Tesco PLC SWOT Company Analysis Report

Tesco PLC SWOT Company Analysis Report

 

Tesco Plc

Strategic Evaluation

Swot analysis

Strengths

·         Size favours economies of scale and bargaining power – being the world's third largest retailer gives Tesco advantages in terms of economies of scale and strong bargaining power over suppliers.

·         Adaptation to local market environments – Tesco has been successful in adapting its operations to local market environments in various countries. For example, in Thailand, where customers are used to purchase fresh food from market stalls, most fresh produce in Tesco’s hypermarkets are sold loose or in small quantities so that customers can choose the amount they require. In each country where it operates, Tesco has a management team dedicated to this market.

·         Private label ranges – Tesco benefits from a successful wide range of private label products catering to varied consumer segments, from low-priced items under the Tesco Value range to premium products under the Tesco Finest range, which means that it can attract consumers from most income groups to its stores.

·         Multi-channel strategy – in the UK, Tesco has succeeded in broadening its customer base by becoming a multi-channel operator, becoming a major player in convenience stores and variety stores, and being a pioneer in internet retailing, and more recently venturing into homeshopping. This multi-channel approach will continue to create synergies for the group.

·         Services beyond retailing – Tesco has been a pioneer among UK retailers in offering a range of competitively-priced services, which have enabled the company to venture into new areas, while building stronger brand loyalty with some of its customers. The various services offered include loans, insurance, savings accounts and credit cards (Tesco Personal Finance) in the UK and Ireland, as well as mobile phone and internet services (Tesco Telecoms). Tesco Telecoms has been a success, with more than two million customers in 2007.

·         Popularity of loyalty scheme – Tesco has run a successful UK and Ireland loyalty scheme, Tesco Clubcard, which boasted over 13.5 million members in 2007. Backed by sophisticated database analytical tools developed by Tesco-owned marketing consultant Dunnhumby, the scheme provides the company with valuable information on consumer habits and their lifestyle. Similar loyalty schemes have also been implemented outside the UK, for example, in Malaysia with the Bonuslink card and in Thailand with the Tesco Lotus Members Club loyalty scheme, and the group will extend this to other markets.

Weaknesses

·         Reliance on UK operations – Tesco relies heavily on the success of its UK operations, which accounted for around 70% of its revenues, and is thus dependent on a highly mature market where potential growth of the retail market is limited. With a slowdown in the UK economy apparent in 2008, Tesco will see its margins in its domestic market eroded as consumers will increasingly seek bargain prices and reduce their expenses on non-food items.

·         No presence in the discounters channel – Tesco has no presence in discounters in Western Europe and is not likely to enter this channel, which is expected to grow faster than supermarkets and hypermarkets over the 2007-2012 period, with value growth rates of 15%, 4% and 2% respectively. This makes the group particularly vulnerable to the aggressive expansion of the Aldi and Lidl chains in Eastern and Western Europe.

·         Recent and limited international presence – despite a rapid expansion abroad, Tesco has a relatively short experience in foreign markets compared with rivals such as Auchan, Carrefour and Metro, with a later entry in many markets, especially in China, which it entered only in 2004. As a result, Tesco lacks experience in this market, and its scope is more limited. In addition, Tesco has a presence in much fewer countries than rivals Carrefour and Metro.

·         Uncertainty surrounding Fresh & Easy – the US venture could prove to be a costly and unnecessary adventure for Tesco. Succeeding in the US market requires considerable investments, which may prove a burden and result in slower expansion in more dynamic markets such as China.

Opportunities

·         Expansion in new markets – expansion in newly entered markets, such as the US, and probably in India and Russia in the near future, will generate further growth for the group. A presence in India would also enable the company to have procurement agreements with local suppliers, which could also benefit its operations outside India.

·         Further growth in Eastern Europe and Asia-Pacific – as Tesco has been highly successful in Eastern Europe where it quickly became the largest retailer ahead of Russia’s largest players, the company has the potential to increase its presence significantly, for example, by opening outlets in smaller towns and cities facing less saturation.

·         New channels and services – an entry into new channels and new services, such as internet retailing for non-groceries and homeshopping retailing, will enable Tesco to increase sales of non-grocery items.

·         Focus on smaller surfaces – the success of the Tesco Metro and Tesco Express fascias in supermarkets and convenience stores in the UK could be replicated in other markets, especially in some markets in Eastern Europe and Asia-Pacific, and Tesco has ambitious plans to operate similar stores outside the UK.

Threats

·         Consumers and authorities reacting against Tesco’s dominance – Tesco is vulnerable to consumers and governments reacting against its aggressive expansion. Its dominance of the retail market in the UK is often perceived as having a negative impact on local communities, “squeezing” suppliers and limiting consumer choice. This was illustrated in the UK by the decision by the Competition Commission in 2008 to appoint a new ombudsman to oversee the relations between grocery retailers and suppliers.

·         More aggressive competitors in the UK – Marks & Spencer, Morrison and J Sainsbury showed strong recovery and became more profitable operators. This will lead to more aggressive competition and lead to greater pressure on Tesco’s margins.

·         Risks of investing too much in markets with modest prospects – investing resources in expanding into notoriously difficult and mature markets such as Japan and the US could limit Tesco’s cashflow and jeopardise its ability to finance expansion in emerging markets where it is already present, and where competitors would be in a better position to gain share. In addition, this could result in diverting some management focus from its core geographic market, the UK.

·         Legislation constraints – as legislation on building new hypermarkets is likely to become more restrictive in China over the coming years, Tesco will need to seek to expand through other formats such as supermarkets and convenience stores, in order to maintain growth momentum, which will require a reworking of its strategy. In Thailand, legislation on the development of foreign retail chains could also become more restrictive, following measures first announced in 2007 to curb the opening of new stores by international players.

12 Month Highlights

2007/2008

·         Tesco purchased the South Korean retailer Homever in May 2008 for £958 million including debt, from the E-Land Group. The chain includes 36 stores, most of which will be converted to the Homeplus format over the following 12 months. This acquisition will consolidate Tesco’s position as the country’s third largest retailer, and give it a greater presence in major cities including Seoul and Gyeonggi.

·         Tesco acquired a 65.5% stake in the Dobbies garden centre chain in the UK in summer 2007, in an unexpected move that highlights the group’s willingness to be present across a variety of non-grocery formats. In May 2008, Tesco purchased another 29% of Dobbies’s capital from West Coast Capital.

Prospects for Tesco Plc in Retailing

Core Businesses

Slowdown in domestic market except in smaller formats

·         In the UK, Tesco’s performance in 2006 and 2007 was robust, with sales up by 8% and 11% respectively in local currency terms, with a particularly strong increase in hypermarkets and internet retailing sales. A marked slowdown was recorded in supermarkets, as the number of stores in this channel declined, following the conversion of some supermarkets to the larger hypermarkets format.

·         However, the robust trend in hypermarkets sales in the UK is expected to wane. With consumer confidence expected to be low over the first half of the 2007-2012 forecast period, total sales through hypermarkets will be impacted, with a fall of 9% predicted, as consumers will limit the number of trips to out-of-town stores, and discretionary spending will be cut.

·         In the supermarkets channel in the UK, forecast sales are also likely to be less resilient, with a 1% decline, as they are more exclusively reliant on non-discretionary purchases. However, consumers are likely to increasingly shun premium variants of food products, such as organic and healthier ranges, in order to balance their budgets in the wake of rising energy bills.

·         In contrast to supermarkets and hypermarkets, convenience stores and discounters are expected to see buoyant sales, with forecast growth of 25% and 42% respectively over the 2007-2012 period. There is potential for Tesco to further increase its presence in convenience stores in the UK through small-scale acquisitions. In addition, Tesco, which does not have a presence in discounters, could test this format, or alternatively dedicate a greater proportion of its product assortment to budget ranges at its convenience stores.

Some resurgent UK rivals

·         In its domestic market, Tesco will face more competition from two resurgent rivals, J Sainsbury, which became more competitive in 2007, with prices often matching Tesco’s, as well as Morrison, which has seen a strong recovery. As a result, Tesco’s share of grocery retailing in the UK is expected to remain relatively stable in 2008, and could even decline slightly. Meanwhile, at the more premium end of grocery retailing, the Waitrose chain has performed strongly, driven by the popularity of its fresh food and organic ranges in an environment increasingly characterised by greater health-consciousness among consumers.

·         Within convenience stores, the Co-operative Group has seen a stronger performance in 2007, and its expansion in 2008 could be boosted by a takeover of the Somerfield chain, should it win the bid. The potential acquisition of Somerfield would give the group the ability to take greater advantage of economies of scale. Hence, Tesco’s growth potential in the convenience stores channel in the UK could become more limited from 2008 onwards than over previous years.

Pressure from shareholders

·         The city became less impressed by Tesco’s results in 2007 and early 2008, despite profits increases matching expectations in the financial year to February 2008, as like-for-like UK sales show signs of slowing down to levels similar or below rivals including Marks & Spencer and Morrison, while the uncertainty about the future of the US operations is an additional concern.

·         The greater pressure from shareholders will also impact Tesco’s strategic decisions, as some investors are concerned that the investments abroad will not bring extra profits in the short term, which means that Tesco may need to pull out from some markets if return prospects are uncertain in the near to medium term, regardless of the long-term potential benefits of staying in the market.

Growth Opportunities

Asia-Pacific still offers untapped growth prospects

·         There remain considerable opportunities for growth in emerging as well as developed markets in Asia-Pacific for Tesco, especially thanks to a multi-format approach that can offset the potential future saturation in a particular channel, such as hypermarkets in first-tier cities in China. In Asia-Pacific, the group ranked 13th in store-based retailing in 2007 with a share of 0.4%, just below Wal-Mart but slightly ahead of Carrefour, and, with a presence in China, Japan, Malaysia, South Korea and Thailand, operating in almost as many countries as Carrefour (six) in 2007.

·         Tesco’s modest share of retail sales reflects both the relative fragmentation of the retail environment in Asia-Pacific, reflecting the predominance of national operators in each major market, as well as the relatively minor presence of non-Asian retailers. These characteristics of the retailing market in Asia-Pacific highlight Tesco’s vast expansion potential.

·         In China, expansion into new cities is on the agenda, and the group is planning to open around 10 new outlets during 2008. However, despite the fact that this represents a significant increase in the retailer's presence, this number of new stores is inferior to the amount planned by Tesco’s two main rivals Carrefour and Wal-Mart.

·         Testimony to Tesco’s success in adapting to local market conditions is its ability to compete successfully in the difficult South Korean market, where other foreign retailers, most notably Carrefour and Wal-Mart, have previously failed and had to exit the market in 2006, as they insufficiently adapted their business model to the local market environment in terms of relationships with suppliers and store format. By contrast, Tesco’s cooperation with local partner Samsung has been particularly successful.

·         Tesco’s commitment to the difficult Japanese market, with plans to open annually more than 30 Tesco Express outlets offering a hybrid format between convenience stores and supermarkets, also highlights the company’s confidence in its concept, thanks to its innovative approach and the knowledge of consumer tastes gained with the operation of local chains.

Ambitious expansion in Poland, South Korea and Turkey

·         In some major emerging and developed markets where Tesco has already a strong presence, the group has ambitious plans for growth, as it seeks to gain from favourable macroeconomic conditions and changes in shopping habits which favour hypermarkets operators, but also smaller grocery retailing formats such as convenience stores.

·         In Turkey, Tesco plans to open up to 100 new stores over the next five years, under an investment plan of around £380 million (US$750 million), in order to benefit from favourable macroeconomic conditions. Tesco will also benefit from the rapid growth of the hypermarkets format in Turkey, which is expected to see sales rise by 82% over the 2007-2012 period, at a much higher rate than supermarkets. Tesco opened its first store in Istanbul in early 2008, which marks a change from its earlier strategy, which was based on opening stores in smaller and cheaper cities. The group will face more intense competition from rival international players, especially Carrefour and Metro, which both have plans for major expansion.

·         In South Korea, the Homeplus chain continued to benefit from the strong dynamism of hypermarkets, which illustrates the growing popularity of out-of-town retail locations in the country. With sales growth forecast to reach 28% over the 2007-2012 period, hypermarkets should perform better than supermarkets, and Tesco’s 2008 acquisition of the Homever chain will enable the retailer to benefit from this favourable trend.

·         Tesco seeks to expand beyond hypermarkets in Poland, with a focus on supermarkets, as part of a plan to open 50 new outlets in 2008. This marks an acceleration of its new stores expansion compared with 2007, when it opened 25 outlets, and illustrates the growing saturation of the hypermarkets channel, where sales are forecast to increase by 21% over the 2007-2012 period, compared with supermarkets, with 24% growth, and which are less concentrated and where Tesco can strengthen its leadership.

·         By developing its presence in supermarkets, Tesco will increase its presence in smaller towns and cities of over 20,000 inhabitants in Poland, at locations where grocery retailing is not as concentrated as in larger cities.

Multi-format strategy in grocery and non-grocery retailing

·         Creating synergies between different formats has been an important recipe of Tesco’s success in grocery retailing, enabling the group to reach a greater number of consumers and apply its operational efficiency to smaller formats such as convenience stores. In February 2008, Tesco introduced the first Tesco Express in Shanghai, in order to benefit from the rising popularity of convenience stores in China’s first-tier cities. This new format can bank upon the image of Tesco’s larger stores in terms of product quality and reliability, and dozens of new stores are planned. Tesco is also developing its Express convenience format since 2006 in Turkey.

·         The retailer also applies this approach to non-grocery retailing. At its Tesco Home Plus variety stores in the UK, the retailer intends to create synergies with its homeshopping Tesco Direct business, thanks to a dedicated area where consumers can browse through the catalogue and can instantly order and collect an item, under a store model successfully used by the Home Retail Group’s Argos chain. The homeshopping catalogue, which was launched in UK stores in spring 2007 under Tesco Direct, complements the internet retailing offer, and generated revenues of £180 million in the financial year ending February 2008.

·         Since Tesco already has strong bargaining power in non-grocery retailing, thanks to its wide offer of non-grocery items through hypermarkets and through internet retailing, it has the potential to offer competitive prices and become a major operator in homeshopping, by achieving synergies between these channels.

Internet retailing: potential in food and non-food

·         Internet retailing is expected to remain buoyant over the 2007-2012 period, with global sales forecast to rise by 103% in US dollar terms, and by 90% in the UK. Tesco remained the UK's largest internet retailer in 2007, ahead of Amazon, and ranked second in Ireland, as well as being the world's largest grocery retailer in internet retailing.

·         Tesco’s success is largely due to an earlier move compared with other chains. The company was the first major UK grocery retailer to be profitable in internet retailing. The UK's operations relied on a store-based rather than warehouse-based delivery system, which has proved to be a cost-effective solution and enabled Tesco to reach a coverage of more than 95% of UK households, a proportion which exceeds its main rivals – J Sainsbury and Ocado. Sales in the UK were up by 29% to reach £1.8 billion in 2007.

·         The success of Tesco.com was helped by the fact that the UK became a more mature market than other European countries for internet grocery retailing, as most leading grocery chains, including Tesco (www.tesco.com), Asda (www.asda.com), J Sainsbury (www.sainsburystoyou.com) and Waitrose (www.ocado.com), have offered online shopping services for several years, and their operations have wide geographic coverage. In comparison, in many European countries, where specialist food and drinks outlets are more developed, consumers do more frequent top-up food shopping and use internet retailing less regularly to order food products.

·         The addition of a website dedicated to non-grocery products under Tesco Direct should further boost Tesco’s position in this channel in the UK, although it will face established players offering competitive prices, especially Amazon. In early 2008, Tesco enlarged its online clothing assortment by adding menswear to its Tesco Direct site, following the successful introduction of womenswear in November 2007, as part of a plan to overtake Marks & Spencer as the leading clothes retailer in the UK by 2010. This move places Tesco ahead of rival Asda, which is expected to launch the George brand on its internet retailing site in summer 2008. Tesco will develop synergies between its internet retailing operations and its homeshopping activities, both available under the Tesco Direct brand dedicated to non-grocery products.

·         Tesco also intends to grow sales through internet retailing by developing mobile internet retailing, which would enable the company to target a wider audience, especially among young consumers. Test campaigns were launched in early 2008 under a Tesco Mobile website, allowing customers to order flowers for Valentine’s Day and for Mother’s Day. The group is a pioneer in the UK among grocery retailers, where only non-store retailers, most notably Amazon, have made significant inroads through mobile internet retailing.

·         Beyond the UK and Ireland, Tesco also has a presence in internet retailing in South Korea, which is likely to remain a dynamic market over the forecast period, as the country has one of the world’s highest internet usage rates in the world. A potential roll-out across Eastern Europe would make Tesco a pioneer in these markets. In addition, the company would benefit from using the experience gained by Home Plus in South Korea, albeit on a modest scale, as a stepping stone to move into other countries in Asia-Pacific.

Providing a sound basis for developing US operations

·         Tesco opened the first Fresh & Easy outlets in the US in November 2007, and had opened over 60 outlets by May 2008 in California and Arizona, with plans to have around 200 stores by the end of 2008. The potential for Fresh & Easy’s expansion in the US appears vast, as the chain may venture into many other states, and the US market for grocery retailing remains less concentrated than in some Western European countries such as the UK. However, grocery retailing in the US is highly competitive and mature, and Tesco could struggle to reach the scale of operations that is necessary to operate profitably.

·         Initial observations indicate that the US stores are not succeeding as well as Tesco initially anticipated, with the concept relying too heavily on private label and failing to generate enough footfall as it does not generate enough appeal among families, while not fully conveying the premium feel that Tesco seeks to achieve. Hence, its development is likely to be slower than Tesco expected, and the store concept is likely to be adjusted in 2008.

Limited Potential

Facing growing saturation in supermarkets could boost convenience stores

·         Tesco should increasingly focus on convenience stores, as this format is forecast to perform better than supermarkets in most developed markets, since convenience top-up shopping is increasingly favoured over one-stop weekly shopping.

·         In Western Europe, supermarket sales are forecast to grow by only 4% over the 2007-2012 period, and to fall by 1% in the UK, as they will be hindered by the more rapid increase in sales of convenience stores and discounters, which have more scope for growth in markets characterised by a rise in the number of single-person households and busier lifestyles.

·         In Japan, Tesco remains a minor player in grocery retailing, and has modest expansion plans, which means that it cannot acquire the scale and brand recognition of the leading grocery retailers. Tesco’s sales have been relatively stable in 2006 and 2007 in Japan, largely as a result of the slow growth and the deflationary trend of the Japanese economy, which led to strong price pressure in the country’s grocery retail market. This was accompanied by an ageing population, with elderly people favouring proximity retailers to supermarkets. Supermarkets are expected to remain affected by declining sales in Japan over the forecast period, despite the deflation era having recently come to an end, whereas convenience stores sales are predicted to increase by 6%.

Slowdown in non-food and hypermarkets in the UK

·         Non-food sales, which account for between 20% and 25% of Tesco’s revenues in the UK, are expected to grow more slowly than food sales in 2008, which represents a reversal over the trend prevalent over previous years. The slower sales increases have been particularly apparent in clothes in 2007.

·         In hypermarkets, which sell a larger proportion of non-food products, the group is particularly vulnerable to a lower economic growth or a possible recession in the UK, as more consumers will postpone purchasing big ticket items. In addition, there is relatively limited potential for the building of new hypermarkets due to planning restrictions on the building of out-of-town stores, so that growth will be restricted mostly to the extension of the surface area in existing supermarkets to transform them into hypermarkets.

·         In addition, the Dobbies garden centre chain in the UK, which Tesco acquired in 2007, is likely to experience sales stagnation, with the housing market showing clear signs of weakness in 2008 and probably in 2009. Hence, this acquisition could be considered an attempt too far at diversifying Tesco’s formats.

Department stores in Eastern Europe, and soon in the UK?

·         Tesco operates department stores in the Czech Republic and Slovakia, as a legacy of the outlets that it acquired when it entered these two markets. As this channel faces modest growth prospects in Eastern Europe, in the wake of the growing popularity of hypermarkets and the high costs associated with department stores city centre locations, Tesco is unlikely to develop its presence in this channel.

·         However, although the company should not withdraw from this sector in the two markets, since these stores have proved successful and they benefit from synergies with hypermarkets in terms offering similar product assortments, they do not generate significant additional costs despite higher rental and personnel costs. In addition, Tesco announced in 2008 some plans to launch department stores in the UK for the first time, although it may struggle to find suitable sites.

·         Despite having rapidly developed non-food sales through various channels, Tesco could find it difficult to establish a brand image against established department store chains such as John Lewis and Marks & Spencer. In addition, opening non-food only stores will lead to some overlap with Tesco Extra hypermarkets, thus potentially adding some unneeded cannibalisation to a format already facing prospects of slower growth.