| Name | Tesco PLC |
| Industry | Food retailer – Supermarket |
| Founded | 1929 |
| Headquarter | Shire Park, Welwyn Garden City, Great Britain |
| CEO | David John Lewis (since September 1st, 2014) |
| Revenue: | GBP 64.76 billion in fiscal year 2020 (ended on February 29th, 2020) |
| Profit: | GBP 1.66 billion (2.6% net margin) |
| Competitors: | Wm Morrison Supermarket, J Sainsbury, Carrefour SA, Casino Guichard Perrachon |
Company Overview
Tesco is operated as a food retailer through online retailing, brick and mortar supermarkets, and a private-label brand of products. Tesco mostly provides services in Europe and a few countries in Asia. It is the number one retailer and one of the largest companies in its industry. Tesco sells groceries, beauty products, consumable, electronics from its network of 3,400 physical stores under Tesco Express (small format store), Metro (medium-sized, urban locations), Superstore (large supermarket), and Extra (hypermarket). Tesco’s retail stores also include a network of 780 One Shop convenience stores and 200 Booker stores. Outside of the United Kingdom, Tesco has 150 stores in Ireland, 900 stores in Central Europe, and more than 2000 in the Asia/Pacific region (mostly in Thailand). Tesco PLC also has Tesco Bank that offers consumer banking products to about 7 million customers. Let’s go over a swot analysis of the company.
Tesco Strengths 2021:
- A large network of retail stores makes shopping convenient for customers as well as taking market shares from competitors.
3,400 brick and mortar stores under Tesco brand plus 200 Booker (a wholesaler) stores alone in the UK definitely helps Tesco reach out to as many customers as possible and make finding a Tesco nearby become a no-brainer task. Tesco’s distribution network would intimidate any similar retail brand, from big to small, trying to penetrate the U.K market.
- Private label and exclusive in-house products give customers a cheaper choice but similar quality to that of famous brands.
Tesco has contracts with brand name manufacturers to produce their goods but distribute them under the Tesco brand. As a result, Tesco can offer them cheaper than if the products bear the original name and many customers prefer them given their competitive price and quality. Sales in the UK and Ireland in the fiscal year 2019 went up 3%, partially thanks to the introduction of eight new “Exclusively at Tesco” brands, including Ms. Molly’s and Hearty Food Co. By doing so, Tesco can increase customer loyalty. - Flexible methods of payment for customers in cooperating with Tesco Bank.
Moving toward cashless, Tesco offers a Pay+ mobile payments application, PayQwiq digital wallet, and a new contactless Clubcard to provide customers a quick and convenient way to pay at checkout.
Tesco Weaknesses 2021:
- Participating in many types of retail results in inefficiency.
Not only provide services through its supermarkets and convenience stores, but Tesco also owns and operates Dobbies Garden Centres, Euphorium bakeries, Giraffe restaurants, Tesco Opticians. Those non-core businesses have contributed to an increasing number of head office jobs and call center workers, and as a result, Tesco divested those businesses in 2017 to free up resources and cut down costs. However, Tesco still owns many other types of service businesses, besides its retail stores, that do not generate good profit and therefore they should be divested. - Lack of innovation leads to cutting costs as the main strategy to boost net income.
Tesco has been struggling to increase sales and its profit margin since its culture does not encourage finding new ways to grow the business besides acquisition. Therefore, to stay afloat, Tesco announced a cost-cutting target of GBP 1.5 billion by fiscal 2019/20, including the removal of 9,000 roles, or about 4% full-time equivalent employees. Tesco expects this short-term strategy can save GBP 150 million. However, cutting costs is not a sustainable strategy since the company can only cut down so much until it backfires.
Tesco Opportunities 2021:
- Increase sales through online channels. Currently, customers can order groceries on the Tesco website and have them deliver as soon as on the same day of the order.
However, apart from groceries, other non-food items are very limited in terms of choice and pricing, which eliminates Tesco.com from customers’ one-stop-shop website list. Instead, Tesco can follow Wal-Mart in the U.S to sell many more items at a very competitive price, such as electronic devices, entertainment, tools, and gardening. - Expand the Booker brand with a cash-and-carry model to countries like Brazil, where the model has proven successful.
Cash-and-carry is a model where all credit transaction is excluded (no sales are made on account receivable), all goods and services require up-front payment. This model is still popular among wholesalers, such as Metro from Germany, however, only in a few countries, this model is actually a success. By implementing this model using the Booker brand, Tesco would be able to increase sales from another market, scale down its account receivable and improve cash flow, further strengthen its financial position.
Tesco Threats 2021:
- The consequences of Brexit will affect Tesco’s supply chain in Europe as well as its revenue and income.
The withdrawal of Great Britain from the EU will leave UK firms exposed to tariffs and other trade barriers that the bloc imposes on non-member countries, and vice versa for EU firms exporting goods to Great Britain. Tesco sources its inventory from all over Europe and imports them to the U.K, and EU goods will be subjected to higher taxes, not to mention that they will go through stricter custom inspection and further delayed delivery. Similarly, to serve its store in Central Europe, Tesco will have to export UK products to those stores and subjected to similar treatment with higher tax and stricter inspection. Nevertheless, Tesco cannot pass all the increased costs to customers, hence its net income may decrease.
- Discounted stores, such as German’s Aldi and Lidl, are taking over the British grocery market.
The German brands have a plan to open hundreds of new stores in most towns and cities. Started from small discounted shops, Aldi and Lidl are now running a large supermarket format and step into Tesco’s territory. Moreover, changing perceptions among higher-income shoppers allows the German to add more space to affluent areas in London, further compete with Tesco’s Jack’s brand of the discounted store. Jack has not reached the level of momentum necessary to be considered a serious threat to Aldi and Lidl.
Tesco SWOT Analysis Conclusion:
Despite strong competition, Tesco is still a leader in the retailer sector in Great Britain and Ireland. Strong trading in Tesco’s core food business has been offset by downturns in small but more profitable lines – clothing, general merchandise, and Booker’s catering sales. Tesco’s financial outlook for the recent fiscal year is strong enough to maintain a dividend payout ratio of 50% of net income and it is expected to increase to 59%. Tesco plans to sell its Thai and Malay business for GBP 8.2 million and uses that cash to concentrate on the U.K market. This move will improve the financial structure of the company; however, it reduces growth prospects. It will be interesting to see how much of the new strategy of restructuring and cutting costs would play out in the medium and long term for Tesco.
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References
Allen, C. (2020). Tesco: Company Outlook. Bloomberg Intelligence.
Tesco PLC. (2020). Annual Report and Financial Statements 2020.
