MARKETING REPORT WRITING: TESCO
Executive Summary:
Tesco is the world’s third largest retailer based UK with its major operations being centered on the European Union market and some presence in the Asian Market. The company’s US subsidiary Fresh & Easy was closed in early 2014, due to accumulated losses despite its massive investments. Tesco China is also in the process of forming a joint venture with Chinese leading state owned retailer – CRE, to manage its challenges it that market. The Japanese market is also problematic but it enjoys massive success in its other markets especially within the EU (Tesco, 2016). On June 23rd 2016 the UK voted for a referendum on whether Britain should leave the EU market dubbed Brexit. A 52 percent win led to a start the negotiations and other efforts to facilitate a smooth exit from the EU market. This revision and renegotiation of trade agreements with EU is expected to affect business operations for most UK business that transact with the EU market frequently. Tesco whose main operations are within the EU market anticipates and prepares for the post – Brexit uncertainties by segmenting and positioning in the new market environment. The company is evaluating opportunities and threats in this post – Brexit environment to come up with ways of advancing the brand position for the organization.
Contents page
Introduction:
On Thursday June 23rd, over 30 million Britons participated in a referendum vote with the main question being Britain’s exit from the European Union, dubbed the Brexit vote. The European Union is an economic and political partnership involving 28 European countries established post cold war. 48 percent of them voted against while a 52 percent vote won, which signified the start of Britain’s exit from the EU. Territories of Britain were ‘divided’ by this vote with England and Wales supporting the exit while Scotland and Northern Ireland voted to stay. The major question of the implications of this vote is how British firms will do business in EU and the effects to the rights of the EU nationals to live and work in UK. The immediate effect is the change of Government with a new Prime Minister Theresa may, and the cabinet members expected to drive the after-Brexit negotiations – Davis Davis, Liam Fox and Boris Johnson.
It has caused varying implications on various businesses in the FTSE100 like Tesco and the other markets in the United Kingdom. Some of the main concerns of the business enterprises following the Brexit vote are issues such as continued access to the single market and the right to employ skilled workers and raw materials from the European Union. It is however important that the businesses focuses on the immediate opportunities and prepares for the new world outside of the EU. Some businesses are worried that bank funding for expansion and other funding needs is expected to fall in the short term due to the post – Brexit caution, which could affect their ability to expand especially into the new markets. This paper will be aimed at identify various market concepts that can help the selected company during the post – Brexit period
Body of the Report:
Background information,
Tesco PLC is a British multinational with over 1500 stores, a grocery and general merchandise retailer in areas such as retailing of books, electronics, clothing, furniture, toys, petrol and software. It was founded in 1919 by Jack Cohen as a group of market stalls, which is now diversified into; the financial service industry, telecoms and internet services, with stores in 12 countries across Asia and Europe. Its main subsidiaries include Tesco Stores Ltd, Tesco Bank, Tesco Mobile, Tesco Ireland, Tesco Kipa, Tesco Family Dining Ltd, Giraffe Restaurants, Dunnhumby and Spenhill. Tesco is the third largest retailer in the world by profits and the fifth largest measured by revenues. New entrant and other challenges have led to a general reduction in sales in most UK supermarkets however Tesco was enjoying the lowest decline in sales of 0.5% for the 12 months ended Feb 2016, compared to Asda’s decline of sales by 4% within the same period. After closure of its US subsidiary Fresh & Easy, Tesco suffered a fall in pretax profits by 51% to £1.96 billion but post tax profits including the cost of US exit were just £120m a drop of 95.7% (BBC, 2013).
Segmenting, Targeting and positioning
Our post – Brexit market segments are expected to change considering the expected change in trade agreements between the EU and UK. Currently the Tesco brand is already multinational with presence in the EU and Asia. However some of these markets are already problematic like Japan which is loss making and the US subsidiary Fresh & Easy which had to be closed down early this year due to accumulated losses despite over £1.2 billion investments in it. Tesco China is currently in the process of forming a joint venture with the largest state owned retail supplier in China – China Resources Enterprise (CRE) following a tough time cracking that market. The Hungary, Malaysia and Thailand are profitable especially Tesco Ireland which is performing very well with a take-over of the entire country’s retailing operations.
Brexit will ensure that the UK will not be bound by the EU restrictions to ‘external trade’. The post – Brexit UK Government is expected to negotiate for better trade agreements with EU and other ‘external markets’ considering it is not part of EU anymore. For companies whose main market was Europe like ours – Tesco, new trade agreements means new markets. For this purpose we will segment the global retail market into three segments as follows,
Tesco’s post – Brexit market segmentation, targeting and positioning
| MARKET SEGMENT | COUNTRIES | COMMENT |
| The European Union Market | Countries include: Austria, Belgium, Denmark, France, Germany, Ireland, Italy, Netherlands, Portugal, Sweden Spain and the rest of the 28 EU countries | This is the main market for Tesco and will have to remain so. A deep understanding of this market segment by our company –Tesco PLC will not exit with Britain out of the European union. Therefore the company will push the Government to negotiate for similar, if not better trade agreements with the post-Brexit EU. |
| Emerging ‘external market’ | This market includes the African market and the Indian Sub-continent market. | The African market is one of the fastest growing economically with a growth in its continental GDP of 3.3 percent against the global 1.5 percent.. The African population is 1.3 billion and is the fastest growing creating an untapped market. India’s population is also estimated at a billion and is expected to grow with very good economic prospects. Its retail sector is not very advanced creating opportunities in another slightly tapped market. |
| Developed ‘external market’ | Countries in this market include United States, China, Japan and other non- EU developed countries | Tesco pulled out of the US recently through closure of all its Fresh & Easy stores due to continuous losses. Tesco China is forming a joint venture with CRE the largest retailer in China to counter tough conditions. Tesco Japan is also experiencing negative profits for some time now. However this market is still viable although with massive competition from their local players. |
The target market for Tesco PLC will remain to be the European Union market considering the already developed infrastructure and goodwill in the market. This is risky though, considering that the future is uncertain as new trade agreements between UK and the post – Brexit EU are expected to affect Tesco’s business operations. However there is a very high probability that the terms of business, especially with big players in the market like Tesco are not expected to be affected negatively. This is because the expected ripple effects of any negative effects on Tesco’s operations in the EU countries are not conceivable. The ‘external market’ that is opened up by the ‘liberation’ from EU is promising in different angles. The developed market is highly competitive and our efforts to try and enter some of the developed markets like the US, China and Japan, have been futile (Tesco, 2016). The emerging market on the other hand is very lucrative for Tesco but it is expected to take some time for our business operation to pick up in these countries. This still makes the European Union our target market in the longer short-run period.
The current positioning of Tesco’s operations in the market can be better analyzed by using the porter’s market forces model. This model facilitates a better understanding of the current position of the Tesco brand and a projection into its future prospects into its planned positioning. Some of the forces in the market that define Tesco’s market position are,
- Supplier Power: Tesco is known to only work with developed manufacturers in Europe, United States, Japan and South Korea. These business relationships are not expected to be affected much by Brexit.
- Buyer power: The Tesco brand is already developed in the market and as such customer loyalty and this goodwill is what directed our decision to maintain the EU as our Target market
- Competitive rivalry: There is minimum material competition in the target market but the developed ‘external market’ requires a fresh thorough due diligence to come up with entry and re-entry strategies in some of these markets.
Some of the strategies to maintain and even leverage on the opportunities associated with the results of the Brexit vote may be explained under,
Enhancing brand image
To mitigate the immediate impact of the Brexit vote, we will start by reassuring our customers and suppliers that nothing will change in the short term. The UK will maintain its current trading position for at least two years (CEB, 2016). However, the company is expected to develop strategies and plans to enhance the Tesco brand, in the post – Brexit period. The brand is only enhanced to our ‘stake holder’s eyes’ translating to more value to our business and as such the following issues should be addressed towards that end;
- What are the long term effects to the company’s operations? Tesco’s main areas of operations are the EU and Asia however most supplies are sourced within the EU. Brexit means a renegotiation of trade and other agreements with the EU. The new trade agreements negotiated by the new ‘Brexit government’ with the EU may affect their operations in the long run.
- What are the short term effects to business? The pound has recovered from the initial post Brexit shock but is still at a 30 year low. The company should consider whether the ongoing currency fluctuations and market turmoil will affect the company or its major suppliers.
- What are the specific risks to the business in the post – Brexit era? Brexit will affect each company differently due to the wide range of regulations that could change. It is worth considering now whether the company has specific characteristics that could become vulnerabilities or advantages in the face of Brexit.
- Brexit should be a factor when prioritizing and monitoring supply risks: As Procurement maps operational risks – like geopolitical risk and market risk; it should add Brexit and its potential effects to its model. The company should prioritize measure and recommend possible solutions to Brexit as a risk to supply.
- The company should partner with its stakeholders to understand the broader implications of Brexit on the supply chain. For instance, Procurement department can work with Finance department to explore how Brexit would affect areas like revenue, cost, tax, partnerships, and intellectual property. Or Procurement can work with the Legal department to examine contractual liabilities in different scenarios under the Brexit.
- Use scenario planning: The company team will need to identify the most important external factors that that will affect its strategy, such as currency instability, economic instability, and geopolitical forces.
Conclusions and Recommendations:
Britain’s exit from the European Union is expected to affect most UK based businesses with operations in that market (BBC, 2016). Tesco main business operations are expected to be affected by the post – Brexit environment considering it is based in the UK. However measures can be taken to control the extent of the expected effects to business operations. The renegotiation of economic terms of engagement with the EU by the post – Brexit Government, will determine the main changes that are expected given material facts. In the meantime however the company will maintain the EU as our target market but measures have been taken to address any emerging issues there from. Newer emerging markets to be exploited however have resulted from this, considering UK’s ‘liberation’ from EU. Better due diligence should be conducted in the failed markets to plan a re-entry strategy in the future. Some recommended ways of maintaining Tesco’s market position and even growing its brand during this post- Brexit period include;
Global trading focus: In the short term there has never been a better time to explore new markets within and outside Europe, particularly with the weak pound. Since the Brexit vote, sterling has depreciated around 10pc of the dollar, which should aid the price competitiveness of our products and services overseas in the ‘external markets’.
Platform power: The Brexit vote exposes the business to foreign exchange risk. Post-Brexit, use of FinTech platforms can help minimize this risk and provide practical help for companies operating overseas. WU Edge is a new platform from Western Union which provides insights to help businesses navigate foreign exchange risks as well as manage and make payments abroad. It can help businesses keep on top of trading in many currencies and markets, as well as finding new opportunities and partners.
Managing risk: In terms of the business supply chain, the pound’s weakness means anything the business imports is likely to become more expensive. One way to improve this is to look for suppliers at home rather than abroad, while there are other steps that can be taken to manage the foreign exchange risk, such as using hedging or forward contracts. Monitoring and tracking the supply chain should help to insulate the business from supply-chain and other risks in the future.
References,
BBC. (2013). Tesco profits fall as supermarket pulls out of US. Retrieved on 11th November 2016 from,
www.bbc.com/news/business-22179255
Tesco. (2016). About us. Retrieved on 11th November 2016 from,
CEB. (2016). Brexit: How firms Should Respond to Shifting Consumer values. Retrieved on 11th November 2016 from,
BBC. (2016). Brexit: All you need to know about the UK leaving the EU. Retrieved on 11th November 2016 from,
www.bbc.com/news/uk-politics-32810887
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