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 grocery and supermarket industry.
Tesco is the market leader in the UK and operates in a number of countries. It offers a wide range of products, ranging from food and drink to clothing, homeware, and electronics. However, it faces stiff competition from several competitors both in the UK and abroad.
Bargaining power of the buyers/customers of Tesco
Tesco serves millions of customers every week, in its stores and online (Tesco, 2023). 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 competitive; however, this will impact on its profit margins negatively.
Bargaining power of the suppliers of Tesco
The bargaining power of suppliers is another important factor in Porter’s five forces analysis of Tesco. It refers to the ability of suppliers to negotiate prices and terms with buyers. In the case of Tesco, the bargaining power of suppliers is relatively low. Tesco has a strong presence in the UK, Ireland, and some other countries. As such, suppliers are unlikely to be able to negotiate prices and terms with it.
Tesco works with 2,500 suppliers in the UK, and many more thousands abroad. However, these suppliers cannot exert any significant power on it as there are so many of them out there who are more than willing to work with it. 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 bullying suppliers. According to BBC (2020) Tesco has reportedly asked many suppliers to agree price cuts as it is increasing the intensity of battle with budget supermarkets.
This shows that Tesco can bargain with suppliers very hard. This is an evidence that suppliers have minimal power. However, this also shows dissatisfaction of some suppliers with Tesco as they face pressure from it to lower their prices.
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. Tesco has a strong brand presence and has established itself as the leader in the UK grocery and supermarket industry. As such, it is unlikely that new entrants will be able to compete efficiently with it in the near future, even if they entered the market.
Threat of substitute products/services affecting Tesco
The threat of substitutes refers to the likelihood of consumers switching to alternative products or services. In the case of Tesco, the threat of substitutes is relatively low. It has a wide range of products and services and is the largest supermarket chain in the UK. As such, it is unlikely that consumers will switch to alternative products or services.
Tesco 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 very low if not irrelevant.
Rivalry amongst Tesco’s existing competitors
The intensity of rivalry refers to the competitiveness of the industry and the degree of competition between firms. In the case of Tesco, the intensity of rivalry is relatively high. 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 in the UK, the pressure from the nearest rivals is intense. Likewise, price-wars launched by Aldi and Lidl are affecting its profit margins. Therefore, it has taken a number of initiatives to beat competitors.
Tesco has been exploring appropriate solutions to tackle the problem of intense of competition. For instance, Jack’s (a discount chain) was opened to compete with Lidl and Aldi. However, its performance has been poor with disappointing sales, and job losses. Consequently, Tesco has decided to close it (Sillars, 2022).
Summary of Porter’s five forces analysis of Tesco
To sum-up, this article has discussed the details of Porter’s five forces analysis and how it can be applied to the supermarket giant, Tesco. This is a very helpful tool that can help Tesco strategists analyse the industry and devise effective strategies for its current and future operations.
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Last update: 27 January 2023
BBC (2020) Tesco demands supplier price cuts in discount battle, available at: https://www.bbc.co.uk/news/business-53284788 (27 January 2023)
Sillars, J. (2022) Jack’s all folks. Tesco’s answer to Aldi and Lidl is to be shut down, available at: https://news.sky.com/story/jacks-all-folks-tescos-answer-to-aldi-and-lidl-is-to-be-shut-down-12529781 (accessed 26 January 2023)
Tesco (2023) Our businesses, available at: https://www.tescoplc.com/about/our-businesses/ (accessed 27 January 2023
Photo credit: CGMA
Author: M Rahman
M Rahman writes extensively online and offline with an emphasis on business management, marketing, and tourism. He is a lecturer in Management and Marketing. He holds an MSc in Tourism & Hospitality from the University of Sunderland. Also, graduated from Leeds Metropolitan University with a BA in Business & Management Studies and completed a DTLLS (Diploma in Teaching in the Life-Long Learning Sector) from London South Bank University.