Clever Marketing. I am always impressed by how Tesco’s knows exactly how to get me to go shopping there again. If I haven’t been shopping for a  few weeks, they will send vouchers giving me £5 off my next £30 shop. The really clever thing is that usually I spend £20-£25 on a shop at Tesco. Not only do they get me to go shopping, but I spend an extra £5. (My house always has piles of food boxes, I need to buy to get some minimum order delivery )

Cheaper Prices. Some customers are price sensitive; in this regard Tesco has a reputation for being cheaper than Sainsburys. Whether this is true I don’t know. But, they certaintly have a reputation for being cheaper. This is probably helped by their Tesco value range which is markedly cheap.

Catering to both Sectors. Tesco have catered to both the price sensitive market, but also the up market sector. The Tesco value brand is supposedly ugly on purpose. But, the finest foods caters to the upmarket sector; the kind of customer who might goto Marks and Spensers. They are practicing price discrimination quite effectively within their own store.

Opened the most stores. Tesco seem to have opened the most stores showing a flexibility to open different sized stores reflecting the location. For example, Tesco metro stores in city centres.

Diversification. It seems there is no area where Tesco has not been able to diversify into – electricals, insurance, banking, mobile phones. These non food lines have offered scope for greater growth. It also gives people more reason to shop at Tesco’s – you can get pretty much anything you might need all in the convenience of one hypermarket.

In particular the internet has squeezed profit margins of low cost retailers. If you want to succeed on the high street, there is a need to offer something different, a niche, highly valued product. Therefore, brand names like Marks and Spencers may continue to do well – they don’t compete just on price. However, electronic goods will increasingly be dependent on cost factors.

Despite the record rise in internet sales and predictions for the future, many firms are reluctant to invest time and resources into developing their internet presence and internet sales.

On the internet, there is a lot to be said for being early into the market. Being the first firm enables you to get a privileged market position, brand loyalty and google rankings, Amazon UK have posted record turnover results and prospects look good for the biggest online retailer.

Many firms used the web to launch the sales on Christmas day. It is estimated 25% of web users on Christmas day bought something

Is tesco’s power a net benefit or a cost to the wider economy?

In the UK, Tesco’s have over 32% of market share for supermarkets. It is a similar situation as the US, where supermarkets are dominated by:

It is an emotive issues whether Tesco’s is Good or bad for society and consumers.

Benefits of Tesco’s

1. Economies of Scale.

The large size of the firm means that it can benefit from economies of scale in areas such as bulk buying, transportation, distribution, marketing and technology. Economies of scale mean higher output leads to lower average costs.

2. Diversification

The large size and financial resources of Tesco’s means that it has been able to diversify into other products such as Mobile Phones, insurance, credit cards and banking. In these areas, Tesco’s has helped to increase competition, provide more choice and help lower prices for consumers.

3. Minimum Standards,

Tesco has grown and been so successful, because arguably they have been successful in meeting the needs of consumers. They offer good quality and competitive prices. Note, in the past few years they have increased their market share considerably. If they were not able to offer what the consumers wanted they would have struggled to do this.

Costs of Tesco’s

1. Less Choice for consumers.

Tesco’s dominance has meant consumers face less choice. There has been a fall in the amount of competition. This could result in higher prices in the future.

2. Small Shops Squeezed out.

It has been argued that Tesco can use its size and market power to squeeze out small firms, especially in city centres. Tesco’s are often built in out of town shopping centres. Arguably, this has had a detrimental impact on local shops in city centres.

3. Farmers Margins have been squeezed.

The success of Tesco has enabled them to reduce the profit margins of farmers. For example, farmers argue the selling price of milk to the large supermarkets is too low and does not enable them to make sufficient profit.

• The Rise and Rise of Tesco
  
• Tesco Profits rise amidst Competition Enquiry

The Future?

Tesco’s is the UK’s leading supermarket, with an estimated market share of 31.5%.Yesterday, the competition commission suggested that the Supermarket’s dominance was not due to unfair trading practices. After a long investigation of the  British supermarket industry, the Competition Commission have concluded:

1. Supermarkets are not competiting unfairly
2. The dominance of big supermarkets does not preclude smaller grocery shops  from competing
3. The planning process for new supermarkets is too restrictive – What is needed is for a streamlined procedure to enable the building of more supermarkets, and not just on the edge of towns.
4. The one area of concern was the practise of buying up land close to the existing supermarket. It is alleged that supermarkets often buy up land in close proximity to their new stores. This is to prevent new firms from competing.

Criticisms of the Competition Commission Report include:

• They have focused on the benefits of cheap food, but have ignored other factors such as social responsibility and diversity.
• The Report didn’t adress the issue of Monopsony power. – This is the way supermarkets have allegedly been ‘bullying’ suppliers such as farmers. Farmers claim their profit margins have been squeezed by the combined market power of the Big Four.
• Does the UK really need more supermarkets? – Supermarkets in the centre of town would make life more difficult for specialist shops.

Friends of the Earth, one of the groups which called for an inquiry by the Competition Commission in the first place, said:

“Today’s report is a totally inadequate response to the growing power of the big four supermarkets. The commission acknowledges that supermarkets bully suppliers and reduce consumer choice, but then bizarrely recommends making it easier for them to expand.”

• Fury and disbelief greet Supermarket report at Independent
• Read latest news at Competition Commission site