Analysis of Tesco’s Competitiveness in the Czech Republic
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Analysis of Tesco’s Competitiveness in the Czech Republic
Global expansion strategy is corporation’s formal plan for expanding its operations to another country or a number of countries throughout the world. This report seeks to conduct a feasibility study for Tesco expansion to the Czech Republic as direct foreign investment competitiveness in the sector, foreign direct investment, the company’s business structure, internal and external factors that have both negative and positive influence. It will also look into the macro and micro environment which will be analyzed using PESTLE analysis and porter’s five forces. The purpose of this feasibility study is to come up with a strategy for successful entry into the new market and discuss the barriers it will face and recommendations for maintaining a top position in the industry.
Tesco Stores limited began as a grocery selling stall in 1919 by Jack Cohen an official at the Royal Flying Corp in East London, United Kingdom (Ryle, 2013). The company operates retail shops and other related business activities including petrol stations. It offers fresh groceries including bakery items, fresh food, baby food, frozen food, home electrical, furniture, sports and leisure, technology and gaming, pet care, entertainment products, flowers and gifts as well as all kinds of clothing. Currently, the company has 2,654 stores in Scotland, England, Northern Ireland and Wales (Ryle, 2013). Formerly the firm was known as J. Colyer Furnishers Limited a business name that was changed in 1987 to Tesco Stores. In 1953, the company was incorporated and the headquarters are now based in Welwyn Garden City, United Kingdom. In the UK alone, the company has more than 3,400 stores with over 300,000 employees that work together to offer better services to their customers every day (Ryle, 2013). Currently, Tesco is ranked as the third largest global retailer by measurement of its gross revenue and also the ninth largest in the world by the measure of its revenues.
Tesco operations are service oriented. Business operation include opening everyday and adhering to the set trading hours for the company (Tesco plc, n.d.). The management is considering extending trading hours by opening more express and metro stores. The human resource management is responsible for management and recruitment of personnel. The company invests in customer service and maintains a well motivated team for provision of quality services. In the UK, the company operates in six formats including Tesco super stores, Tesco Extra, Tesco Metro, Tesco Express, Tesco Home Plus and One stop. Globally, the company has a portfolio of 1,800 stores located in France, United States, Malaysia, South Korea, Japan, Poland, China, Thailand, South Korea, Turkey and Czech Republic (Tesco plc, n.d.). Telecommunication, financial services and consumer goods are provided through the internet.
Although Tesco is one of the largest grocery stores in the UK, its operations in the country are threatened by a number of competitors including Argo’s, Waitrose and ALDI Einkauf (Ryle, 2013). Argos began its operations in 1973 at Stafford England. The company deals with consumer goods and generates $78.8nillion less than Tesco. Founded in 1984, Waitrose headquarters are in Bracknell, England. Tesco faces competition from Waitrose food processing industry. The top most Tesco’s competitor is ALDI was founded in 1913 and its headquarters are in Essen, North Rhine-Westphalia. The two companies compete in retail distribution. Currently, ALDI makes 124% of Tesco revenue. Tesco convenient stores are keen to meeting the changing consumer tastes and preferences making it gain popularity (Ryle, 2013). . As of 2015, Tesco was UK’s market leader in the industry with a 28.4% market share closely followed by Waitrose and Argos.
The annual returns for Tesco amounted in Northern Ireland and United Kingdom amounted to about 45 million British pound for the fiscal year 2017/2018, in 2016/2017 the revenues we 43.5 million while 2015/2014 they were 43 million.
Tesco Czech Republic
Tesco entered Czech Republic market in 1996 after purchasing Kmart which had a number of departmental stores. Currently, the company has more than 84 stores in the county with further expansion plans. Koruna and Zabka were also added in 2011 in form of convenient stores. Later Koruna was changed to Tesco express while Zabka operates as a franchise (Terterov and Reuvid, 2005). The Czech Republic has helped Tesco to shape retail business in Central Europe. In 2012, Czech branches launched online shopping home service making it the initial Central European State where shopper can access more than 20,000 Tesco products at the convenience of their homes. Tesco has grown to be the largest private employer in Czech Republic. Tesco entry to Czech Republic demonstrates an example of an organization seeking foreign expansion.
Political:Czech Republic is a highly liberal and democratic country but still there are some old pieces of conservatism (Terterov and Reuvid, 2005). The country also has high corruption levels fueled by political parties. This may result to unfair competition for Tesco and uncompetitive business practices in the environment. It is also worth noting that Czech is a European Union member but not a party in the monetary union (Terterov and Reuvid, 2005). Consequently, the euro currency is not yet accepted. The country was not affected by the 2008 economic crisis compared to European and American States. Other political factors that may affect Tesco in Czech include taxes, legislation and future political instability. The country has also signed a number of bilateral trade agreements and is a member of Multilateral Investment Guarantee Agency.
Czech Republic is a prosperous market as well as a stable economy in central Europe. In 2018, the country was ranked as the 30th country in the world for doing business by the World Bank (Meyer et al, 2018). The country was also 31st among 138 states as ranked by WEF Global Competitiveness report of 2017/18. In 2017, the country’s GDP stood at 17,046 pounds making it the highest in Eastern and central Europe. Additionally, Czech exported 6.4 billion pounds in 2017 to the UK that were dominated by manufactured goods and cars (Meyer et al, 2018). Consequently, Tesco is thriving well in the fast paced economy that is forecasted to continue growing in the coming years.
Czech Republic boasts of an education system that meets the demand of a competitive economy as published by the IMD World Talent Report in 2015. The 2017/2018 academic year enrolled more than 85,000 students in technical courses. The number of university enrollment increased due to transformation of the education system and demographic surge of the youth and middle age that make up a promising cluster for workers in for foreign entrepreneurs (Meyer et al, 2018).
Source: (Sioras and Spilling, 2010).
In November 2018, the annual rate of inflation dropped from 2.2% to 2% a rate that is matching with economic expectations. Since April the same year, this was the lowest inflation rate and led to reduction of non-alcoholic beverages and food prices. In contrast, the prices for housing, transport, and other utilities increased.
Image: Czech Inflation Rate, Source: (Meyer et al, 2018)
Another factor that may have a positive influence on TESCO investment in Czech Republic is the well-educated and skilled economy whose cost is just a fraction of Western economies cost (Sioras and Spilling, 2010). Further, investment attractiveness is rooted in high-quality and dense infrastructure and its geographical location near Western Europe. Although some Asian countries have higher labor costs, the negative factors outweigh the benefits making Czech an attractive country for foreign investors.
Image: Comparison of Czech Labor cost with other developed countries
Source: ((International Business Publications, 2015)
The Czech Republic has a high population of foreigners who enjoy the destination due to low cost of living combined with high life quality (Sioras and Spilling, 2010). The cultures offer an overwhelming choice embracing all types of food and music. Healthy eating has become popular in the country. For instance, people have replaced white bread with whole meal. The demand for children’s breakfast cereals increased by 11% in 2012 compared to 2011(Virglerová, Dobeš and Vojtovič, 2016). Although breakfast cereals are in high demand, there is no broad range which is an opportunity of Czech increasing its sales. Czech is also famous for museums, architectural heritage, galleries, cinemas, historical gardens, theaters, cafes and cinemas. The country’s birth rate is low at 9.6 per 1000 resident while the death rate is 10.5% in every 1,000 inhabitants. The number of people dying is higher than those being born. 14.8% of the population is made up of children less than 14 years, 15 to 64 years make up 68.7% of population while 16.5% comprise of 65 and above.
Czech infrastructure is ranked as the 19th in quality by the EU. The low ranking is attributed to by poor road network but the recent years have seen technological improvement. Accessibility in the county was made possible by a motor way covering 283KM that was completed in 2014 (Virglerová, Dobeš and Vojtovič, 2016). There are other major transportation improvements across the country. The country hosts international airports located in Prague its capital and has a dense train network compared to other countries in Europe. These would be important for Tesco transportation of goods from the suppliers to the stores. Czech government developed a national policy for science, research and innovation. New innovations ensure the country’s long term sustainability and competitiveness in the global market. Besides, the state is fostering collaboration between firms and universities and supports research for development. Innovations attract investments to in new areas and could enable Tesco to explore new business opportunities. Although effective research results and transfer of innovative skills remain a challenge to Czech Republic, their commercialization would be critical for enhancing the country’s economic competitiveness.
Czech Republic being a member of the EU is advantageous to Tesco since there are no trade restrictions regarding exporting or importing foods to and from EU member (Sioras and Spilling, 2010). Free movement of goods is advantageous since it enables Tesco access products from suppliers within and outside the country. However, there are certain rules pertaining food handling that the business should consider. Other important legal factors in the republic include consumer laws that fight unfair pricing and misleading product description, competition laws protect bullying of small firms by large ones, employment laws on minimum wage rate, abuse of power and working hour. Health and safety laws cover issues of safe workplace and reporting accidents.
Czech government is keen on environmental sustainability. It requires firms to consider ways for recycling and ensuring environmentally friendly behavior. Recycling has improved by 16% and still there are campaigns for its advocacy (Virglerová, Dobeš and Vojtovič, 2016). The shift in environmental care would require Tesco to consider engaging in CSR activities as a way of giving back to the communities.
Analysis of Business Scenario
Impact of Opportunities and Threats from the Macro-environment
From the Pestle analysis, Tesco is presented with adequate opportunities for investing in Czech Republic. The State presents companies with adequate opportunities for growth due to high number of skilled labor. Additionally, enrollment in tertiary institutions is high in the country producing a knowledgeable workforce. Consequently, this has a positive impact on Tesco operation since the company standards a change for engaging productive people in the crucial departments. The country also utilized funds obtained from the EU in developing research centers with an objective of making the State a prestigious investment destination with State-of-the-art infrastructure that is suitable for innovation development (Kosova, 2010).
The country’s GDP which impacts foreign direct investment increased from 0.95% to 1.93% in 2015 (Virglerová, Dobeš and Vojtovič, 2016). This makes the country a potential business center for Tesco and other foreign investors. As earlier seen, the country has favorable costs of labor where the skilled workers are paid less compared to other developed nations. FDI has positive influence on the local business and markets that work with suppliers and contractors for services and products sold to the foreign investors like Tesco. There is a 20% difference in wage rate in different regions whereby workers in Prague are paid more since it is the capital (Kosova, 2010). This presents Tesco with an opportunity for obtaining high skilled employers at lower wages. From the statistics, workers in Prague are paid 28% above average.
The Global Competitiveness Report made by 2017-2018 World Economic Forum ranks Czech Republic as the 31st among 137 world economies. The advantages in the country are driven by inflation, trade tariffs, flexible determination of wages, the GDP, FDI rules on business rules and imports. Currently international transfers that include royalties and profits are now possible and investments can be made freely. Foreign legal companies from other countries including the EU are able to carry out investment without major restrictions just like the local businesses (Virglerová, Dobeš and Vojtovič, 2016). Hence, the country has lifted legal limits in regards to establishing a company or a branch. Since 2015, the labor market at Czech has gotten stronger with the unemployment rate now at 2.9%. Surprisingly, labor in the country is cheap but this does not fully explain the reasons behind the low unemployment since labor is cheap in other countries. this may impact Tesco in that some states areas may lack adequate personnel for running the organization operations.
Porter’s Five Forces
The five forces will outline the factors within the economy that will bring in competition that has direct impact on Tesco. Although Tesco is one of the shops that dominate Czech Republic grocery market, other major supermarkets such as Billa, Norma, Kaufland and Albert have a market share in the country. In the past few years, the grocery market in the country has changed to supermarket dominated. Major hypermarkets have built their brand by investing on operation efficiency, marketing mix and one-stop shopping. These new entrants into the market have an impact on existing businesses such as Tesco. However, it is difficult for new entrants to develop enough capital due the developed supply chain, advanced technology and fixed costs present in the country (Porter, 2008). The huge investment done by Tesco in the country is a barrier to new entrants. Therefore there is moderate impact on the business.
Bargaining power of suppliers is impacted by major groceries and supermarkets. As the leading grocery in the country, Tesco has a high bargaining power for negotiation power compared to other chain stores. Czech suppliers are threatened by threatened by ability of local retailers get cheaper deals from exporters. The relationship between a company and the sellers may restrict the company’s freedom to source from different places especially if they take credit facilities (Porter, 2008). Consequently, this may have a negative effect on their profit margins. Currently, suppliers’ forces have little influence on Tesco’s profits since the company has diversified its products range.
As products become undifferentiated or standardized, customer’s bargaining power is getting high since they have low switching costs (Porter, 2008). Tesco has come up with customer retention strategies in Czech Republic such as loyalty card and online shopping platform. Tesco has maintained a strong brand by committing to meet customer needs through a wide range of choices, low prices, constant ins-store promotions, and customized services. Czech people are changing to healthier choices, consequently changing their buying habits. This has provided the company with ideas for strategic expansion to meet buyer needs.
Threat of substitutes reduces the demand for a firm’s products (Porter, 2008). At Czech Republic, has a large number of small grocers that offer alternatives buying places to consumers. The industry is weakened by new trends in the emerging convenience stores offering similar products at a cheaper price. Since the level of threats of substitute is high, the company can address it by acquiring smaller stores that offer the same services with competitors. The company can also open more store in major cities and local towns to attract huge sales.
Bargaining power of competitors is high the grocery market due to significant growth in the industry and consumers seeking for green options. Notably, food retailing is dominated by small stalls in Czech operating in open market. However, buyers are increasingly demanding for sophisticated services that are mostly offered in large stores such as Tesco. The high competition in the sectors would require Tesco to come up with innovative ways for maintaining its market share. This may include responding to consumer behavior and coming up with different trading formats.
Due to the changes in trade agreement and policies that promote globalization, companies are constantly seeking to expand their operations to different countries. Tesco Stores a UK based company has widened its operation to cover different countries where it has more than 3,400 stores. As a part of its foreign direct investment strategy, the company invested in Czech Republic where it is the leading hyper market in the industry. Czech Republic has a strong and stable economy that attracts foreign investors. The education system the country has enabled to produce a skilled work force with low labor costs. The country has also invested in infrastructure, technology and reducing unemployment rate for its residents. The country is commendable for a country seeking entry to the market or expanding its operations. The market attractiveness is also strengthened by government support for foreign investors allowing them to enter the country with minimum restriction. Czech Republic has also signed a number of bilateral free trade agreements and Is a member of the European Union making it easy for companies to import and export products.
International Business Publications, U. (2015). Czech republic investment and business guide. [Place of publication not identified]: Intl Business Pubns Usa.
Kosova, R., 2010. Do foreign firms crowd out domestic firms? Evidence from the Czech Republic. The Review of Economics and Statistics, 92(4), pp.861-881.
Porter, M. (2008). Competitive Advantage. Riverside: Free Press.
Meyer, Klaus E., Yuan Ding, Jing Li, and Hua Zhang. “Overcoming distrust: How state-owned enterprises adapt their foreign entries to institutional pressures abroad.” In State-Owned Multinationals, pp. 211-251. Palgrave Macmillan, Cham, 2018.
Ryle, S. (2013). Making of tesco.
Sioras, E. and Spilling, M. (2010). Czech Republic. New York: Marshall Cavendish Benchmark.
Virglerová, Z., Dobeš, K. and Vojtovič, S., 2016. The perception of the state’s influence on its business environment in the SMEs from Czech Republic. Administratie si Management Public.
Tesco plc. (n.d.). About us. [online] Available at: https://www.tescoplc.com/about-us/ [Accessed 13 Dec. 2018].
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