Tesco SWOT Analysis

Strengths

Increasing market share: Tesco holds a 13% share of the UK retail market. (tesco annual report 2008) Its multi-format capability means that it will continue to grow share in food, while increasing space contribution from hypermarkets will allow it to drive a higher share in non-food.

Tesco's general growth show no sign of abating: In the UK, Tesco's late 2006 investment into West-midlands based convenience store group was billed as the most aggressive move into the neighbourhood market by a big-name retailer so far. The deal has turned Tesco into the country's first biggest convenience store chain after the Co-operative Group, and the company also plans to open up 59 new stores in the UK this year. Tesco has grown its non-food division to the extent that its revenues now total 23% of total group earnings. Tesco's international business segment is growing steadily, and is predicted to contribute nearly a quarter of group profits over the next five years. If geographical spread continues to grow, this will ensure Tesco's continued regional strength.

Insurance: In fiscal 2007 Tesco Personal Finance reached the milestone of one million motor insurance policies making it the fastest growing motor insurance provider ever. The group's instant travel insurance allows Clubcard holders to buy their holiday insurance conveniently at the checkout. Pet insurance now has over 330,000 cats and dogs covered, while the life insurance policy followed on from the success of last year, when it was voted The Most Competitive Life Insurance Provider in the MoneyFacts Awards 2007. (tesco annual report 2007).

Tesco online: Tesco.com is the world's biggest online supermarket and this year the group had sales of over ?577 million, an increase of 29% on last year.(Tesco annual report 2009). Tesco online now operates in over 270 stores around the country, covering 96% of the UK. With over a million households nationwide having used the company's online services, the company has a strong platform to further develop this revenue stream.(www.tesco.com)

Brand value: Profits for Tesco's operations in Europe, Asia and Ireland increased by 78% during the last fiscal year (Tesco annual report 2008). The company has a strong brand image, and is associated with good quality, trustworthy goods that represent excellent value. Tesco's innovative ways of improving the customer shopping experience, as well as its efforts to branch out into finance and insurance have also capitalized on this.

UK market leadership reinforced: Since acquiring number one ranking in 1996, Tesco has developed a successful multiformat strategy that has accelerated its advantage. Its UK sales are now 71% larger than Sainsbury's. Also the Competition Commission's report makes it very difficult for a competitor to challenge its scale and has effectively scuppered Wal-Mart's chances of stealing UK leadership. Therefore, Tesco is in an enormously strong position in its domestic market.

Weaknesses

Reliance upon the UK market: Although international business is still growing, and is expected to contribute greater amounts to Tesco's profits over the next few years, the company is still highly dependent on the UK market (73.8% of 2003 revenues). While this isn't a major weakness in the short term, any changes in the UK supermarket industry over the next year for example, like the Morrison's group successfully purchasing the Safeway chain could alter the balance of UK supermarket power, and affect share

Debt reduction: Tesco has a large capital expenditure program mainly due to its huge investment in space for new stores. Since its expansion is so aggressive, Tesco has little free cash for any other operations.

Signs point to serial acquisitions: With an enterprise value of ?23 billion, Tesco clearly has enormous firepower. Also, its product range is vast and almost any acquisition can be justified, particularly in the UK. While 'fill the gap' strategy would be useful to the company, as has been the case with the UK convenience market, there is the danger of Tesco becoming a serial acquirer, as this tends to reduce earnings visibility and quality.

Opportunities

Non-food retail: The growth in Tesco's hypermarket format in the UK means that there are expectations of seeing its 13% share of retail sales climb sharply over the next few years. It can use its footfall and low cost structure together with improved merchandising skills to add another leg to growth. Equally, its growth overseas will further increase earnings and scale, taking Tesco onto the virtuous circle of growth. It is estimated that Tesco's non-food sales will double over the next four years.

Worldwide it has sales of ?7 billion in non-food, some 23% of the total. Its aim to be 'as strong in non-food as we are in food. Around half of new space opened in the UK last year was for non-food and the result has been to increase its market share from 5% to 6% and its overall share of UK retail sales has increased by 100 basis points to 12.8%. The company's telecoms venture is the latest stage in its strategy to develop popular retail services. It has repeated its approach in banking, by capitalizing on its brand.

Health and beauty: Tesco's UK health and beauty ranges continue to grow, and it is currently the fastest growing skincare retailer in the market. The company has a volume market-leading position in both toiletries and healthcare and is number one retailer in the baby goods markets. Across all health and beauty ranges Tesco continues to invest in price to deliver the value customers have come to expect and this year invested ?27 million on health and beauty pricing alone. The company now has 19 stores with opticians and nearly 200 stores with pharmacies.

Further international growth: Tesco now operates in six countries in Europe in addition to the UK; the Republic of Ireland, Hungary, Czech Republic, Slovakia, Turkey and Poland. It also operates in Asia: in South Korea, Thailand, Malaysia, Japan and Taiwan. Seven years ago, its International sales were ?770 million. Now, they are nearly 10 times larger, at almost ?7 billion, with profits of ?306 million. Growing internationally has forced Tesco to become serious about hypermarkets and this has had seriously positive implications for growth in the UK. Tesco has formed a strategic relationship with US supermarket, Safeway Inc, to take the tesco.com home shopping model to the US. Telecoms are the latest stage in its strategy to develop popular retail services. It has repeated its approach in banking, by capitalizing on its brand. In 2004 the company plans to enter the Chinese market, as China is one of the largest economies in the world with tremendous forecast growth and will present many opportunities for Tesco.

Threats

UK structural change could spark a price war: The price followers in the UK market are about to become aggressive investors in price, Safeway because of new ownership and Sainsbury because of new management. Morrison is reducing Safeway's prices by up to 6% and Sainsbury is bound to see lower prices as one of the basic changes necessary to drive its recovery. With both Asda and Tesco committed to price leadership, this could result in a step down in industry profitability.

Overseas returns could fall: Tesco is predicated around investment overseas driving higher group returns as each country moves past critical mass. This might not happen, either because of economic conditions, competitor action, or failure in Tesco's business model. It also could come as a consequence of an aggressive move into a larger market, such as China or Japan.

Wal-Mart/Asda challenge: Since the US shopping giant Wal-mart purchased Asda, Tesco's rank as the top UK supermarket has been threatened. Asda can now compete extremely well on price and range of goods. For the moment, Asda is the third largest supermarket in the UK, just behind Sainsbury's and then Tesco. However, Asda closed the gap on Sainsbury's in 2006, leaving the company to directly challenge Tesco's dominance. Tesco is well aware of this, and has so far been quick to keep up with price cuts or special offers at Asda. Wal-mart may also decide to wield its buying power more heavily in the UK, and this could spell the end of Tesco's brand dominance in the future.

International expansion: International growth is expensive. Entering new markets with a new brand requires heavy investment and marketing, as well as land prices (which are currently low) and extra distribution and operation expense. Tesco's debt may increase before it begins to decline.

Korea is contributing a good proportion of Tesco's international profit growth. If profits continue to grow in this way, Korea will probably represent one-third of Tesco's international profits in 2010. Korean consumer spending is currently quite low, and coupled with the country's current unrest, and Tesco's large investment, this represents a high risk area for Tesco to bank.

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