Developments In UK Food Retailing: Tesco Case Study

Tesco is the greatest operator of supermarkets in the UK and is one of the largest food retailing organisations on earth. Whilst the overwhelming majority of its products participate in the group of foods, it is aggressively expanding its range of non-food items and services.

Assignment A

Supermarkets constitute the most common feature of the British landscape. Self-service shops that market an comprehensive variety of conveniently merchandised food and household products in large, attractive and organised properties, supermarkets have significantly altered the meals and household purchasing decisions and processes of UK residents since the 1970s.

The food retailing sector in the united kingdom is continuing to grow rapidly over the last 2 decades. With an twelve-monthly turnover greater than 100 GBP, it is one the largest financial sectors of the united states; by using turnover, employment, and profits. The structure of the united kingdom food retail sector comprises of small grocery, vegetable, fish and meat shops, farmers markets, standalone departmental stores, and undoubtedly supermarkets; which can be owned by national and international supermarket chains.

The last few decades have witnessed numerous developments in food retailing in the UK, like the materialisation of new shop formats, improved logistics, investment in new technology, sophistication of supply chain practices, and the continuous growth of supermarket chains. The sector has witnessed the emergence and growth of giant corporations, both national and international, who have come to regulate an overwhelming majority of the food retailing business. Constant and heavy investments by supermarket chains have enabled these to benefit from scale economies, use advanced supply chain techniques, build hundreds of well planned and consumer friendly stores, achieve buying economies, offer product ranges that exceed more than 30, 000 items, and grow enormously in size, scale, and revenues.

UK individuals are among the richest on the planet. Most UK residents, even some decades back, purchased their food and other household requirements directly from vegetable, fish and meat sellers, and local grocers and markets. Today the huge bulk (80 %) of such purchases in the country takes place in shops that belong to one from the five predominant supermarket chains, namely Tesco, Sainsbury's, ASDA/Wal-Mart, Waitrose and Morrison. Practically 33 percent33 % of the amount of money allocated to food in the united kingdom occurs in a Tesco shop.

Whilst it is difficult to acquire a perfect market with free competition in true to life, the UK retailing sector has over the last few decades become truly oligopolistic in nature. Oligopolies occur whenever a few large players come to dominate market. Such situations lead to reduced amount of competition and allow oligopolistic players, (whether intentionally in concert or otherwise), to sway market circumstances with their advantage. Theoretically an oligopoly should lead to increased costs for other market players and inefficient use of market resources, all together. With oligopolistic players receiving more returns than normal, these resources cannot in such cases be used elsewhere.

Ellickson (2004) states that oligopoly is natural to supermarkets because of John Sutton's (1991) theory of sunk costs. Growth of markets leads local rivals to increase their sunken investments, thereby limiting the amount of businesses that can enter a market, irrespective of its size. Whilst the amount of market participants does not alter, the quality of service that is provided does improve with market size. It is this want to provide better service that finally determines market structure.

With concentration in food retailing, (common to developed countries around the world), being especially saturated in the united kingdom, there exist apprehensions that retailer power, in the hands of Tesco and other major supermarket chains, may lead to its misuse, both with suppliers and with consumers. Such supermarket chains be capable of obtain more favourable conditions from suppliers than what are available to other buyers, or would be normal under more competitive circumstances. Aside from extracting abnormal discounts from suppliers, supermarket buyer power may reveal itself via imposition of contractual restraints on suppliers. Seller power by supermarkets could possibly lead to raised consumer as well as reduced selection of goods and services combinations than in normal competitive conditions. Modern times have seen several anti-trust investigation in the UK on the issue of supermarket chains exploiting their concentrated market power. Tesco in addition has in the recent past been accused of exploiting employees in an Indian textile factory.

"A key issue highlighted for the reason that (anti-trust investigation report) report was the extent to which retailers can exert buyer power over their suppliers and the impact this has on consumer choice and competition in the meals chain. It figured while there was only limited prospect of abuse of market power with respect to consumers, there have been grounds for significant concern regarding food retailers' relationships with suppliers, highlighting 27 oligopsonistic practices that specifically gave cause for concern"

Civil society organisations are deeply apprehensive of the seeming domination of supermarkets within the farming and food system.

"Supermarkets are accused of "driving a 'race to the bottom' by procuring food 'grown anywhere, anyhow' without care for standards of labour, the conservation of wildlife and landscapes, the livelihoods (or even survival) of family farms, the congestion of roads, the demise of the high street, the management of waste, the welfare of farm animals, or medical and food security of neighbourhoods. "

With Tesco competing generally against other large supermarket chains, the company has to take care to see that its retailing power can be used responsibly, both with consumers and suppliers. As an oligopolistic company, its actions are influenced by the actions of other members of the oligopoly and its strategic planning takes care never to create internal conflicts between such members.

With none of the oligopoly members getting the capacity to dominate the demand curve independently, Tesco's actions need to necessarily concentrate on retaining and attracting more customers. The sector is seeing constant price competition, with all participants following cue of the retail chain that decides to drop the costs of a particular food or commodity. In these situations, the company looks at meeting customer needs through a range of customer oriented strategies like (a) continuous consumer research, (b) upsurge in product range, (c) better product prices, (d) convenient stores layouts, (e) proximal stores locations, and (f) a sophisticated system of incentives and rewards for repeat visits and purchases.

Whilst the participants of the united kingdom supermarket sector, especially Tesco, have been impressive in their approach towards greener plus more ethical supply chain practices, their wish to constantly provide better prices and quality to their customers can lead to oppressive supplier oriented practices, especially with regard to suppliers from developing countries. With self-regulatory and voluntary initiatives likely to be taken only for concerns associated with mainstream consumer interest (like Fair-trade products), their state is expected to play an extremely regulatory role in UK's food retailing sector.

Assignment B

The laws of supply and demand are considered fundamental to the procedure of markets also to the governing of economies. Demand, very briefly, refers to the quantity of a product or service that is wanted by buyers, the number required being the quantity of the merchandise people would be willing to buy at an absolute price. With supply representing the amount the market can offer at a determined price, price is essentially a manifestation of supply and demand. The economy reaches equilibrium, when supply equals demand, or where in fact the supply and demand functions intersect. All market participants are satisfied because suppliers are available all that they have produced, at a given price, and individuals are getting all they are demanding.

Whilst the concept is easy enough, demand supply relationships can be damaged by lots of factors that play havoc with the achievement of equilibrium. The major drivers of demand in the retail sector include factors like population levels, per capita and personal disposable incomes, employment levels, and individual debt. The supply drivers on the other hand include variables like competition in the sector, market size and the price tag on factors of production.

The size of the united kingdom foods and household goods market has grown immensely during the last few decades, driven by increasing incomes and purchasing power, as well as by immigration powered steadily growing population levels.

Demand has also been significantly impacted by a host of social and cultural changes like the breakup of joint families, rapid increases in the amount of ladies in the workforce, the earlier departure of children from parental homes, greater variety of divorces and single parents, and upsurge in living standards. Growing environmental and health concerns are also changing the demand for a variety of food and household products. Though it is difficult to assess the impact of advertising, demand is also significantly altered by the continuous high voltage advertising (through a range of mass, direct and electronic channels) that is integral to present day society.

Changes in local financial circumstances also affect demand for food and household items. Whilst demand has been subdued over the last two years as a result of ongoing financial meltdown, current indications reveal the likelihood of a slow revival in 2010 2010.

The demand for several stuff like fruits, ice creams, and beverages, changes with the seasons. Extreme weather conditions, which keep people at home, are associated with periods of low demand in the UK.

Supply in the UK supermarket sector has been shaped by internationally sourced commodities that are imported from around the world to meet local demand and make up for local shortfalls. UK supermarkets now sell a range of fresh and frozen foods and foods, and also other goods from across the world. The major supermarket chains source a significant amount with their material from overseas markets and, as described in the last section, are being severely criticised for their use of buyer capacity to marginalise them as well as a amount of other undesirable outcomes. International production of varied foods, as well as international demand, therefore impacts the supplies designed for the UK market.

With the market being oligopolistic, different supermarket chains are interdependent in their actions and largely follow the lead of others in creating demand through price alterations. Thus when ASDA dropped the price of bananas sharply some years back, all other supermarkets followed its lead immediately.

Supermarket managements must ensure that customer demand is satisfied, first by quantifying it through various techniques and thereafter taking supply chain actions to ensure that it is adequately met. Supplies of products can be influenced by a range of factors like local and international production, fuel costs and by political and other environmental developments in producing areas. The supply chain management of huge retail chains is thus a complex procedure that needs to be constantly monitored and improved.

Although all supermarkets work towards meeting customer expectations in range, quality and price, they face serious issues regarding their approach in sourcing material, which very often can lead to oppression of farmers and staff in developing nations, ignoring of local producers and significant consumption of fossil fuels.

UK consumer demand is being met through the agency of supermarkets at the cost of local farmers and producers, whose goods are ignored because they can not meet up with the lower costs of overseas suppliers. It goes without saying that the rise of supermarkets has also been accompanied by the demise of a large number of smaller shops selling a variety of produce, who've been forced to shut shop because of customer shifts towards supermarkets.

Whilst Tesco and other supermarkets want to address a few of these issues through green sourcing policies and stocking of Freetrade products, a lot more needs to be achieved on this account.

Assignment C

Elasticity is mostly an indicator of responsiveness. Price elasticity determines the speed of response of demand in quantity in response to an alteration in cost. Income elasticity of demand on the other hand measures the rate of response of demand in quantity because of change in consumer income.

"Income elasticity of demand is used to observe how sensitive the demand for a good is to an income change. The bigger the income elasticity, the greater sensitive demand for a good is to income changes. Very high income elasticity shows that when a consumer's income goes up, consumers will buy a great deal more of this good. Suprisingly low price elasticity implies just the opposite, that changes in a consumer's income have little influence on demand. "

Concepts of elasticity help in explaining the amount of change that could come about in goods sold by retailers due to changes in unit price. It's important for retailers to know about how precisely elastic their goods are really in quantitative terms; such knowledge helps them to improve prices, both to increase turnover and improve profitability.

The demand elasticity of goods differs using their nature, for example, goods that fall in the group of necessities will probably have inelastic demand, even while demand for luxuries may very well be elastic. Demand is also elastic when goods can be substituted with others that continue to be available. Again most goods are elastic in the long term because people modify their behaviour when goods with inelastic demand continue being highly priced or unavailable for long periods.

Empirical research has confirmed the clear relationship between price elasticity and revenues, which makes it an area of importance for any retailers. The revenues from sales of items increases if its demand is inelastic, decreases if it elastic, and stays regular if it is unit elastic. Understanding of price elasticity helps supermarkets in deciding after and optimising consumer-centric pricing policies that derive from their information about consumer behaviour and demand. In addition, it helps them in defining strategies and optimising prices across complete product lifecycles, namely during introductory phases as well as through every day, promotion and markdown periods.

Such knowledge helps supermarkets like Tesco in deciding the right balance between your appropriate balance between EDLP (everyday low pricing) and Hi-Lo pricing, validate and improve price tiers, and leverage their customer insights to react to price elasticity phenomena, consumer demand and competitor actions

It is often important for retailers to learn the effect on sales of varied marketing initiatives like price discounts and special promotion schemes. While using arrival and use of optically scanned data, retailers now regularly utilise estimates of the results of changes in marketing mix to boost inventory management, allocation of shelf space, and promotional initiatives. The impact of marketing actions on retail sales is often evaluated by estimation of sales response functions.

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