Critical analysis of the influence of discount retailers on Tesco plc in the UK

Content

Introduction

AIM and OBJECTIVES

LITERATURE REVIEW

METHODOLOGY

Finding and Analysis
Impact of discount retailers over traditional retailer Tesco in UK:
Flexible business model:
Comparison Aldi strategy with Tesco:
Inter-company format change:
Future of Discount retailers:

CONCLUSION
Impact of discounter:
Flexible model:
Future of discounter:

APPENDIX-1

APPENDIX-2

APPENDIX-3

References:

The Author of this text is not a native English speaker. Please excuse any grammatical errors and other inconsistencies.

Introduction

The UK’s grocery retail sector is one of the most competitive and fierce in retail. Over the last decade, the UK’s grocery retailing landscape has transformed radically, especially emergence of the Germany and Scandinavia deep discount retailers such as Aldi and Lidl [1]in early 1990s. Hard discount retailer have very distinctive approach than UK’s traditional grocery retail such as Tesco, Sainsbury, Walmart-Asda and Morrison (studied in Singh et al.2006 and Zhu et al. 2008) and were lead onto UK by these Traditional retailer which enjoyed high profit margins at the time and they recognised the Gap in the market in terms price and spatial gap in terms of the most deprive area in UK’s towns and cities (Wrigley and Clarke, 1998 and Hickman, 2008).

By 2015, Germany discount retails have grown record level which followed a period of gradual increase number of store and most favourable trading characteristics even given recession and global financial crises between 2007 and 2009 (Thompson et al., 2010). Having reached record sales, by end of 2014, Aldi and Lidl’s sales have grown by 22.6% and 15.1% and 4.8% and 3.6% market share respectively. On the other side, big four traditional retail Tesco lost sales 1.2%, J Sainsbury 0.7% and Asda and Morrison both 1.6% as well as 1.2% market share in combine (FT, 2015:1).

The success of German discount retails has become main concern in UK’s traditional retails. Aim of this paper is to investigation the impact of discount retailers on traditional retailers in UK because German discounters not only direct impact on traditional retailers’ market share, also put pressure on increasing operational efficiency and or decreasing prices (Harvard Business Review, 2006 and van Heerde et al. 2008) which lead this paper’s second aim to analyse should existing traditional retailers develop new flexible business model like Walmart (Jia, 2007). Having successful business strategy, it still begs a question what is the future of this German discounter, third aim of this research paper is to investigate can they (German discounter) be[Abbildung in dieser Leseprobe nicht enthalten]ble to beat big four UK’s traditional retailers like what Walmart did in US (Jia, 2007) and Ryanair did British airways (Ruddick, 2014).

Due to having time and words limitation, this paper will only focus Tesco in terms of UK’s traditional retailer and German discounter Aldi.

AIM and OBJECTIVES

Aim of this research is to provide up to date key information on UK retail market competition between discount retailer and traditional retailer. This research also intended to facilited traditional and discounting retailer to revisit their existing business model.

This paper will therefore, critically analyse both UK’s retail sectors current situation. This paper will draw on academic evidence, observe current business performance and market data. The research focus will be on three key area as follows:

Analyse impact of Germany discounter Aldi on UK’s traditional retailer Tesco

Analyse on necessity for new flexible business model for Tesco

Evaluate future of discounting retailer Aldi

LITERATURE REVIEW

As the discount retailing sector continues to grow, opposition from other retailers, (Nijs el al, 2005). Some commentators portraying them as playing a leading role in reshaping the grocery sector, tempting cash conscious consumers away from the established brands of the British market (Retailthinktank, 2015).

There is no doubt, however, while these discount brands have eroded the edges of the big four’s market share and continue to do so, Kantar Worldpanel figures showed both Tesco and Morrisons have lost significant market share (Retailthinktank,2015) where Aldi and Lidl are gaining (Brinded, 2015). According to YouGov, Aldi and Lidl are new favourite brand to British public (BrandIndex, 2014).

Furthermore, rise of discount retailers are also creating severed impact on the retail market. Retailthinktank (RTT) believes that price war is destroying the retail sector and putting off the potential investors. According to Nick Bubb, Retail Consultant to Zeus Capital, ‘’ Despite of providing attractive dividend yield by big UK supermarket, their share price still under pressure as equity investors are worried and dismal investment due to big UK supermarket’s (Tesco, Sainsbury, Morrison) poor sales volume and profitability’’ (Retailthinktank and Kpmg, 2015). Similar opinion also came from Tim Denison, Director of Retail Intelligence at Ipsos, said that grocery sectors are become less attractive due to profit falling, price war and low volume sales.

Another problem is identified by RTT that consumer behaviour is changing rapidly due to discount retailer. People tend to think more expensive the supermarket the ‘better’ and the ‘healthier’ but it seems Aldi has changed this tendency (Brinded, 2015). However, another study argued that this changing trend is not due to presence of discounter but for economical down turn (Scott and Rice, 1994).

The biggest mistake has been done by traditional retailer (i,e; Tesco) that ignoring discounter due to small company and thus slow recognition of discounter threat which gave discounter an opportunity to grow (Wyman, 2014). Ronald Bernard an independent strategy advisor thinks that Traditional retailer should recognise the strengths of the discounter immediately and diminished them by developing value proposition to customers and internal process (Wyman, 2014). Traditional retailer also might like to consider to open their own discount store for example Carrefour, Casino and Rewe they have their own discount chain such as ED, Leader Price and Penny (Cleeren et al. 2008). By doing so, Traditional retailer is coming out from their rigid conventional format and building new flexible business format. Similarly, independent market researcher Nirmalaya Kumar also suggested in Harvard Business Review, to compete with discount retailer, traditional retailer could build strategy to become low cost provider itself or augment current operation with low cost ventures (Harvard Business Review, 2006). However, if traditional retailers go with another low cost venture, in that case, their profit will shrink as they have to share with low cost venture as well as they might be opening door for another future competitor. Furthermore, becoming low cost provider or simply replicating the prices and promotion could lead to major problem as traditional retailers can not beat its competitors who invented the game and other side traditional retailers can not switch off all the majority customers who likes premium products (Ritson, 2014). Therefore, while focusing cost, they also should differentiate or be innovative what they offers (i,e; Waitrose, Gillette) [2] as well as continuing to increase switching cost. On the other side, giant traditional retailer can just ignore developing new strategy and just reduce cost to join price war with discounter which might give them moment to enjoy the victory but until another low cost discounter comes to the market as well as that will put hole on their profit margin as there will be required new cash injection (Retailthinktank and Kpmg, 2015). Researcher believes (working experience) that traditional retailer can reduce it price without new cash investment if they bring simple changes in their business strategy. Similarly, Kantar retail study found that if traditional retailers change their business strategy specially reduce huge products range to minimal, it will help them to generate cash and reinvest those money to offer lower price products without new cash investment (Wood and Butler, 2015).

Study also found fear, if giant traditional retailer reduces their products range what will they do with empty space (Wood and Butler, 2015), traditional retailer need to ask themselves how will utilize their asset to make sure it’s added value (Retailthinktank and Kpmg, 2015). Another drawback is that traditional retailers will lose commercial money from suppliers as there will be less number of suppliers (Anthony, 2015). However, this removing range will dramatically improve the shopping experience as it would be easier to find what shoppers want which will help them (Traditional retailers) to focus profits from sales to customers rather than supplier money.

Nevertheless, do traditional retailer really need to change the way they do business? Will discount retailer survive? Will they ever be able to reach where traditional retailers are? These are all valid question although, during the harsh economic condition, consumers were motivated to shop in more price-aggressive outlet but nevertheless, when economy recovers, the search of price incentive was faded out (Lamey, 2014) even Traditional big four retailer might like to express similar opinion but researchers believe (Harvard Business Review, 2006) if any business gets the customers due to their price they will only lose customers if there is new entrant offering lower cost. Since, traditional retailer charging premium, therefore, discount retailers win all their customers due to price they are offering.

METHODOLOGY

As literature review suggest, this research would be conduct against quantitative and qualitative. As this research topic is very broad therefore, keeping time concerning in the mind, the project will 90% be conducted through rather secondary sources such as annual reports, publications, journals and internet articles than primary like face to face interview, sampling etc. Secondary data are both time and cost effective and easy to access. However, lack of primary date this research information becomes more of subjective. There would be less opportunity to validate the up to date data. Nonetheless, due to the nature of the research topic, collecting primary data would be time consuming and costly also need human resource.

Qualitative methodology’s aim which related to understanding some aspect of social life and this method generally use words rather than number, data analysis. This method try to measure people’s experience and attitudes through asking ‘what’ ‘how’ and ‘why’. For example, in this project researcher’s two objectives are to find out what impact did discounter bring into customers shopping behaviour and how and why did it work as well as trying to explore what next (Fieldresearch, 2015).

The advantages of qualitative methodology is that issues and subject can be evaluated in depth and details. The framework and direction of the research can be revised quickly as soon as fresh information and findings emerge. The data from this methodology depends on human experience and this is more compelling and powerful than collecting data from quantitative method (OccupyTheory, 2014).

However, the drawback of qualitative methodology is that rigidity. The data interpretation and analysis are time consuming. Another problem is confidentiality and anonymity which makes difficulty while presenting the findings (OccupyTheory, 2014).

Quantitative methodology is a more logical and data-led approach which provides an analytical view what people think from an analytically and numerical point of view. For example, this project is trying to look for how much market share traditional retailer loosing due to discounter (Bl.UK, 2015).

The advantages of quantitative method is that it helps researcher to test hypotheses in experiments due to its ability to measure data using statistics. Nonetheless, its main problem is that it ignores the context of the study or experiment. Another disadvantage is, it needs large population of sample to increase accuracy of analytical result (eHowUK, 2015).

Finding and Analysis

Impact of discount retailers over traditional retailer Tesco in UK:

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