International Business. Tescos in the UK and China The Economic Environment Facing the Business

by cookthefish (student)

P5-M2

Tesco’s in the UK and China

The Economic Environment Facing the Business

Currently in the UK the economic environment is heading towards a double dip recession. The inflation rate is also making the cost of living increase. Inflation (CPI) is the measure of the cost of living and is calculated by the average price of a basket of goods. In the UK the economy is currently heading towards double dip, the country has little growth currently at 0.5% when it should be around 2%, which is the target the government is aiming for. A double dip is when a country has recently been in recession and goes back into one. Usual business strategy when faced with this dilemma is to go into survival mode where you might close stores and cut jobs. However looking at Tesco’s sales, turnover, profits, staff numbers and most particularly market shares you can see Tesco’s are growing in the UK because they meet people’s needs, and have adapted to the UK’s economic environment by capturing a huge market with their value range, as people cant afford expensive items. Another factor contributing to Tesco’s low prices is competition with other large grocery retailers, this competition causes a “price war”; meaning the retailers lower their prices in order to gain more customers. Lowering prices causes less profit but is essential to keep customers happy. Tesco’s has a staggering market share of 30% in the UK. They have 2,715 stores spread across the UK making it a convenient store for people all over the UK. However Tesco’s success is their cheap prices and special offers which save people money as people want to spend as little as they can due to a lack of confidence spending money. Per capita means the amount of income generated per person. To calculate per capita you divide the amount of people in the country by the GDP. The UK’s per capita is currently at 0.5% which shows people don’t have much disposable income.

The ripple effect is a diagram of confidence within a country, for example constant change in government policies, a bank going under or high interest rates. When people feel less confident they are less likely to spend money which effects Tesco’s. Common effects of the ripple effect are people loosing confidence in spending money, often there are freezes in employment and potential job redundancies.

However when we look at China’s economic environment it is very different. China has newly industrialised growth and their economy is growing fast and is well above the trend rate. Tesco’s have been operating in China since 2004 and now has over 105 stores. Tesco’s have chosen to suit China’s market by building hyper stores which are big supermarkets which can sell a wider range of products including luxury items such as TV’s and electronic items. Tesco’s have built hyper stores in China because unlike the UK facing a recession, China is in high growth, so people have money to spend so Tesco’s focuses on high priced products such as gadgets. The definition of a sudden period of high growth; in high growth the population tend to spend a lot of money on goods such as houses and cars as they are feeling confident with their money. To justify the fact that China is in high growth and people have money to spend, this statistic taken from the Daily Mirror “The average Chinese shopper spent £729 on each transaction in December. The average Briton parts with just £130 on a day’s shopping trip”. Another example of China’s wealth in spending is this statement from the BBC website “Rolls-Royce said 90% of cars sold last year went abroad, with China overtaking the US as its biggest market”. Looking at this statistic a potentially profitable diversification into car sales could result in a wealthy venture for Tesco’s. Per capita in China is $5,184; this is actually below world average but is higher than the UK’s. This is good news for Tesco’s as it confirms that China has more money to spend and are confident with spending.

Both the UK and China have a growing population and therefore rising demand for products and services. The UK has a population of 62,218,761 million people and China has a staggering 1,338,299,500 billion people living in their country.

Levels of Inflation

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Levels of Inflation

Due to China’s high levels of economic growth China’s government are trying to keep the level of inflation as low as possible. Chinas inflation rate was calculated at 4.2% in November this year which is higher than they would like it to, however their GDP is at 9.4% which means there is a positive gap of 5.2%. This gap of 5.2% still gives China’s population the confidence to spend, however prices could rise over time. The BBC news has released a report about Chinas inflation rate ‘China's rate of inflation has fallen in November to its slowest pace in 14-months. Inflation was at 5.5% in October, after hitting a three-year high in July of 6.5%’. Because of Chinas high inflation rate and taking into consideration Chinas GDP, Tesco’s strategy of opening and expanding new hypermarkets is well suited to their economy as China’s citizens have a lot of disposable income and Tesco’s hyper stores will attract people to buy luxury products and spend their money. A factor which keeps Chinas inflation up is their prices for fuel are low. Subsequently Chinas inflation rate is hard to maintain and unsustainable, which is a problem which Chinas government are trying to even it out. In China the cost of fuel isn’t as high as in the UK so it means it costs Tesco’s less to distribute their goods. This means that the cost of fuel doesn't dramatically affect the cost of goods in China unlike in the UK.

The UK’s inflation rate was measured in November at 4.8% down 0.2% from the month before. The cost of living is higher in the UK than in Chinas due to a combination of factors; such as in the “UK unemployment rose by 118,000 in the three months to November to 2.685 million, the highest level since summer 1994”. Another major factor affecting inflation rates in the UK is the price for fuel at almost £1.40 per litre. This is affecting the UK’s standard of living as it is costing us more to be accessible with our cars. The problem with fuel being so expensive is far more excessive than just with people driving cars, train prices are increased “An open return train ticket from Coventry to Manchester went up 20% in price in the last 12 months” taken from the BBC website. In the UK fuel prices are very high which means it costs Tesco’s more to transport goods store to store. If the distribution costs are increasing it means that customers have to pay more for the goods. Because the cost of fuel is high and rising it means people find it less accessible to get to the stores and will therefore buy less or shop closing to their homes in different stores. In China the cost of fuel isn’t as high as in the UK so it means it costs Tesco’s less to distribute their goods.

Another impact on inflation is interest rates. The current interest rate for the UK is at 0.5% and has been for the last three years which is somewhat unusual. The Bank of England are not raising interests rates because of fears of people decreasing their spending even more. In the UK the bank of England control interest rates, rising interest rates can affect confidence in spending and can make inflation increase even more. Raising interest rates is bad news for Tesco’s as customers might stop spending meaning less profit for Tesco’s. Interest rate in China was last reported at 6.56 percent. In China, interest rates decisions are taken by The Peoples' Bank of China Monetary Policy Committee. China has fears of social unrest with regards to rising prices, however the economy is currently borderline sustainable and is being controlled by Chinas government. Rising interest rates will help lower inflation; this is a method which has been used by Chinas government to help the economy become more sustainable. This can be seen in an article taken from the Guardian, "Chinas central bank has said it will increase interest rates for the third time this year, in its latest effort to put the brakes on its fast growing economy". Chinas Bank have also said that they would "increase one year lending rates by a quarter of a percent point to 6.56%".This is due to Chinas Peoples Bank facing large inflationary pressures and the interest rate rise. China has also raised bank reserve requirements to help bring growth under control and prevent prices from spiralling.

Government policy in relation to business

China has put government policies in place to control their growing population. The policy was create and enforced in 1978 to try to keep their economy stable. By keeping their population down jobs are available and the economy is more stable. With regards to Chinas government they are stable and don’t need to take drastic action. Tesco’s isn’t affected greatly by Chinas government policies which gives them more opportunities and fewer risks. Tesco’s choosing to sell in hyper stores suites Chinas economy because citizens have money to spend on general goods and luxury goods. Tesco’s have taken advantage of this by selling gadgets and electrical goods within their hyper stores. If the country is doing well; low inflation, available credit, low interest rates and available labour supply Tesco’s are more likely to do well. China has risen their interest rates for the third time this year to try to slow down their fast growing economy. This is bad for Tesco’s because people are spending more money on interest rates which may affect people’s confidence to spend money as seen in the UK.

In the UK a coalition government was formed on the 12th of May between the Conservatives and the Liberal Democrats. Lead by David Cameron they try to come up with solutions to resolve current financial problems in the UK such as a double dip recession, rising inflation rates and increasing interest rates. Due to the cost of living increasing in the UK the price of goods have increased meaning people have less money to spend. Tesco’s have adapted to the UK’s climate to become one of the most powerful retailers in the UK today. With their ever expanding range of products and services, promotional offers and different ranges they cater for every sector of the market. Tesco’s could do with people getting more money to boost the economy and will then keep inflation right.

Changes in GDP and in demand in the UK and China

Growth domestic product (GDP) is ever changing in the UK and is currently at 0.5% compared to normal growth of 2%. The UK is among the world's most developed economies; however has only recently recovered from a recession back in 2009. A recession is when a country GDP is negative for two successive quarters. This has been caused by the ripple effect. The largest proportion of GDP is in services, particularly banking, insurance and business services. As Tesco’s main focus is in the UK core selling groceries GDP will affect them but not significantly. There is constant demand for goods in the UK so Tesco’s will always have customers but as people have not got as much money Tesco’s focus on groceries and general goods. The ripple effect can shrink or grow GDP, good confidence; people start spending more and more GDP grows, bad confidence; GDP shrinks more and more.

Examine issues involving global interdependence that affect the business.

Global interdependence is mutual depend at a level. One country depends on another country for something and that country may depend on another country, which global interdependence. Tesco’s like many other grocery chains companies source its goods from different countries. Tesco’s import TV’s from China as their manufacturing is cheap. They import kiwis from New Zealand because they grow well in that specific country. This example of Tesco’s importing good shows that they are dependant on other countries. This in turn means Tesco’s are vulnerable to suppliers because if for example China demanded more money for their TV’s Tesco’s would have to pay more, but the customers buying the TV would have to pay the high price ultimately. Another factor in Tesco’s interdependence is the chance of a global disaster which could affect supplies from an affected country resulting in higher prices to import goods.

In conclusion there are similarities and differences for both the UK and China’s economies. However Tesco’s success is dependant on how they strategise to suit the countries economy. This and focusing on the needs and wants of customers has made them the global retailer they are today.

Bibliography

www.dailymail.com

www.guardian.co.uk › ›

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www.etutor.com