Tesco's Legal, Social, and Economic Environment Analysis

Introduction to Tesco's Strategic Environment

Tesco is the world's third-largest grocery retailer, with operations in 14 countries. The UK remains its biggest market. Tesco also carries non-food ranges, which accounted for 21% of group turnover in 2008. Tesco has a well-established and consistent strategy for growth. The rationale for this strategy is to broaden the scope of the business so as to deliver strong, sustainable, long-term growth by following the customer into large expanding markets at home — such as financial services, non-food, and telecoms — and into new markets abroad, initially in Central Europe and Asia, and more recently in the United States (Palmer, 2010).

Legal and Political Factors

Various government legislations and policies have a direct impact on the performance of Tesco. For instance, the Food Retailing Commission (FRC) suggested that an enforceable Code of Practice should be established, banning many current practices such as demanding payments from suppliers and changing agreed prices retrospectively or without notice (Mintel Report, 2004). The government's anti-monopoly policies and reduction of buyers' power can also limit entry to this sector through controls such as license requirements and limits on access to raw materials (Finch, 2004).

As a global organization, Tesco is influenced by the political environment and legislation in the European Union as well as in the rest of the world. Since Tesco operates in the retail sector and also sells products under its own brand, it is labor-intensive. From manufacturing, supply, and distribution to retail and advertising, labor is a major input. Tesco employs workers across all levels of the population — from low-skilled to high-skilled, from students to professionals, and from disabled people to the elderly — thereby helping the government reduce unemployment. In an industry where staff turnover is high, students, disabled people, and senior citizens are particularly desirable employees for Tesco because of their greater loyalty and their willingness to work at lower wage rates (Palmer, 2010).

New store developments generate employment on one hand, but on the other they pose a threat to the survival of small local businesses, which may be forced to shut down or substantially lower their profit margins in order to survive. However, this competition ultimately benefits society as a whole through lower prices (Metzger, 2006).

Economic Factors

Business cycles — from high GDP growth to low or negative GDP growth — affect all businesses, but they also validate the survival-of-the-fittest theory. Weaker organizations are eliminated, while the strongest survive the recession and grow more confidently afterwards. Tesco has proved its economic viability and resilience through recent recessions. In fact, apart from a few exceptions (such as Woolworths), most grocery supermarkets have performed well globally even during downturns, earning them the label of recession-proof businesses (Dennis, Enech, & Merrilees, 2005).

Nevertheless, a suffering economy does affect the retail sector through rising unemployment levels and reduced consumer purchasing power. In such an economic climate, Tesco and other businesses have had to cut their profit margins to stay afloat during recession.

The risk of lowering costs through downsizing is that it increases unemployment and can initiate a vicious cycle and a downward economic spiral. This can be avoided by reducing salaries starting from the top — at the CEO level — and working down to ordinary laborers. This approach gives a company a high moral standing and helps employees feel they are part of a family in which sacrifice begins at the top. Tesco's international business has been growing well, but since its major market remains the UK, it will face difficult conditions until the UK economy fully recovers.