Tesco plc. is the UK’s largest supermarket. It has over 3700 stores in the UK and employs 218,000 people. Tesco has stores in 6 other countries including; Ireland, India, Malaysia, Thailand, Czech Republic and Hungary.
- Tesco was founded in 1919 by Jack Cohen. The name derived from a combination of T.E. Stockwell and Cohen’s surname. Cohen purchase tea from T.E. Stockwell in 1924 and merged the names to create Tesco.
- Dave Lewis is currently CEO. He was appointed in 2014.
- Tesco boasts a market share of just over 27% and has a market capitalisation of over £23bn.
- In 2017, the supermarket posted revenue of £55.9 billion and pre-tax profit of £1.3 billion
Three Key Challenges:
Competition – Lidl & Aldi: The supermarket sector has become one of the most fiercely competitive markets in the UK. This has largely been fuelled by the rapid growth of Aldi and Lidl. These two budget supermarkets founded in 2011 and 2012 respectively were traditionally low cost but low quality. Over the past few years, they have invested heavily in marketing higher quality products at lower prices than the big four. Their growth in market share illustrates their rapid development. Lidl and Aldi’s combined market share has grown from 8.4% to over 12.7% in under 4 years. Tesco has however, announced plans to open its own discount chain to compete with Lidl and Aldi (see below).
Competition – Big 4: The Big Four supermarkets may become the Big Three if the agreed merger between Sainsbury’s and Asda is approved. The deal is worth £14 billion and the combined supermarkets would leapfrog Tesco to become the largest supermarket group with 31% share of the market. Sainsbury’s CEO, had revealed that customers are likely to see 10% falls in prices of goods. This deal is likely to hit Tesco hard if it goes ahead. For example, Tesco offer customers a price match promise on branded goods. If a combined Sainsbury’s and Asda are able to instantly cut prices by 10% this may be something Tesco needs to reconsider. Even without the price match issue, the price war amongst the Big Four is certainly likely to heat up. Tesco has however, fought back recently formed strategic alliance with French supermarket giant Carrefour (see below). This alliance will give it greater economies of scale with suppliers and allow them to slash prices.
Consumer Trends: Tesco will need to keep up with changing consumer trends in the Internet age. While Tesco boasts a very strong online shop section, it does have numerous megastores on huge estates. In the wider retail sector, stores with huge outlets like Toys R Us and Maplin’s have collapsed due to failure to adapt. The effects on Tesco of the internet age however, will not be as acute as they were in these cases. Tesco must adapt departmentally. One of these key changes is that many consumers now buy goods such TV’s, entertainment systems and films online. Tesco could once fill numerous rows with these goods but naturally have had to cut back. The speed of change is the real challenge. For example, DVD’s were released in the late 1990’s and became the most popular disc format for movies. By 2010, internet downloads had risen in popularity and the death of the DVD was already being discussed. As trends change, filling these vast vacant spaces with profitable items is a key challenge.
Booker Acquisition: In March 2018, Tesco completed its acquisition of wholesaler Booker for £3.7 billion. Booker supplies 120,000 retailers and it also owns the Londis, Budgens and Premier brands. The deal faced significant regulatory scrutiny but because Tesco and Booker do not directly compete, the deal went ahead. This deal allowed Tesco to incorporate wholesale products into its stores.
Sale of Korean unit: In 2015 Tesco sold its Korean unit, Homeplus, for £4.2 billion. This was a successful move to balance the books. The funds gained from this were used for investment and to pay off debts. The supermarket had suffered a staggering £6.4 billion in the year to February 2015 so drastic action was needed.
Accounting Scandal: In 2014 Tesco was found to have overstated its profits by 25%, roughly £250 million. It had manipulated its profit figures by delaying payments to suppliers and taking payments earlier. This meant that expenditure and income were not properly accounted for, leaving a black hole in their accounts. In 2017, Tesco paid a £129 million fine to the Serious Fraud Office and £85 million in compensation to shareholders. Three executives were charged with fraud but the case was initially abandoned in February 2018 after one of the defendants suffered a heart attack. In March however, the SFO announced that they will be seeking a retrial.
iNews : Tesco set to open discount chain store to compete with budget supermarkets Lidl and Aldi
BBC News: Tesco and Carrefour say ‘strategic alliance’ will cut prices
Retail Gazette: Amazon rebuffed by Tesco and Sainsbury’s over product deals
City A.M: Tesco hit with huge equal pay claim that could leave it liable for billions
Tesco has appeared to have turned a corner in its fortunes. After the accounting scandal and the £6.4 billion loss in 2015, it has worked hard to claw its way back to profits. Like for like sales rose 2.2% in the year to February 2018 and it seems like Tesco is back on track. The fall in the value of the pound after the Brexit vote also didn’t have a huge impact. The Asda-Sainsbury merger however, is potentially the most significant challenge facing Tesco. This deal is likely to shape the supermarket sector and could see Tesco knocked off top spot. Tesco’s turnaround has been strong so far but rocky roads may be ahead.