Tesco and the organic market

Tesco and the organic market

Contents

Introduction

I. Market environment analysis

II. Tesco’s organics food resource capability analysis

III. Strategic fit analysis

Introduction

Tesco is the leading retailer in the United Kingdom, and one of the largest food retailers in the world. It however is not just limited to the food market and has expanded into areas such as electrical goods and clothing. Tesco has its headquarters in Hertfordshire and employs about 318,300 people. The group recorded revenues of £42,641 million for February 2007.

Tesco is not just a retailer it is also a brand. It has to its name, not only various shops such as Tesco Express, Metro, tesco.com, catalogue, Tesco expand, Fresh and Easy, Tesco homeplus but also Tesco station, Tesco insurance, broadband, mobile and electricity. Tesco adapts and answers its customers’ needs by improving its offers especially as regards food. Keeping apace with market trends Tesco has over the past few years developed in yet another direction; the organic market. This report therefore will consider the remit and success of Tesco’s organic business in United Kingdom. Tesco is developing a series of strategies based on the organic market. Firstly, it is attempting to widen the scope of organic food available in the store, including fruit and vegetables, meat, spirit and wines. Furthermore Tesco has expanded the ideology of organically grown substances, developing a range of organic clothing in collaboration with Katharine Hamnett. In this report we are going to focus on the issues surrounding Tesco’s organic food range in United Kingdom.

The UK has the third largest market for organic food in Europe, after Germany and Italy more than 50% of Europe’s organic land is in Italy, Germany, Spain and the United Kingdom. By December 2006, 498,646 hectares of land were managed to organic standards across the United Kingdom. Retail sales of organic products in the United Kingdom were worth approximately £1.6 billion during 2005, an increase of 30% on the previous year. Sales of organic products sold through supermarkets increased by 21% in 2006.

I. Market environment analysis

The macroeconomic factors in the UK that impact supermarket organic business

As a starting point, it would be useful to consider the environment of the organic market. Indeed, it may help in understanding why environmental influences are particularly significant for the future of a company and its competitors. So, a PESTEL analysis can be done in order to succeed in the new market.

The market has to take into account the environmental protection laws which are very strict and also the fact that local authorities regulate land planning. Furthermore, the market must take into account the European Union regulations, under which the company is obliged to work only with pre-approved product producers.

Equally, supermarket have to consider factors such as current rates of inflation and the personal disposal incomes of its customers insofar as these factors directly affect its sales. Moreover, the actor on the market must consider the politico-legal variables. For example, the European Commission has proposed that up to 0.9% GM contamination should be allowed in organic food. So this is a market that has many constraints, but demand is strong and growing body of research proving the benefits of organics, it is a growth market.

Equally, they must take into account the research undertaken by the government. 2005 was the first year that scientific proof of particular health benefits of organic food had a demonstrable impact on the organic market.

Finally, the lifestyle of the population is an important factor. In UK, there are 60 million consumers of which 9.4 million are aged over 65 years. This significant since as people age become very concerned with their health and how to sustain a healthy lifestyle. The main reasons for buying products organics are 52% for health issues and then taste and the protection of the environment at 39% (study prepared by Market Tools Inc in 2006 of 1000 people).

Porter’s five forces

The next step in environment analysis would be to consider the immediate environment of the organisation. Take for example, the competitive arena in which Tesco operates. “Firms do not act in isolation; they are influenced by forces that change their markets. Markets are influenced by the actions of firms and markets are influenced by events beyond the control of firms which in turn influenced the actions of firm” (Johnson and Scholes, 2002; Williamson et al., 2004)

As we can see in the Porter model, the competitive rivalry is high due to the oligopolistic nature of the market, with competitors such as Marks & Spencer, Waitrose, and Asda. However International competitors like Wal Mart and Carrefour have become very dangerous for Tesco. Moreover, the market is mature. Furthermore, there are many independent retailers, adding to this rivalry. All Retailers would like sprawl. That is why, the market change rapidly: “many organisations in the public and private sector face turbulent, fast changing, uncertain business environment and increased levels of competition. This sort of environment is called hypercompetitive” (Johnson, and Scholes, 2002).

However, the bargaining power of suppliers and buyers is low. Tesco can decide its own prices and margins for its products. The threat of replacement product is also low as is the threat of new entrants. As can be seen on the life cycle of the organic market is growth but the market life cycle, the mass retailing market is in maturity phase. This means there is slow market growth. We see this phenomenon can be seen since 2004. In addition, barriers to entry such as economies of scale, brand image, reliable, high investment and the dominance of independent retailers are binding. These cover the market in the United Kingdom and make it very difficult for new entrants to penetrate the market.

We can conclude, thanks to the model of Porter, the United Kingdom market of retailer are highly competitive. The Organic market is growth and if Tesco wants to keep its place as a leader it has to continue to improve its core competences, its resources

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