Tesco plc is a British multinational grocery and general merchandise retailer headquartered in Welwyn Garden City, Hertfordshire, England, United Kingdom. It is the third-largest retailer in the world measured by revenues (after Walmart and Costco) and the second-largest measured by profits. Tesco has over 6,800 stores in 12 countries across Asia, Europe, and North America. In the UK convenience store market, Tesco Express’ market share has increased over the years to 32%, compared to 11% for Sainsbury’s Local.
Strengths
Large store network – Tesco has an extensive international store network and significant market share in all the markets in which it operates, most notably the UK. At the end of the 2020 financial year, Tesco operated over 3,400 stores in the UK alone. The large store network provides excellent access to potential customers and enables Tesco to benefit from economies of scale in purchasing and logistics.
Strong brand and reputation – Tesco has established itself as a strong, well-known brand over many years of operation. It has built a reputation for value for money, high quality products and excellent customer service. The strong brand loyalty and positive perception of Tesco among customers provides a competitive advantage against rivals.
Loyal customer base – Tesco utilizes various customer loyalty programs like Clubcard to build stronger relationships with customers and encourage repeat purchases. Over 17 million UK households are members of the Clubcard scheme. Loyal customers are less likely to switch to competitors easily which provides stability and predictable sales.
International presence – While Tesco started in the UK, it has significant operations in other countries through a mix of organic expansion and acquisitions. Its international portfolio includes Central Europe, Ireland, Malaysia and Thailand. An international presence allows the company to diversify revenue streams and reduces over-reliance on the mature UK market.
Experienced workforce – Tesco has developed a large, experienced, and loyal workforce over the decades. Its employees are well trained in merchandising, logistics, and customer service skills required in the retail business. This skilled workforce is a valuable asset and competitive differentiator for Tesco.
Financial strength and scale advantages – As one of the largest grocery retailers globally, Tesco benefits from significant scale advantages. It has strong cash flows and balance sheet to fund expansion plans. Large scale also enables Tesco to negotiate favorable terms from suppliers and keep costs low.
Weaknesses
Perception of “everyday low pricing” damaged – For long, Tesco followed an aggressive ‘everyday low pricing’ strategy in the UK. This led to accusations of squeezing suppliers which damaged Tesco’s reputation and relationship with suppliers. It lost some supplier contracts and market share to Waitrose and discounters Aldi/Lidl as well.
High dependence on UK market – Tesco generates majority (55-60%) of its sales and profits from the UK. This concentration makes it vulnerable to economic fluctuations and increased competition in its home market. Sales declines seen in recent years in the UK have impacted Tesco’s overall performance.
Outdated stores – Some of Tesco’s older stores have outdated layout and formats which do not meet changing customer needs. Customers now prefer shops with easily navigable aisles, greater variety of products and modern Check Outs. Rivals like Aldi/Lidl offer a fresher shopping experience attracting more customers.
Inability to compete on price with discounters – Tesco finds it difficult to match the aggressive ‘low prices’ offered by German discounters Aldi and Lidl. Their lower cost base allows them to consistently undercut Tesco and other major supermarkets on prices inducing more customers to switch.
Struggling international operations – While international operations provide diversification, some markets like the US and Japan have struggled to gain real traction resulting in write-downs and exits. Performance in remaining countries like Central Europe, Thailand and Malaysia also varies with currency volatility, regulatory changes and local economic cycles posing challenges. Brexit also brought about currency exchange issues.
Opportunities
Omni-channel retailing – There is a major opportunity for Tesco to strengthen its omni-channel strategy by better integrating its online and offline offerings. Investments in Click & Collect services, enhanced digital capabilities and delivery infrastructure can tap growing online grocery demand. Delivery through schemes like Tesco Whoosh in as little as 60 minutes also appeals to time-poor demographics.
Growing convenience stores segment – Convenience stores offering top-up shopping close to home are becoming increasingly popular. Tesco is well positioned to capitalize on this trend through further growth of its One Stop and Express store formats. The acquisition of Booker also provides a solid convenience delivery infrastructure through Premier stores.
Expanding product ranges – There is scope to increase the range of Non-Food categories like General Merchandise, Electrical and Apparel in large hypermarkets. This will attract more customers under one roof by fulfilling multiple shopping needs. Private Label development across categories also boosts margins.
Loyalty programs and data analytics – Customer and transaction data from 17 million Clubcard members offers unparalleled opportunities. Tesco can leverage data analytics to gain better customer insights, personalize offers and target promotions more effectively. Build strategic partnerships with Fintechs for new digital loyalty propositions.
Regeneration of underperforming stores – Improving the customer experience through refurbishments or redevelopments can revitalize sales from dated stores over time. Acquiring additional stores in affluent urban locations also enlarges addressable customer catchments.
Acquisitions for geographic footprint – Opportunistic acquisitions of regional retailers remain a faster route for international footprint expansion compared to organic routes alone. Complimentary geographies like central/eastern Europe or Asia Pacific provide scope for M&A growth.
Threats
Increased competition in UK grocery – Aldi and Lidl having gained significant traction currently hold a combined market share of 14.3% in the UK grocery market, growing at 20% annually. Their lower costs allow very competitive everyday pricing inducing more customers switching from major supermarkets like Tesco, Asda, Sainsbury’s and Morrisons. Waitrose also appeals to higher income demographics.
Macroeconomic uncertainty – With Britain’s exit from the European Union, there are risks of slowing economic growth, rising inflationary pressures and fluctuating currency exchange rates in key Tesco markets like the UK, Ireland and Central Europe. This may negatively impact customer spending power and store footfalls.
Changing consumer preferences – Trends like increased health consciousness, flexitarian diets, local sourcing, smaller household sizes and convenience are changing what and how customers shop for groceries. Retailers need to keep evolving product ranges, store formats and offerings keeping pace.
Regulatory compliance – Across different markets, retail operations are subject to various regulations relating to areas like employment, consumer protection, product standards and data protection. Changes in these laws can increase compliance costs. Exiting operations also brings with it regulatory exit costs and litigation risks.
Competition from discount variety stores – Non-food specialists like B&M and Home Bargains have seen rapid growth by offering tremendous variety at low prices at large out-of-town stores complemented by smaller convenience stores. Their appeal reduces larger baskets at Tesco stores.
Elevated supply chain costs – With inflationary pressures due to factors like wages, fuel prices and Brexit, there is little flexibility left to absorb further cost increases from suppliers. This may compress profitability if not recovered through pricing.
Rising technology investments – Significant ongoing investment is required to digitally transform and stay competitive on online and data analytics capabilities. Failure to keep pace with spending could impair Tesco’s competitive positioning versus adaptive rivals.
Tesco remains one of the most prominent retailers in the UK and globally but faces strong challenges from discounters seeking to break its dominance. While new opportunities exist, addressing weaknesses around outdated stores, scaling international operations profitably and keeping pricing competitive amid rising costs will be key focal areas going forward. Maintaining a robust omni-channel strategy leveraging its loyalty program data will also be pivotal to fend off competition and drive profitable long-term growth.
Andrew Stroud