Costs and Benefit of Tescos

December 5th, 2007 | retail -

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.