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It is one of the ‘big four supermarkets’, which include Asda, Sainsburys and Morrisons were up until recently the only serious competitors in the market [2]. Despite Tesco’s apparent dominance in the market significant changes have been unravelling over the past few years which have posed serious threats to Tesco’s performance. This report will go on to examine the nature of the problems Tesco faces, analyse possible reason s behind them and provide recommendations as to how to overcome them. Problem Statement One of the most significant problems facing Tesco today, like most Of the ther ‘big four, is its falling market share.
Tesco’s share has fallen to its current level from a record high of31. 8% in 2007 [3]. This is a result of the unprecedented growth from discounters Aldi and Lidl which have seen large increases in market share and huge growth in sales [2] stealing market share from Tesco from the value end of the market. At the same time Waitrose, at the top end of the market, also increased their market share pressuring the ‘big four’ to compete for the decreasing market in the middle [3]. This has had a knock on effect to Tesco’s financial situation.
In August 2014 Tesco nnounced the expected profits for the previous six months would be El . 1 bn, down from El . 6bn the previous year. It soon came to light that through an accounting scandal this figure had been exaggerated by about E250m, slashing the value of Tesco shares and sparking a plethora of negative publicity This leads on to the third major problem faced by Tesco; its damaged brand. This is depicted by YouGoVs Brand Index Score, measured by customer ratings of brand impression, value, quality, 2 reputation, satisfaction and likelihood Of recommendation, which has seen its brand fall significantly [5].
Each of these problems is interrelated and there are many factors involved. This report will examine in closer detail some of these factors. Store location is a major factor contributing towards financial difficulties. Location is considered as one of the biggest influencers in consumers choice to visit a certain store Tesco operate four main store formats within the CJK; Express, Metro, Superstore and Extra, with respectively wider assortments of food and non-food products.
In recent years Tesco have implemented an aggressive store opening plan [2] with a particular push on the extra and express formats [7]. The push signifies Tesco’s strategy to gain a sustainable competitive advantage by opening stores in strategic locations [6] to compete in the retail industry ‘space race’ Tesco Extra stores are developed as community shopping centres. They are large, have plenty of space for parking and are out of town. A reason for this is the high cost of land in urban areas due to high population density [6].
Therefore premises further out of town are favoured as the space required for the enormous assortment of products offered in Extra stores, from groceries to white good and garden furniture, is cheaper. Yet, this location also coincides with consumer behaviour. The behaviour of a retailers target market must be taken into consideration when making decisions on location, to ensure that the location coincides with their needs Tesco took their target market’s behaviour into account as they typically did a weekly shop, allowing them to buy everything they needed in one place once a week.
This meant the convenient parking which makes shopping and putting the week shop into the car easy, and the large product assortment to cater for a whole week suited these community locations. However, this strategy to gain sustainable ompetitive advantage through aggressive development of ‘Extra’ stores has backfired. This is due to a significant change in consumer behaviour as they start 3 to reject the ‘big weekly shop model’ as decreased disposable income means consumers don’t want to buy extra items along with their groceries and more people do their shopping online.
This shift favours more conveniently located stores with a smaller assortment of products Considering this using the multiattribute model there has been a shift in consumers weighting from assortment to store location and the consumers evaluation of the erformance of Extra stores in location is not good [6]. As a result sales in Extra stores are falling and the expense Of numerous staff to operate the large stores makes this a major contributor to Tesco’s financial downturn.
This highlights the fact that location decisions are risky due to the large amount of investment required to develop real estate Where Tesco have done better in gaining sustainable competitive advantage in terms of location is there expansion of Express stores. Express stores cater for the shift towards convenience shopping in the grocery market and Tesco ave many shops in excellent locations, often forcing the competition to establish in less desirable locations Although these stores are performing well it is also suggested that they may also be having a negative effect.
This is because it is considered that these stores may pose a threat of cannibalisation from existing extra stores, as people take the easier option to shop at the more convenient stores. This will increase the cost to Tesco of Extra stores even more [7]. However, if this trend towards convenience shopping is set to continue then Tesco have done well to take advantage of any of the best locations before the competition could. It is also suggested that express stores may have a negative impact on the Tesco brand. Dunn and Davis [1 0] argue that brand is a crucial business asset which should be protected and nurtured.
They go on to explain that brands are a combination of consumer expectations and associations which result from their full experience of the company and therefore everyone within the organisation, from the top down should be driven to uphold the businesses desired brand. Company values should be used to underpin the retailer’s brand [11]. One of Tesco’s core values which should be incorporated into their brand is “no one tries harder for customers” [11. However this has come into 4 question, especially with the development of Express stores.
Express stores operate on a lean business model with many self-service checkouts and few staff [9] which has a negative effect on customer service [7]. Consumers have many touch points with an organisation which develop their perception of the brand. Companies should prioritise these to ensure it spends enough attention and resources to improve brand loyalty and customer relationships 10]. It is suggested that for many people one of their major touchpoints with Tesco is through express stores and due to the lack of customer service this may be having a negative impact on the companys brand.
This highlights the need for Tesco to allocate the necessary resources and attention to ensure these stores effectively communicate the desired brand, and ensure it is consistent with the other relevant touchpoints [10]. Another shift in the market which could enhance Tesco’s financial difficulties and declining market share is the rise in e-commerce. In 201 3 e-commerce ccounted for 5% of all grocery sales in the UK and this figure is expected to grow significantly over the next few years [12].
This rise comes as ecommerce offers consumer’s cheaper prices, larger assortments, extra convenience and time savings [13] which is particularly important as consumers have less free time than ever before [14]. Currently Tesco operate a successful e-commerce store and are the dominant player in the market [15]. However, there are also rumours that growing competitor Aldi might move into online shopping in the UK [16]. This move will increase Tesco’s competition in the online market hich could see more Tesco customers defect to this growing competitor, threatening market share.
This shift in consumer behaviour could also devalue the sustainable competitive advantage Tesco has gained through their aggressive store expansions strategy as online grocery retailers appeal to shoppers who were not previously close to their brick and mortar stores. Although the perishability of groceries does not allow for centralisation of operations [1 7] store location in terms of footfall will likely become of less importance. There is also a growing threat from online-only competitors such s Ocado who may gain competitive advantage through their specialisation in online-only sales evident in their more user-friendly website [12].
However, there may still be advantages of store 5 location as Tesco can take advantage multichannel retail. For example, many consumers still like to touch products before buying them and pick their own fruit in store. Therefore Tesco could implement a strategy to focus their brick and mortar stores for this purpose. Or they push the benefits of click and collect allowing customers to order online and collect in store [18]. Although Tesco is a hugely successful retailer it faces real problems in its core business in the home market; falling market share; financial downturn and a damaged brand.
There are many elements which may have contributed towards this. One contributor is their development of large Extra stores located in community shopping areas which has left them losing money as consumer behaviour has changed and sales in these stores has dropped. Also their smaller express stores may be having a negative impact on the Tesco brand as a result of poor customer service and as this is a major touchpoint or many customers it may be predominantly what they base their brand perception on.
Furthermore the shift towards e-commerce poses significant threat for the future as more competitors enter the market to compete for market share. This trend may also diminish the competitive edge Tesco have gained through their effective store locations. Further Propositions There are many other elements which have contributed towards Tesco’s problems which should be explored in more detail. One being Tesco has strayed too far from their retail offering by expanding their assortment until it no longer met the needs of their target market.
This coupled with the increasingly price sensitive consumers is causing many to default to Aldi and Lidl. Also the brand has been further damaged by negative publicity, relating to bad supply chain management and the accounting scandal. As well as this the benefit of their loyalty card scheme to the company has come into question due to its high cost and the loyalty schemes offered by competitors. All in all there are many aspect of the business which need to be assessed and action must be taken to ensure Tesco obtain a sustainable competitive advantage.