Tesco’s Operation in the UK and China
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.
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 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.
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).
Market Structure of UK and China
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 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.
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.
Comparison of Major Macroeconomic Indicators of UK and China
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.
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).
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.
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 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).
Impact of Fiscal and Monetary Policy 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 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.
Conclusion
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).
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).
References
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 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.
Reference list:
Assets.kpmg. (2019). Retrieved 13 February 2019, from https://assets.kpmg/content/dam/kpmg/uk/pdf/2018/11/The-socio-economic-contribution-of-Tesco.pdf
Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), 1593-1636.
Butler, S. (2016). Tesco increases grocery market share for first time in five years. the Guardian. Retrieved 5 March 2019, from https://www.theguardian.com/business/2016/oct/18/tesco-increases-grocery-market-share-sales-rise
China pledges more tax cuts and infrastructure funding | Financial Times. (2019). Ft.com. Retrieved 20 February 2019, from https://www.ft.com/content/3138a136-0506-11e9-9d01-cd4d49afbbe3
Emlinger, C., & Poncet, S. (2018). With a little help from my friends: Multinational retailers and China’s consumer market penetration. Journal of International Economics, 112, 1-12.
Eng, T. Y., Ozdemir, S., & Michelson, G. (2016). Brand origin and country of production congruity: Evidence from the UK and China. Journal of Business Research, 69(12), 5703-5711.
Farrell, S. (2014). One million fewer customer visits a week at Tesco. the Guardian. Retrieved 5 March 2019, from https://www.theguardian.com/business/2014/jun/03/tesco-morrisons-sales-fall-further-aldi-lidl
Hu, Z., Chen, X., & Yang, Z. (Eds.). (2016). Research Frontiers on the International Marketing Strategies of Chinese Brands. Routledge.
Iberchina.org. (2019). Retrieved 5 March 2019, from https://www.iberchina.org/files/china_retail_market_fung.pdf
Imf.org. (2019). Retrieved 13 February 2019, from https://www.imf.org/external/datamapper/index.php
Lilavanichakul, A., Chaveesuk, R., & Kessuvan, A. (2018). Classifying Consumer Purchasing Decision for Imported Ready-to-Eat Foods in China Using Comparative Models. Journal of Asia-Pacific Business, 19(4), 286-298.
Martin, R., Pike, A., Tyler, P., & Gardiner, B. (2016). Spatially rebalancing the UK economy: towards a new policy model?. Regional Studies, 50(2), 342-357.
Mckinsey.com. (2019). Retrieved 13 February 2019, from https://www.mckinsey.com/~/media/mckinsey/featured%20insights/Europe/Driving%20productivity%20and%20growth%20in%20the%20UK%20economy/Driving_productivity_and_growth_in_UK_Report.ashx
Seven priorities for the UK economy. (2019). McKinsey & Company. Retrieved 13 February 2019, from https://www.mckinsey.com/featured-insights/europe/seven-priorities-for-the-uk-economy
Shan Ding, Q. (2017). Chinese products for Chinese people? Consumer ethnocentrism in China. International Journal of Retail & Distribution Management, 45(5), 550-564.
Tesco CEO: Ex-Sainsbury boss is wrong on Brexit — but ‘no deal’ could push up food prices. (2019). Business Insider. Retrieved 13 February 2019, from https://www.businessinsider.com/tesco-ceo-dave-lewis-brexit-supermarkets-food-prices-2017-10?IR=T
Tesco PLC. (2019). Tesco plc. Retrieved 13 February 2019, from https://www.tescoplc.com/
TRADING ECONOMICS | 300.00 INDICATORS | 196 COUNTRIES . (2019). Tradingeconomics.com. Retrieved 20 February 2019, from https://tradingeconomics.com/china/gdp-rate
Tselios, V., Lambiri, D., & Dolega, L. (2018). Performance within a recession: The converging trajectories of retail centres in the UK. Regional Science Policy & Practice, 10(4), 347-365.
UK trade policy: a guide to new trade legislation. (2019). GOV.UK. Retrieved 13 February 2019, from https://www.gov.uk/government/publications/a-uk-trade-policy-a-guide-to-trade-legislation/preparing-for-a-uk-trade-policy-a-guide-to-trade-legislation
Yin, Y., Song, Q., & Ranchhod, A. (2016). An exploratory investigation into senior customers’ supermarket shopping experiences in China. Journal of Retailing, 1-52.
Zhang, L., & Wei, Y. D. (2017). Spatial inequality and dynamics of foreign hypermarket retailers in China. Geographical Research, 55(4), 395-411.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
