Porter’s five forces analysis of Tesco
This is a detailed Porter’s five forces analysis of Tesco. It aims to examine the impact of the five forces i.e. competitive rivalry, supplier power, buyer power, threat of substitutes, and threat of new entrants on Tesco which operates in the supermarket industry. Tesco is the market leader in the UK and operates in a number of countries.
Bargaining power of the buyers/customers of Tesco
Tesco serves millions of customers every week, in its stores and online (Tesco, 2020). The bargaining power of the buyers in the UK is low as they are not organised, and it is unlikely that they can be better off if they switched to competitors such as Asda and Sainsbury’s. This makes the industry attractive for Tesco.
However, some analysists argue that the bargaining power of the grocery customers is high in the UK as now-a-days they are many competing retailers (notably Aldi, Lidl, and Poundland) vying for the same customers, and compared to Tesco, some of them are cheap as well. This requires Tesco to keep its prices low that impacts on the profit margins.
Bargaining power of the suppliers of Tesco
Tesco works with 2,500 suppliers in the UK, and many more thousands abroad. However, these suppliers cannot exert any significant power on Tesco as there are so many of them out there. Tesco negotiates very hard with the suppliers to increase its profit margins. However, it should be mentioned that Tesco has been accused of bullying suppliers over price cuts. Some people have accused it of behaving like ‘mafia’ for its tactics to squeeze suppliers (Poulter, 2o16).
Threat of new entrants affecting Tesco
The threat of new entrants coming into the UK supermarket industry is very low particularly because of the capital requirements. Tesco does not need to worry about any new entrants as it enjoys economies of scale and has its own core competencies. Likewise, would-be competitors may not have enough money, access to distribution networks, and expertise to explore the supermarket industry in the UK either.
Threat of substitute products/services affecting Tesco
Tesco offers its customers a wide range of products. It also sells substitutes of the majority of the products. For example, it sells both butter and margarine. Likewise, it also sells fresh milk, condensed milk, and powder milk. It is therefore easy to argue that the threat of substitute products and services for Tesco is mostly irrelevant.
Rivalry amongst Tesco’s existing competitors
Tesco has a number of powerful competitors in the UK. These competitors spend lavishly on advertising and other marketing techniques. Though Tesco is the market leader, the pressure from the nearest rivals is intense. Likewise, price-wars launched by Aldi and Lidl are affecting Tesco’s profit margins.
Tesco has been exploring appropriate solutions to tackle the problem of intense of competition. For instance, Jack’s (a discount chain) was opened in 2018 to compete with Lidl and Aldi. However, its performance has been poor with disappointing sales, job losses, and fewer stores than expected being opened (Wood, 2019).
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Last update: 01 January 2020
Poulter, S. (2016) Bullying Tesco ‘behaved just like the mafia’: Supermarket used strong-arm tactics to squeeze suppliers – who waited up to two years to get paid, available at: https://www.dailymail.co.uk/news/article-3418428/Bullying-Tesco-behaved-just-like-mafia-Supermarket-used-strong-arm-tactics-squeeze-suppliers-waited-two-years-paid.html (accessed 25 December 2019)
Tesco (2020) Our businesses, available at: https://www.tescoplc.com/about/our-businesses/ (accessed 01 January 2020)
Wood, Z. (2019) Slow growth takes shine off Tesco budget chain Jack’s a year on, available at: https://www.theguardian.com/business/2019/sep/15/slow-growth-takes-the-shine-off-tesco-discounter-jacks-a-year-on (accessed 24 December 2019)
Photo credit: CGMA
Author: M Rahman
M Rahman writes extensively online with an emphasis on business management, marketing, and tourism. He is a lecturer in Management and Marketing. He is a graduate of Leeds Metropolitan University and London South Bank University.