Weaknesses of Tesco

Tesco PLC is a leading grocery retailer in the UK that serves millions of customers every week, both online and in stores. The company’s larger market share and its other strengths have contributed to the brand’s success which has helped to give it a competitive advantage over its competitors.

However, regardless of the company’s strengths, there are certain weaknesses of Tesco that have affected the company in several aspects. In this article, we will be highlighting Tesco’s weaknesses which involve the internal and external factors that affect the brand negatively.

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Briefly about Tesco PLC

Jack Cohen founded Tesco PLC in 1919; it started as a market stall in East London. Over the years, the company has grown steadily and currently operates about 4,752 stores in five main markets, the Czech Republic, the UK, Slovakia, Ireland, and Hungary.

This grocery chain is headquartered in Hertfordshire, England, and has become one of the most well-known British multinational grocery and merchandise retailers. Due to the competitive advantages and strengths of Tesco, it has become one of the most valuable companies in the UK with a market capitalization of about £19.01 billion (as of August 2023).

Tesco has significantly expanded its product lines and services over the years and has also diversified into other sectors, like mobile phones, insurance, and financial services. The company’s motto, “Every little helps,” denotes the company’s core purpose which is “Serving our customers, communities, and planet a little better every day”.

In line with its core purpose, Tesco has been committed to continuously improving its services, offerings, and overall shopping experience for its customers. This has positioned the company in the retail industry as a household name known for committing to responsible and sustainable business practices and offering value to its customers at affordable prices.

Nevertheless, in as much as the company has grown to become a significant player in the global market, there are still some weaknesses of Tesco that hinder its growth at certain levels. We will be looking at some of the problems the company faces and its weaknesses.

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Tesco’s problems and challenges

1. Intense competition
2. Economic downturns
3. Evolving consumer preferences and shopping habits
4. Disruptive technologies

Intense competition

Intense competition from other retailers like Sainsbury’s, Amazon, ASDA, Aldi, and Lidl is one of the problems Tesco faces. This results in reduced profit margins, price wars, and decreased market share. Online retailers like Amazon, for instance, entering the grocery market, has potentially stolen market share from Tesco’s online delivery service.

Economic downturns

Economic downturns, such as recessions, are also a challenge for Tesco because they can lead to decreased consumer spending, which could affect Tesco’s net income.

Navigating through economic downturns is a major problem in the retail industry because it makes it more difficult for companies to secure financing for investments in new technology or expansion.

Economic challenges also cause inflation and supply chain disruptions which leads to increased costs for the company. For instance, for the year 2022/23, Tesco recently reported a 6.9% decline in its adjusted operating profit across its bank and retail business. This is due to the unprecedented levels of inflation in the prices that the company paid its suppliers for their products and the cost of running its own operations.

Evolving consumer preferences and shopping habits

One of the problems Tesco faces is the constantly evolving consumer preferences and shopping habits. For instance, according to Reuter as of October 5, 2022, Tesco said customers were continuing to change their shopping habits in an attempt to save money and reduce waste.

Ken Murphy had told reporters that customers were increasingly concerned about household spending and watching every penny to make ends meet. He mentioned that they were shopping less online, and making more shopping trips, but with smaller basket sizes.

This is a huge challenge because once the company can not keep up with changing trends, it loses market share to other retail brands.

Disruptive technologies

Disruptive technologies are one of the technological factors affecting Tesco. Emerging technologies like blockchain, automation, and artificial intelligence can potentially disrupt the company’s supply chain and operations. This is a challenge because implementing and adopting new technologies can be way too costly.

In order to digitally transform its operations, the company has to invest hugely in big data, artificial intelligence, and cloud among other disruptive technologies. Its annual ICT spending was estimated at $2.2 billion for 2022.

Tesco is forced to keep adopting technology in order to stay competitive. If these technologies are not adopted by the company but adopted by its competitors, this becomes one of Tesco’s weaknesses because it can lead to decreased efficiency and competitiveness.

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Weaknesses of Tesco

1. Overreliance on the UK Market
2. Price competition
3. Complex organizational structure
4. Failed ventures into foreign markets
5. Poor online delivery service
6. Reliance on suppliers
7. Criticism of the treatment of suppliers
8. Lack of investment in new store formats
9. Weak CSR Initiative

Sainsbury’s, Morrisons, and Asda are Tesco’s biggest competitors. These three companies including Tesco account for about 66% of the market share in Great Britain. Each of them is in strong competition with each other and has certain advantages over each other due to one another’s weaknesses and challenges. In this session, we will discuss some of the weaknesses of Tesco that its competitors are likely to take advantage of.

Some of the weaknesses of Tesco are temporary such as shortage of products and change in leadership, while the long-standing issues are problems associated with inventory management, customer service, overdependence on the European market, and quality control. Nevertheless, the unique thing about Tesco is that based on its core value, the company ensures it addresses its weaknesses over a period of time.

Overreliance on the UK Market

One of the weaknesses of Tesco is its overreliance on the UK Market. Despite Tesco’s international presence, the majority of its revenue comes from the European market because the company has been unable to adapt and operate in markets outside of Europe.

In as much as Tesco is the biggest grocery retailer in the UK market, its over-dependence on the European market makes it vulnerable to certain factors like increased competition in the domestic market, changing consumer preferences within a region, and economic fluctuations. Such factors could further impact the profitability of the business.

The company no doubt has higher sales and revenue than other retailers in Great Britain due to its successful operations and close attention in the European market. However, Tesco’s weakness of depending too much on the UK market limits the company’s potential for growth and expansion into other markets.

In order to overcome this weakness, the company has to explore opportunities for growth in emerging markets by carrying out marketing research and market potential analysis.

Tesco has to diversify its product offerings to cater to different purchasing habits in other countries. The company can customize its offerings to a market by understanding the market dynamics and specifics and putting other factors like cultural aspects into consideration.

Also, in order to expand to other markets, one important element is finding the right local partner who understands the particularities of the market. The company can partner with firms in other countries that are familiar with the local market dynamics and establish a structure that mutually rewards long-term success.

Price competition

Another weakness of Tesco is price competition. The company faces intense price competition from discount retailers like Lidl and Aldi. These discount retailers offer lower prices and have successfully attracted cost-conscious customers thus causing stiff competition for Tesco.

This stiff competition pressures Tesco’s profit margins and as a result, the company tends to lower prices or increase promotional activities in order to maintain its market share. This, in turn, happens to be one of the factors that affect the company’s profitability.

In order to tackle this weakness of Tesco and stay competitive, the company can adopt a more customer-centric approach, like improving its in-store experience, offering personalized products and services, and leveraging its brand strength and loyalty programs.

The company can also explore collaborations and partnerships with other retailers or firms to expand its customer base and market reach ahead of rivals like Aldi and Lidl.

Complex organizational structure

As a large multinational corporation, Tesco has a complex organizational structure that is designed to meet the needs of its diverse customer base and support its global operations.

Once it gets complex, the company has to sort work into departments, segregating employees which can affect communication. This complexity tends to hamper communication especially when the organizational structure includes whole divisions separated by distance. Also, once communication is hampered, coordination tends to suffer too.

Having a complex organizational structure is not necessarily a bad thing, the only issue is that it could lead to slower decision-making, inefficiencies, and challenges in implementing changes across different business units.

Nevertheless, slower decision-making can be improved by decentralizing, which involves delegating authority to the lowest levels possible. This gives room for those who are closest to a situation to make decisions. For instance, a front-line employee can make a spot-on decision for the betterment of the company instead of relying on or waiting for a supervisor.

Tesco has its businesses in many locations and as a result, the head office is reasonably unable to control or make decisions for all the locations. Hence, in order to cover some of the weaknesses of Tesco that come with the complexity of its organizational structure, the company uses a decentralized organizational structure wherein lower levels in the business have decision power.

Poor online delivery service

One of the weaknesses of Tesco is its poor online delivery service. The company’s online delivery service has struggled to keep up with demand, which has resulted in late or canceled deliveries. This, in turn, leaves the company with disgruntled customers, thus damaging the company’s reputation.

For example, sometime in August 2022, a lot of Tesco home delivery shoppers saw their orders canceled, due to a system issue. The supermarket chain had to apologize, saying the problem was caused by a technical issue, and urged customers to rebook. A lot of customers in anger, however, had taken to social media after Tesco customer services contacted them over the problems.

The picture below is a typical example of a disgruntled customer who went on Twitter (X) to air her grievances about Tesco which the company had to reply to, in order to remedy the situation:

Poor online delivery service is one of the major weaknesses of Tesco that other retail companies can take advantage of. For instance, as seen in the tweet above, while other customers came to air their disappointments about the issue, Iceland Foods, another British supermarket chain, took advantage of the situation to advertise its discounted online delivery service in an attempt to convert some of Tesco’s disgruntled customers.

This goes a long way to show that if Tesco’s weakness of poor online delivery service is not properly addressed and worked on, over the years, the company is likely to lose its customers to other retail brands that have better online delivery services.

This will cause a huge reduction in the company’s customer base, and fewer customers means fewer sales, which will affect the company’s profit margin.

Therefore, in order to address this weakness, Tesco needs to invest in its supply chain and logistics capabilities. The company can make use of more efficient delivery models by partnering with third-party logistics providers and using data analytics to optimize delivery routes.

It can also improve its customer service by offering compensation to customers for late or canceled deliveries as well as providing real-time updates on delivery times.

Reliance on suppliers

Tesco is always on the lookout for new high-quality products from brand-new businesses or well-established ones. The company has a profitable relationship with its suppliers, giving them a great opportunity to share their products with Tesco’s customers across the nation.

Nevertheless, the company’s reliance on suppliers for its products happens to be one of the weaknesses of Tesco. This is because total dependence on suppliers for products makes the company vulnerable to supply chain disruptions and shortages, which can affect product availability and sales.

Hence, in order to mitigate the risk of supply chain disruption, Tesco can invest in stronger relationships with its suppliers, diversify its supplier base, and adopt more flexible sourcing strategies.

It can invest in stronger relationships with its suppliers through strong strategic partnerships and retail concessions like Target does. Target, for instance, has a competitive advantage through the shop-in-shop concept that it implemented where it partners with strong brands like Starbucks, Apple, Disney, and Ulta Beauty.

Tesco can also diversify its supplier base and adopt backward vertical integration. Implementing a backward integration strategy may be capital-intensive but it has its benefits.

Since Tesco has its own factories and already makes some of its groceries, it can expand and integrate manufacturing more of its products into its supply chain in order to reduce its dependence on external suppliers to the bare minimum.

This strategy would enable the company to not be totally at the mercy of external suppliers. It would also save costs and make the products cheaper. Kroger’s supply chain, for instance, uses this strategy to stay ahead of the competition in the retail industry.

Also, Tesco should use data analytics to monitor and predict changes in demand and supply in order to avoid a shortage of products and implement risk management strategies, such as contingency plans for supply chain disruptions.

Criticism of the treatment of suppliers

Another Tesco weakness is the criticism it faces for the treatment of its suppliers. The company has been accused of using its buying power to negotiate lower prices from suppliers which has put pressure on suppliers to cut costs.

Also, according to a recent report by BBC (March 2023), Tesco requested its suppliers to pay a new fulfillment fee when the company sells its products online. According to the retail chain, the new charges were needed to help the company cover the expenses of serving more customers shopping online. This news, however, was not received well by some suppliers. Some business retail consultants have criticized this move to be “outrageous”.

The new charges were part of the reason the company experienced price increases from suppliers. Hence, there were more gaps on the supermarket shelves as the company was not accepting price increases from suppliers.

Lack of investment in new store formats

Lack of investment in new store formats is a prominent weakness of Tesco. Its dependence on large physical stores and lack of investment in new store formats has made the company less agile and innovative. Hence, losing customers to competitors that are more flexible and dynamic.

Changing shopping habits is one of the problems faced in the retail business. Hence, traditional brick-and-mortar retailers like Tesco are likely to face declining foot traffic and reduced sales due to the rise of e-commerce and online shopping. For instance, Tesco’s reliance on physical store locations limits its ability to compete with online retailers like Amazon which has greater flexibility and lower overhead costs.

Online retailers have disrupted the traditional retail model, and Tesco seems to be at a disadvantage due to its slow adoption of digital innovations.

The company’s operations and logistics are also affected by the trend towards smaller, and more frequent grocery trips. Due to the changing consumer preferences towards online shopping and smaller local stores, Tesco’s larger store formats, like Tesco Extra and Tesco Superstores have faced challenges.

This is because consumers are increasingly demanding convenient and personalized shopping experiences, which the company’s traditional larger store formats are unable to provide. Adapting new store formats and managing underperforming stores has been one of the challenges and weaknesses of Tesco because such operations take time and effort.

Failed ventures into foreign markets

One of Tesco’s weaknesses is its challenges in international markets. Although the company has some global success stories, it has still faced difficulties in some international markets. For instance, the company experienced some failures over the years in Japan, the USA, and Poland.

The company’s failed ventures into these foreign markets highlight some of the weaknesses of Tesco in expanding and maintaining a presence in diverse markets and competitive landscapes.

When expanding to other markets, a company has to adapt its strategies to fit the regulations and conditions of a local market which involves significant investment. Hence, Tesco’s failed venture in international markets clearly shows that the company has specific weaknesses in understanding overseas markets.

For some reason, the company has not been able to achieve the same level of success that it has in Europe in other continents or countries. Its expansion into foreign markets has been impaired by factors like cultural differences, logistical challenges, high trading costs, and regulatory hurdles, leading to significant losses and failed ventures.

The company’s poor market performance in the US, for instance, was due to its failure to maintain its stores and services. It had small store formats, poor store locations and its effort to adjust its foods to fit the American public’s lifestyle didn’t work out. As a result, Tesco lasted only five years in the States, sold its stores, and exited the US market in 2013.

Tesco also expanded and failed into several Asian countries, like Japan, China, Thailand, Malaysia, India, and South Korea. But so many issues like high trading costs, customer demands, and financial problems prevented the company from succeeding in these markets.

The company left Japan in 2011 after nine years. The Japanese market was a challenging market for the company’s trade because, despite the company’s monumental investment, it was still unable to win the Japanese market over.

Tesco also failed to gain a large enough market share in the Chinese market especially because most Chinese people would rather shop online than do walk-in stores. This was obviously one of the major reasons for the company’s failed venture in China.

Nevertheless, in order to succeed in foreign markets, Tesco needs to adopt a more localized approach, like tailoring its product offerings to local preferences and tastes.

The company might need to, partner with local suppliers and businesses, engage with local communities and stakeholders, and build strong relationships with local governments and regulators. Also, before entering new markets, thorough market research and due diligence should be conducted.

Weak CSR Initiative

Regulatory compliance is one of the challenges Tesco faces. The company operates in a highly regulated industry with strict rules regarding food safety, employee rights, and environmental impact. Hence, it must constantly ensure it monitors and adapts to regulation changes, which can be time-consuming and costly.

A lot of environmental campaigners are skeptical about the willingness of major companies like Tesco to cut emissions, claiming it’s a PR exercise. But Tesco, however, claims it has already made changes.

The company, for instance, has introduced unwashed potatoes that have a longer shelf life, turned to vertical strawberry farming to cut water usage, and launched reusable packaging.

Tesco has also electrified its home delivery vehicle fleet and increased recycling of soft plastic packaging that usually ends up in landfills. The company has set out plans to use renewable energy, cut down on plastic usage, and encourage more sustainable diets in order to hit a net-zero carbon target by 2035.

Nevertheless, a persistent weakness of Tesco and others is the negative publicity from environmental campaigners surrounding their CSR initiatives.

A lot of social and environmental campaigners feel like companies are not implementing enough CSR activities. This in a way affects the company’s ability to attract and retain talent and consumers, especially the younger generations that prioritize social and environmental values.

These days, consumers are more environmentally oriented, and in order to stay competitive, Tesco has to capitalize on these market trends. This has been a challenge for the company because failure to address sustainability issues in its supply chain causes the company legal and financial consequences, like lawsuits, fines, or reputational damage. This could affect the company’s long-term viability and decrease investor confidence.

The head of Tesco, Ken Murphy in an interview stated that investors and customers want supermarkets to improve their environmental credentials but are not prepared to accept lower returns or higher prices as a trade-off. He mentioned that in order to navigate the shift to net-zero emissions, the company had to strike a balance, for instance, reducing the use of plastic packaging without increasing the food waste that might follow.

According to Murphy, there is always a small proportion of very committed customers who are willing to pay higher prices for more sustainable goods, while the vast majority are not willing. Even investors insist that retail chains increasingly focus on environmental goals but do not want to see a lower return on their investment as a result. Hence, the company is constantly juggling these priorities and, hopefully, trying to do a decent job.

In order to solve this challenge, the company should implement more concrete actions and measurable results to prove its commitment to sustainability and ethical sourcing. It should also engage in meaningful dialogue and collaboration, involving its stakeholders in its CSR decision-making processes.

Also, in order to gain trust and loyalty to the brand, the company should be transparent toward its customers and communicate everything it does towards ethically sourcing its products. The brand can also provide a more comprehensive selection of healthy, eco-friendly, and organic products.

Lastly, in as much as Tesco boasts rigorous quality control measures, it should also take into consideration any disturbing complaint from a customer as an indication of room for improvement.

Last Updated on November 2, 2023 by Nansel Nanzip Bongdap