US consumers SWOT at Tesco

Tesco has a strong brand image around the world for offering diversified range of goods and services. In the UK, Tesco is a household name and people that immigrate to the US (2) could shop at Tesco’s stores due to brand loyalty. Also Tesco, due to its large size, is enjoying Tesco could utilise their ownership specific strengths in the UK to benefit its expansion in the US. For example, it could transfer some of its top managers to the US, or it could use its distribution contacts to low transport cost in the US.

Also as the UK food market is reaching maturity(3), Tesco could use UK as a cash-cow for milking. In the sense that it could use the profits (�2,280 million in 2006)(4) generated in the UK partially for the expansion in the US. However, if Tesco price discriminates by charging UK consumers more in order to finance its expansion abroad it could receive negative media attention resulting in bad publicity. And as its industry position in the UK is virtually secure, it can concentrate its attention on the US without worrying about competing in the UK.

Weaknesses

In the US, Tesco is opening its stores as “Fresh & Easy” so it is starting out with almost zero brand recognition and loyalty. Therefore, it already faces an uphill task in competing with the Wal-Mart brand name, size and an almost monopsony power in the US (in 2006 Wal-mart had net sales of $308,945 million, compared to Tesco’s �43.1 million)(5). So Tesco will have to spend a lot of money to in order to promote its new brand.

Furthermore Tesco’s huge size can also be a disadvantage, as it will not be able to quickly react to the consumer’s changing tastes due to its complex management structure. Information to- and decisions from- top managers could take a long time to move around and so Tesco will not be able to make quick decisions in reaction to consumer or market changes. However, Fresh & Easy is operating as a separate line of business with its own CEO, Tim Mason, which will shorten the chain of command and enable Fresh & Easy react quicker to changes in the US food retail market.

Opportunities Tesco saw the opportunity to open up smaller stores closer together that are specialising in fresh, healthy food and quick service(6); a market that is still untapped in the US – as traditionally US retailers favoured food-to-clothes megastores. The faster and easier shopping system aims at single professionals that do not have the time to shop at big megastores.

Tesco’s new stores will also feature ready-made meals, a relative novelty in the US; it is in response to the changing consumer trends in the US (In 2002/3: Sales of fresh-cut salads increased by 10%. Sales of bagged spinach and microwave-in-a-bag fresh products grew 37%. Fresh-cut fruit sales grew by 25%)(7), as more and more people don’t have time to cook proper meals. Therefore Tesco could take the opportunity of a first-entrant advantage.

Threats

Possibly the biggest threat that is facing Tesco’s expansion plan is the constricting world economy and, potentially, a US recession. This will force consumers to shop at their trusted and possibly cheaper (A 2002 study by UBS found that Wal-Mart’s average prices are 14% below its rivals)(8) retailers instead of trying something new. Tesco, in turn, will be generating less revenue, which would halt its expansion into the US because the expansion would become unprofitable. Another threat is in Wal-Mart copying Tesco’s blueprint for expansion(9) and by launching its own smaller sized stores.

This could prove very damaging as Wal-Mart could use its huge market power(in 2002 Wal-Mart’s market share was: 32% in disposable diapers, 30% in hair care, 26% in toothpaste, 20% in pet food, 13% in home textiles, 15% in CDs, Videos, DVDs and in magazines)(10), contacts, and brand name in the US to undercut Tesco’s prices and make expansion unprofitable. Furthermore high barriers to entry such as; high start up costs, price undercutting, and a possible collusion by existing firms could make it very difficult for Tesco to expand in the US.

Is expansion into the US a viable option for Tesco? The expansion into the US could be a profitable venture as Tesco is not challenging Wal-Mart in its core business of “stack them high, sell them cheap” hypermarkets. Instead, Tesco found a niche market in smaller closer stores and fresh and healthy food, and is seeking to expand there because Tesco could never compete with Wal-Mart in the US on size alone (in 2007 Wal-Mart Group operated 2,419 super centres, 988 discount stores, 586 Sam’s Clubs, and 128 Neighbourhood Markets)(11).

Therefore, Tesco is not pursuing the most lucrative option, which would be to open up a few huge low-cost-high-volume stores, rather Tesco has identified a mix between its strengths (high financial and managerial economies of scale) and the opportunities in the market (niche market and a new consumer trend) and therefore has increased its chances of developing a competitive advantage (in product differentiation) over other US retailers.

Is SWOT analysis an effective planning tool? One of the strengths of SWOT is that even with a simple input it can help to uncover opportunities that other firms have not yet taken advantage of, and by identifying and understanding its weaknesses, the firm can foresee and deal with potential threats that otherwise would have caught it unawares. On the other hand, SWOT by itself is not comprehensive enough to take into the account all factors influencing the firm and sometimes the options generated are too vague and do not fulfil their potential. Overall, SWOT is a very useful tool because with a clear objective and in conjunction with other strategic planning tools it provides information that is helpful to a firm in matching its resources and capabilities to the market in which it operates or is trying to expand to.

Bibliography:

Sloman J. and Hinde K. (2007) “Economics for Business”, Pearson Education, ch 8, 11 and 13. Stapleton, J. and Thomas, M.J. (1998) “How to Prepare a Marketing Plan”, Gower Publishing Ltd, ch6.