Greater profit margin
Tesco has many competitors, which makes the threat of substitution high. For instance, Tesco has competition from companies like Asda, Sainsbury, Morrison and many more that can provide substitutes for their products. When a substitute becomes available both demand and prices are reduced. If beans or bread are too expensive in Tesco then buyers will exploit their power and move to one of their competitors. Substitution strengthens buyers’ power. The market has matured as prices are high but are coming down. Between 2000 and 2006 Tesco prices have fallen by 17%.
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Tesco’s are extending their food range and reducing their prices to meet customers’ needs and provide more choice. 4. 4. Buyer Power Buyer power for Tesco is high but decreasing. This is because customers are price sensitive therefore there is a ‘lock in’ of these customers which limits there power as they are very unlikely to shop elsewhere. Tesco is also able to offer a premium service of one stop shopping. This is because buyers are time poor but cash rich which essentially means a buyer would rather spend the extra few pounds to save time than search elsewhere to save money instead.
For an organisation like Tesco this means a greater profit margin. Hence, in the last tax year gone Tesco’s pre tax profits were in excess of i?? 1billion. Buyers seek a large range of products at once and in dong so has meant that the balance has tipped in favour of a firm like Tesco and rather than buyers having power over Tesco, Tesco has now increased its power over buyers instead. There have even been attempts to take on such firms like Tesco and increase buyer power; however the effects have been fairly minute, for example renowned chef Jamie Oliver’s attempts to influence buyers when buying chicken.
The sad fact is that the majority of buyers will not consult their ethical conscience before buying goods and such factors mean that buyer power is decreasing and a firm like Tesco can expect even higher profits in the coming years. Tesco is doing very well at implementing its strategies. It will minimise buyer power and build customer loyalty, hence schemes such as reward cards and points. The shift in balance towards Tesco having greater power is reflected by the presence of having watch-dog groups and relevant authorities such as the monopolies commission or trading standards for example.
Supplier Power The ability to charge customers different prices in line with differences in the value created for each of those buyers usually indicates that the market is characterized by high supplier power and at the same time by low buyer power. Bargaining power of suppliers exists in the following situations and for this example we will use the vegetable; cauliflower. Within England, the temperatures vary from cool summers and mild winters meaning that Cornwall is the only county within the United Kingdom, which can deliver this vegetable all year round.
Because of this Cornwall farms play a vital role in Tesco’s efforts to reduce the need for imported food, and therefore reduce their costs. The Cornwall based farms, who provide Tesco’s with cauliflowers, also supply Tesco’s with green cabbage all year. They can also grow courgettes for two months longer than farmers in other areas around the UK. Much of their packaging bears the Cornish logo to help customers across the South to choose local food. People prefer home grown foods compared multi corporate brands because the local people believe that home grown foods are fresher, and due to this belief the company created an extra 40 jobs.
Due to the extra work required they were offered a contract to supply Tesco with vegetables directly. As an important local supplier, with currently 160 staff employed, a new building worth i?? 2 million is being built to increase capacity and enable further growth. 5. Useful analytical tools Porter’s five forces analysis can complement other analytical tools, such as a SWOT or a PEST analysis. A SWOT analysis focuses on the company, analysing their Strengths and Weaknesses internally, and Opportunities and Threats externally. The SWOT analysis (see appendix 2) and the PEST analysis below (see appendix 3) summarise the key issues of Tesco.
6. Recommendations Tesco’s will want to ensure that they remain the market leader in this particular industry. After analysing their company the key areas that we think they should address are the fact that Sainsbury’s are closing in on them. This is putting a lot of pressure on Tesco’s, and they need to try and create barriers to prevent Sainsbury’s from once again becoming market leader. Competitive rivalry within this industry was low; however as you can see from the results found, this is increasing. Tesco’s have no control over this and cannot prevent this from happening.
This then makes threat from new entrants low. With such competitors and such a strong successful company like Tesco, it is unlikely that they will have any threat of new entrants, unless potential entrants can buy their way into the market by purchasing, or even merging, with an already successful competitor, as what happened with Safeway’s and Morrison’s. Threat from substitutions is high. Currently, there a lot of similar products available, where the only differentiating factor is the brand and price. People are beginning to see past this and ‘own brands’ becoming more and more popular with the ever-increasing range.
This shows that barriers have been built by individual companies to attain customer loyalty in replacement of brand loyalty. Supplier power is high, as buyer power decreases. As suppliers have a lot of power this affects buyer power. Customers tend to look at the suppliers of products and in recognising this and liking this, there power decreases. They appreciate that Tesco’s is addressing their needs to the best of their ability. Suppliers are lucky in this that as they have the power, and Tesco’s have to accept this in order to keep their customers happy and their power low.
I do not think Tesco’s, or any retail firm can escape competitive rivalry. In providing such a necessity like food, there need to e some competition. People need varieties and need to be given options. Some people shop in 2 or even 3 places as they like different groceries, from different places. For example Sainsbury’s provide a high standard of fresh fruit and vegetables, with Tesco’s being cheaper and of a lower quality. Customers will always look primarily at cost and quality, and there needs to be competition to satisfy their differences.