Analyzing the Macroeconomic Environment of Tesco in UK and China

This report analyzes the macroeconomic environment of Tesco in the United Kingdom and China, including the market structure, macroeconomic indicators, and the impact of monetary and fiscal policies on the company's economic activities.

Running head: GLOBAL BUSINESS ECONOMICS AND FINANCE
Global business economics and finance
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Table of Contents
Introduction:..................................................................................................................1
Discussion:...................................................................................................................2
Description of company and the market it operates:....................................................2
Analysis of market structure of Tesco in United Kingdom and China:.........................3
Comparative analysis of the macroeconomic indicators of UK and China:.................5
Identifying the impact of macroeconomic indicators on the economic activities of
Tesco:...........................................................................................................................6
Analyzing the monetary and fiscal policy instruments of two countries and their
impact on economic activities of Tesco:.......................................................................6
Analyzing the foreign trade policy instruments of UK and China and their impact on
economic activities of Tesco:........................................................................................8
Conclusion:...................................................................................................................9

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Introduction:
The report is prepared for analyzing the macroeconomic environment of the
countries where the chosen firm carries out its operations. For the purpose of
analysis, the chosen company is Tesco which has its operation in countries such as
United Kingdom and China. The main objective of conducting this study is to
determine the impact of several macroeconomic factors of the two countries on the
economic activities of firm. In the first section, a detailed description of company and
the operation of its product and market are done. The analysis proceeds giving a
detailed evaluation of the market structure of the two countries. Furthermore, the
major macroeconomic indicators of UK and China such as unemployment rate, GDP
growth rate, inflation rate and balance of payments are compared. The impact of
fiscal and monetary policy on the economic activities of firm is determined by
evaluating the interest rate of the two countries. Moreover, the foreign trade policy of
both the countries is analyzed by evaluating their exchange rate and its impact on
the operation of Tesco.
Discussion:
Description of company and the market it operates:
Tesco Plc is the largest retailer of food that is based in United Kingdom and
has operations in Europe, Asia and USA (tescoplc.com, 2019). Being a leading
retailer, millions of customers are served by Tesco at their stores and online. The
healthier eating has become more affordable with Tesco producing and selling range
of good quality meat, vegetables, fish, poultry brand and operates on a wide range of
brands such as Tesco superstores, Tesco metro, Tesco express, home shopping,
club card, banks, Telecom and petrol stations. Tesco is enjoying an increasing
market share in UK holding 13% of the market share (Butler, 2016).
Operations of Tesco in China have been initiated for creating a multi format
retailer by the formation of joint venture with the China resource enterprise. Market of
China is considered as strategically important for growth of business of Tesco. The
international headquarters based in Hong Kong is used for sourcing 40% of the food

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items and 50% of clothing. The partnership of China with Tesco is considered as
strategic plan by placing a bid on the ParknShop supermarket chain of China which
is a second largest retail chain. A convenience chain format is launched is launched
by Tesco in China.
Analysis of market structure of Tesco in United Kingdom and China:
One of the major contributors to the growth of economy of UK is the retail and
supermarket industry. There is enormous variation in the size of retail business with
Tesco at sakes value of over £ 22.7 billion (Farrell, 2014). The market of UK is
becoming increasingly polarized between the handful of huge corporate chain and
numerically dominant independent retailers. Supermarket and retail sector of UK is
oligopolistic market; however, there is growing monopsony leaving a high barrier to
entry. Market structure of UK has three broad trends that are appropriate to the
supermarket competition. These trends include reasonably high national market
concentration, stimulation of supermarket store in convenient store sector and
limitation in the customer choice due to concentration of market in some sector. The
consumers of retail in UK are empowered with product quality orientation and high
degree of sophistication. The trend of increasing space has allowed retail leaders to
penetrate in the category of beauty and health product where Tesco is one of the
leaders beside Lloyds pharmacy and Boots. Consumers of UK should be provided
with the low bargaining power in the oligopolistic market. For meeting the needs,
customers control their buying process by using more than one retailer. Therefore,
the retail market of UK is characterized with a unique consumer power that makes
the UK retail market extremely competitive and differentiating from other markets.
The expectation of higher increase in high end categories of customer higher income
patterns has resulted in the sustainable growth in high end good categories. Tesco
has adopted the strategy of cost leadership by attempting to offer private labels and
lower prices along with offering differentiated products to premium customers. A
multichannel leadership is adopted by Tesco that helped in creation of organizational
strategy for diversification that offered target segment with several commercial
solutions (Emlinger & Poncet, 2018).
The retail and consumer market of China is the second largest market in the
world with a nominal increase in total retail sales by 10.4% (Iberchina.org, 2019). In

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year 2015, the merchandize trade contributed to overall GDP at about 36% and the
trade revenue for consumer goods grew year on year from 2016 to 2017. The market
of China is targeted by Tesco as it offers opportunity of income growth. Competition
in the grocery retail sector is driven by the continuous expansion of hypermarket and
supermarket to smaller cities from major cities. With rising disposable income in
China and increase in demand for convenience by consumers is expected to drive
the growth of convenience stores. The evolvement of grocery retail market in China
has influenced the consumer trend influencing beverage and food product. The
supply chain structure of retail sector in China is complex which makes it necessary
to work with the network of distributors. There is great variation in the retail demand,
purchasing power and the rural urban income gap due to wide disparity among the
region of China. A product oriented strategy is adopted by traditional retailers in
customer management and managing supply chain efficiently and increasing
profitability (Lilavanichakul et al., 2018). The retail market of China is highly
fragmented as it composed of many medium and small sized retailers. Companies in
retail sector face different level of competition and the integrated retail business of
China include supermarket and department stores.
Comparative analysis of the macroeconomic indicators of UK and China:
The performance of economy of any country can be assessed by the analysis
of macroeconomic indicators such as Gross domestic product (GDP), unemployment
rate, inflation rate and balance of payments. The GDP of UK grew at an average rate
of 2.8% every year. Private investment and private consumption is the main driver of
growth of GDP. Economy of UK grew at 1.8% in year 2017 as against 1.9% in year
2016. Year 2018 recorded the slowest growth with the activities grounding to halt
and expanding by just 0.1% which is the slowest growth rate in five years. Brexit
being the significant drag, the growth rate slowed to 1.5% in year 2018 (gov.uk,
2019). For China, a growth rate for year 2018 is recorded at 6.6% compared to
growth rate of 6.8% in year 2017 and 6.9% in year 2016. It can be observed that the
growth rate of China is significantly higher than UK (Imf.org, 2019). However, the
level of GDP year on year is significantly lower than that of UK. The aggregate
demand of an economy is measured with the help of GDP indicator that measures
the quantities of all goods and services produced in an economy.

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Demand analysis of UK and China:
(Source: Tradingeconomics.com, 2019)
Inflation rate in China witnessed slowdown due to non food prices and the
rate being at a six month low of 2.1% in year 2018 compared to 1.6% in year 2017.
The consumer price inflation in year 2018 slowed down to a sixth month low of 1.9%
year on year. Inflation rate in UK is recorded at 3.21% in year 2018 compared to
3.58% in year 2017 indicating decline. Figure for year 2016 is recorded at 1.74%
which clearly showed that inflation rate increased considerably in 2017 and then
decline by less value (Imf.org, 2019). When comparing the figures, inflation rate in
UK in year 2018 was much higher than the rate in China.

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Comparison of inflation rate of UK and China:
(Source: Tradingeconomics.com, 2019)
The rate of unemployment of UK in the fourth quarter of 2018 is recorded at
4% which is at its lowest level since year 1970s. There was an increase in
employment and fall in number of unemployed by 14000. On other hand,
unemployment rate in China was level below UK and it was recorded at 3.8% in the
fourth quarter of 2018. However, unemployment rate for UK witnessed a downward
trend since the beginning of year 2012 but the rate was comparatively lower than
what was recorded in China (Tradingeconomics.com, 2019).
Comparison of unemployment rate between UK and China:
(Source: Tradingeconomics.com, 2019)

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From the above graph, it can be seen that for a considerable number of years, the
level of unemployment in UK is lower than in China. In the initial year of analysis say
2010, the rate of unemployment in China was higher than UK.
The balance of payment of UK is facing downward trend since year 2012 and
it is way much below the rate enjoyed by China. China on other hand recorded a
volatile balance of trade and at the present situation, the balance of trade is
favorable at level of 400 (Tradingeconomics.com, 2019). On other hand, UK has
negative balance of trade at -200 in the current year that is 2019.
Comparison of balance of payment between UK and China:
(Source: Tradingeconomics.com, 2019)
Identifying the impact of macroeconomic indicators on the economic activities
of Tesco:
The growth of market share of Tesco in UK was accompanies by many
factors such as large stores and broadening product range. Higher inflation in UK in
the wake of Brexit has weighed on business sentiment of Tesco due to uncertainty
and squeezing consumer buying power. The demand for groceries and food of
Tesco has decreased in recent years because of falling consumer buying power and
this resulted in company losing 22 million customers. However, the main focus of
company is on better customer service and lower prices that has led to growth in

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sales figure. The slowing food inflation rate in UK was flagged up by Tesco but a
virtual halt was reported on food sales over the last few months. The increasing cost
of living in China and rising inflation resulted in loosing winning over customers and
has led to fall in sales figure of Tesco. It was reported by the retail giant that amid
slower growth in sales, the expected profits was significantly lower (Tselios et al.,
2018).
Analyzing the monetary and fiscal policy instruments of two countries and
their impact on economic activities of Tesco:
The business organization and economy as a whole can be controlled by
using different monetary and fiscal policies. Government bodies construct the
policies by considering the economic policies for creating a favorable impact on the
activities of business. The monetary policy is constructed by taking into account the
change in rate of interest. Government and regulatory bodies devise the monetary
policy by changing the rate of interest (Martin et al., 2016).
Fiscal policy is designed to bring a change in level of aggregate demand by
contraction or expansion. Such policy comprise of change in spending by federal
government and change in taxation rate. Government adopts an expansionary fiscal
policy during the time of recession either by increasing their expenditure or by
lowering the level of taxation. In event of creating an expansionary pressure,
government adopts expansionary fiscal policy that lowers the spending and
increases the taxation expenditure (Baker et al., 2016). During the recession,
government is requires expanding surplus of budget and deficit spending. In event of
low demand, government can take measures to stimulate demand by reducing
income tax and increasing spending. Interest rate of country such as UK and China
is impacted by the action of respective central bank (Imf.org, 2019). Government
designs the monetary policy by changing the level of apex bank reserves and
increasing the interest rate.
The central bank in China uses multiple tools for controlling the amount of
money and interest rate in economy of China. Bank has adopted dual mandate with
the help of management of policies for promoting growth and maintaining price
stability. Adjustments in such policies are in accordance with the economic
conditions faced by country. China manages its monetary policy with the help of

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open market operations, benchmark interest rate, reserve requirement ratio and
standing lending facility. On other hand, an intense policy to support the growth of
GDP was embarked through increased spending on infrastructure. Cutting down the
rate of interest has resulted in sparking property demand and pushing down the
mortgage interest rate. Another fiscal measure that is adopted by China in recently is
increasing the funding of infrastructure by way of cutting down on taxation (ft.com,
2019).
Business activities of Tesco would face difficulties if there is increasing
interest rate or if the government took measure to increase the rate of interest
payable. This is so because there would be reduction in their consumption level and
an increase in cost of capital which would ultimately reduce the sales volume of
company. On contrary to this, if there is reduction in the rate of interest, it would be
easy for Tesco to finance their capital at lower cost. Such reduction in cost of capital
would help company to seamlessly carry out their operating activities.
The shift in the monetary policy is done by government by changing the
reserve requirement. It can be seen that the economic and operational activities of
Tesco is substantially impacted by change in reserve or balance of payment. An
increase in reserve requirement would have an upward push on the interest rate and
this rising interest rate creates an urge among customers to increases their deposit
instead of spending on consumption (Yin et al., 2016). Therefore, a declining rate on
consumption will lower the sales volume of business and change the business
activities of Tesco. In developing economy such as China, greater emphasis is
placed on development of organizations operating on small scale and several
measures are employed against hiring labor at lower cost.
Change in rate of taxation through the fiscal policy of China and UK would
considerably impact the business from different perspective. A reduction in the rate
of taxation by way of fiscal policy would create a favorable impact the price
movement of the goods of Tesco and this would enhance the product quality. It is so
because there would be declining impact on the cost of operations of the product.
Profitability of company can be increased because of reduction in rate of taxation as
the available income can be diverted on advertisement (businessinsider.com, 2019).

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Analyzing the foreign trade policy instruments of UK and China and their
impact on economic activities of Tesco:
While carrying out international trade, organizations are required to comply
with various regulations and rules. The international, trade policy of UK is managed
by European Union that sets commercial policy instruments such as anti dumping
instruments. The fair and free trade policy of government of UK is regarded as
fundamental to the prosperity of development (mckinsey.com, 2019).
Such policy has resulted in ensuring the higher wages to people for accessing a
broader choice of services and goods at lower cost. On other hand, the foreign trade
policy of China has undergone continuous development and there has been
elevation in the position of country in terms of trade in recent years. The cooperation
and economic exchanges of China with other countries has been developed in line
with the principle of mutual benefit and equality. The technical and economic
assistance to other countries have been expanded. For foreign investment, the main
hot spot have been the basic infrastructure and industrial projects and a strong
competitive edge on the world market is possessed by China. China has been able
to enjoy a sound environment for economic relations and foreign trade development.
In a situation where the export duties and import duties of any country is very high
which requires Tesco to incur a huge amount of money as there is deterioration in
the level of profits (Assets.kpmg, 2019).
The growth of Tesco in the global market is restricted by one of the significant
macroeconomic factors that are exchange rate. Foreign trade policy instruments
such as change in exchange rate has considerable impact on the economic activities
of Tesco since many of the activities are conducted through the international trade.
The overseas operations of retail organization of UK such as Tesco are adversely
impacted by the change in rate of exchange (mckinsey.com, 2019). An appreciation
in the value of pound sterling would have negative impact on the operating and
economic activities of Tesco in countries such as China. On other hand, sales in
home country would enhance as the value of pound in relation to other currency has
increased. The change in exchange rate of China would considerably impact the
business of China as there would be difference in value or the payment made to their

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suppliers, when conducting sales forecast and hedging the balance sheet (Shan
Ding, 2017). The exposure to the exchange rate would make difference to the
business of Tesco when they have to make payment to their suppliers.
Conclusion:
From the analysis of the different macro economic factors of both the
countries, it can be seen that the economic activities of Tesco is significantly
impacted by such factors. All the fiscal and monetary measures of both the countries
deeply impact the business activities of Tesco. In UK, Tesco has been successful by
creating core competency due to its brand image that has helped it to enhance the
short and long term profits. However, Tesco seems to be impacted by the worst
scenario that would be brought by Brexit as it is seen as the brand that is highly
associated with Brexit and adequate measures should be taken to aggressively
hedge against the risks.
Carrying out trade by Tesco in China becomes difficult as they emphasizes on
their economic development. Carrying out business by Tesco in other countries
became difficult due to stringent global environment. The economic set up of country
such as China makes it difficult for Tesco to conduct their business efficiently
because of surplus and shortage of several resources such as capital, soil and labor.
Furthermore, the great variations in the spending of Chinese consumers on food
items have also resulted in dragging down the business of Tesco. Rising rate of
inflation has lowered the consumption that has led to fall in sales figure.

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