An Evaluation of Tesco's Business Problems: Critical Assessment, Causal Factors and Potential Soluti

Critical Assessment of Tesco

The current report is an evaluation of Tesco's business problems. The evaluation will identify the problems of the company, the causal factors and appropriate solutions. The views presented in the current report are informed by data extracted from Tesco company websites and scholarly articles on the different problems that have been identified. Markedly, the current report is part of a portfolio of documents following a group task. The next section is the critical assessment of Tesco- it describes Tesco company, the problems associated with its operations and the potential solutions to the problems. The latter section is followed by the conclusion and recommendations.

2.1. About Tesco

Tesco PLC is a multinational company based in Britain. Its headquarters are located in Welwyn Garden City. The firm operates in the retail sector offering general merchandise and groceries to its clients.  Markedly, Tesco also operates in the retail banking and insurance services sectors (Stevenson, 2015). From its low point in December 2014, the stock price of Tesco PLC has risen by roughly 40% (Stevenson, 2015). The increased optimism stems from investors' positive reactions to new CEO Dave Lewis following the accounting fraud (Stevenson, 2015). Also, the UK economy was facing a growth in 2014 (Stevenson, 2015).  The recovery from the accounting fraud led Tesco PLC to regain a strong position in the market as the goal was to return the share price to normal (Stevenson, 2015). A report by Delloite in 2010 ranked the company as one of the top 5 retailers (Delloite, 2010). Markedly, Tesco PLC operates in five countries in Europe-however, its highest market share is in the UK (Delloite, 2010). Tesco PLC grew from its inception in 1919. Tesco PLC is currently listed on the FTSE 100 of the London Stock Exchange.  

2.2. Problems in Tesco

There are wide-ranging issues that face Tesco PLC. For instance, Rosnizam, et al.(2020) argue that the company has issues with its customer service. The firm has also attracted negative attention through scandals such as the horsemeat scandal that began in Ireland and spread to other European nations (Foley, 2017). The scandal involved the mislabeling of beef products yet they contained horse meat. The scandal caused significant losses to Tesco PLC because a large number of goods were recalled. The firm also lost trust amongst its clients leading to a decrease in sales. Another scandal recorded in Tesco PLC is linked to accounting. It was unearthed in 2017 by the Serious Fraud Office and Financial Conduct Authority (Foley, 2017). The scandal cost the firm 293 million pounds for the illicit accounting practices done in 2014 (Rosnizam, et al., 2020). The scandals observed in Tesco PLC indicate a problem with business ethics.

About Tesco

Tesco was ordered by the UK's Financial Conduct Authority to reimburse investors who purchased shares and bonds before an accounting issue was revealed in September 2014 (Foley, 2017). The preceding is a novel experience for the Financial Conduct Authority especially on the value of shares without accounting fraud. A large property write-down was widely expected in Tesco's full-year results, but the actual amount was significantly more than expected. The company made a £3.1 billion impairment charge on its property assets in the United Kingdom, bringing their total value down to £10.5 billion (Stevenson, 2015). Its market value has now been calculated to be equal to its book value. Tesco has also put aside £0.6 billion in the UK for onerous leases (Stevenson, 2015). Tesco's rental outlets, like its freehold properties, have lost a lot of their value.

Tesco also faces significant competition from novel retail stores.  For instance, in recent years, the discount supermarkets Aldi and Lidl have had a large disruptive impact on the UK grocery retail sector that Tesco PLC operates in (Stevenson, 2015). Specifically, the latter firms effectively utilized the reduced costs to overtake the top four largest retailers. Their strategy has increased their market share from 5% in 2012 to 9% by 2015 (Stevenson, 2015). Markedly Tesco PLC experienced the most significant market share because of the aggressive competition (Stevenson, 2015). The preceding assessment by Stevenson(2015) is evident from the decline of Tesco PLC from 32% to 28% (Stevenson, 2015). According to Stevenson(2015), the bulk of consumers will continue to shop at big supermarkets, but discount stores, convenience stores, and internet retailers are expected to continue growing. Stevenson(2015), argues that the four largest retailers in the UK pulled back on openings, discount stores continue to establish new locations at a rapid pace.

PESTEL and SWOT analyses of Tesco PLC indicate a myriad of issues. Specifically, Tesco PLC is faced with political uncertainty especially linked to tax rates, regulation and social-economic issues linked to politics such as unemployment (Ghrmay, 2017). Environmental issues of Tesco PLC include the high rate of inflation that is outside the control of the firm. High inflation is just one of the environmental concerns as (Rosnizam, et al., 2020) argue that Tesco PLC lacks adequate control of external and internal factors linked to the economy.

The future profitability of Tesco's UK company is undoubtedly lower now than it was previously, but estimating a sustainable level is difficult (Stevenson, 2015). Management hasn't stated a long-term margin goal beyond stating that it should be higher than the industry average, whatever that may be. It will be interesting to see whether this is right (Stevenson, 2015). It is projected that margin levels would be smaller than in the past (at their recent results presentation, Sainsbury suggested an average of around 3 percent. The four major grocery companies are all facing similar issues (Stevenson, 2015). Tesco, on the other hand, is having greater problems: it has a higher share of leased outlets, more huge stores, and more financial debt. It has a much greater cost base, which may compensate for any scaling disadvantages.

Problems in Tesco

According to Stevenson(2015), Tesco PLC has fundamental structural challenges. Stevenson(2015) argued that the sales productivity of Tesco PLC has consistently dropped since 2007. The sale productivity is quantified in the number of sales per square foot and these values have been declining (Stevenson, 2015). Tesco PLC has substantial legacy expenses that cannot be minimized because of the rising rents (Stevenson, 2015).  The latter makes Tesco PLC less competitive against its peers.  Even though the prospective profitability of Tesco PLC is unknown, Stevenson(2015) argues that the previous levels will never be met. Tesco PLC's share prices are too expensive because of deep underlying structural issues (Stevenson, 2015).

Tesco has problems, coping with the difficult impact of frugal clients. A recent report indicates that grocery inflation has turned positive after being negative for two years. Also, the pound has become weaker- this benefits the suppliers of Tesco PLC and not the company itself. itself. Tesco PLC is also facing financial pressure owing to the purchase of Booker. This is forcing Tesco PLC to lower prices which diminishes the revenue earned by the company. Also, the pressure to lower prices is coupled by conflict from two shareholders of the firm Schroders and Artisan who are concerned that the purchase of Booker by Tesco PLC will not be profitable in the long run. Tesco PLC is dealing with a wide range of difficulties, some of which are beyond its control. For example, the company cannot address difficulties such as competition, recession, or constraints. Another issue that Tesco PLC can address in the long run rather than the short term is rising rent rates.

Although a huge number of Tesco stores are currently losing money, the company's management has declared that more store closures are not necessary (Stevenson, 2015). They believe that when business grows, these stores' profitability will improve as well (Stevenson, 2015) Tesco's flexibility is limited, however, by the high number of its UK stores that are leased for extended periods (Stevenson, 2015). The increased cost of paying rent is borne by leased stores. Even if the stores are still underperforming, the expenses of ending leases may make it uneconomic to close them. Tesco's freehold shops have a somewhat different equation (Stevenson, 2015). Even though they are unprofitable in accounting terms owing to depreciation charges, their worth may still be higher than their alternative use value if they create positive cash flow (Stevenson, 2015).

2.3. Solutions to the Problems

The ethical issues of Tesco PLC can be addressed by an internal restructuring of the firm and the adoption of a business ethics policy within the organization. The scandals that plagued Tesco PLC diminish its public image to both customers and investors. Specifically, the horsemeat scandal caused losses of market share due to diminished trust by customers. Therefore, Tesco PLC needs to take measures to change the public’s opinion concerning the safety and quality of the products. The firm can use internet resources such as social media to change customer perceptions about the company. Tesco PLC can also change customer perceptions through corporate social responsibility (CSR) initiatives that increase the trust of customers.

Tesco PLC needs to adopt transparent accounting practices to gain the trust of investors. The accounting scandal in 2014 damaged the reputation of Tesco PLC to investors. Tesco PLC needs to employ strategies to gain back the lost trust of investors by embedding ethical practices in the business processes. Tesco PLC has a customer service issue. The latter problem can be addressed by streamlining the customer service of the company through incorporating customer feedback. Tesco PLC needs to conduct analyses into the customer service issue and identify the underlying concerns.

Tesco PLC is also facing problems emanating from the political environment. They include uncertainties such as tax rates, regulations and recent restrictions that lead to low customer turnout. The latter problems are outside the control of the firm; however, Tesco PLC can engage the relevant stakeholders through transparent lobbying activities. Even so, Tesco PLC needs to ensure compliance with governmental standards to avoid scandals such as the earlier mentioned accounting scandal. Tesco PLC also needs to adopt a strategy that allows the firm to control and monitor its supply chain. This will allow the firm to avoid unwanted or low-quality items entering its supply chain. The firm can use AI-based supply chain monitoring to identify the avenues in which problems can arise in the supply chain.

The issues experienced by Tesco PLC are broad and some are beyond the control of the company. For instance, issues of competition, recession and restrictions cannot be addressed by the firm. The rising rent prices are also another issue that Tesco PLC can address in the long term and not the short term.

Conclusion

The preceding report identified problems in Tesco PLC. They are largely linked to ethical issues, customer services and political uncertainty. The ethical issues observed in Tesco PLC include the accounting scandal unearthed in 2017 and the horsemeat scandal. The latter scandals damaged the reputation of Tesco PLC to customers and investors respectively. The new management team may focus on enhancing the company's operational performance now that it is no longer required to maintain margins or pay dividends. However, there is no one-size-fits-all solution: Tesco's issues are systemic. They aren't merely attributable to the rise in popularity of discount stores but date back far longer. The corporation will be unable to undo the sale and leaseback agreements, which have left it with a significant financial burden. Tesco's sum-of-the-parts valuation may give some support for the stock price, however, it's uncertain which companies it'll eventually sell or whether the proposed values will be met. Tesco appears to be overvalued at the moment: despite the significant uncertainties, its stock price has already assumed a successful comeback. Another issue identified by the preceding report is the poor customer service of Tesco PLC.  The customer service issue can be addressed through the incorporation of customer feedback in how Tesco PLC delivers services. The report also proposed that Tesco PLC lobby the respective governments of the countries it is operating in to create favourable conditions for its operations. Tesco PLC can address the problems linked to its supply chain by adopting the latest technology to track products and avoid issues of quality.

The current report recommends that Tesco PLC take advantage of novel technologies to address its business problems. The technologies that can be deployed in the current context include social media campaigns aimed at improving the public image of the company. Tesco PLC can also deploy AI-based technology to improve the integrity of its supply chain and improve its customer service. Further, Tesco PLC needs to improve its policy on ethics to avoid illicit transactions within the organization. The policy should be strict and transparent to deter scandals such as the 2014 accounting scandal. The problems of Tesco PLC are systemic and deeply rooted in the structure of the organization. Problems of competition from discount stores, online stores and alternative retailers to supermarkets such as Tesco PLC cannot be addressed at the moment unless Tesco opts to offer discounted prices. The preceding will diminish the profitability of Tesco PLC. The stagnant market growth in the UK retail industry can lead is beyond the control of the management of Tesco PLC. Even so, Tesco PLC can lobby the government to release economic stimulus and subsidies to encourage purchases and shopping in supermarkets. The rising costs of rent in the UK and other countries where Tesco PLC is operating. Tesco PLC owns approximately 40% of the locations of their stores while the others are leased. Tesco can reduce the rent burden by purchasing more store locations-however, this requires significant spending by Tesco. The latter is a complex problem because Tesco PLC is currently not as profitable as it used to be thus, spending on the property requires either the use of debt or investment from shareholders. The latter is difficult to acquire at the moment because Tesco PLC is in a recovery phase. The changing market in which Tesco PLC operates requires that the management adapts to the changes instead of maintaining the traditional approaches. Specifically, there has been a rise of online shopping and discount stores that are robbing the market share of large retailers such as Tesco PLC. The market also comprises largely of customers who seek cheaper products which require Tesco PLC to sacrifice profitability. The current report recommends that Tesco PLC sacrifice a small amount of profitability to align with the needs of the customers. The reduced profitability will be determinantal to Tesco PLC but it can help the firm to compete effectively with upcoming discount stores such as Aldi.

References

Delloite, 2010. Emerging from the downtown: Global Powers of Retailing 2010, s.l.: Delloite.

Foley, J., 2017. Tesco has three issues, but only one matters. [Online]

Available at: https://www.reuters.com/article/us-britain-tesco-breakingviews-idINKBN16Z1A8

[Accessed 20 February 2022].

Ghrmay, T. M., 2017. Tesco: Losing Ground in the UK Case Analysis. European Journal of Business and Management, 9(34), pp. 109-117.

Rosnizam, M. R. et al., 2020. Market Opportunities and Challenges: A Case Study of Tesco. Journal of the Community Development in Asia, pp. 18-27.

Stevenson, N., 2015. Tesco PLC: Deep-Rooted Problems. [Online]

Available at: https://www.nasdaq.com/articles/tesco-plc-deep-rooted-problems-2015-05-15