2245287214 - Bb, Aa Cost_Leadership-_Tesco_Sainsbury

Introduction In today’s competitive global market, it is imperative for businesses to establish or maintain a competitive advantage in order to survive the intense competition fueled by global market expansion and technological advancement. In this context, Michael Porter’s concept of cost leadership plays a pivotal role for the firms to establish competitive advantage by enabling the firms to offer competitive prices. This holds significant importance for the United Kingdom’s retail industry, as it is for any other industry, due to its rapid growth and the major key players involved. The British retailing industry is a highly competitive and challenging market, and many businesses are experiencing a squeeze as a result of changing consumer preferences, the replacement of channels (online retailing), and the increasing number of niche or cost leadership businesses. In 2022, the UK retail industry experienced a 4.7% increase from the previous year and reported £441 billion in sales where 27% of the total sales were through online channels which reflects the changing consumer patterns (Retail Economics, 2023). The sector is highly important for the economy as well as it employs 3 million people and accounts for a significant portion of consumer spending that constitutes one-third of the total. While online sales have witnessed a dip of 10% as most consumers resorted to online shopping in 2020-2021 due to the COVID crisis, the sector has remained robust and shown upward growth in terms of total sales. The sector contributes 5% to the total GPD of the UK (Retail Economics, 2023). These values highlight the importance of the UK’s dynamic retail landscape where each player strategically aims to gain a major market share. In this context, Porter’s cost leadership concept is of paramount importance as it enables retail companies to achieve competitive advantage in the prevalent dynamic market conditions. Therefore, this report focuses on two key players of the UK retail industry i.e., Tesco PLC and Sainsbury in order to understand how cost strategies enable the firms to establish competitive advantage. Tesco PLC is a leading retailer of groceries and general products in the UK with 4,169 stores in the UK and 4859 worldwide. Not only is Tesco a highly recognized brand in the

moves. For instance, it has made self-scan devices from “ Scan as You Shop” more widely available and made invoices optional in smaller locations, which has resulted in total savings of £3 million. It has also achieved great strides in minimizing the cost of non-resale products and services by identifying and capitalizing on Group-wide synergies. Particularly noteworthy are the £50 million in savings through the improvements and creating synergies. The recent reports stated an exuberant cut down in the operating expenses of a 3.27% decline from 2022 with a total amount of £61.41 billion in operating expenses as compared to the previous year's figure of £63.56 billion (Tesco, 2023). This decline indicates Tesco's success in implementing cost-saving measures and optimizing its operational efficiency, aligning with its strategic goal of sustainable profitability across all channels. The critical review of the recent financial statements of Tesco PLC revealed that the predominant costs of the company include various types of costs including fixed, variable, direct, and indirect costs. In the income statement, the cost of goods sold represented as major cost of the business that reflected the costs associated with the procurement of goods. The cost of goods sold is a direct cost and was reported to be £62,034 million in 2023 (Tesco, 2023). Administrative expenses such as staff costs, premises and equipment expenses, and other administrative costs are part of indirect costs. In 2023, Tesco's administrative expenses amounted to £2,136 million (Tesco, 2023). Another predominant cost that appears in financial statements is a significant portion of Tesco’s cost structure is operating cost. It is also one of the key strategic drivers for Tesco to control the pricing of retail products. In 2023, Tesco's administrative expenses were £2,136 million (Tesco, 2023). Depreciation and amortization costs are typically fixed as they represent the allocation of the cost of non-current assets over their useful lives. In Tesco's financial statement, the depreciation and amortization expense of £1,700 million represented a significant portion of its cost structure (Tesco, 2023). Understanding the nature of these costs helps Tesco make strategic decisions to manage and control its cost structure. Sainsbury, being a challenger, also focuses on increasing its market share through cost savings. The goal of Sainsbury is to implement a fundamental decrease in its operating

offering budget-friendly prices and staying ahead of competitors. On the other hand, Sainsbury, while maintaining slimmer profit margins compared to Tesco, demonstrates a more consistent performance. It's crucial to recognize that the downturn in 2020 and 2021 was significantly impacted by the COVID-19 crisis, and the recent dip in profit margins can be linked to the escalating cost of living. Tesco PLC’s five years data Metrics 2023 2022 2021 2020 2019 COGS £ 61,081 million £ 56,650 million £ 54,028 million £ 53,680 million £ 59,403 million Gross Margin 5,567 7.5525 6.8496 7.0723 6.484 Operating Margin 2.319 4.1732 2.999 3.8882 3.3688 Net Profit Margin 1.1329 2.4143 10.6121 1.4994 2.0685 Sainsbury’s five-year data Metrics 2023 2022 2021 2020 2019 COGS £29,409 million £27,514 million £27,283 million £26,977 million £27,000 million Gross Margin 6.3637 7.9144 6.0761 6.9534 6.919 Operating Margin 1.7846 3.8669 0.2066 2.2419 1.0756 Net Profit Margin 0.6573 2.2646 -0.9639 0.5243 0.755 Competitive advantage Porter’s Five Forces Framework – Tesco PLC Analysis Impact Threat of New Entrants  Tesco has an established market presence of more than 26%  Tesco has strong supplier network through Low

Discussion In the competitive landscape defined by Porter's Five Forces, Tesco PLC faces challenges and risks that could impact its costs. With an established market presence and a strong supplier network facilitating economies of scale, Tesco enjoys a low threat of new entrants. However, the high competition among UK retailers and the constant pressure for innovation in technology and supply chain management contribute to a high rivalry among existing firms. This fierce competition causes Tesco to take aggressive measures to maintain its market share which consequently impacts its profitability. As discussed above, to offer competitive prices through measures of locking the prices for a specified period and negotiating with suppliers (Woods, 2023), Tesco also seeing a decline in its profit margins. While Tesco's bargaining power of suppliers is low due to a diverse supplier base, its medium bargaining power of customers necessitates strategic efforts to maintain customer loyalty and manage costs effectively. On the other hand, Sainsbury has comparatively a lower market share but it holds a key position in the UK retail industry with the stress to offer competitive prices to stay relevant. The low threat of new entrants is attributed to Sainsbury's existing market domination, extensive capital requirements, and technological infrastructure needed for new competitors. Sainsbury's low to medium bargaining power of suppliers, despite a diverse supplier pool, suggests potential challenges in managing supplier dependencies due to various product offerings. Similar to Tesco it also faces intense competition which forces Sainsbury to make strategic decisions about cost management. As both companies' pricing strategies are rooted in cost leadership strategy, they face a high risk of declining profitability due to the escalating cost of living (inflation). However, it is clear that both companies have a stable market position in the market with Tesco having a competitive advantage due to the various reasons including its diverse retail network across all over the UK, effective cost management strategies, and focus on innovation and technological advancements.

References Carroll, N. (2023), “Sainsbury’s commits to further investment in value as it fights to maintain market share”, Marketing Week , Marketing Week, 27 April, available at: https://www.marketingweek.com/sainsburys-value-market-share/ (accessed 28 November 2023). Financial Times. (2023), “Tesco PLC Preliminary Results – Company Announcement - FT.com”, available at: https://markets.ft.com/data/announce/detail?dockey=1323-15913793- 3KJQS4SG9NL6MDET3KAGE565OE (accessed 29 November 2023). Jefferson, M. (2022), “Sainsbury’s: Premium sales remain resilient despite the cost of living crisis”, Marketing Week , Marketing Week, 5 July, available at: https://www.marketingweek.com/sainsburys-premium-cost-of-living-crisis/ (accessed 29 November 2023). Macro Trend. (2023), “Tesco Operating Expenses 2010-2023 | TSCDY”. (2023), Macrotrends.net , available at: https://www.macrotrends.net/stocks/charts/TSCDY/tesco/operating- expenses#:~:text=Tesco%20operating%20expenses%20for%20the%20twelve%20months %20ending%20February%2028,a%2010.8%25%20increase%20from%202021. (accessed 28 November 2023). Retail Economics. (2023), “UK Retail Stats and Facts”, available at: https://www.retaileconomics.co.uk/library-retail-stats-and-facts Sainsbury. (2023), “Annual Report and Financial Statements 2023”, Sainsbury, available at: https://www.about.sainsburys.co.uk/~/media/Files/S/Sainsburys/documents/reports-and- presentations/2023/annual-report-2023/annual-report-and-financial-statements-2023.pdf (accessed 29 November 2023).