Micro-Economic Impacts on Tesco Plc

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1.0 Introduction
In this essay we are going to evaluate the micro economic factors on the activities and performance of Tesco. Tesco Plc (2011) states, that the retail industry is a highly competitive environment. Tesco competes with a wide variety of retailers of varying sizes and faces increased competition from UK retailers as well as international operators in the UK and overseas. Failure to compete with competitors on areas including price, product range, quality and service could have an adverse effect on the organisations financial results. Tesco aims to have a broad appeal on price, range and store format in a way that allows them to compete in different markets. There is a risk that Tesco may not deliver their stated strategy in full, particularly since, like all retailers; the business is susceptible to economic downturn that could affect consumer spending. 2.0 The Extent of Competition in the Market

Tesco is a multi-national grocery and general merchandising retailer. By revenue, Tesco is the fourth largest retailer in the world after Wal-Mart, Carrefour and Metro. With 4,811 across 14 countries in regards to profit, Tesco is the second largest retailer in the world. In the UK, Tesco operates in an oligopolistic market competing against three major retailers; Asda, Morrisons and Sainsbury’s. Oligopolistic markets are those which are dominated by a small group of larger firms with several smaller firms also competing in the market with minority market share. The concentration ratio of the retail market is 4:76.2.

Figure 2.0.1: Comparing the Grocery Market (Preston, 2008)
Preston (2008) states, Tesco are the market leader with 31.4% with Asda, Sainsbury’s and Morrison’s having a market share of 16.9%, 16.4%, 11.5%. This means theoretically Tesco have monopoly power within the market but due to the intense competition which is apparent, they are not able to exploit their market power and discriminate against other firms as well as customers. However, there are still allegations that the major players within the market collude with one another to cause higher levels of barriers of entry and keep prices at a level which benefits all of the major firms. This protects their position within the market and allows them to set prices at any desirable level. With this happening these major players make it extremely difficult for start-up businesses to enter the market. 3.0 Market Dominance

In 1998 the market share for the grocery market showed that Tesco had 21.8% of the market share. Asda had a market share of 12.1% with Sainsbury’s share at 19.9%. Morrisons and Safeway controlled 13.3%. This gave a concentration ratio of 4:66.1. However in figure 2.0.1, it shows that Tesco started to dominate the market and saw a rise in their market share from 21.8% to 31.4%. Presumably, within these 10 years Tesco’s used its economies of scale to gain this extra market share. With Tesco having a great majority of the market share they operate in, it allows them to possibly price discriminate. The way in which Tesco could do this is by having such a high market share they are capable of forcing competitors out of business and therefore, leaving only them to provide the products or services within that area. In addition to this, Tesco can under-price its products and services as with a greater market share they can reach economies of scale. Economies of scale arise when cost per unit falls as output increases. With having economies of scale Tesco’s can then be more productive than its competitors and supply more to its customers at better prices. For example if Tesco reach economies of scale they can get more from their suppliers with bulk buying allowing them to supply at lowers prices. By doing this poses a threat to smaller businesses that can be undercut by the competition. With a 30.1% of the market share Tesco definitely do have some market dominance within the market via the instruments stated above such as the...
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