Understanding the Business and Economic Environment: Tesco PLC

Business performance is affected significantly by the business and external environment in which it operates. This report is an analysis of the environment with regards to Tesco. The report evaluates the structure of the industry that Tesco operates in and the business organization. It also includes a STEEPLE analysis of the social, technological, economic, environmental, political, and ethical environment. The macroeconomic factors that affect the organization have also been discussed, and the determinants of demand or supply of the goods that Tesco trades in. Market factors such as competitiveness and random shocks could affect UK’s fiscal policy, as well as the challenges in the external environment.

Tesco is a retail chain that operates primarily in the United Kingdom. Tesco stocks various goods and services such as foodstuff, clothing and apparel, home gardening, cleaning, lighting equipment, and home appliances and electronics.

Industry Structure

Tesco’s competitors in the United Kingdom retain industry are Sainsbury’s, Asda Stores Limited, and Morrisons. These four organizations are regarded as the big four in the UK retail space. The organizations have a similar business model incorporating physical and online retailing activities. Their distribution, and supply chain models are also similar; the store layout follows the classification of different sections of products. The customer base is primarily in the United Kingdom through Tesco has branches outside the UK.  

STEEPLE Analysis

This section analyses the social, technological, economic, environmental, political, legal, and ethical environment.

Social

The social factors that affect Tesco include the changing feeding habits in the UK population. There has been an increased emphasis on healthier feeding habits. In response, Tesco has increased the variety of groceries available in its stores and supported the sale of groceries on online platforms (Rosnizam et al., 2020). Due to the increased racial and population diversity, Tesco has changed its product offering to include and serve the Muslim community, such as the sale of Halal meat, increasing the number of attendants to serve the increasing aging population and the disabled.

Technological

The retail business relies heavily on technology to ensure critical activities. Tesco has adopted an e-commerce platform where it sells various products, especially food and groceries. Technology is also essential in managing stock. In a business model that incorporates foods that must be kept in a certain humidity and temperature conditions to keep them fresh, Tesco fulfills such needs through technology (Ju & Li, 2011). Tesco also uses technology for queue and till management, to provide customers with multiple payment systems, and to manage customer loyalty points system. Technology is also essential in managing the stock levels to ensure that customers always have products.

Economic Environment

The global economy has been recovering from the effects of the COVID-19 pandemic. The United Kingdom was under several lockdowns, which affected the organization’s revenues, as shown in the reduced sales in the 2020 financial year. The imposition of social distancing also affected its performance. The slow economic recovery characterized by unemployment rates has affected populations’ income levels, purchasing power, and Tesco’s return to optimal performance.

Environmental

Tesco PLC has to consider several environmental factors in its business model. One key issue is waste management, especially from food. However, Tesco has an elaborate environmental sustainability program it has partnered with its suppliers in environmental conservation initiatives. Initiatives include removing plastics from its network to reduce plastic waste, installation of waste collection centers in its stores to support recycling, commitment to reducing greenhouse emissions from its facilities, using renewable energy, sustainable sourcing of seafood, and working with the World-Wide Fund for Nature in preserving global resources.

Political

Tesco has had to restructure its business since the onset of Brexit. For instance, Tesco needed to amend modalities for the flow of goods and services between Northern Ireland and the Republic of Ireland.  

Legal

Tesco is required to conform to certain laws by the government. For example, since Tesco sells food, it must conform to food safety and hygienic standards set in the law (Lindgreen & Hinley, 2003). Other legal, and operational issues include observing labor laws such as minimum working age and minimum wage. Some of the products that Tesco sells have age restrictions. For example, alcohol is not supposed to be sold to individuals below 18 years in the UK.

Ethical

Tesco has a code of conduct to ensure that its dealings with stakeholders are straightforward and ethical (Tesco, n.d). The code of conduct touches on many areas of operations. For example, the code guarantees that Tesco’s marketing communication will always be above board and honest. The code also guarantees customers that Tesco will always take due care when handling food and protecting customer data. Externally, the code also details interactions with suppliers, fair trade with competitors, intellectual property rights, and the need to uphold the law regarding bribes and gifts, conflict of interest, fraud, and accounting practices. Internally, the code details how employees should relate to each other, employee integrity and safety, equal opportunity and inclusion, and human rights.

Determinants of Demand for Tesco’s Products

Tesco operates in a market with 4 other major organizations signifying that it operates in an oligopolistic market (Severov et al., 2011). In an oligopolistic market, the firms may easily set prices because the size of the organizations provides barriers to entry into the market. Due to their ability to set prices in an oligopolistic market, the firms may be able to affect the demand for their products. Therefore, the demand curve will be kinked, as shown below.

The diagram above shows Tesco’s demand curve. If Tesco increased its prices, the customers would move to one of the other four rivals. The prices of the other organizations determine the price controls by Tesco. If customers move to one of the other 3 rivals available, the demand for Tesco’s products decreases significantly. As such, Tesco would lose revenues. The effect of reducing the price would also be different. If Tesco reduced its prices, it could experience an increase in quantity demanded and have increased revenues in the short term. The other rivals in an oligopolistic market would respond by reducing their prices. In the long run, the revenues would reduce, and Tesco would not be able to maintain the advantage in the long run.

Determinants of Supply for Tesco’s Products

Agricultural market. Tesco is a renowned seller of vegetables and food items. The global food market has experienced shocks due to the suspension of farming activities in the COVID-19 era (Pu & Zhong, 2020). As a result, global food prices have significantly increased. For Tesco, which purchases food items in bulk, their profit margins are likely to reduce. One current issue is the fluctuations and shocks in global oil markets. The global increase in oil prices affects energy generation, which directly affects manufacturing processes and overheads. Manufacturers often transfer the cost to customers, and the overall effect is an increase in prices. However, Tesco operating in an oligopoly market puts it in a weak position to control the prices. Additionally, fuel prices can affect Tesco’s logistical operations and significantly its supply chain. Since Tesco operates in an oligopolistic market, it is not in a position to set prices and does not have a supply curve.

Market Competition

The big four retail and supermarket chains take up most of the market share in the UK. Other small-scale retailers and online retailers share the e-commerce space. The organizations also have similar strategies to attract and maintain customers. They focus on customer service and offering the best price for customers to remain more competitive.

Fiscal Policy

The government is the primary developer and implementor of fiscal policy in the UK. The government’s actions determine the interest rates and currency circulation in the economy. This, therefore, matters because it affects how Tesco accesses credit and how actions of the government affect the value of Tesco’s assets held in Great Britain Pounds.

Government activities to simulate the economy affect employment. In the aftermath of the COVID-19 pandemic, the UK government-initiated measures to cushion individuals and businesses from the adverse effects. These initiatives were essential in ensuring that citizens maintained their employment opportunities. The rates of unemployment affect Tesco because they influence purchasing power (Rosnizam, 2020)

Government actions also take actions to control inflation. Inflation affects the value of the currency, causing a rise in the cost of goods and services. Inflation could affect Tesco significantly because Tesco operates in a cash-intensive business and, therefore, would be significantly affected by currency devaluation.

External Challenges

Tesco also has to consider the forex rate. The primary currency in the United Kingdom is the Great Britain Pound (GBP). The resilience of the GBP in comparison with other currencies is an important factor to consider, especially for forex transactions for the goods that it pays for outside the UK borders (Ren, 2021). Suppliers of such goods may be unwilling to provide goods and services if they do not get value for the goods they provide. Therefore, Tesco’s international and local supply chain may be significantly affected by inflation. The value of Tesco’s assets may be affected by currency devaluations.

References

Ju, Z., & Li, Y. (2011). Analysis on Internet of Things (IOT) based on the” Subway Supermarket” e-commerce mode of TESCO. In 2011 International Conference on Information Management, Innovation Management and Industrial Engineering (Vol. 2, pp. 430-433). IEEE. https://ieeexplore.ieee.org/abstract/document/6116820

Lindgreen, A., & Hingley, M. (2003). The impact of food safety and animal welfare policies on supply chain management. British Food Journal, 105(6), 328–349. https://doi.org/10.1108/00070700310481702

Rosnizam, M. R. A. B., Kee, D. M. H., Akhir, M. E. H. B. M., Shahqira, M., Yusoff, M. A. H. B. M., Budiman, R. S., & Alajmi, A. M. (2020). Market opportunities and challenges: A case study of Tesco. Journal of the Community Development in Asia (JCDA), 3(2), 18-27.

Pu, M., & Zhong, Y. (2020). Rising concerns over agricultural production as COVID-19 spreads: Lessons from China. Global Food Security, 26, 100409. https://doi.org/10.1016/j.gfs.2020.100409

Ren, J. (2021). The Research of Tesco’s Current Investment Portfolio and Some Recommendations. In 2021 3rd International Conference on Economic Management and Cultural Industry (ICEMCI 2021) (pp. 1461-1465). Atlantis Press

Severová, L., Kopecká, L., Svoboda, R., & Brčák, J. (2011). Oligopoly competition on market with food products. Agricultural Economics (Zemědělská Ekonomika), 57(No. 12), 580–588. https://doi.org/10.17221/107/2010-agricecon

Tesco. (n.d.). Our Code of Conduct. Tesco.Com. https://www.tescoplc.com/media/1239/tesco-code-of-business-conduct-2018.pdf