Tesco's Domestic Market Decline

This report investigates the reasons behind Tesco's declining profitability in the UK domestic market. It examines the intense competition from rivals like Lidl and Aldi, focusing on their pricing strategies and efficient business models. The report analyzes Tesco's cost leadership strategy, its failure to adapt to changing economic conditions, and the impact of events like the horse meat scandal. The research methodology involves analyzing secondary data from various sources. The findings highlight several factors contributing to Tesco's poor performance, including low profit margins due to price wars, ineffective leadership decisions, and a failure to embrace online sales and home delivery. The report recommends that Tesco adopt elements of Lidl and Aldi's business models, optimize its logistics and operations to achieve economies of scale, implement a loyalty program, and improve employee training to enhance customer service. The conclusion emphasizes the need for Tesco to innovate and adapt its business strategies to regain its competitive edge and improve profitability.

LOSSING OF GROUND IN
DOMESTIC MARKET BY
TESCO

TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................3
Aims & objectives ..........................................................................................................................3
Literature review..............................................................................................................................4
Research methodology.....................................................................................................................7
Findings ...........................................................................................................................................8
The main objective of research is to find out the those factors due to which firm performance
become poor...........................................................................................................................8
The second main objective of research is to identify the solutions that can be adopted to
improve firm profitability.....................................................................................................10
Evaluation and analysis .................................................................................................................11
Conclusion.....................................................................................................................................12
Recommendation ..........................................................................................................................13
REFERENCES..............................................................................................................................15

INTRODUCTION
Tesco is one of the largest retail player in the UK market. It is operating in number of
nations of the world and having more then 6000 stores with workforce of more then 5,00,000
employees. From past few years firm is facing problems in its business and consistent erosion of
profitability is the one of the main issue that Tesco is facing in its business. If there will be slow
growth rate of revenue then it is not a big issue but in case of Tesco revenue is falling
consistently in comparison to previous years. There are many rival firms of Tesco like Lidl, Aldi,
Sainsbury, Asda and Morrison. These retail firms are giving tough competition to Tesco
especially two German retail firms Lidl and Aldi. The common strategy that is followed by most
of retail firms in the UK is that they are offering products at low price. But there is difference in
prices at which firms are selling there products. This is the reason due to which retail firms are
earning low margin in there business. This cut throat competition strongly affects profitability of
Tesco. Earning of low margin in business and strong competition are the one of most important
factors that are playing key role in low profitability of the business. Although, Tesco market
share today also is very high in the UK retail industry in comparison to its competitors. But if
same situation will exist in upcoming years then Tesco will loose its ground in the market. Thus,
the main question that arises is that what are the factors due to which Tesco is not able to earn
sufficient profit in its business. The second main question that arises is that what steps Tesco
must take in order to improve its condition.
Aims & objectives
Aims and objectives of research are given below.
Aims The main aim of the research is to identify the reasons that are responsible for decline in
the firm profitability.
Objectives
 The main objective of research is to find out the those factors due to which firm
performance become poor. The second main objective of research is to identify the solutions that can be adopted to
improve firm profitability.
Justification for aim and objectives

The main aim of the research is to identify the factors that are responsible for decline in the firm
profitability. This aim is determined because in past years due to strong competition firm loss its
ground in the market which is main subject of the research study. In order to achieve this aim
objectives are prepared. There are two main objectives answers of which will help in achieving
aim of the research. The first objective is to identify the overall factors that are responsible for
poor performance of Tesco in its business. In line to this second objective is prepared under
which solutions will be identify to solve problems that are faced by Tesco in its business. This
objective will also help in achieving the aim of the research.
Literature review
Retail industry is one largest business domain in the UK in which there are few large
retail firms that have entire control on the industry. According to Ashworth, (2012) in past years
competition between retail firms increased to great extent. There is competition in every industry
because every firm wants to expand its business at fast pace. But there are some boundaries
within which firms operate in order to give competition to the competitive firms. In retail
industry of the UK this does not happened because firms use pricing strategy as weapon to
increase there market share in the industry. When one firm reduce its product price its
profitability increases and by looking at this scenario other retail firms also reduce there product
price. Further, in order to improve position in the industry firm reduce its product price. Again
other competitive firm reduce there products price. All these things give birth to never ending
fierce competition among the firms. Due to consistent reduction in product price firms earn low
margin in there business and face lots of problems in there business.
Williams, and Connell, (2010 ) claims that in order to survive in the market most of the
retail firms take some specific steps so that costing can be reduced. But this does not reduce
problems of the firm. Results are in front of the firms stakeholders that profitability of Tesco
reduce to great extent and in case of Morrison and Sainsbury revenue is earned in specific range
for last five years. In case of Morrison it is observed that revenue is in range of 16,000-17000 in
all years that comes in between 2011-2015. Similarly, in case of Sainsbury revenue is earned in
range of 23300-23500 in all years that comes in 2011-2015. This clearly reflects that due to low
margin earning either firms are earning same range of revenue in all financial years or there
profitability declined in comparison to past years. This is clearly indicating that steps that are
taken by retail firms to improve there condition are ineffective and companies are not deriving

fruitful results from same. This is matter of concern for the retail firms in the relevant industry.
Consistent curtailment in price by the retail firms is the one of most important reason due to
which firms are earning low profit in the business. This strategy in today time period are not
benefiting anyone.
As per views of Islam and McPhail, (2011) the main target to earn maximum profit is not
one of the basic reason due to which firms consistently reduce there product price. The
slowdown in world economy is another reason due to which firms reduce there product price.
Due to recession and slow economic growth unemployment rate get increase. Due to this reason
burden of unemployed people comes on employed people. This reduce people saving rate and
there spending capacity decline to large extent. Due to all these things firm profitability decline
to great extent. This thing to some extent force firms to offer there products at low price so that
demand can be revived in an economy and revenue as well as profit can be earned in the
business. It can be said that this was right strategy for the firms at that time. But no one think that
one day this profit elevation strategy will become main reason that will be responsible for low
earning of margin in the business. Firms failed to take some effective steps to control there cost
whether it is direct or indirect cost. So scene is that revenue decline, profit reduce but expenses
increases or remain same. This reduce firms profitability to some extent.
As per views of Mena, Adenso-Diaz and Yurt, (2011) it is very important to identify the
reasons due to which revenue of the firms like Sainsbury and Morrison in specific range and big
difference is not observed in sales amount. This may happen due to the fact that customers are
loyal towards specific brand and like to buy products from same retail store every time. It is
possible that retailers are able to attract specific type of customers. In case of Lidl and Aldi it can
be said that they are able to attract those people who are cost conscious. Thus, it can be assumed
that those people who are very cost conscious always like to visit stores of Lidl and Aldi. Such of
consumer behavior in the people may be one of the important reason due to which profitability of
Sainsbury and Morrison remain in specific range.
According to Fernie, Sparks and McKinnon, (2010) it is very important to find out
solutions of these problems which is earning of low profit in the business. In order to solve these
problems firms that operate in the UK retail industry needs to identify the ways by using which
they can generate economies of scale in there business. In this regard firms needs to evaluate
there business operations and needs to identify the areas where they are making extravagance.

Firms also needs to identify the steps that are unproductive in nature and not profitable for the
business. They can identify new ways in respect to performance of business operations. By doing
so cost of business whether it is direct or indirect can be reduced to great extent and profitability
in the business can be increased. In this regard companies like Tesco can make use of process re-
engineering under which its business managers can review each and every business operation
and accordingly can suggest the ways in which specific activity must be performed in an
organization so that cost can be reduced. This will help firm in generating economies of scale in
there business.
As per views of Pantano, (2014) firms needs to bring change in there business strategies
and they must shift there focus from price to many other things. Like firms can keep there
product price medium and can launch an attractive offer on same. This will to some extent
increase margin earning on per unit sale for the firm. The second benefit that firms will derive
from this strategy is that they will be able to promote word of mouth marketing of there name
among the people and this will create there different image among the people. It can be said that
this strategy have multidimensional benefits for the firms.
According to Wood and Reynolds, (2013) Tesco is facing serious challenges in its
business and it makes many decisions which instead of solving its problems increase same. On
eve of Christmas firm in order to create its good image among the customers and to treat them in
proper way increase its workforce. This increase its employee cost and it was assumed that this
decision may affect firm profitability. In order to solve this problem firm reduce its management
tiers. Tesoc going through brutal process and under this it focused on cost cutting and it curtail
tiers of management from its stores and at its head office also number of employees were
removed. Due to this reason problem instead of elimination get increase for the firm. This is
because now few employees at administration level have to handle work of all those employees
that are removed from the workforce. This affects working efficiency and productivity of the
employees and it play great role in reducing profitability of Tesco. Apart from this, Tesco also
dump its salary pension scheme and implement new way that will be followed to calculate staff
bonus. These things also affects morale level of employees and result in reduction in productivity
and efficiency level. All these things to great extent affects profitability of the organization.

Fernie, (2013) claims that with passage of time small retail players are performing good
like Lidl and Aldi. These two firms have relatively low market share in the UK but business of
these two firms are growing at rapid pace. These two firms market shares are around 4-5% in the
UK. But it is there capability to generate economies of scale in the business and offering of
products at low price. This is the reason due to which these firms are making available products
at very cheaper price and at same time earned a good profit in the business. Companies like
Tesco, Sainsbury and Morrison needs to learn many new things from Lidl and Aldi business
model. Condition in the UK retail industry is very tough and firms are facing lots of problems in
there business and in this situation it is very important for the companies to make sure that there
are taking viable moves in there business. It is also very important to ensure that steps that are
taken for benefit of the firm will not further create problems for the firm like seen in case of
Tesco. Business firms needs to understand that with passage of time it is very important for them
to bring change in there business model and strategies. It is flexibility in decision making that
helps firm in surviving in every condition whether it is favorable or unfavorable. Hence, firms
needs to take there business decisions very cautiously.
Research methodology
Research strategy- The main of the research is to identify the problems that are faced by Tesco
and solutions on which it can work out to solve the problems. The research strategy is to collect
and analyze the secondary data from reliable sources. Under this strategy specific information
which is relevant for current research will be taken from multiple websites. This will ensure that
authentic information is taken for the research from different websites (Asche and et.al., 2011).
This is the important step that will acts as milestone in success of the research project. Under the
strategy first of all topic of research is determined and in line to same aims and objectives are
prepared. On the basis of objectives different questions will be prepared which will be linked to
the research topic. Answers of the research topic will be identified and same will be used to give
recommendations for the problem.
Reliability and viability- It is very important to ensure that research that is carried out is reliable
in nature. In other words, it can be said that one must ensure that data that is used to conduct
research is reliable. If correct data will be used to carry out research work then reliable results
will be obtained from research work. In this work every effort is made to make sure that reliable
information is obtained from multiple websites. Hence, it can be said that results that will be

generated by research work will be reliable. It is responsibility of an individual to make sure that
valid research results are obtained from the research because in future many other researchers
can consider this report to carry out there research work. Hence, it is ensures that data collected
for research are valid and reliable in nature.
Ethical concerns- There are lots of ethical issues that are related to the research and use of
relevant information is one of them in context of secondary data. There are lots of facts and
figures related to the specific information that are available on internet (Rieple and Singh, 2010).
Thus, it is ethical responsibility of the researcher to make sure that he is collecting and using
valid information from websites. After ensuring that available content fit for research specific
information must be taken for the study. It is ethical responsibility of the researcher to make sure
that he is analyzing secondary data in systematic way. This is because if data will not analyzed in
proper way then accurate interpretation of collected information will not be done. If this will
happen then those who will consider research report prepared by the researcher will not get
complete information (Goworek, 2011). It can be said that by doing study on the basis of such
kind of research report one will not be able to understand research topic completely. Hence, it is
ethical liability of the researcher to make sure that he is using valid information to do his
research work. Moreover, data must be analyzed in systematic way to make sure that research
will produce reliable results.
Findings
The main objective of research is to find out the those factors due to which firm performance
become poor
Q1 What were the factors due to which Tesco profitability reduce?
Ans: There are number of factors due to which profitability of Tesco reduce in its business and
sale of products at low price is one them. In order to give stiff competition to the competitors
Tesco decided that it will charge low price on its products. This strategy does not work out in
favor of the firm business and it is earning low margin in its business. The solution to this
problem is that firm must not make available its products at low price. Instead of this, firm must
distribute loyalty cards to its customer’s (Gilmore and et.al., 2013). After achieving some
specific points card must be issued to the customer. Products must be available at low price to
the customer’s. The benefit of this scheme will be that same will help firm in developing loyal

customer base in its business. First of all firm in initial stage will not give any discount to the
customer’s. When customer’s will earn specific points they will start getting products at very
cheaper price from Tesco. This will help firm in earning sufficient amount of margin on sales.
On same time it will be able to develop loyal customer base. On other hand, it will be in position
to show customer’s that it is not only making available products at cheaper price then rival firms
but is also making available good offers to them (Tesco- six challenges for in store for Matt
Davies, 2016). This, will totally create different image of the firm among the customer’s. Firm
will earn more margin on sales in comparison to previous years and it will be able to retain its
old customer’s. This strategy will prevent shifting of customer’s to firms like Lidl and Aldi.
Failure of the leadership of Tesco is another important reason due to which profitability
of the mentioned firm reduce. Top managers failed to prepare strategy in right direction and due
to this reason even they take step firm performance does not get improved. Apart from this Tesco
does not provide services like home delivery which is also one of the main reason due to which
people prefer other retail stores in comparison to the mentioned firm. Today most of firms are
selling there products through both online and offline platform. Tesco sale its products only
through its stores. The main mistake that is made by the firm is that it remain stick to the old
business model. Contrary, to this rival firms with passage of time bring change in there business
model and strategies. This is one of the main reason due to which firm lagged behind its rival
firms in competition and its profitability is shrinking consistently.
Horse meat scandal that comes in existence in 2013 under which it was identified that
four of Tesco owned brand meat product contain horse meat. This reduce reliability of the firm
among the customer's and this is the reason due to which many people abstain from purchasing
any product from Tesco retail store. In other supermarkets also same cases were identified but
same were not sold under brand name of giant retail stores. Some beef burgers were identified
that contain pig DNA. In religions like Muslim and Jews eating of pork is prohibited. Hence,
large number of customer's shift from Tesco to other retail stores. This is also one of the main
reason due to which profit of Tesco decline in past years.
Competing firms like Lidl, Aldi and Asda are offering products at low but different price
ranges. This gives bargaining power to the customer's. Firms in order to retain old customer's
are making possible changes in there business strategies. Tesco due to its business model is not
able to reduce its product price substantially. Customer's have high bargaining power due to

availability of number of options. Hence, they are preferring to make purchase from stores of
rival firms. This is also one of the main factor due to which profit of the firm decline.
Q2 What are the factors due to which firms Lidl and Aldi are growing at faster pace in the
industry?
Ans: The main problem that Tesco is facing is growing competencies of the German retail firm
Lidl and Aldi. Thus,it is very important to identify that what are the success factor due to which
in unfavorable business environment also these two firms earn good profit in there business. It is
the business model that help these two firms two give strong competition to the rival firms. Thus,
solution of problem of Tesco lies in understanding the business model of Lidl and Aldi. The
business model of Aldi is that it sale product of other firms under its own name “Aldi exclusive
brand”. It makes purchase of products from small manufacturers of Germany and sale them in
UK under specific brand name. The benefit that firm get by doing this entire work is that it
purchase products at low price from small manufacturers and sale same at low price in the UK
market. Due to purchase of products at low price Aldi generate huge savings and some part of
that saving is passed to the people (Tesco turnaround: The three BIG problems Britain's biggest
supermarket will face in 2016, 2016). Hence, on one hand firm is purchasing products at low
price and making available products at low price in comparison to big brand name. This is
business model of Aldi. This business model can be followed by Tesco and it can also purchase
products from small manufacturers. It will not need to pay any import duty to the nation and it
will be able to make available products at very cheaper price then Lidl. This is one of the
important solution of the problem.
Q3 What role economic environment plays in poor performance of Tesco in its business?
Ans: Economic environment plays a very important role in poor performance of Tesco. When
recession comes in the UK market unemployment rate get increased and large number of people
loose there job. Scene was that employed people were bearing burden of unemployed people.
This reduce saving rate of the people and there spending power also get reduced. As a result,
retail firms earn low profit in there business. On other hand, competitor firms like Lidl and Aldi
due to there unique business model were in position to make available products at very cheaper
price (Barnes and Lea-Greenwood, G., 2010). This badly affect the profitability of Tesco and on
this basis it can be said that economic environment plays a major role in poor performance of the

firm. Till the date firm is struggling to restore its old profitable position in the market but nothing
good happened in the business. Moreover, steps that were taken by the firm like curtailing tier of
management instead of solving a problem increase same. Hence, it can be said that poor
economic environment is one of the main reason that is responsible for decline in performance of
the firm. Tesco cost leadership strategy is not working properly in current time period. Under
cost leadership strategy firm perform its operations in such a way so that cost of same can be
controlled. Due to unfavorable changes in economic environment cost of transportation and other
things increases. Firm is not identifying any other ways that can be adopted to control cost like
done by competing firms. This is the main factor due to which firm is unable to control its cost.
The second main objective of research is to identify the solutions that can be adopted to improve
firm profitability
What role economies of scale can play in improving performance of Tesco?
In order to get economies of scale Tesco can manufactures products at large level.
Moreover, when firm produces products at large level or scale then it gets cost benefits in terms
of material and other expenses etc. Usually, supplier of raw material provides discount to the
industrial customers when they purchase material in bulk. Further, by expanding the business
operations and functions economies of scale can be attained by Tesco to the large extent.
Moreover, when new stores are opened by Tesco then demand for the product or services
increase with the high pace (Goyal and Joshi, 2012). Further, Tesco can also raise manufacturing
aspects by raising the demand of customers through discounting offers and prices. This in turn
places positive impact on the manufacturing aspect of firm. Moreover, economies of scale is
highly associated with the aspects of huge production.
Economies of scale makes vital contribution in the growth and profitability aspect of the
firm. Moreover, cost per unit is significantly declined when business unit produces at large level.
In this way, such aspect offer opportunity to Tesco to attain high level of profit margin by selling
per unit of products or services. On the basis of this, improved profitability aspect attracts
stakeholders to invest in the firm's operations. Thus, by getting high economies of scale Tesco
can enhance its profitability and thereby financial performance to the great extent.
What are the other factors that can play a vital role in improving performance of Tesco?

There are several factors which can be used by Tesco for improving the performance of
Tesco in both financial and non-financial terms. In the present era, quality is one of the main
factors on which customer makes focus on. Thus, by improving the quality level Tesco can
attract large number of customers towards the products or services offered by it. This in turn may
result into high level of high level of productivity and profitability. Along with this, Tesco can
also enhance its profit margin and financial performance by making improvement in the level of
customer service. Thus, by offering better before and after sales services Tesco can enhance its
customer base.
In addition to this, services offered by the personnel also have high level of influence on
customer satisfaction and loyalty. In this, by recruiting talented personnel Tesco can deliver
quality services to the customers. In retail industry, satisfaction and loyalty aspect of the
customers are highly influenced by the services of employees (Yakovleva, Sarkis and Sloan,
2012). In this, by building competent workforce company can evolve satisfaction among the
customers. It enables Tesco to maximize its productivity and profitability to the significant level.
Evaluation and analysis
It is clear fact that Tesco is facing serious problems in its business and it at its own level
make many mistakes. Business conditions were not congenial and this is another reason due to
which firm is facing problems in its business. The center problem lies on the fact the business
model that was followed by Tesco was not appropriate according to prevalent business
conditions. Apart from this curtailing the administrative workforce was another decision that
increase problems for Tesco. On the evaluation of firm performance it is identified that its
revenue is not increasing and contrary to this same is declined on year on year basis (Bruce and
Daly, 2011). Consequently, firm profitability also declined. Economic environment improve to
some extent but any big change does not come in same and this is the reason due to which there
is not appropriate business conditions in the UK. This force a firm to diversify its business in the
nations like India where there is a huge scope. Tesco is doing same thing that is done by other
firms in there business. This is the reason due to which it is not able to differentiate itself from its
competitors. Here, problem is created and it can be seen that Lidl and Aldi craft there different
image among the customer’s. This is the reason due to which these two firms achieve huge
success in there business. Whereas, Tesco which is one of the largest retail firm in the UK is not
able to earn profit in its business. This is the big difference between Lidl, Aldi and Tesco.