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UK Grocery Retailing Industry Macro Influences And Tesco Marketing Essay

Paper Type: Free Essay Subject: Marketing
Wordcount: 5135 words Published: 1st Jan 2015

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The global retail industry has metamorphosed more in the last seven decades than it has in the last seven centuries. History tells us that the retail business depends on the economic and disposable income levels of the populace that moves from the centres of economic deprivation to the industrialised and prosperous environments. The evolution of the retail industry in the United Kingdom bears testimony to this phenomenon.

The last few decades have seen heterogeneous expansion in food retailing in the UK, including the materialisation of innovative shop formats, superior logistics, capital outlays in new technology, sophistication of supply chain processes, and the continuous growth of supermarket chains (Nicholson-Lord, 2004).

This report takes up the food retail sector, with particular reference to the strategies followed by Tesco, for examination and analysis.

Supermarkets reflect, in the United Kingdom as elsewhere, the reality of contemporary economic life and have an enormous and urbane influence over the grocery supply chain (Defra, 2006).

The supermarket industry is lucritive and could be said to be profiteering at consumers expense, however recent investigations into the industry by the competition commision show that this is not the case “the industry is currently broadly competitive and that, overall, excessive prices are not being charged, nor excessive profits earned.” (Defra, 2006). The sector has changed and adapted over time from solely selling groceries to offering a wide range of products under one roof. With technologcal improvement and the internet being used by the many, operations have also moved online allowing customers to shop for anything from bread and milk to car insurance and telephones from their computer.

This structured report deals with: the key macro factors in the evolution of UK supermarkets; the current attractiveness of the supermarket sector, and; Tesco’s growth strategy.

2. Key Macro Factors in the Evolution of UK Supermarkets

The retail business in British cities, till the 1960s, had a hierarchical arrangement and focused on the central commercial districts. It was balanced by a comparatively minor number of town or district centres, offering a strapping convenience-goods merchandising function, and a secondary array of comparison wares for particular city centres (Bromley & Thomas, 1993).

The next stage of transformation from the mid-1960s onwards: increasing prosperity and disposable incomes; rising levels of vehicle ownership; urbanisation; increased levels of female participation in employment, has driven new patterns of consumer behaviour and increased demand for specialised and sophisticated ranges of goods and services (Bowlby, 2001). This transformation has been instrumental in changing the character of the urban retail landscape (Bromley & Thomas, 1993).

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Political and Legal

The supermarket sector is under constant political watch since restriction of competition and accusations of being an oligopolistic market arose. Investigations carried out by the Competition Commission resulted in the adoption of a Code of Practice, which has now been in operation for some years. The sector is also under governmental pressure to increase its employment levels, particularly because employment in the supermarket sector has not kept pace with growth (Emerging, 2010).


Supermarket operations are under pressure because of the ongoing economic downturn. High unemployment levels, along with stagnation in consumer incomes, has affected consumer spending. Supermarkets are responding with better offers through renegotiation of supplier prices and improvement of operational efficiencies (Tesco, 2009).


Social and demographic changes play a major role in supermarket operations. For example, the ageing population, along with an increasing number of female workers, single parents and divorcees, is reducing the frequency of meals prepared at home. Increasing consumer focus on health is leading to greater stocking of organic foods and Fairtrade marked products (De Chatel & Hunt, 2003).


Most supermarkets now have an online presence to market their products and have set up efficient, well designed e-commerce websites. Supermarkets use modern technology in a number of other areas e.g. electronic shelf labelling, customer data management and supply chain management (Tesco, 2009).


Although supermarkets are very popular, they are scrutinised for increased fossil fuel consumption due to goods transportation and changing shopping patterns, requiring customers to drive to supermarkets.

Also the introduction of reduced usage of plastic bags in supermarkets, Marks & Spencer was a leader in reducing the plastic bags used by its consumers; a five pence levy was placed on each carrier bag in a bid to curb usage. Other supermarkets although not charging customers to use the bags withdrew from the shop floor and customers had to ask if they needed the bags. Tesco introduced a clubcard scheme offering customers clubcard points to customers who do not use plastic bags.

3. Current Market Position of UK Supermarkets

It needs to be noted that the retail business has evolved from an industrial to a post-industrial stage. More than 2.1 million people, approximately comprising about 10 per cent of the labour force, were working in retail distribution by 1992 (Employment Gazette November 1992), and the biggest retailers are now among the major companies (Lowe & Crewe 1991).

Competitive Rivalry

The supermarket sector witnesses intense rivalry between market participants.” Supermarkets have grown at the expense of specialist food shops (e.g. grocers, green grocers, dairies, butchers and fishmongers) by offering wider product ranges and lower prices under one roof”(keynote 2007). The constant monitoring of market share, price wars, innovative shopping formats, promotions and loyalty schemes not only demonstrate the rivalry present but also the struggle each supermarket faces for customer footfalls.

With the four main supermarkets having such a large market share, the UK supermarket industry could be said to be operating as an oligopoly. However as shown by the competition commission and the Office of Fair Trading, there is no anti-competitive behaviour taking place. In realty prices would be lower for consumers in a perfectly competitive market rather than the oligopolistic market that is currently in the UK, however unless there is clear evidence of price-fixing or cartels it would be highly unlikely government will intervene and take action to stop the big four supermarkets growing further.

Bargaining Power of Buyers

The power of buyers can be interpreted in different ways. At first glance, they appear to be powerful because they have a wide range of products to choose from, and can switch from one supermarket to another. In antithesis, customers have lost the flexibility, home grown service, and range of produce that was available with traditional providers.

Consumers may be loyal to their local supermarket, but by no policy or guidelines consumers are technically free to shop at any supermarket. The government through the OFT ensure that a fair price is being charged to consumers. The consumer could be said to have immense power as with the industry being so competitive and incentives always being used customers are benefiting. Also the wide use of the Internet now allows customers to check prices and compare products online before purchasing, whether they purchase in store or online. But they could be said to have very little power as they cannot negotiate, the prices are set by the supermarket and cannot be changed by the buyer.

Bargaining Power of Suppliers?

The power of supermarket suppliers…

Suppliers power is the most talked about force within the supermarket industry. UK supermarkets have immense purchasing power due to their dominant size and can demand products at the price and quality they require. The problem facing suppliers is because there are so many suppliers if one fails to meet the requirements of the supermarket then the supermarket can go to another supplier and get what they want. This gives them relatively little or no bargaining power with the supermarkets.

The ‘supplier code of practice’ has been put in place by the government to stop such bad practice by retailers however its viability is yet to be seen. Many smaller suppliers are still saying that they are being bullied by the large supermarkets price and other conditions. But as with any business transaction, the seller wants to achive the highest possible price and the buyer wants to keep costs as low as possible, the interests of bother parties will be different.

Threat of New Entrants

The threat from new entrants is comparatively weak because of the immense financial investments required to effectively enter the UK supermarket and superstore segment. It is difficult for entrants to invest the capital required for space, assets, and extremely sophisticated supply chains. Other barriers include existing market shares, scale economies, product differentiation and customer knowledge expertise built by existing players.

However with supermarkets requiring planning permission for every new store there are areas in the country in which smaller independents which are wearket to get access and launch or continue their business. With the government offering many grants and tax relief for small businesses it could be said that the market is still a free market to operate in.

But by being a free market and open economy it also allows large multinationals enter the uk supermarket industry through mergers and acquisitions as that of Wal-Mart purchasing Asda in 1999. By government not intervening it has allowed Asda to compete much more in the industry without the funding it would lag behind its rivals substantially. This has also been the case with the merger of Safeway and Morrisons. By not intervening the government has allowed the market to be less monopolistic as their would have only been two large players, Tesco and Sainsbury’s.

Threat of Substitute Products/Services

The threat from substitutes is weak because of evolved consumer buying habits and the enormous convenience provided by supermarkets. This was recently illustrated by the failure of Aldi and Lidl who tried to take advantage of the economic recession by introducing new and more economical shopping formats.

The threat of substitutes could be said to be irelavent as there is no substitute as everybody needs food, however substitutes such as smaller specialist food retailers could be seen as a substitute. With government emphasis on healthy eating, the large supermarkets have started to label their foods nutritional value in much more depth. This oculd be seen as indirect intervention and government may have actually hindered smaller food retailers who had found a niche in the market, and also therefore reduced the threat of substitutes. But with some products the price inelasticity or luxury means that customers are willing to pay more for the product, for example organic produce from farmers markets.

However with more and more emphasis on healthy eating being made on all forms of media by the government, the green grocers, butchers and other smaller units may be seeing an increase in sales due to the freshness of their produce. Customers from supermarkets may prefer to purchase food from these smaller retailers as they know the quality may exceed what they would normally purchase and will be healthier. Clearly customers are willing to pay more where they


Whilst the industry may appear to be attractive, because of the growth and profitability being achieved by market participants, it is characterised by enormous competition and very high entry barriers. Organisations trying to enter the market need to have high capital reserves, a consistent strategy, and the willingness to grow by acquisition, as well as through organic means. In conclusion the supermarket industry can be shaped and restrained by government intervention but by allowing the industry to continue as a free market, everyone is seen to benefit, whether it be consumers getting the best possible price, making suppliers livelihoods, or the economy as whole growing.

4. Tesco: Strategy and Growth

Tesco has a deep-rooted and constant strategy for growth, which has allowed the strengthening of its core UK business and growth into fresh markets. The underlying principle of the strategy, laid down in 1997, was to enlarge the span of the business to allow the delivery of a sturdy and protracted long-term growth (Quick facts, 2009). This can be achieved by pursuing current Tesco customers and encouraging them into purchasing from its other domestic businesses, including financial services, non-food and telecommunications (Quick facts, 2009). They are currently ranked 4th in global retail sales and operate in 13 countries in 2008 (Delloite 2009).

The objectives of this five pronged strategy are (a) to be a successful global retailer, (b) to grow the core UK business, (c) to be equally robust in food and non-food segments (d) to scale up retailing services like Tesco Personal Finance and (e) to place community at the centre of its strategy (Tesco plc, 2009).

In being a successful global retailer, Tesco has long practiced the commonly used ‘glocal’ practices which encompass the ground realities of the local environment with the global best business practices. Being close to the consumers enables quick reaction times, especially in the current downturn, to the local changes as they happen in its markets across the world (Tesco plc, 2009).

Dunnhumby, the consumer research entity that enabled Tesco’s Clubcard loyalty scheme, has brought about a deep understanding of the consumers’ wants. This was developed through many years of research in customer insight skills and buying patterns. (Tesco Group, 2010).

Market Penetration

During the last recession, ‘Value lines’ was launched in the country to provide the cheapest grocery products, inclusive of discounters. Keeping quality in mind, Tesco made the biggest change to their product range by launching 500 new items as part of their ‘Discount Brands’ (Tesco plc, 2009). The unique efficiency saving plan called ‘Step Change’ has already delivered £540 million of productivity and other changes. These have been ploughed back primarily into efficiency projects that encompass the entire business from stores and depots to the office (Tesco plc, 2009).

Examples of such improvements include reducing energy consumption in stores, eliminating 52,000 store deliveries by means of larger-fill transportation, leading to added savings of 12 million road miles. Also, the introduction of new self checkout technology for stores, as well as introducing pioneering technology to allow electronic check-in of bread and milk depot deliveries leading to a sizeable removal of paperwork and administration (Tesco plc, 2009).

Tesco’s offer of five pence of a litre of fuel in their petrol stations, this a form of market penetration in an aim to get more customers through the doors in its supermarket operations, while giving them a discount on fuel. This strategy employed by Tesco could be seen as successful as the promotion is offered regularly on a short term basis, also competitor Sainsbury’s also do the promotion on a regular basis.


The non-food market remains an essential component of Tesco’s long-term strategy, since it encompasses a market similar to that in size of food, and provides a vast opportunity. Empirical data strongly suggests that the consumer will buy, even in poor economic conditions, when they see value. By products being sourced globally, consolidating freight volumes and investing in buying hubs,Tesco are able to exploit economies of scale to ensure customers receive the best possible price.(Tesco plc, 2009).

The global purchasing office based in Hong Kong is accountable for buying 100,000 non-food products for the entire Group and, wherever possible, the purchases are sourced directly through factories without involving agents. This sourcing team last year shipped 72,000 containers from 54 ports. The sourcing hubs based largely in Asia and Europe ensure that the goods are delivered from ethical sources, on time, and in the best price and quality (Tesco plc, 2009).

Product Development

The Tesco website has around 1.5 million hits per week and Tesco Direct, which is controlled within tesco.com, is effortlessly accessible to customers via the internet and their catalogues (Tesco plc, 2009).

The strategic retailing services comprise of tesco.com, online shopping channels, Tesco Direct, telecoms, and Tesco Personal Finance. All financial products are obtainable online and over 50% of customers choose to purchase in this manner (Tesco plc, 2009).Tesco has targeted profitability growth in the services division from approximately £400 million in 2007/08 to £1 billion over the next few years (Tesco plc, 2009).

High quality practices for supply chain and customer relationship management, used in conjunction with Point of Sale (POS) software, has enabled Tesco to manage a paradigm shift in its core retail business. This has enabled Tesco to reach out to its exsisting customers in order for them to utilise the other retail services available. A critical cornerstone of Tesco’s strategy is to strategically position the community at the core of its operations. The Group has taken a leadership role in its efforts towards climate change and environmental responsibility, and has set ambitious targets to reduce emissions in its own buildings and distribution networks (Tesco plc, 2009).

Market Development

Tesco is now the first UK retail major to exhibit the full carbon footprint of all its own-label milk ranges, excluding organic milk, and has vowed to footprint 500 products by the year end. Reassuringly, research has now established that 50% of shoppers surveyed now realise the proper meaning of “carbon footprint”, as against only 32% of shoppers surveyed in the previous year (Smithers, 2009).

Extensive scrutiny of sales and loyalty card data has enabled Tesco to select the main items for economy conscious buyers. This has enabled prices to be reduced on important consumption goods, in order to assist customers in the difficult economic conditions as well as beating competitor prices (Tesco plc, 2009).

In response to the threat posed last year from the fast-expanding discount stores, including Aldi, Tesco reacted quicker than competitors in taking a stance. The launch of the “Discount Brands at Tesco” scheme presented price deflation, rather than expecting customers to downgrade, in contrast to competitors. The initiatives main aim was to retain the current market share held by Tesco and prevent these discount stores from acquiring further market share.

Tesco was the first major player in the online grocery market (Mintel, 2010), giving it the first mover advantage. This has allowed Tesco to build up a strong customer base as at one point, it was the only UK supermarket to offer onlne groceries. Their share is steadily declining as their competitors are also offering customers the ease of shopping online by having an online presense. Although it operates transacional websites for three countries many of its sales are generated in the UK. It began trading with food only but in only three years of operation it expanded and launched the non-food section, Tesco Direct. From 2004 – 2008, Tesco.com sales as a percentage of all uk revenue has grown from 2.6% to 5.0, this is shown in Appendix ……

Tesco’s online division has been so successful that two stores have had to be opened just to service online demand (Mintel, 2010)

5. Conclusion

Supermarkets and superstores are an undisputable part of the geographical contours and the economic foundation of UK society. Such supermarkets, comprising of Tesco, Sainsbury’s, ASDA, Waitrose and Morrison, provide approximately 80 % of the foods consumed by UK residents and play an important role in the determination of consumer choice across the country.

The growth of supermarkets, much of which has occurred during the last few decades has been driven by the rapid and far reaching transformation of UK society, characterised by increasing prosperity and disposable incomes, rising levels of vehicle ownership, urbanisation, increased levels of female participation in employment has driven new patterns of consumer behaviour and increased demand for specialised and sophisticated range of goods and services (Bowlby, 2001). This transformation has been instrumental in changing the character of the urban retail landscape.

Tesco, the clear leader of the UK supermarket sector, and otherwise an eminent example of British commercial and retailing skills, has constantly adopted a fundamental and steadfast strategy for growth, which has reaulted in the constant strengthening and expansion of its core UK business and helped it to grow into new markets. The primary principle of its strategy, which is now being followed for more than a decade, lies in enlarging business span iin order to allow for delivery of robust and and continuous growth.

Recent years are also witnessing much improved corporate citizenship in the supermarket sector, with regard to the purposeful and determined support for health and organic foods and sustained efforts to reduce fossil fuel consumption and greenhouse emissions.


Appendix 1 (Tesco Group, 2009)

Five year summary







53 weeks

Financial statistics






Group sales (including VAT) (£m)






Revenue (excluding VAT) (£m)












Rest of Europe















Total Group






Operating profit2 (£m)












Rest of Europe















Total Group






Operating profit margin2












Rest of Europe















Total Group






Share of results of joint ventures and associates3 (£m)






Profit on sale of investment in associates


Net finance costs3 (£m)






Profit before tax (£m)






Taxation3 (£m)






Minority interests (£m)






(Loss)/profit for the period from discontinued operation4 (£m)




Profit for the financial year attributable to equity holders of the parent (£m)






Underlying profit before tax5 (£m)






Enterprise value7 (£m)






Basic earnings per share8






Diluted earnings per share8






Dividend per share9






Return on shareholders’ funds10






Return on capital employed11






Group statistics






Number of stores






Total sales area – 000 sq ft12






Average employees






Average full-time equivalent employees






UK retail statistics






Number of stores






Total sales area – 000 sq ft12






Average store size (sales area – sq ft)13






Average full-time equivalent employees






UK retail productivity (£)






Revenue per employee14






Profit per employee14






Weekly sales per sq ft15






1. Results for the year ended 25 February 2006 include 52 weeks for the UK and ROI and 14 months for the majority of the remaining International businesses.

2. Operating profit includes integration costs and profit/(loss) arising on sale of fixed assets. Operating margin is based upon revenue excluding VAT.

3. Share of results of joint ventures and associates is stated net of the interest and tax of the Group’s joint ventures and associates. The Group’s charges for interest and tax have been reduced by these amounts.

4. Consists of the net result of the Taiwanese business which was sold during 2006/7.

5. IFRS underlying profit excludes IAS 32 and IAS 39 ‘Financial Instruments’ – Fair value remeasurements, the IAS 19 Income Statement charge, which is replaced by the ‘normal’ cash contributions for pensions, IAS 17 ‘Leases’ – impact of annual uplifts in rent and rent-free periods and IFRS 3 Amortisation charge from intangible assets arising on acquisition. For further details of this measure, see accounting policies.

6. Results have been restated to reflect the US as a separate segment.

7. Market capitalisation plus net debt.

8. Basic and diluted earnings per share are on a continuing operations basis.

9. Dividend per share relating to the interim and proposed final dividend.

10. Profit before tax divided by average shareholders’ funds.

11. The numerator is profit before interest, less tax. The denominator is the calculated average of net assets plus net debt plus dividend creditor less net assets held for sale.

12. Store sizes exclude lobby and restaurant areas.

13. Average store size excludes Express and One Stop stores.

14. Based on average number of full-time equivalent employees in the UK, revenue exclusive of VAT and operating profit.

15. Based on weighted average sales area and sales excluding property development.

16. Excludes one-off gain from ‘Pensions A-Day’, with this one-off gain ROCE was 13.6%.

17. Using a ‘normalised’ tax rate before start-up costs in the US and Tesco Direct and excluding the impact of foreign exchange in equity and our acquisition of a majority share of Dobbies.

18. Excluding 53 US stores and 22 Dobbies stores.

19. Excluding start-up costs in the US and Tesco Direct and adjusting average number of full-time equivalent employees in the UK to exclude US and Tesco Direct employees – profit per employee would be £11,317.

20. Excluding acquisition of TPF and Homever, and India start-up costs, and after adjusting for assets held for sale. Calculated on a 52 week basis, ROCE for 2008/9 is 12.8%.

21. Excluding 24 Dobbies stores.

Appendix 2 (Tesco Group, 2009)

Quick facts

Staff worldwide


Staff in the UK


Stores worldwide


Total stores in the UK


By format…


















Number of markets


Which markets

China, Czech Republic, Hungary, India, Japan, Malaysia, Poland, Republic of Ireland, Slovakia, South Korea, Thailand, Turkey, UK, USA

Facts correct May 2009

Appendix 3 (Tesco Group, 2010)


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