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Business Evaluation of Tesco Essay

The analysis of the structure of UK supermarket industry has identified four companies dominating the market and creating an oligopolistic market economy: Tesco (30%), Asda (17%), Sainsbury (16%), Morrison (12%). It also looks at the growth trend of these companies over the last 10 years. A macro-analysis was conducted assessing the external factors affecting the supermarket industry focusing on the Political, Economical, Social/Cultural and Technological even that have been affecting this market over the last 5 years.

The PEST analysis also evaluates current trends in order to estimate future developments. The Porter’s 5 forces analyses has established an imbalance in this industry. It appears clear that although the top four chains are exerting a strong competition on each other, the power of customers and suppliers is very limited and almost nil. The same applies for new entrants that have very high barriers due to the oligopolistic market present at the moment. The financial and business performance of Tesco have been analysed and compared with its biggest competitor Sainsbury.

The outcome clearly shows a more favorable situation regarding Tesco. The expansion into non-food market, overseas and the takeover of smaller shops have been identified as major opportunities. The price competition and the new

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investigation of the Office of Fair Trading (OFT) have been identified as main threats. A conclusion is given to summarize the findings. Suggestions are made on the possible future of the market and the company and whether or not the client should invest in Tesco.

At present it is possible to notice Tesco in the headlines of newspapers and magazines with news and information regarding its dominance of the retailing market and its continuous improvements and expansion. It is clearly stated that Tesco owns about 30% of the UK market with a constant growth over the last ten years. Their expansion abroad has been very successful so far and it has a good prospective for the future. In order to achieve these goals, Tesco claims to have researched the market and tries to meet the consumers’ needs, including a policy of lowering prices.

Among their strategies the company has expanded the services provided to non-food products and has opened different formats of shops, such as metro, express, extra, and superstore. However, not all the news is in the favour of this company. There is a dispute going on about the negative impact that Tesco has been having on the economy, especially regarding smaller grocery shops, farmers and suppliers. It appears that the top four supermarkets have gained too much power that has been used to obtain more profit at the expense of the companies mentioned above, many of which went out of business.

Although the structure of the market is oligopolistic, Tesco, having a much higher proportion of the market, can almost exercise a monopoly. The government and through the Office of Fair Trading (OFT) have taken consideration of this matter and are investigating the circumstances. As shown in Graph 1 (Appendix A), there are four main operators that own and control the market: Tesco, Asda, Sainsbury, and Morrison. These four leading companies own around 75% of the food market and more than 60% of the grocery sales. (BBC, A, 2006)

Graph 1 shows the trends that these four top companies have been developing over the last 10 years and their market size. Tesco has always been in first position since 1996 with a steady increase from 21. 5% of the market to 30. 4% in 2005. It is followed by Sainsbury and Asda which have opposite trends: Sainsbury has been having a continuous decline, from 19. 7% in 1996 to 15. 9% in 2005, while Asda has been having a stable rise from 11. 8% in 1996 to 17%, overcoming Sainsbury in 2003. Morrison had a deep increase in 2002 as they took over Safeway.

As it is stated by Monbiot (The Guardian, 2006) over the past 25 years, the government and the OFT have not been able to control the supermarket industry and as a result the big chains have taken control. One of the first government actions that generated this failure was to interpret the public interest as the consumer interest with regulations that look mostly at prices and the competition among superstores. However, the OFT has started to investigate big chain dominance of the market and fair trading, especially regarding suppliers.

(BBC, A, 2006) As stated on the article of Friends of Earth (FOE, 2005), at present there is an alliance of 15 environmental organizations that are demanding the government to take action through the Department of Trade and Industry (DTI) to make changes to the Supermarket Code of Practice in order to stop the growing power of the big supermarket chains and protect suppliers and small retailers. The Federation for Small Businesses (FSB, 2006) is also putting pressure on the OFT in order to stop the growth of the monopoly of the top 4 supermarkets.

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