Tesco is the UK’s leading retailer launched its Factory Gate Pricing initiative, it turned to G-Log, a provider of global logistics and transportation software to come up with a new solution to address Tesco’s logistics processes for collecting goods from suppliers and delivering to Tesco’s 23 UK distribution centres.
Tesco was founded in 1924 and over the past 79 years has grown and developed to become Britain’s leading food retailer. Over the years, Tesco has expanded its footprint from selling groceries to offering 50,000 product lines, ranging from food and toiletries to garden products, small electrical goods, clothes and gasoline.
One of Tesco’s most recent ventures is the launch of its fixed line phone service. Tesco handles more than one million inbound shipping movements per year from over 2,500 suppliers. It made sense therefore, for Tesco to require a single-vendor solution to consolidate and manage its logistics planning, control and monitoring processes. Classical economics predicts that rivalry between companies should drive profits to zero. This is part of the threat of substitutes. For instance, Tesco has competition from companies from Sainsbury that can provide substitutes for their goods.
This drives the prices of groceries down in both companies. Buyer power also acts to force prices down. If an item is too expensive in Tesco, buyers will move to Sainsbury. Fortunately for Tesco, there are few other large supermarket companies. This means the market is disciplined the supermarkets have a disciplined approach to price setting. Discipline stops them destroying each other in a profit war. Supplier power, is wielded by suppliers demanding that retailers pay a certain price for their goods. If retailers don’t pay the price, they don’t get the goods to sell.
Large supermarkets, like Tesco, have an overpowering advantage over the small shopkeeper-they dictate the price they pay the supplier. If the supplier does not reduce the price, they will be left with no retailers to sell to Tesco and the other large supermarkets will have all the customers. Tesco, Asda, Sainsbury and other supermarket chains put up considerable barriers to entry. Anyone starting up a new supermarket chain has barriers imposed on them, implicitly or explicitly, by the existing supermarkets.
Tesco also has the advantage of economies of scale. It will pay a lot less for large volumes of goods from suppliers. A new, small supermarket chain can only buy a relatively small volume of goods, at greater expense. Porter’s five forces is a “bottom line” way of analysing a company, from the perspective of the company. In the true spirit of capitalism it looks at economic rivalry as being of central importance, and suggests that you should look only at factors affecting the company’s profit in a systemic model defined by that rivalry.