Executive Summary
Inflation refers to the phenomenon of rising prices and goods in an economy and the rate at which it rises is called the inflation rate. It affects the living standards of the people living in the country significantly. The selected article has discussed the event of the surging inflation rate in the UK. It is predicted to hit 8% in April. This will impact the working of organisations such as Tesco which is one of the Big Four companies in the UK. The strategy of increasing productivity by cutting costs and improving spending is the proposed strategy in this case study. Differentiating and categorising costs strategically, reducing work through automation, understanding cost drivers and taking effective decisions through the help of teams will help Tesco to overcome this inflationary environment.
Introduction
The inflation rate of the UK has been on the rise for the last few months. This will impact the living standards of the people in the coming months. Inflation, as a concept, is the scenario of rising prices. The article chosen for the case study has highlighted this aspect. The inflation rate is an essential economic factor for all organisations. It erodes business profits, investments, market values and resource allocation. Stock markets underperform under the pressure of inflation. This leads to an adverse decrease in the company’s market value. Due to increased prices of goods, there is a reduction in people’s purchasing power. This reduces the overall sales of the organisation. In this case study, the selected company is Tesco PLC, one of the UK’s leading retailers. Being customer-focused, Tesco is quite dependent on the UK’s inflation rate. In this inflationary environment, consumers’ spending on Tesco’s products will be cut short due to the stringent purchasing power of the customers (Ilmiani and Meliza, 2022).
Case Study: Impact of Rising Inflation in The UK on Tesco
Background
The article chosen for this case study has been published in The Guardian on the 16th of February, 2020. It focuses on an economic factor of PESTLE, inflation rate. This scenario has been observed since the reopening of the UK’s economy after the Covid-19 pandemic. In April of this year, inflation has been predicted to hit its all-time high (The Guardian, 2022). To control the increasing prices, the Bank of England might increase interest rates. Tesco PLC is one of the UK’s largest supermarkets and is part of the UK’s retail industry. Tesco PLC has been considered relevant for the scope of this case study because it has a variety of goods and services, whose sales are dependent on the inflationary environment.
Tesco’s diversified portfolio of products includes clothing, groceries, electronics, furniture, toys, software, etc (Tesco Official Website,2022). The products that will see the maximum increase in prices are household products, furniture, etc. This will lead to consumers reducing their spending on these products. The people of the UK will have to squeeze their living costs to sustain this inflationary economy. From April of this year, the estimated electric and gas bills will rise by 693 Euros. March will see a rise of 3.8% in England’s regulated rail fares (BBC News, 2022). Under the Health and Social Care Levy, employees, workers and companies will pay 1.25 Pound more in April. This will put companies like Tesco and their consumers under pressure. Monthly payments might further go up if the Bank of England decided to raise interest rates (Joseph et al., 2021).
Case Evaluation
Britain’s households are expected to lower their living standards shortly due to the climbing inflation rate. In thirty years, Britain’s inflation rate has surged to the highest point at 5.4% in December 2021. Governments limit spending in scenarios of high inflationary spending to bring balance. This in turn, in most cases, does not produce fruitful outcomes for retail businesses. Economists have predicted the consumer price index to increase from January’s 5.5% to a significant 8% in April. This 2.5% jump will push energy bills in households to soar high, putting pressure on consumers’ pockets (The Guardian, 2022).
The article presents the effect of external economic factors, that is, inflation. It is responsible for the reduction in business sales and the overall revenue generated. Governments across the world try to limit inflation for companies to run smoothly. As estimated, the biggest impact of the rising inflation in the UK will be on energy costs. Being the driving force of most business operations, this increased cost will push prices of most goods and services, especially, food items, household items and furniture (Hipwell, 2022). Tesco has occupied 25% of the UK’s retail market and generates the most sales. Thus, the rising inflation rate will adversely affect the pricing of Tesco’s wide range of items.
Inflation is outside the control of Tesco. Though the company is expanding their business globally, its profits are largely dependent on the UK’s market and the economy as a whole. Thus, this hike in inflation will directly or indirectly affect Tesco in terms of its market dominance. Tesco’s Chairman, John Allan has expressed his concern in this regard. According to him, the future will bring along horrible food price inflation which will further put added pressure on the people (Hipwell, 2022). He has also said that people will be forced to choose between whether to feed their families or heat their homes. Both Tesco and its consumers will badly suffer in this situation and is a major threat of high inflation rates (Caporale et al., 2022).
The Office for National Statistics publishes the Retail Price Index which measures inflation in the UK. It is already quite high at 7.8% as said by a research economist, Isabel Stockton of the Institute for Fiscal Studies. This has surpassed the Retail Price Index as anticipated in last year’s October budget. The projected spending of the UK’s government on debt interest in 2022 will be about 69 billion Euros, which is 11 billion Euros higher than what has been forecasted at about 58 billion Euros in 2021 (Davies, 2021). This significantly increased spending will push the rates of inflation and bring an overall impact on the UK’s economy (The Guardian, 2022).
There are possible chances of the interest rates being increased by the Bank of England. The rising inflation will harm both businesses and consumer groups. Many firms will become insolvent owing to this adverse scenario. Consumers will have very little to spend on luxuries. Tesco’s Allan has said that the rise in Tesco’s food prices will be dependent on the items. This means that though certain items will become costlier, the prices of some food items will also get cheaper. In the long run, the amount spent by consumers on certain items will also change (Haldane, 2021).
Tesco will soon struggle to keep up with this increase in inflation. The gradually increasing price of energy globally will lead to higher transport and energy bills on Tesco’s part. It will try to ease this situation by passing it to customers through increased product prices. There will be a significant surge in shipping costs and create supply problems for Tesco. The UK is currently facing staff shortages as an effect of the pandemic and Brexit. This is pushing companies to raise wages so that they can attract suitable staff to work for them. As a result, it is contributing to the high inflation in the UK (Cúrdia, 2022).
Proposed Strategy
To counter this situation of price increase, Tesco has to take some decisive steps. Analysis of companies during the period of the Great Depression shows that the most successful strategy taken by companies was to cut costs in a way that will help to increase productivity. This gave these companies a proportionately higher stakeholder return as compared to the ones that did not take the steps. The main consideration that has to be taken during the current economic scenario is that labour markets are volatile, constrained supply chains and also there is not much decrease in consumer demand. Thus, to tackle the higher inflationary environment, Tesco will need to not just cut costs but also build more scalable platforms for growth. Tesco will be able to maintain its strategic market position through reinvestments in programs that will provide greater resilience. It will help to build a stronger pricing and purchasing framework. Growing the top-line by cutting costs will help Tesco to improve its employee retention and become less dependent on volatile labour markets. As of January 2022, the operating cost inflation of Tesco runs at 5% (Reuters, 2022).
Strategic Steps for Implementation
To achieve the successful implementation of the proposed strategy in Tesco’s structure, certain strategic steps and decisions will be involved. To manage expenses effectively, Tesco needs to get high visibility of its spending. The managing teams will be able to understand the areas where the money is going and who is responsible for it. To do this, Tesco will have to establish end-to-end, repeatable and actionable spending visibility by categorising based on costs, business unit and business operations. This will significantly increase Tesco’s productivity through accountable organisational decisions that will be made based on the impact of the high inflation (Girdzijauskas et al., 2022).
During this current disruptive scenario, the odds of executives taking wrong decisions that will endanger Tesco’s long-term strategy is significant. So, it is essential to differentiate effectively between non-strategic spending and strategic spending. Protecting and targeting the signature customer as well as improving employee experiences will help Tesco to prioritise consistent ROI investments. Tesco will be able to fuel their strategy and also effectively out-invest their major competitors like Sainsbury’s, Asda, Morrisons and Waitrose. The managers of Tesco will have to identify the areas where investments need to be stopped and where to realise the cost savings to counteract high inflation (Ulu, 2022). They need to understand to trim costs selectively that will enable Tesco to improve operating expenses returns and achieve results through strategically investing in greater capabilities. It will beneficially maintain Tesco’s competitive advantage by reshaping its cost structure. During this disruptive economic condition, maximising the value of shareholders in the company by taking better decisions in regards to deploying the scarce resources will be strategic (Ilmiani and Meliza, 2022).
The understanding of the main drivers of cost in times of high inflation is crucial. Critically categorising costs such as rate and consumption along with drivers of spending is the way to go. It will help Tesco to implement the proposed strategy by creating different initiates for each unique driver of cost. Some possible moves are increasing buying power, improving compliance opportunities, introducing AI- deployment for procurement, using data analytics and insights. All these help to increase savings and deliver real-time results. It will help Tesco to take effective decisions in this scenario (Koester et al., 2021).
To counteract the inflationary environment, Tesco can use approaches that will help it to thrive even in the bad times. By spending better, Tesco will be able to overcome its producer pricing and fluctuating supply chain pressures. Cross-functional change can be brought about in Tesco due to this. Increasing collaboration between the internal stakeholders will help Tesco to build new projects by making better decisions. Prioritising spending can help Tesco to reduce costs by avoiding unnecessary costs and identifying savings opportunities. Eliminating insignificant work by implementing automation will help Tesco to deal with labour shortages during this volatile period. The managers of Tesco will need to effectively scrutinise the activities of Tesco to understand how they are performed and who performs them. This will lead to resetting the way of work and redesigning it to adapt to the inflationary environment (Hémous and Olsen, 2022).
Conclusion
This Case Study has thoroughly discussed the impact of the rising inflation rate on Tesco PLC. The future of the UK’s economy will bring along higher inflation rates of 8% in April of this year. Considering the prediction to be correct, this will be the UK’s highest inflation rate in almost thirty years. This will be mainly due to the rise in petrol princess across the world which is putting pressure on the supply chain and transportation. The Covid-19 pandemic and Brexit has made the UK’s labour market volatile that have forced companies to increase wages leading to inflation. Being heavily dependent on the UK’s retail market for their overall revenue generation, Tesco will be adversely affected by such high rates of inflation. This Case Study has thus proposed the strategy of increasing productivity by reducing costs and managing to spend rather than focusing on the supply chain. This will require some steps to be followed by Tesco as mentioned here.
References
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