing to reduce
                            cost and increase reliability. - King’s recovery program:
                                                             reactivation of 2 distribution

        Operation         - 5 store formats; Tesco Extra, - 3 formats; regular stores, local
                            Tesco Superstore, Tesco         stores (convenience stores)
                            Metro, Tesco Express and        and central stores (small
                            One Stop differentiated by      supermarkets) differentiated
                         size, location, operating hours     by size, location, operating
                         and product range.                  hours and product range.

Outbound logistics     - Goods handpicked in selected - 2 dedicated picking centres
  (online sales          stores (limited investment).   (warehouse model with heavy
    channel)                                            investment).
                       - CEO John Browett received
                         Wharton Infosys Business - Average delivery charge of ≈
                         Transformation Award for       £ 3 per delivery.

                       - Average delivery charge of ≈
                         £ 4 per delivery.

Marketing and sales    - Tesco.com                         - Sainsbury’s to You
                       - Processes weekly order of - Processes weekly order of
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