Tesco – Porters Five Forces analysis: Wide economic moat

The Porters five forces framework is used to analyse the competitive position of Tesco, the UK supermarket giant. Tesco has a strong economic position over its competitors, which is described as having a wide economic moat. The wider the economic moat of Tesco, the greater its ability to counteract its competitors attempts to win market share, customers, access to capital and ultimately profit. Below you will find our comprehensive Porters five forces framework. We also analysed Tesco using these other frameworks:

Threat of new entrants to Tesco

Tesco is one of the largest and most well-established retail chains in the United Kingdom which has many outlets throughout the country. Tesco has 4074 stores around the UK, and this large number of store locations makes it convenient for people, and this has huge importance for its competitive advantage.

Tesco has a good advantage in terms of access to capital and a huge organized supply chain. and any new business that wants to outperform Tesco will need to have a huge amount of capital and need to build an organized supply chain of huge product categories.

Tesco has strong brand recognition and ability to conduct extensive marketing campaigns that new entrants will need to match. Therefore, it can be concluded that the Threat of new entrant’s is low for Tesco, contributing to Tesco’s wide economic moat.

Competitive Rivalry for Tesco

Besides Tesco in the retail market of the UK, there are also big retail players available who have strong supply chain distribution systems alongside huge capital and marketing efforts. Some key players are ALDI, and Sainsbury’s. Tesco needs to compete with those companies and those businesses have similar access to and cost of capital as well as similar supply networks. The location of the supermarket, pricing, and marketing efforts are the key factors that create differences among those businesses and those businesses. Otherwise they essentially provide the same thing, groceries. Given the goods sold are much the same, this causes intensive price competition and rivalry which limits Tesco’s ability to earn profits in excess of its cost of capital.

Bargaining power of suppliers used by Tesco.

Tesco has huge categories of products that come from many suppliers. Tesco collects its products from 2500 suppliers therefore Tesco has huge availability of product suppliers. So, the business can easily switch its suppliers and the cost of switching suppliers will also be low which gives the business advantage in terms of negotiations with suppliers. Therefore, Tesco can bargain with suppliers to get products at a low price which can increase the profit margin for Tesco. So, according to the Porters five forces framework, the bargaining power of suppliers used by Tesco is low, and this strengthens its economic moat and improves its ability to achieve strong profits.

Bargaining of buyers of Tesco products

Tesco generally sells daily life products or groceries that satisfy the consumer’s basic needs. So, most consumers are price concerned while shopping for grocery products and the availability of the products. Therefore, consumers mostly choose the stores that are near them (see Social factors in our Tesco PESTEL analysis) provide products at low cost. There are many competitors like ALDI and Sainsbury’s that compete with Tesco that provide similar and often the same grocery products. This means price wars are common and the buyer has the ability to switch between supermarkets. If a competitor provides a lower price than Tesco, consumers will most likely take products from that competitor. Therefore, the switching cost for buyers is low which makes the bargaining power of buyers high for Tesco.

Threat of Substitutes for Tesco

Products that can satisfy the basic needs of consumers are mainly sold by Tesco such as groceries, electronics, and clothes. For purchasing those products retail shops are mostly used. Other alternatives such as E-commerce can be used to purchase products but there are various factors such as delivery time and shipping fee available which makes it incompetent with retail super chain shops. Therefore, for the people of the UK switching costs to alternatives will be costly which makes the threat of substitute low for Tesco.

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