The changes in the market in regards to supply and demand Essay
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In this assignment, I will be looking into how Tesco has responded to changes in the market in regards to supply and demand and then I will be evaluating how they might react to future changes. In the UK, supermarkets are the main places for customers to buy food and daily articles for use. The scales of these supermarkets are very big and they also provide customers with diverse and wide selection goods such as vegetables, fruit, meat, stationery, televisions, and computers.
Chain supermarkets can be easily found all over the country and big scales of supermarkets also spread in every city. The supermarket industry in the UK could be described as an oligopoly market because it accords with three key characteristics of an oligopolistic market.
Firstly, in an oligopolistic market, there are only a few major competitors in the market, so they control the supply in the industry and the market share. Secondly, there are barriers to entry to the industry, so they can prevent other firms from taking advantage of the abnormal profits characteristic of oligopolies. Tesco is the largest UK grocery firm and retailer with 28.2% of the total market. (https://www.theguardian.com › Business › Tesco) But how do they deal with competitors? Tesco has differentiated itself from the competition by entering new retailing markets; they no longer only specialize in food and drink as they have broadened their market by entering markets such as clothing, financial services and have recently launched their highly successful telecommunications line. This allows the business to stand out from the crowd and create imperfect competition as they are providing additional services that many of the other big named supermarkets can’t provide.
Tesco operates in the oligopoly market structure, therefore, the market is highly dominated by big chain supermarket retailers such as Asda and Sainsbury’s this means Tesco is in perfect competition; when competition is at the highest possible level. For the consumer, this ultimately means there are many available substitutes for Tesco as vast amounts of supermarkets provide the exact same products that Tesco offer at maybe a competitive price. Tesco has implemented a loyalty card to create a bond with customers and influence them to stay so that they avoid shopping with the competition. One of Tesco’s main competitive advantages is its loyalty discounts that are created using the club card. The Club card was one of the most important retail innovations of the 20th century, the Dunnhumby database behind it, provided Tesco with an unprecedented level of detail into who its shoppers were and how they shopped. Using the data from Club card, Tesco could predict consumer trends and react to them, this can include discounted items that they regularly buy. All these factors give Tesco a competitive advantage against other supermarkets as the pricing policies that they use to attract more customers into the business, also the company creates a bond with customers when they use the club card which means they will continue to shop at Tesco.
The state of the economy has a massive impact on demand it depends if the product is a luxury or a necessity during difficult financial times. Tesco is notorious for their carefully branded packaging and the promotion of an “every penny counts” environment. The company has a strong brand image and is associated with good quality, trustworthy goods that represent excellent value. Tesco also uses product differentiation when it comes down to target markets as they do cater the needs of every Socio-economic Classification. Their products range all the way from luxurious more expensive products to Tesco’s own range which offers cheaper items. This helps them create a competitive advantage over their rivals as it gives them a much broader target market which will ultimately lead to more customers shopping there. The pricing strategies of Tesco caters the needs for any kind of income, therefore, anyone can shop there.
The price elasticity of a product describes how sensitive suppliers and buyers are to changes in price. It doesn\’t change in relation to supply and demand. A product with high price elasticity of demand will see demand fall sharply when prices rise. For the product with high elasticity of demand, the downward-sloping demand curve appears flatter – for every change in price, there is a large change in the quantity demanded. A demand curve for a product with low elasticity appears to be steeper, because the quantity demanded doesn\’t change much, even if prices do. Products with low price elasticity are described as being inelastic.
As Tesco is a renowned supermarket retailer, price elasticity can be very advantageous for them; if Tesco lowers the price of some products then there will be a massive surge in demand as they are recognized as a store that provides good quality products. However, due to many available substitutes in the oligopoly market if they were somehow forced to increase the price of products, maybe because they needed to pay a bigger fee to supply them, then there potentially could be a drastic fall in demand for the products and many customers would chose an alternative supermarket to buy the product because they sell it for a much cheaper price. Therefore price elasticity of demand plays a huge part in accumulating a price for each product as they need to consider how many people want this product and what is the competition selling it for. In addition, it isn’t always about the price, many of Tesco’s customers would shop with them regardless of their pricing as they believe their products are of a high quality, therefore, they wouldn’t mind paying the additional costs.
One of the most recent changes that have impacted the supply of Tesco’s products is Britain exiting the European Union. Due to the exit, it has meant the value of the pound has now decreased therefore Tesco are getting less for their money from overseas suppliers. This ultimately means that they will have to charge more for their products in the store which may have a negative effect. Tesco has responded by locally sourcing their meats and collaborating with local farms which is a good way of solving two problems as their objective is to get good quality affordable meat and also one of their recent objectives is to help the local community. In addition, the pricing set by “European supplier has increased by 10 %”(https://www.thetimes.co.uk/article/europeans-demand-10-price-rise-on-white-goods-zhlz5zs3x) therefore Tesco are looking for a supplier from outside of Europe.
Tesco uses several pricing policies online and In-store. To begin with, they use loss leader pricing which is selling high-demand items at atypically low prices, even if those prices require taking a loss on that item. They do this so that they can attract as many customers as possible as there is an increased demand for certain products and then they can hopefully create loyalties with them so that they continue to shop with the supermarket. They often choose this method as they are able to buy this product in bulk as it is cheap to supply. In addition, Tesco also uses promotional pricing they do this by analyzing the consumers buying habits and with the information they gather they can establishing different pricing profiles which allows them to optimize its prices by region.
One of Tesco’s main competitive advantages is its loyalty discounts that are created using the club card. The Club card was one of the most important retail innovations of the 20th century, the Dunnhumby database behind it, provided Tesco with an unprecedented level of detail into who its shoppers were and how they shopped. Using the data from Club card, Tesco could predict consumer trends and react to them. All these factors give Tesco a competitive advantage against other supermarkets as the pricing policies that they use to attract more customers into the business, also the company creates a bond with customers when they use the club card which means they will continue to shop at Tesco. This drastically increases the demand for Tesco’s products as many of the items have been personally discounted for them. (http://research-methodology.net/tesco-marketing-mix/)
In this section, I will be focusing on how Tesco may react to changes in the future. To begin with, I will be talking about the economy in regards to people’s disposable income. After the recession hit in the UK, consumer spending habit drastically changed, the consumers became more aware of how much they were spending each week on groceries and began to look for discounted supermarkets. With the recession came the rise in Aldi and Lidl who are beginning to creep up on the “big four” supermarkets including the market leader Tesco. Consumer spending habit also changed in regards to the big shop. Consumers all over the country are now avoiding doing the “big shop” in-store or at all. Tesco has been very quick to react to this complicated change, 29% of UK online grocery shoppers are shopping for their groceries more online now* than 12 months ago and in addition over 30% of consumers are visiting the shops more than 2 a week.
(http://www.mintel.com/press-centre/retail-press-centre/29-of-uk-online-grocery-shoppers-are-shopping-for-groceries-more-online-now-than-a-year-ago). Tesco has had to react to this situation quickly to try to maximize sales. They have recognized that fewer people are going into their large supermarkets for a number of reasons, such as the experience is time-consuming or unpleasant. Tesco recognized that it was essential to introduce more convenience stores around the country in prime locations; most recently, Tesco has opened 128 Tesco express stores in the UK over the last year. In addition, Tesco has taken over One stop convenience store and there are now currently 750 stores in England and Wales, employing over 10,000 people. The graph (1) shows a 5.1% decrease in supermarket shoppers which doesn’t look like an extremely big loss. However, this percentage equates to 10’s of billions of pounds and the amount of supermarket shoppers is continuing to deplete.
As a result of this Tesco have introduced over 600 new convenience stores since 2009 this is very advantageous in perspective from the consumer and it means they can purchase their goods quickly and easily whenever best suits them. The changes in consumer spending habits have created many positives for Tesco; the introduction of convenience stores is highly proficient for Tesco as well as they are able to maintain their bonds with customers also open a new stream of revenue. However, the changes have also had knock-on effects in regards to the supermarkets, as many are losing out on a substantial amount of revenue due to the lack of big shoppers. This has majorly impacted Tesco as they are already in a profit deficit due to further money being spent on convenience stores, however, the business now has a much broader target market which subsequently means they are on track to reduce the profit shortage. I believe in the future a much larger percentage of people will be avoiding the larger shops and will, therefore, be shopping more online and at convenience stores. I think Tesco may react to this by continuing to close down supermarkets and opening up more convenience stores around the country, they may also choose to innovate their online platform as it is becoming ever more popular.
Tesco has always been at the forefront of Technology over the previous years. Tesco has continued to utilize innovative technology since the first ever introduction of online shopping in 2000, where consumers could purchase their goods and have them delivered to their house at a time convenient for them. Tesco has continued to react to the changes in technology and is always using it to improve the shopping experience. Tesco has introduced new payment methods such as chip and pin and contactless, these methods have contributed to speeding the shopping experience up. In addition to the previous point, Tesco also introduced the first self-service checkout in the store which only made the shopping experience more pleasurable, this enabled the consumer to purchase goods without needed the help of employee hence Tesco have been able to reduce the amount of staffing they have and therefore create more money in the business. This has also had a knock-on effect on staffing morale as there is some job uncertainty. Tesco has reacted to the changes in technology and used them to their advantage by targeting a wider market. Tesco’s online platform opens up the opportunity for everyone to purchase their goods from Tesco. With the increase in smartphone usage, Tesco has introduced a mobile app, therefore people who are constantly on the go and do not have time to shop can simply order their product via the mobile app and can then chose the click and collect option or alternatively have the goods ordered straight to their home. Tesco has been able to access a much wider range of customers due to the click and collect option as it provides product guarantee, it also allows people to purchase goods via the internet and avoid the delivery fee. It is also advantageous for people who work long hours as they can purchase goods online and then pick them up at a time convenient for them. Click and collect has also negatively impacted Tesco as the initial start-up cost is extremely large which is reducing the already low profits. In addition, Tesco has been able to target individuals who avoid shopping in-store or people who may be unable to complete the strenuous task such as old people. The innovation of online shopping has meant that people can purchase groceries from the comfort of their sofa. The introduction of chip and pin has positively impacted Tesco as it has enabled them to open new shopping methods such as self-checkout and self-scan. They can now do this because they no longer need a human to process the payments. This has helped to reduce the numbers of staff in stores which have meant that Tesco can keep the cost of staff to a minimum, however, this may come as a negative as there can be a depletion in morale due to job uncertainty. Advancement in technology does have its negatives; the technology does not come at a cheap price which is costly on top of already reduced profits. As stated, Tesco is at the forefront of technology and they will continue to react to the technological changes for as long as they are around so that they can improve the shopping experience for all and provide all the essential platforms for consumers. Tesco may react by completely innovated all stores in the future, therefore, there may be less demand for staff which will allow them to reduce costs in every store, all over the country.
Another thing that Tesco are going to need to react to is Britain leaving the European Union, the effects of this decision have not officially happened yet. However, since the decision was made the price of the pounds has dramatically decreased. Multinational household goods giant Unilever has reportedly demanded a 10 percent price rise in Tesco products, including those made in the UK, to offset the higher cost of imported goods. The dispute means popular products such as Marmite and PG Tips tea bags will no longer be available via Tesco\’s website, the country\’s biggest online retailer. (http://www.independent.co.uk/news/business/news/brexit-tesco-unilever-pound-value-slump-marmite-dollar-euro-currency-exchange-rate-a7358926.html). In the future Tesco will have to react to this by creating relationships between non-European countries and begin to source more local produce as the price for European goods is constantly rising which will men if they continue to supply from there they will have to pay more and subsequently charge the customers more; this may have negative effects as the demand for the items may decrease.
In conclusion, Tesco has been very quick to react to the changes in the market, they have utilized and innovated previous technologies to aid a competitive advantage over their competition and so that they can make the shopping experience more efficient. In addition, they have recognized the changes in consumer spending rates and habits, therefore, they have been able to adapt to the current market ensuring business is running well. I believe in the future Tesco will react to changes very well, in particular with the upcoming effects of the UK exiting the European Union there may be major effects for businesses. Exporting and importing goods overseas may have additional costs for Tesco as they will not have the same relationships with European based providers, therefore I believe that Tesco will react to this by sourcing products more locally do avoid the increased delivery fee. In addition, Tesco may aim to create relationships with countries outside of Europe e.g. China as they are becoming more of an affluent country. Tesco also has business in Hong Kong which is already creating more revenue for the supermarket chain.
In addition, I believe that Tesco will continue to reach to consumer spending rates and habits, they have already recognized that their average customers are deciding to avoid the weekly shop as they prefer to shop in convenience stores. Tesco has already reacted to this by opening more convenience shops all over the UK, and in the future, I believe that they will reduce the number of supermarkets around the country and focus on building new convenience stores and upgrading their online platforms so that the shopping experience is better for all customers.