This report will explain the role of the European Union and describe the impact which UK membership of the EU has on Tesco. The impact which a range of significant global factors have on the operations on Tesco will also be described followed by an assessment on the impact of changes in the EU environment and global factors on Tesco.
Different European factors have different influences on the UK economy as the UK is currently a part of the European Union at the minute. As the EU affects the UK economy, different businesses such as Tesco are also affected and this will be looked at below.
Role of European Union (EU)
The European Union (EU) is a political and economic union of 28 member states that are located primarily in Europe. The European Union was formed in 1950 with two countries and since then there are now 28 countries with others wanting to join. The purpose of the EU is to allow the free movement of people, goods and services throughout its member states. In April 2017, the population of the EU is estimated to be 739,207,742.
An organisation such as Tesco has access to the European market that links economies and this has an impact on them as there is no need to pay any customs or excise charges to other member states. This has implications for Tesco as they have less expense and are able to trade much more freely. This free movement of goods has decreased costs for businesses within the EU as well as reduced costs for countries outside the EU that trade with it.
The Single European Market means that the EU countries are just one big market.
It is a free trade area and a customs union designed to encourage economic growth and employment throughout the member states. Free trade area means that it allows the free movement of goods, services, capital and labour between member states without any restrictions. Customs Union means that there is a common external tariff on goods coming into the EU from non member states such as the USA and Japan no matter where there point of entry. This has positive implications for Tesco as they have the same legislation across the EU which means barriers to trade are removed and this allows Tesco to trade much more effectively and efficiently with both suppliers and customers.
The European Council was formally founded in 2009 and this helped to draw all the strengths of the different states together. This then resulted in the Lisbon Treaty being signed which was set up to enhance the efficiency and legitimacy of the Union and to improve the coherence of its action. This then allowed the EU to work more effectively and effectively and allowed the free movement of people, goods and services throughout all member states. This affected Tesco positively as they were able to buy and sell goods and services freely as well as source labour from other EU countries without any problems.
Performance of European Union economies
The EU encourages its 28 member states to work closely together through the single market as this means that as they do so, the economies of individual countries such as Ireland, UK and Spain for example are more closely linked. As of April 2017, 19 of the 28 EU countries use the Euro as their currency which means there are no exchange rate fluctuations between them. As Tesco is primarily based in the UK they use GBP and so the value of the current currency is less. This impacts on Tesco as it means that they perhaps cannot afford to buy some products as cheaply as they would like from other EU countries due to the decreased value of the pound. This would mean that Tesco’s expenses rise and profits may also be negatively impacted as a result.
The EU has encouraged its 28 member states to work closely through the single market and as time has passed by the counties have become more closely linked. The performance of a lot of EU countries has greatly reduced in recent years. They have built up huge deficits.
This led in 2008 to a group of economies in the EU being referred to as PIGS (Portugal, Italy, Greece and Spain) as they had large deficits and high levels of unemployment. More recently Ireland has joined the group and it now has become PIIGS.
Different countries within the EU have very different economies as some do well and others have huge debts and financial deficits. In 2008 a group of economies in the EU were grouped together as they had large deficits and high levels of unemployment. As of 2017, some of the most competitive EU economies include
Switzerland, Germany and the Netherlands. The performance of EU countries would be of interest to Tesco as if a country they bought goods and services from became a struggling economy such as that of Luxembourg with many businesses in debt, Tesco may withdraw business relations with them. This would result in Tesco sourcing goods and services elsewhere from a better- performing country in terms of its economy such as Switzerland. This would guarantee more security in its business operations and may allow Tesco to receive better prices which would allow them to maximize their profits even further.
There are many different European policies that affect UK businesses such as Tesco. Some of these will be:
Agriculture – The Common Agricultural Policy (CAP) was developed by the EU and was set up to benefit its members by encouraging the production of safe and high quality food, supporting the upholding of rural communities and giving farmers incentives to have a good corporate responsibility for the environment. The CAP aims to make sure there is sustainable agricultural production in the EU that ultimately helps the economic and social environment of the union. In the EU, agricultural land represents a large part and so it is important to ensure that sustainable agricultural production takes place from not only an economic point of view, but also an environmental and social point of view.
This policy impacts Tesco as they must follow procedures to ensure they are selling food which is safe, of high quality and which was produced in line with protecting the environment. Tesco are also impacted by the CAP as they trade within the EU and to have a good brand image, must show that they follow guidelines set by the CAP as this will give them a good image in terms of corporate social responsibility. Tesco may be further impacted as they follow strict guidelines of suppliers they can and cannot have as well as ways in which they source their goods.
Business, growth and employment – The European Commission (EC) works with the 28 EU member states to help achieve business success, growth and employment The EC will look at ways to invest and grow that are smarter and greener. The EU has policies in place which promote employment and schemes that support countries to develop and grow. Examples of policies that support business growth and opportunities for employment include Enterprise and Industry policies which are developed by the EC.
This policy impacts Tesco as they may be given grants to help them become greener and grow faster which would help them, other businesses and the economy. Tesco may also be impacted by this policy as they become more supported with employment schemes and apprenticeship schemes by the EC to help reduce unemployment. This helps Tesco to acquire new staff cheaply which helps them cut costs, increase profits and grow much quicker.
Education – As well as business, growth and development, the European Commission also sets out policies in relation to education within the 28 member states. The European strategy in relation to education and training identifies different strategic objectives which include;
- Making lifelong learning and mobility a reality
- Improving the quality and efficiency of education and training
- Promoting equity, social cohesion and active citizenship
- Enhancing creativity and innovation at all levels of education and training
By 2020, the European Commission has set benchmarks for its EU members such as having at least 95 per cent of children from the age of four participating in early childhood education and early leavers of education and training should be less than 10 per cent.
This policy will result in the people of the EU become more educated and so their skills are enhanced. This impacts Tesco as they have a higher educated, more skilled population to choose from when they are recruiting for their business. This will help the business become more productive and ultimately more profitable as a result of higher skilled workers. More highly educated people also impact Tesco as they have more knowledge and skills for each department of the store such as finance, human resources and sales. This will mean the business becomes more productive as a result and this will lead to Tesco becoming more effective and efficient in its operations and so more profitable – giving it more opportunities to grow even further.
Economics and finance – European Union countries are very closely linked economically and financially. All countries have to pay into the EU budget depending on its income, the amount of tax paid and the resources that the country has. Financial regulations are in place so that the money in the budget is distributed fairy among all of the 28 member states. The EU works towards growth and increasing the number of jobs in each of the member states. The EU wishes to create security and deal with key issues such as the ageing population across the EU and globalization. As all of the 28 member states work together, their economies are seen to be of common concern and advice is given by the European Council to make sure that the policies of the individual countries support one another.
This policy impacts Tesco as they must work in line with policies set by the European Council. This may involve paying into the EU budget depending on the profits which they make as well as paying tax to support the budget of the EU. Tesco may also be impacted by this policy as they follow policies of the UK which are directly linked to other member states. Tesco have to pay the minimum wage, pay their bills and contribute to the EU budget in an attempt to support other countries and this will impact on daily operations as it can be expensive to be paying to support the economy. This may mean that the money they have to spend on daily operations is reduced and their net profit may also feel the effects.
Environment – The EU has many different policies on the different ways to protect the environment of each of its member states. These policies relate to issues such as;
- EU climate change
Having policies in place on the above issues and on the environment in general mean that businesses in member states must acknowledge them. These policies help to support the overall aim of the EU which is to protect the environment.
This policy impacts Tesco as they have to follow rules and regulations in relation to caring for the environment. Tesco would have to restrict the waste they produce and deal with it accordingly. They may also have to change the operations of the business so that pollution is reduced and that they aren’t affecting the air quality in the area of their stores. Tesco will also be affected as they must become more economically friendly and reduce their contribution to EU climate change. This could mean altering the way in which they conduct business such as sourcing products and services more locally to reduce food miles as well as changing the layout of stores so that they become more efficient. This may be expensive for Tesco but will be more efficient in the long-term and will improve the company’s corporate social responsibility.
Science and technology – The European Commission’s Joint Research Centre (JRC) carries out extensive research and develops policy with regards to science and technology. The JRC carries out a lot of research and focuses on many different key areas such as using GM organisms in foods and other products. They also investigate technology and how it can be used to help support and improve the lives of people within the European Union.
This policy impacts Tesco as the results of research may influence their business activity. If there are progressions in relation to technology by the JRC, Tesco may be impacted as they adapt this new technology in their factories and stores. This may lead to Tesco becoming more efficient and cutting costs which ultimately result in the business becoming more profitable. Research in science and technology by the JRC can also impact Tesco as they become more aware of GM organisms in food and other products and so offer more high quality products as a result. This can help customers favour them over other companies if they do their research correctly and this can result in higher sales, profit margins and lead to Tesco becoming a larger, more dominant business in the market.
Regional – Within the 28 member states, the EU has a huge number of people who live across the hundreds of regions within them. This means that there are many differences between the living standards of those people. For example, the living standards may be different for people in Northern Ireland and in Berlin. Part of the EU policy is to reduce social differences and so regional policy has been developed which focuses more on member states that need more help.
Regional policy affects Tesco as they must be aware of the social differences between different people across different regions. If they were to expand and open stores in other parts of Europe, there would be different living standards and so Tesco would have to change the products they offer and the services they provide in accordance with the region they are operating in. Tesco may also be impacted as they have to follow different trends and should be aware of them. For example, they may offer summer products in June/July in the UK. However, these same products may be offered in a different month in a different region of the EU.
External relations – As the European Council now has a president, the member states are able to work together as a group to coordinate external relations across the world. This means negotiations would take place on behalf of the EU with powerful external countries such as China, India and America. There is also a vice president of the EC who oversees foreign policy – much like the role of the current UK secretary of state Boris Johnson.
External relations impacts Tesco as there are stronger relationships with other countries across the world. This means that Tesco may find it easier to expand their stores into countries outside of the EU due to strong relationships already being established. This would allow Tesco to grow much more easily and maximise their profits as a result.
Furthermore to this, Tesco are impacted as they are able to increase their market share of the grocery market significantly.
Social – Social policy refers to policies and guidelines that affect the way people live such as welfare policies that cover areas such as social security and housing. EU social policy focuses on combating discrimination and work towards equal treatment of people across all 28 member states. EU social policy also seeks to support social mobility across member states to ensure that EU citizens can move between them freely. The European Union Agency for Fundamental Rights (FRA) works with the EU to campaign on different issues such as combating poverty, social exclusion, discrimination and violence.
Social policy impacts on Tesco as they must follow rules, regulations and guidelines for the way in which they treat their employees and customers alike. They have to show no form of discrimination or prejudice at work and social policy will work to ensure this doesn’t occur. Furthermore, because social policy supports social mobility across member states, Tesco may find it easier to recruit higher skilled workers from other EU countries which can improve their business productivity, operations and subsequent profits as a result.
European Monetary Union (EMU)
All 28 member states of the EU are linked into the Economic and Monetary Union either by being within it or being affected by it. Countries that trade in euro are known as the ‘euro zone’. As of May 2017, 19 of the 28 EU member states use the euro as their currency and enjoy the benefits of it. The benefits to member states of being part of the EMU are that there is enhanced economic stability throughout the EU. The UK has always had opt-out with regards to the euro zone and due to referendum vote in favour of Brexit in 2016; it is now looking as unlikely as ever. There are a number of potential arguments for and against the UK joining the EMU which will be looked at below.
Arguments for the UK joining the EMU;
- Risk of currency changes in favour or against UK businesses would no longer exist
- Interest rates in the UK would be the same as the rest of the EU. This may be positive as the UK may have worse interest rates (such as the EU having a base rate of 0.25 percent and the UK having a base rate of 0.5 per cent in 2009)
- Charges to change currency will be avoided
- Many UK businesses already trade in euro so a change to euro wouldn’t affect people and businesses too significantly in that regard
- It would be easier to compare prices between the UK and EU member states
- Moving around Europe will become much easier including the purchasing of products online from different member states both to and from the UK.
Arguments against the UK joining the EMU –
- Interest rates and other factors such as levels of taxation and public spending will be set by the European Central Bank and as a result may not be right for the UK
- The UK will lose the benefit of exchange rate fluctuations to make additional profits
- The UK will lose its history of using the pound sterling currency
- Several EU member states noted that once they introduced the euro, prices became higher
- It may weaken links with business partners around the world if the exchange rate in euro is not as good as the exchange rate in pound sterling.
The UK is currently not a member of the EMU and with Brexit; it is now looking more unlikely to happen than ever. Not being a part of the EMU has implications for Tesco such as the benefit of taxation and public spending being set by the UK government and not the European Central Bank. This is positive for Tesco as the ECB may not set a budget which is as suitable for the UK and Tesco as the UK government would. Another implication is the benefit of exchange rate fluctuations which can benefit Tesco in the form of higher profits if the exchange rate works in their favour when trading with other EU countries. This is positive for Tesco as they are able to use these profits to reinvest into the company and to increase their market share of the grocery market here in the UK.
The EU is extremely important on businesses such as Tesco and the economic environment as this links together the different economies in Europe. However, – as well as European economies – economics across the world are now all strongly linked with one another through their stock markets and through the supply of money across the globe. The links between world economies can have both positive and negative effects on the UK economy and companies such as Tesco due to the huge investment that takes place across borders. These implications and their effects will be looked at below in relation to Tesco.
World Trade Organisation (WTO)
The World Trade Organisation was set up in 1995 and is made up of 164 member governments. The purpose of the WTO is to promote trading and to sort out any disputes. It tries to help countries to negotiate trade agreements and thus boost the development of all countries. There are ten benefits that the WTO associates with trade across the world and these include;
- The system helps promote peace
- Disputes are handled constructively
- Rules make life easier for all
- Freer trade cuts the cost of living
- It provides more choice of products and qualities
- Trade stimulates economic growth
- Trade raises incomes
- The basic principles make life more efficient
- The system encourages good government
- Governments are shielded from lobbying.
This factor works to achieve higher living standards, full employment and sustainable development. This has implications for Tesco as there is a society which has higher rates of employment and so higher disposable income to be spent with Tesco. This allows Tesco to have customers who spend more which increases their revenue and subsequent profits. The WTO also impacts Tesco as it promotes free trade and this cuts the cost of living which again increases the disposable income which people have to spend in stores such as Tesco, giving Tesco the opportunity to have a more affluent customer base which ultimately leads to higher profits for the business.
A trading bloc is a group of countries that work together in an attempt to increase trade amongst one another and to take advantage as a group from economic benefits. Trading blocs can make trade with other countries not inside the trading bloc much more difficult. Examples of trading blocs would be the European Union (EU) and the North American Free Trade Agreement (NAFTA) which supports trade between the United States, Canada and Mexico and so fees and other charges are reduced which makes free trade easier. Just like this, the EU acts as a trading bloc and allows some other countries to work with it to trade more easily.
The EU trading bloc impacts Tesco positively in the UK as they are able to trade much more freely and cheaply with other countries inside the same trading bloc. They can benefit from cheaper importation costs and source their products more cheaply from suppliers in other countries. This can help Tesco reduce their costs and increase their profits too.
Stock market fluctuations
Stocks and shares are traded throughout the world through different stock exchanges that exist in different countries. An example of a stock exchange in the UK is the London Stock Exchange. As trade is now much more global as it was years ago and investors try to make as much profit as they can fluctuations in the value of stocks and shares in one country can have a huge impact on those in another. Daily stock market movements are largely based on the laws of supply and demand. This means that stock prices will tend to appreciate in value as demand perks up and the supply of stocks for sale decreases. Conversely, if demand for a particular product is low and the supply or volume of stocks for sale in the marketplace is high, prices will tend to decline. The economic recession in 2008 caused huge fluctuations in the stock market as people sold shares they no longer wanted to invest in as companies were not performing as well.
Stock market fluctuations impact on Tesco both negatively and positively. If Tesco share prices fall, more people buy them which can generate revenue for the company as more people buy into the company. This can help them generate capital and help them grow. However, if Tesco do not perform well, people may sell their shares and as a result the company doesn’t bring in as much and here revenue may begin to fall and business operations are negatively affected such as the ability to pay suppliers or maintain stores.
The International Monetary Fund (IMF) was set up to help economies around the world achieve financial stability. As of May 2017, there are 188 countries who are members of the IMF. As countries trade with one another for goods, services and exchange rates, the IMF tries to ensure that all economies are as stable as possible. The IMF also helps to control the amount of credit that is available in its member countries. This is because the amount of credit that is available across the world can impact the price that different countries pay to borrow money and also the amount that businesses have available to invest and grow.
If a country has issues or problems paying its bills, the IMF is able to give them loans to try to avoid their economy having serious problems which could have a negative ripple effect on other economies. This is what happened in 2008 as the UK entered recession and other countries were affected as a result. Countries are encourages to lend money to the IMF so it can then be offered to other countries in greater need.
Credit availability from the IMF impacts Tesco positively as they can be helped out in times of need such as if they struggled paying large bills or making huge payments that – if unpaid
- Would negatively impact on the economy. Tesco are also impacted here as the economy becomes more stable as a result of the IMF and so the general population will feel more financially stable and confident to shop in Tesco. This can give Tesco the opportunity to increase their customer base, sales and profits as a result.
Global warming is becoming a huge issue for people, businesses and economies around the world. As the temperature of the world increases due to greenhouse gases being released by human and human-related activities, it is predicted there will be huge differences in sea levels. This will have drastic effects on different parts of the world such as flooding which will mean that thousands of people will be at risk of losing their homes and businesses and property prices will be affected in these areas.
It is important to look at cleaner energies so that greenhouse gas emissions are reduced as much as possible. Transport may also need to be changed as we turn more eco-friendly.
Every day, the effects of global warming are seen around the world and businesses will also be affected by changes in competition as well as imports and exports.
This factor impacts Tesco as they change their business activities to help prevent global warming. They may be impacted by having to change the equipment they use in stores, the amount of miles their products travel to get to stores and the waste they produce into the atmosphere. Tesco are also impacted as there will be changes in competition due to companies not being able to operate as efficiently as they can afford as it is expensive to do so. There also may be increased costs to import and export as this transportation of goods is leading to global warming and reducing it may reduce global warming. This may mean Tesco have to source their goods and services more locally and at a more expensive price which can lead to a significant increase in costs and decrease in profits.
Political stability and war
Political instability such as the frequent changes in government has a large impact on the way that trade occurs between different countries. Wars also have an impact due to the support that is needed in a country to help deal with poverty and large movements of people between countries. Political instability and war affects the ability of a country to trade with others which is likely to negatively affect the economy of that country as well as those around it. If a country relies heavily on its exportation of raw materials to other countries, political instability or war may mean that it can no longer supply the materials to that country. This can then further affect not only the economy of the country producing the raw materials, but also the economies of those countries that reply on the materials.
Countries which face extreme political instability in 2017 include Iraq, Afghanistan and Syria. Currently, there is a lack of stability of the Northern Ireland government, political relations between USA and North Korea and political relations with Iraq and Iran over the supply of oil.
Political instability affects Tesco because if there is no government in a country, there won’t be a budget set which impacts on businesses. Just like in Northern Ireland at present, there is political instability and this may impact Tesco as there is no budget set in terms of
Infrastructure and roads and business. This can leave Tesco in a difficult place as they don’t know what the government plans to do. For example, increase tax rates or business rates and this can prevent Tesco from carrying out effective planning which can impact negatively on future profits. War can also impact Tesco as if there is a war in a country, they may not be able to import goods and services from that country. This may mean they lose out on stock or must source the same products and series from other countries for higher prices which can be damaging to profits as expenses of the company increase. War may also mean more immigrants come into the UK which can be positive for Tesco as their customer base could potentially grow. However, it may mean that there become more cultural differences and Tesco have to add new products to accommodate new cultures which can be expensive.
Developments across the world in the oil, gas and motor industries have a major impact on the competitiveness of UK businesses. The price of oil and gas around the world affects the prices of production around the world. This is because most products and services are affected by oil prices – whether it is due to the production of a product, the offering of a service or the movement of goods or services from the production company to the retailer to the customer. The UK used to be one of the world largest suppliers of natural gas and still produces a significant amount in the North Sea. However, the UK is beginning to reply on imports which affect the production and distribution of gas as well as its costs. When oil and gas become scarcer, their prices will rise and this impacts on businesses that rely on them. With the availability of natural resources set to decrease in the near future, it is important for the oil and gas industries to consider how sustainable these resources actually are.
The UK motor industry is responsible for a significant proportion of the research and development of new and cleaner types of fuel. The search for more environmentally friendly fuels is a huge issue for many different countries around the world as part of the need to help reduce the impacts of global warming.
Industry specific developments impact on Tesco. If Tesco rely on oil and gas in their business operations such as transporting goods and services as well as running their stores and the price of these natural resources rises, Tesco will notice their expenses rise significantly. This will impact on company profits and the capital which Tesco have to spend. Tesco may also have to consider changing the type of energy which they use to something more cheap and sustainable.
The increasing threat of global warming and other environmental problems means that all countries need to commit to becoming more clean and green in their business practices. Key meetings of world leaders regularly take place in an effort to help protect the environment and the planet as a whole. Below are initiatives which are a major part of a global attempt to help the environment;
Rio Earth Summit – The Earth Summit was a very large and important conference held in Brazil in 1992. Leaders from many different countries across the world attended and together made some very important decisions that they hoped would have positive effects on the environment. Agreements were made to support work in areas of biological diversity, climate change, forest management and sustainable development.
Kyoto Protocol – This is an agreement that was adopted by many countries in Japan in 1997 to set targets to support work that aims to reduce carbon emissions and to support investment in and development of cleaner energy in developing countries. The UK’s target for carbon emissions is 12.5%. The UK has to follow this and therefore each industry has to reduce the pollution and waste they produce and if they don’t it is most likely that UK as a whole as well as Tesco – because it is a company within the UK – would have to pay penalties.
The environment impacts on Tesco as they must follow policy, rules and regulations to show a consideration for it. Tesco may have to alter business operations such as reducing waste or changing their business practices to become more efficient. The Kyoto Protocol for example may impact on Tesco as they must keep their carbon emissions to a minimum and if they do not, they can fact penalties. This would further impact Tesco not only in the form of higher expenses and decreased profits, but also a negative effect on the company’s social corporate responsibility. This policy may impact Tesco positively as if they follow it correctly, they – as well as the environment – will have increased sustainability.
Genetically modified products
Genetically modified (GM) foods are those foods that have had their genetics changed in some way. This process is carried out as it allows certain crops and other foods to give higher yields, be resistant to diseases and pests and survive droughts or grow in difficult conditions. Some people in the world protest against the use of GM products as they feel they are unsafe. In the developing world, GM foods are viewed more positively especially in places where droughts or diseases are common as they are seen as a way of feeding the population in desperate times. There are now believed to be over one hundred types of GM plants.
Genetically modified foods impact on Tesco as they compete with other businesses: Tesco claim that their own branded products do not contain any GM ingredients. This can impact positively for Tesco as their customers feel that their products are more organic and healthier. This can lead to Tesco increasing sales of their own branded products and subsequent profits. However, Tesco can also be negatively impacted by selling GM products in their stores as customers may feel that these products are unhealthy and unsafe and this can lead to Tesco having a bad image and a loss of sales too.
Outsourcing is where a business asks another company to carry out work on its behalf. On a global level, this means getting people in other countries to do work that used to be done in the UK. Companies in different developing countries are now able to offer high quality services at a cheaper price than some UK companies offering the same services. Popular countries for outsourcing are China and India and it is expected that the economies of both will continue to grow as a result – particularly in the industry sectors of computer science, engineering and business processing.
Outsourcing impacts Tesco as they are able to source products and services at a significantly lower price in some eastern countries such as China and India than they would be paying for the same products and services in the UK. This is positive for Tesco as they are able to reduce their expenses and maximise profit margins. Outsourcing also allows Tesco to benefit from economies of scale due to the goods being so cheap they can buy in bulk and receive even greater discounts. This saves Tesco thousands of pounds and allows them to remain as a leader in the market.
Globalisation is the process by which the world is becoming increasingly interconnected as a result of massively increased trade and cultural exchange. Globalisation has increased the production of goods and services. The biggest companies are no longer national firms but multinational corporations with subsidiaries in many countries. Globalisation has been taking place for hundreds of years, but has speeded up enormously over the last half- century. Globalisation has resulted in;
- Increased international trade
- A company operating in more than one country
- Greater dependence on the global economy
- Freer movement of capital, goods, and services
- Recognition of companies such as McDonalds and Starbucks in lesser economically developed countries
Due to economies and businesses that operate in different countries now being more closely linked, it means that if something is working well in one country, it will have an effect on other countries across the world, and vice versa. Developments in shipping, transport methods, internet and telecommunications have all led to a big growth in globalisation.
Globalisation impacts on Tesco as they can move their manufacturing factories to low cost economies where labour costs are lower or outsource their production to companies in those countries: This can help Tesco reduce costs and increase profits. Globalisation also impacts Tesco as it increases the potential market for the company as they are better able to sell their products and services to people across the world and open new stores in other countries. Globalisation also means Tesco have access to skilled labour from different parts of the world which can lead to increased skills in the business, increased productivity and increased profits too. Globalisation can also impact Tesco negatively though as big multi- nationals such as Walmart could easily branch into the UK and make it extremely hard for Tesco to compete. This is because globalisation increases competition and although this is good for business, can make it harder for Tesco to survive in an ever-changing business environment.
Emerging economies are those that are growing rapidly such as the economies of China and India right now. The opposite of an emerging economy is a developed country such as the UK or the USA. ‘Tiger economies’ are also economies that are rapidly growing but the term was originally used to refer to the economies of South Korea, Singapore, Hong Kong and Taiwan where rapid economic growth resulted in huge reductions in poverty and the countries having some of the fastest growing economies in the world. In the 1990s, the Republic of Ireland was known as the Celtic Tiger as its economy grew significantly and many jobs were created for the Irish people as a result.
There are other ways in which the economies of countries can be grouped together. For example, the economies of Brazil, Russia, India and China are grouped together and are known as BRIC economies because they share some similar characteristics. They have all been growing rapidly and also have large rural populations. It is predicted that because these economies are growing so rapidly, by 2050 they are likely to be the four wealthiest economies in the world.
Growth of emerging economies and countries means an increase in demand for goods and services worldwide as these countries now have a lot more people on higher incomes that are willing and able to buy goods and services from the western world. This may mean that Tesco can look to set up stores in these emerging countries due to the growing economies within them. This impacts Tesco positively as it gives them the opportunity to grow the business, the market share they possess as well as the profits they return.
Below will assess the impact that changes in the EU environment and global factors may have on Tesco.
The continued growth of the BRIC and Tiger economies
Tiger economies are economies that are rapidly growing. South Korea, Singapore, Hong Kong and Taiwan are all tiger economies which are continually growing. This means huge reductions in poverty increase in GDP. Brazil, Russia, India and China are also set to become the four wealthiest economies in the world by 2050 and this has implications for Tesco.
Their growth results in economies which are more financially stable and will result in people having higher disposable incomes. This has positive implications for Tesco as they may look at setting up stores within these emerging countries due to their growing economies and due to people spending more. This can help Tesco maximise their market share as well as their profits. This is great for Tesco and will mean that they can branch their business into new countries which will also grow their customer base and increase brand awareness of the company.
Problems facing China
China has recorded extraordinary rates of economic growth for a very long time – an average of 10% a year for three decades. But there are weaknesses. It’s based on very high rates of investment, currently running at 48% of national income or GDP. When it’s so high there’s always a danger that many projects will turn out to be wasteful or unprofitable, undermining the finances of the investors themselves and anybody who has lent them money. There are also growing rates of inflation which would negatively affect Tesco as they have to pay higher for goods and services which would only increase their costs. If investments did fail, Chinas trade may suffer. This could mean that many companies in China go out of business. These companies may be suppliers of Tesco and this could mean that Tesco are negatively affected as they lose some of their biggest suppliers such as suppliers of clothing. This could mean Tesco cannot receive products for prices as cheap as they would like and so expenses rise. This would result in Tesco’s profits falling and the company struggling to compete in a retailing industry that is growing with competitiveness.
More countries joining the European Union
More countries joining the EU have many different implications for Tesco. First of all, there is greater export potential. There are trade creation effects from increasing the size of the EU. The UK can now source some of their imports of goods and services more cheaply leading to improvement in terms of trade. This means that Tesco has access to cheaper importation costs as there are more EU countries to source from. This can help the company to reduce costs and increase profits which allow Tesco to grow even further.
As the size of the EU market increases and countries within become richer, demand for goods and services are created. The value of British exports to Poland has more than doubled since Poland joined the EU in 2004. This not only helps economies grow, but increases demand for goods and services within different countries. Tesco can take advantage of this as their market increases and so they can see about opening more stores in other EU countries which would help the company grow and significantly increase its profits.
A growing European Union means there are now greater opportunities for British businesses such as Tesco to import lower-cost skilled labour in areas where there are labour shortages. The migration of labour from new EU countries was larger than many economists predicted but during the strong growth years of 2005-2008, inward migration into the UK helped to offset some of the longer-term effects of an ageing population. It kept wage inflation and consumer price inflation lower than would otherwise be the case and may have contributed to a higher level of national income. This is positive for Tesco as they are able to recruit skilled labour at a much cheaper price which lowers their costs. They can also get access to new, skilled labour which improves their productivity, business operations and subsequent profits.
Growth of genetic modification
As time goes on, there is significant growth in GM foods and this has received mix reviews. Tesco claim that their own branded products do not contain any GM ingredients and this can impact positively for Tesco as their customers feel that their products are more organic and healthier. This can lead to Tesco increasing sales of their own branded products and subsequent profits. However, Tesco can also be negatively impacted by the growth of genetic modification as it is only a matter of time before more and more products become genetically modified and selling GM products in their stores mean that Tesco customers may feel that these products are unhealthy and unsafe and this can lead to Tesco having a bad image and a loss of sales too. If it hits hard enough, Tesco’s profits may also plummet and this can have drastic implications for Tesco if people took a strong enough opposition to GM products such as the company going out of business completely if operations aren’t changed.
Growth of developments in artificial intelligence
Artificial Intelligence is usually defined as the science of making computers do things that require intelligence when done by humans. From SIRI to self-driving cars, artificial intelligence is developing rapidly. While AI is often portrayed as robots with human-like characteristics, AI can be anything from Google’s search to a Sat Nav. As of 2017, AI is described as being ‘weak’ in that it only performs narrow tasks. However, researchers are aiming to create ‘strong’ AI that may eventually outperform humans at tasks such as production of goods and solving equations. The growth of artificial intelligence may have implications for Tesco in the future. There may be a time where robots replace humans in Tesco factories which, although would be expensive in the short term, would save Tesco on thousands in the long term as they wouldn’t have to pay expenses such as wages. However, we don’t quite know yet if the cost of wages will be cheaper than the cost of the maintenance of robots. AI may also change the ways in which Tesco operates such as the ways in which their products are produced and this may also reduce Tesco’s costs and help to increase profits. AI is set to do away with some jobs which humans have and a result of this will be that Tesco can replace a large proportion of its human workforce with machines that do the job much more quickly and effectively and this can help Tesco improve productivity and increase profits.
Britain leaving the EU
Brexit is an abbreviation for “British exit” which refers to the UK’s decision in a June 23, 2016 referendum to leave the European Union. Although the UK hasn’t officially left the EU as of April 2017, they are in the process of leaving which will have implications for Tesco.
Brexit has made the euro very volatile and this means it is difficult for businesses to plan and do trade as the exchange rate keeps changing. The value of the pound fell significantly after the result of the referendum and this meant that businesses such as Tesco were negatively impacted. They would have found that they would’ve been paying more for goods and services purchased from other EU countries in the euro zone. This would have increased Tesco’s costs and impacted on their profits right away.
As a result of Brexit, there is expected to be less restrictions and regulations to follow which were set by the European Council. This may mean fewer policies to be followed by Tesco and so the business can carry out activities more cheaply. Being a member of the EU meant that the UK was not able to enter own agreements outside of the EU which would be created trading barriers for UK businesses such as Tesco. So, Tesco may now find it easier to trade with other countries outside the EU as the UK leaves the EU completely.
On the contrary, if the UK had have remained in the EU, Tesco would’ve had access to a greater market with more than 550 million people. This would’ve meant that the company were better able to increase their size having access to a larger target market and sales and profits could have also been increased here. Tesco also would’ve had access to the single market which would be made it easier for them to set up and operate across the EU. There would also been the free movement of labour and capital which would be been positive for Tesco as they would’ve had better access to labour and to capital. This would’ve helped them to become larger and to improve business operations. However, as the UK has opted to leave the EU, Tesco have to deal with the consequences and continue to compete in a market which is more competitive than ever before.
This report successfully explains the role of the European Union and describes the impact which UK membership of the EU has on Tesco. The impact which a range of significant global factors have on the operations of Tesco was also described. The report then went into an assessment in great detail of the impact that changes in the EU environment and global factors have on Tesco.