Impact of EU Membership on Tesco

Introduction

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.

Findings

European Factors

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.

European policies

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;

• Air
• Pollution
• EU climate
  change
• Waste

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.

Global Factors

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.

Trading blocs

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.

Credit availability

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

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.

Industry-specific developments

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.

Environment

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

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

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

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.

Changes in the EU environment and global factors: The effect on Tesco

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.

Conclusion

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.

Bibliography

https://list25.com/25-most-unstable-countries-in-the-world/ (accessed on 10/12/2017)

http://www.britishchambers.org.uk/ (accessed on 10/12/2017)

https://www.gov.uk/ (accessed on 10/12/2017)

http://www.bbc.co.uk/news/business-29960335 (accessed on 10/12/2017)