Davos World Economic Forum business Summit 2014 on inequality
Davos World Economic Forum business Summit 2014 on inequality In the recently concluded world economic…
Globalisation in food retailing industry
Threat of new entrants and substitutes
Bargaining power of suppliers and buyers
Domestic organic growth through innovation
Expansion into new markets
Leadership and management
Food retailing industry is one of the less globalised industries around the world mainly because several countries has not yet liberalised in food retailing sector. Taking the case of India and several other similar developing countries the branded food retailing sector has not been opened to foreign direct investment due to the fears that the competition will be stifled, the local fragmented unbranded food retailing sector will be threatened and the most important consideration which is the control of the retail value chain being appropriated by the multinationals.
Tesco is the number one food retailer in the United Kingdom and has less scope for organic growth, because of which it is aggressively pushing for entry into other markets. Tesco has already expanded into Eastern Europe, the United States, several countries in Southeast Asia and trying to expand to Africa, South Asia and other regions. In the following two paragraphs the arguments for and against globalisation in the food industry in terms of the credit of new entrants and substitutes and the bargaining power of suppliers and buyers within the United Kingdom market and with consideration of the major food retailers such as Tesco, Sainsbury and Morrison is conducted. The above two elements had been developed by Michael Potter in his five forces framework for industry analysis and business strategy development. While the five forces framework is a method for evaluating the competitive intensity and attractiveness of the market for an organisation, the below evaluation also considers the perspective of consumers.
When considering the United Kingdom market it is seen that there has been no new entrants which could substitute or pose a threat to the major players such as Tesco, Sainsbury, Morrison or even the other food retailers such as Asda. The three major players which are Tesco, Sainsbury and Morrison had been established for several decades in the United Kingdom market and it is Tesco which has been seeing a large-scale organic growth in the country. Even though Asda is a recent entrant in the United Kingdom it was able to capture some market from the major place from due to the enormous backing it had from the global food retail giant Wal-Mart (Lynch, 2006). Asda was able to gain and the expense of other supermarkets because it was positioned differently providing products at a cheaper rate than that of the other supermarkets and having a product range appealing to a certain segment of the consumer (Bennison and Warnaby and Pal, 2010). From this it can be evaluated that for the major supermarkets which has already been established in the United Kingdom there is literally no threat of new entrants. A minority player can establish its presence in smaller towns and cities but will not be able to compete against the major supermarkets and their level. There are several other grocery food retailers and assess the co-operative group, Waitrose, Aldi, Cost cutter, Lidl and even Marks & Spencer, and all of these are operating under a differentiated strategy. Some of them as the business strategy of providing no-frills, some are region specific and some others have a region of origin strategy (Lang, 2005). Even many of the smaller food retailers were gobbled up by the major players such as Tesco, Iceland and Sainsbury. With their acquisition and merger strategies the major supermarkets have been able to eliminate the competition to a large extent. Hence the essence of globalisation which is the relative ease of entry for new competitors to enter the market has been essentially stifled in the United Kingdom mainly due to the market characteristics and the business strategy employed by the major supermarkets (Leelapanyalert and Ghauri, 2006). But when considering from a consumer point of view it can be seen that Tesco which is a major food retailer is engaging in unethical practices of stifling competition and hard bargaining from its suppliers which had been referred to the competition commission during several times.
When considering the threat of substitutes it can be seen that there is no reasonable level of substitute products for food retailing industry, but one of the substitute business strategy which is seeing growth is the food retailing through online methods (Bennison and Warnaby and Pal, 2010). But online channels of food retailing are also championed by the major supermarkets. From a futuristic point of view it may be said that new entrants who may threaten the top UK food retailers will enter the market with the business strategy of online retailing of products.
When considering the bargaining power of buyers is saying that it is virtually non-existent. All the major supermarkets have a loyal group of customers mainly built up from the business strategies of differentiation and product loyalty. Tesco had invented the strategy of creating customer loyalty through Tesco Clubcard scheme and has been followed by other supermarket chains. The buyers do not have any kind of bargaining power in terms of price and product from any of the supermarket chains (Altaner, 2011). A disgruntled buyer could switch from one supermarket to the other but these are only very minor in nature and would not affect the operations of any major supermarkets as long as they are able to satisfy a majority of its customers. And from the perspective of the major supermarkets there is no bargaining power for the buyers and then they can be determined that there is less competitive intensity from the bargaining power of wireless and the profitability of the organisations have increased (Mintzberg, Ahlstrand and Lampel, 1998). But from the perspective of the consumers their industry segment is unattractive as they are only able to switch the food retailers which are all offering similar varieties of products at similar prices.
When considering the bargaining power of suppliers it can be seen that due to the consolidation of the retailing sector by major supermarket chains the suppliers or mainly the farmers and branded food producers do not have adequate bargaining power over these companies. In that Tesco had been engaging in unethical practices whereby we do retail chains such as Tesco and Sainsbury are able to a more favourable terms from the farmers than other smaller supermarkets or shops. In the early part of 2000 there were several concerns raised by social and community organisations and farmers associations which was then reported to the competition commission (Coca-Stefaniak, Parker and Rees, 2010). On a similar note in the competition commission also evaluated the major retailer’s landholding at different regions and raised concerns against the mushrooming of retail chains in every part of the country. The competition commission in fact found some correlation between the size of the buyers and better buying terms. But in the end there was not much have action taken against any of the supermarket related to competition and the purchase practices of the major retailers. Even then the argument that major supermarkets are able to exert pressure on farmers and agricultural producers due to the sheer size and bargaining power cannot be discounted.
From the perspective of consumers of food retailers the enormous bargaining power of the supermarkets on the farmers and agricultural food producers could promote a positive effect as the prices could be kept low. But it also has to be evaluated whether the advantageous change in the price from the better bargaining power of large organisations on farmers and agricultural products are being passed on to the consumers. The increasing operational profit of Tesco over the several years indicates that this is not the case and hence it may be concluded that the globalisation of retailing has not provided the intended benefits to the consumers in the United Kingdom (De Wit and Meyer 2004). When analysing the other markets, especially in developing countries that are refusing entry of multinational organisations into their food retailing sector, these are mainly because of the fear that the supermarkets will be able to exert enormous grip on the supply chain.
When evaluating the United Kingdom food retail industry it can be seen that the scope for organic growth for many of the major players has in fact a reduced. Tesco had been engaging in acquisition of many smaller retail supermarkets in the last decade and the strategy has also lost steam mainly because almost all the smaller supermarkets have either been acquired or are remaining independent (Johnson, Scholes and Whittington, 2005). The future organic growth could come from the expansion of the separate channel of distribution through online retailing. Even though there were other smaller companies which had initially involved in online food retailing it was Tesco which innovated from several food retail formats through the online channel which was then followed by other supermarkets (Altaner, 2011). Some of the other innovative strategies was the introduction of own label product lines, computerising and centralising the distribution systems, developing shopping centres outside the major cities, opening up petrol stations in the ground of its superstores etc. Tesco’s latest innovation is in store TV advertising for products where product promotion is conveyed to the consumers in the form of recipes and helpful suggestions. These strategies are based on the principle that 70% of the purchase decisions of the consumers are making sure and it is with consumers in the store which are most vulnerable to product promotions and suggestions. Tesco is also working on the Trolley Tamer which is a new kind of shopping trolley that plays DVDs and games to entertain children while their parents are shopping (Kotzab, Munch, Faultrier and Teller, 2011).
Online retailing of grocery products has seen a growth in in the United Kingdom in the past several years. Grocery market was over £150 billion in the year 2010 which is an increase of 3% over 2009 (Felstad, 2011). Amazon.com recently announced the launch of an online grocery store in a bid to appeal to segment of consumers through its offer of 22,000 products which will include ready meals and popular household brands. It is estimated that the UK online food and grocery market experienced a growth of about 400% in the last two years with the total spending reaching up to £6 Billion. Sainsbury’s online food and grocery sales increased by over 20% in the last two years and Tesco’s increase in the online sales channel is around 35% (Tesco plc, 2011). Oh But even considering the levels of organic growth through the online channels it can be seen that there is not much scope for double digits of growth as customer acquisition has been virtually stagnated. The customers have been fragmented into segments and they are all catered to by different supermarkets which are having different strategies (Thompson, 2011). Hence when evaluating the growth strategies can be seen that Tesco is conveniently investing innovative strategies such as online retailing. Moreover the expansion of Tesco into other retail segment such as clothing, banking and other products is also a particularly innovative tactic. Tesco has in fact focused on entering into other areas through the strength of its brand name.
Tesco has been successful in opening up new markets in Central Europe and Asia and when considering the total Tesco sales the international operations bring about 25% of the total revenues. In the last year Tesco’s proportion of total group space outside the United Kingdom grew to 30% with operations in Hungary, Poland, Czech Republic, Slovakia, Thailand, South Korea, Taiwan and the Republic of Ireland. The future entry intention into the markets in Malaysia, Japan and other areas are planned. Tesco is not only developing its food retailing but also concentrating on the back-end operations by developing international sourcing centre which has broadened the sourcing portfolio as well as the geographies (Tesco plc, 2011). The international sourcing of products is now being conducted from different geographies such as Thailand, India, Sri Lanka, Bangladesh and China and is essentially following a Wal-Mart strategy of overseas operations. The globalisation of the retailing industry is a major driving force for such levels of increased sourcing opportunities for Tesco. Even though in these countries the retailing of branded food products through foreign direct investment is not yet been allowed, Tesco has entered the market and has established a smaller presence through its back-end operations, which ease intact providing a competitive advantage. But in the story of the expansion strategies, Tesco has also fumbled on several areas mainly in the United States market where it opened the Fresh & Easy stores which has not yet been profitable due to many flawed business strategies (Bowers, 2011). Similar is the case with Tesco Japan where the company even to open several shops is yet to gain profit from the operations.
Tesco in fact has achieved profitability and is continuing to grow are the markets in Central and Eastern Europe and south-east Asia. Tesco has invented some innovative strategies in food retailing essentially and the different cultural aspects of different countries. In many global expansions Tesco has started by opening a small number of very large hypermarkets and once the brand name and customer awareness has been built it has continued to open other formats such as modern convenience stores and specialist outlets. The innovative strategy is also evident from the formats of the store and the usage of the branding in different countries. In Turkey, Tesco is not using its own brand but the shops are called Kipa. From the perspective of consumers there are several criticisms against the expansion of multinational retailers into developing markets with the main points that these retailers are squeezing out the small stores and threatening the diversity of products and consumer choice and taking advantage of the weaker regulation in developing countries.
David Reid has been the chairman of Tesco since April 2004 and he is retiring in November 2011. Tesco has appointed Sir Richard Broadbent deputy chairman of Barclays and the former Treasury person as the next chairman. The leadership of Tesco has also seen change in the form of Philip Clarke replacing Sir Terry Leahy earlier this year. When evaluating the career of the new chairman he has worked in government as well as private organisations. Mr Broadbent began his carrier in the Treasury then joined the investment house of Schroders where he built up his carrier to rise to the position of head of the European corporate finance business. He was appointed to the board of Barclays and became deputy chairman along with chairing the bank service committee and the remuneration committee. One of the areas where Tesco will get advantage is from the new chairman is experiencing the government and at the city. Mr Broadbent has been chairing several organisations and has watched experience in risk management through working in Barclays bank as well as leading the government and other private organisations (Business Standard, 2011).
When analysing the leadership and management theories there are several possibilities through which an organisation as the size of Tesco can be led and managed. The previous chairman Mr David Reid had a hands down approach management functions and leadership functions or organisation was divided. Mr Reid was of the opinion that the leadership of the organisation is left to the chairman and the Management is left to the Chief Executive Officer of the organisation. Mr Reid has played a pivotal role in advancing Tesco’s status globally. He is considered as a master strategist in the areas of transformation of the business, strategy management, competition and customer service management. It was in fact under the stewardship and management of Sir Terry Leahy that Tesco evolved in the global strategy of expansion into different product areas and other geographies. With the exit of both the leader and the manager of the organisation simultaneously there could be a gap or a vacuum which could be created at the top levels.
The foremost responsibility for the leader is to define reality through a vision. The success of the leader can be analysed by looking at the followers and whether they are able to reach their potential, are they able to learn, and achieve the institution’s goals and objectives. Interest in the leadership of organisational managers increased during the early part of the 20th century and focus on the qualities that distinguished leaders and followers, the situation factors and skill levels. There are several theories but most of them can be classified under 8 major headings as follows. They are the great man theory, the trait theory, the contingency theory, situational theory, behavioural theory, participate in theory, management theory and relationships theory (Alexander and Doherty, 2010). With respect to the present management and the new leadership the best possible material which can be analysed and can be recommended is the participating theory. The participative leadership theory suggests that ideal leadership style is one that takes the input of the others into account. A participative leader rather than taking autocratic decisions seeks to involve other people in the process including subordinates, peers, superiors and other stakeholders. With the case of the future chairman Mr Broadbent due to the enormous ability is an experience which he brings to the new role as the chairman of Tesco should be able to provide leadership and management of the company by having a participative style of leadership. It is seen that most of the other managers of the organisation our remaining in place and have the previous first-hand experience about the trajectory of growth which Tesco has achieved in the last decade. It is not to say that Tesco has achieved the largest possible growth but the achievement of Tesco when comparing with other organisation is commendable. Since both the chairman and the Chief Executive Officer is changing within a short period of time there is a need to maintain the flow and leadership of the company by having a participative process of leadership.
Coming to the specific aspect about the long-term growth prospects in a scene that the company has in fact achieved an increase of sales of about 6.8% with an increase in the profit by 10.4% with earnings per share growth has been 9.8% and the dividend share increased by 9% (Tesco plc, 2011). Now that the recessionary phase in the United Kingdom is over it is pertinent to look at the growth areas of the business mainly in the domestic organic as well as in the new markets. One of the areas where quota leadership skills will be necessary will be in the areas of global sourcing and improvements in the other areas of business which is related to non-food. Tesco has intact generated quite good profitability in the non-food category of business in the previous year especially from banking and insurance operations. As the new chairman Mr Broadbent is having extensive experience in the banking industry by working as the chairman of Barclays, is expected to provide a boost to the leadership of the company and guide the organisation into the development of the non-food segment.
The above report evaluated the globalisation of the food retail market which is extremely competitive and profit margins are becoming law for many organisations. But an evaluation of the operations of Tesco in the United Kingdom and from the subsidiaries reveals that the profitability has increased in the domestic as well as international operations. When evaluating the industry segment with the five forces analysis it is seen that the threat of new entrants which can provide competition to Tesco is virtually non-existent and Tesco is in fact entering into the substitute area of food retailing group online channels. The bargaining power of suppliers and buyers are also very less in the case of the domestic market but this could vary from country to country as the organisation is now operating in different geographies. The levels of domestic organic growth have been stifled due to several internal market actors as well as the factors arising from government regulations related to competition. Tesco had employed the strategy of acquisitions of smaller supermarkets and it cannot be employed furthermore because of the regulations on competition. Hence it is necessary for the organisation to expand into new markets which it has done by entering Central and Eastern Europe as well as Southeast Asia. Tesco has developed several innovative ideas for organic growth which has been detailed above report and has been successful in many of the overseas ventures. But there are also failure stories which are coming out from the United States and Japan which needs to be rectified by the new leadership in the form of Mr Broadbent as the chairman and Mr Philip Clarke as the new chief executive officer.