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The Impact of economic recession on customer loyalty to supermarkets

A Study of Impact of Economic Recession in Supermarket like TESCO

CHAPTER 1: INTRODUCTION TO ECONOMIC RECESSION

1.1 Overview

It is in the year 2008 that economy of United Kingdom fell into heavy recession and effected overall growth and development of country. The great depression affected economic activities around the globe. Scenarios and affects of recession lead to decrease in purchasing power of individuals and consumers. The purchasing power has reduced due to increasing cases of employees’ termination and demotion. Recession is one of the major causes of unavailability of funds for consumer spending. This in turn leads to shifting of demand and reduction in consumer expenditure (Stuckler and et. al., 2011). This implies that it is the reduction in disposable income that affects customer loyalty and retention in long term. Moreover, during the period of recession disposable income of customers diminishes. The customer loyalty for various brands and range of products decreases thereafter. Therefore, it can be said that customer loyalty is heavily dependent on consumers’ purchasing power that in turn is affected by recession prevailing within an economy. Moreover, even in present scenario when effects of recession are withdrawn from the economy; Tesco is unable to achieve significant growth due to increase in competition. The competition prevailing within retail industry in United Kingdom has increased considerably due to new entrants and competitive business strategy. In order to face competition companies are striving to reduce costs and prices of commodities. The same being case with Tesco results in diminishing growth for the business unit. The research work presented herewith analysis various factors that are responsible for stagnant or diminishing growth for Tesco. It also emphasizes on studying the manner in which economic recession affects customer loyalty for supermarkets. In order to demonstrate work with in-depth analysis the case for Tesco is taken into consideration. It is through research an attempt is to identify the affect that economic recession has on customer loyalty (Rae and Drury, 2003).

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1.2 Focus and Purpose of research

The research or study into consideration is directed towards satisfying range of objectives. The research carried without pre-defined list of aims and objectives tend to be meaningless. Researcher in current study aims at evaluating impact of economic recession on customer loyalty to supermarkets for Tesco plc. Moreover, there are list of objectives that researcher attempts to satisfy through present study. The study emphasizes on satisfying following objectives:

  • To analyze the influence of economic downturn on business operations of a firm.
  • To identify the factors that affect customer commitment and loyalty.
  • To establish a relationship between financial downturns and consumer faithfulness.
  • To recommend ways through which trust of customer’s can be gained and maintained at the time of economic recessions.
  • To identify external and internal factors that affects Tesco growth post -recession.

The present research assists in analyzing the affect that economic recession had on customer loyalty. It is through the detailed study that customer loyalty has been analyzed for Tesco before and after recession. This in turn helps in determining the affect that is on customer loyalty because of economic recession (Dick and Basu, 2004). It also supports understanding of shift in consumer demand due to recession within an economy. Henceforth, on the completion of research one will develop deep learning of the way in recession had affected customer loyalty. It also aims at developing recommendations for the organization to gain significant customer loyalty during recovery of economy (Ndubisi, 2007).

1.3 Research Questions

In order to derive perfect solutions and provide specific direction to research work the researcher aims at finding answers to following research questions.

  • How operations of a business organization are affected by bad condition of the economy?
  • What are the various factors that have an impact on customer loyalty and commitment towards company?
  • What is the link between customer faithfulness and economic recessions?
  • Which strategies can be useful to the retailer to attract and retain customers during times of financial crisis?
  • What are internal and external factors that have a negative impact on Tesco growth after recession?

Solutions to the framed questions support research deeply since researcher has a clear idea of research objective and problems into consideration. In order to provide appropriate answers to research problem efforts of researcher will be diverted in a particular direction (Flick, 2011). The research questions henceforth forms a significant part of research work since it acts as guidance to researcher.

1.4 Potential significance of research

Every investigation or research has certain purpose to serve in short run or long run. Researcher always attempts to conduct research that adds certain value to individual, organization, society or economy at whole. It is due to its high significance and nature of value creation that conducting of researches has gained huge significance and occupied a prominent position in modern era (Saunders and et. al., 2006).

The present research is also of high importance and is valuable in nature since it adds value in the following manner:

  • The outcomes will support retail industry to overcome affects of recession on business unit.
  • Evaluation of customer loyalty for Tesco will help the business unit to formulate policies for long term success and development.
  • It adds value in the form of determining manner in which high customer loyalty can be gained by the business units (Srideshmukh, Singh and Sabol, 2002).
  • The research work also helps in identifying the reasons behind diminishing growth of Tesco. The business unit is unable to achieve sufficient growth even after affects of recession were blown away. It is through the in-depth research that reasons behind same will be identified.
  • It provides a useful insight of effect that recession has on consumer purchasing power.
  • The research work adds valuable insights to researcher and readers of all relevant aspects of the study.
  • It also helps in supporting the future research in the similar field by providing them a brief about understanding of the customer loyalty and impact on the same of economic recession.

1.5 Chapter structure

The research is always conducted in a sequential manner so as to help in provide valid outcomes. The present research also emphasizes on following a framework or structure that helps in drawing valid conclusion by moving step by step. It is through coverage of list of sequenced chapters that researcher is able to achieve its objectives. The list of chapters included in present research is discussed below in detail.

Chapter 1: Introduction

The researcher establishes its foot into research work by evaluating all aspects related to research topic. Report formulated starts with chapter of Introduction that provides an overview of entire research. It is in the introduction chapter a briefing about relevant aspects to research, background of the company into consideration, research questions, its focus and purpose and potential significance are derived. The chapter also develops a framework in which research is carried. To summarize it is through this chapter readers get complete idea of investigation into consideration.

Chapter 2: Literature Review

Next chapter of a research report is Literature review that contains evaluation of previous research work. It deals with critical analysis of all previous research studies and theories and models developed related to the topic. The chapter helps in analyzing all aspects related to research by evaluating outcomes generated and other theories developed in past. It determines whether results generated by previous studies matches with the present study. Literature review is a chapter that gives researcher and readers complete idea of scope of research into consideration.

Chapter 3: Research Methodology

In order to conduct profound study researcher moves to next chapter that is Research Methodology. This chapter forms basis of entire data collection, analysis and evaluation since it determines various statistical methods that are applicable to research into consideration. It is in research methodology that researcher determines various method of data collection and most suitable for present research. It also emphasizes on briefing the qualitative and quantitative techniques applicable in conducting in-depth investigations. The researcher provides develops complete picture of various methods and techniques applicable and suitable to research through the chapter.

Chapter 4: Data Analysis

Once information is extracted and methods for evaluation are identified and discussed the researcher moves to next step of data analysis. It is in this chapter that complete information is evaluated deeply through application of methods of evaluation. The researcher is responsible to analyze data accumulated in an efficient manner so as to arrive at valid conclusions. The chapter provides evaluation of data and helps in arriving at specific conclusions for study into consideration.

Chapter 5: Conclusion and Recommendations

The last chapter aims at summarizing the complete research and its outcomes for ease of readers. In this chapter researcher provides a specific list of conclusions arrived at and suitable recommendations. The section provides a briefing about final statements that researcher has developed by in-depth analysis and evaluation. It is through this chapter that readers get an overview of all facts suggested by researcher through the investigation.

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CHAPTER 2 LITERATURE REVIEW

2.1 Overview

In order to conduct in-depth research it is essential for researcher to analyze and evaluate various theories and literature developed in past. The section brings forth outcomes and valid facts related to previous research work. The researcher can develop deep understanding of various aspects related to research field through this chapter. The chapter emphasizes on providing background of various research aspects (Szwarc, 2005). The present study emphasizes on studying impact of economic recession on customer loyalty to supermarkets through analysis of case for Tesco. The outcomes generated will help the business unit and industry to adopt valid measures for gaining customer loyalty.

Tesco plc is a multinational retail chain headquartered at England in United Kingdom. The company occupied second largest position in retail industry across the world on basis of its revenues. It has created its presence in 12 countries including Asia, Europe, North America and United Kingdom. The business unit has emerged as a market leader in United Kingdom with passage of time. It is with flow of time that the company has expanded its business operation by diversifying its product portfolio and entering into new market segments (Friese, 2012). It is its business development and expansion strategies that support its successful venture. The company with significant amount of market capitalization is listed in London stock exchange and is a constituent of FTSE 100 index. The company owes its existence to year 1919 with the start of venture by Jack Cohen as a group of market stalls. Its huge experience and core competency to satisfy consumer demand helps in gaining customer satisfaction and loyalty in long run (Hall and Fletcher, 2009).

During the period of 2008 the world economy has been severely impacted by economic recessions and financial downturns (Rae and Drury, 2003). Today economic scenarios have become so volatile that it is extremely difficult for businesses to operate and function. It can be supported through fact that there is a persistent threat on companies in terms of economic fluctuations and downturns. In this regard it may not be wrong to say that any recession or economic downturn has so many facets to it (Sobtoka, Skirbekk and Philipov, 2011). One of the areas where such financial collapses can have a major impact is that of customer loyalty. Since the purchasing power of people decreases by a considerable margin, they tend to reduce the amount of money they spend on activities such as shopping (Dick and Basu, 2004). Economic recessions have had a great deal of impact on sales and customer retention issues on supermarket or retail chains such as that of Tesco. Profits of the company have declined due to instances such as that of the economic downturn.

The business unit possesses large number customer that shows significant loyalty to the retail chain store. However, in recent past there is shift in consumer’s demand due to economic recession. The economic recession has not only impacted financial institutions but overall industrial development within an economy. This is due to negative impact on consumer's demand and reduction in purchasing power of individual. The profound study is therefore conducted so as to evaluate extent to which consumers’ loyalty is affected as an effect of recession.

2.2 Impact of economic downturn on business operation

Economic recessions basically are defined as slowdown in financial activities of a nation. Today it has emerged to be one of the main threats for most companies in the country because of reason that it affects a lot of aspects of operations of a business (Srideshmukh, Singh and Sabol, 2002). Condition of recession influences functions of a company in a very drastic way; as cash flow reduces dramatically (Stuckler and et. al, 2011). This influence can better be understood through fact that during such crisis, purchasing power of people dimities by a considerable margin, which essentially would mean that they will have a tendency to save rather than to spend. This way the company will not be able to earn enough money to carry out the operations.

Economic downturn or recession within an economy effects entire growth and development of the country. It also has huge impact on business operations and industrial growth. During the period of recession all financial activities slowdown and cash flow within an economy hampers The financial crunch within an economy reduces purchasing power of all individuals. This is due to creation of situation of unemployment and underemployment. The reduction in disposable income of consumers will effect overall demand across the nation (Sobtoka, Skirbekk and Philipov, 2011). This in turn results in liquidity crunch in financial institutions and other organization.

Business operations are always dependent on consumer's demand; since it is the way to generate return on investment and profits. With reduction in demand the revenue and profit of the business unit also reduces. This in turn affects business liquidity position and may result in financial crunch for various organization. Every business unit requires sufficient investment from time-to-time so as to conduct business operations efficiently. Moreover, the organizations are operated so as to generate adequate return on investment made by the business unit. However, during the times of recession the business units are unable to generate sufficient cash flows. This in turn results in unavailability of funds for supporting business activities in short and long run. The situation may also leads to lack of working capital so as to conduct day-to-day business operations. The financial distress is one of the major issues which effects life of an individual, business operations and economy at whole. Every organization strives to achieve sufficient profitability at year's end. However, during the period of recession the business units are unable to earn adequate amount of profits. Economic recession also impacts the business operations and its consumer satisfaction in long run. Henceforth, it can be said that economic recession has huge impact on business operations and running of entire economy.

2.3 Factors effecting customer commitment and loyalty

In order to achieve long term success the business units strive to gain high level of customer loyalty and commitment. There are various factors that results in increasing customer satisfaction and thereby gaining their loyalty. Customer faithfulness is a concept which is very difficult to be attained, mainly because of reason that there are a lot of factors and forces that management of the firm has to identify and understand (Houlihan and Harvey, 2012). This can better be understood through fact that to gain commitment from the customers, company has to provide them with value for money that they spend and also must be different from the ones that competitors sell.

The various other factors that affect customer loyalty includes trends prevalent in market and consumer taste and preferences (Dagger and Danaher, 2014). For an organization it is extremely important that goods they offer fulfill desires of customers and are also as per trends that exist in market. If it is not followed, then there are chances that the organization will not be able to attract and retain customers to a great extent. Many previous studies have shown that price is one of the most important factors on which loyalty of customers is dependent. In this regard it can be said that for companies to be able to retain the buyers have to price their offerings in a way that they are competitive in nature.

It is seen that gaining customer commitment and loyalty is a gradual process that helps in achieving success for the business unit. The organization can gain high level of customer loyalty only by retaining them for certain specific duration. The business unit is able to retain customers by satisfying them at first instance. This in turn leads to gaining of customer loyalty and commitment in long run. The customer loyalty is determined by number of factors such as customer satisfaction, prices of the products, brand image and services offered. It is the responsibility of management to gain high customer satisfaction. This can be possible by offering them required products and services at reasonable price. The customer and loyalty and commitment is dependent on various factors as described below:

Core offering:

Foremost, the customer gains satisfaction through tangible and intangible offerings made by the business unit. Every activity of businesses revolve around gaining customer satisfaction (Hill, Roche and Allen, 2007). It is necessary for the organization to identify needs and desires of the consumers and customize products and services accordingly. The past researches bring forth the fact that customers are satisfied highly through the business offerings. They expect to get worth for their money in the form of tangible products and services.

Satisfaction:

In order to gain customer commitment and loyalty the basic necessity is to achieve high level of customer satisfaction. The loyalty on part of consumers can be gained only after their retention for certain duration. The first step of reaching the stage of accumulating loyal customer is satisfying consumers needs and wants (Walsh and Mitchell, 2011). The satisfied customer tends to visit again and again and gradually becomes loyal customer for the business unit.

Demographics:

The factor suggests that consumers belonging to different demographic segment has distinct requirement. As an illustration, consumers belonging to affluent group of society tends to be brand specific and brand loyal. However, on other hand group of consumers that belong to middle and lower middle class are price sensitivity in nature and have flexibility to shift their demand (Rowley, 2005). As per Jan Hofmeyr and Butch Rice who developed the conversion model, it is easy to gain brand loyalty for long term from affluent part of society. However, less affluent group of people tends to have lower commitment during specific brands.

Market structure:

The customer loyalty is also dependent on market structure and type of market prevailing. The options and areas available for switching the demand to other brands have huge impact on customer loyalty. With wide range of alternatives customers tend to shift demand in lower durations (Szwarc, 2005). However, if there are limited options available with consumers specific brand may gain high customer loyalty.

Disposable income:

One of the major factors that determines customer loyalty and commitment in long term is his/her disposable income. The amount of disposable income decides consumer brand preference (Flavian, Cristobal and Guinaliu, 2008). Moreover, it is the capacity of business unit to get higher share of consumer income that helps in gaining customer satisfaction and loyalty. Henceforth, level of disposable income also determines extent of customer loyalty and commitment gained by the business unit.

It is not an easy task to gain more number of loyal customers but the management is responsible to formulate business strategies in a manner that high amount of customer loyalty can be gained. The organization should identify consumer's requirement in terms of product and services; they are also entitled to identify their willingness to pay prices for same (Valentine and Powers, 2009). Once the organization gets an idea of consumer desires, taste and preferences they are able to satisfy their demand accordingly.

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2.4 Relationship between Financial downturn and customer Faithfulness

Financial turmoil and economic downturn is a situation in which entire nation faces an issue to finance all the business activities. The period of downturn reduces growth in each sector within an economy. This is due to reason that industry and organization's growth is dependent on level of demand prevailing within the market. Financial distress affects one of the major factors that determines customer loyalty that is disposable income available with consumers (Lee and Goldblatt, 2012). One can say that negative impact on disposable income also impacts consumers' demand negatively. This is due to reason that lower disposable income reduces purchasing power of consumers. This in turn effects demand created by them. The reduction in demand of products and services thereafter impacts growth within the organization and industry at whole.

The researchers have argued that during recession consumers' tends to cut off their expenditures on additional commodities. Their main focus is to satisfy the needs of basic and more required commodities. During scenario of recession consumers tend to prioritize their wants and direct their focus on purchasing prioritized goods. Financial downturn directly or indirectly affects consumer demand. This in turn have a negative impact on consumer loyalty or faithfulness. The economic downturn not only impacts demand of certain commodities but also results in shifting of demand to other brands or substitutes. The rationale behind fact is that recession leads to reduction in purchasing power of individuals surrounding. This in turn affects consumer brand loyalty and preferences. For example, say Mr. X is employed within multinational at decent package has brand preference towards Apple Incorporation. He is loyal customer from last few years due to quality of products and services offered by the company. Suddenly, situation of economic downturn spreads over the economy that results in demotion of Mr. X. This in turn affects disposable income available with consumers that results in shifting of his demand to other brand. The illustration describes in detail the manner in which demand of consumers shift towards other brand during the time of recession.

In order to gain faithfulness the organization needs to support its customers during the time of recession. This can be done by way of reducing prices of commodities and providing more number of benefits in the form of discounts and other offerings. In order to enable the same business unit needs to infuse more amount of funds. However, during recession the organizations themselves are facing liquidity and financial crunch. Henceforth, it is not possible for them to offer more number of benefits. The business unit therefore face an issue in retaining their consumers during time of recession (Dagger and Danaher, 2014). Therefore, it can be said that financial downturn may results in loosing of brand loyal consumers. It may also affect business capability to attract more number of consumers.

The facts presented in past shows that growth of the business unit and individual depends on overall growth within an economy. Nevertheless, during the time of recession the growth within an economy hampers that in turn affects overall industrial growth and development (Latham and Braun, 2011). The financial turmoil also results in reduction in customer faithfulness. This in due to reduction in purchasing power and inability of company's during the period to retain its customers. In modern era it is one of the objective of various organization to survive effectively during the period of economic recessions. This is due to increasing exposure to financial distress in recent past; this in turn results in creation of insecurity among business units and individuals. It is necessary to take appropriate actions in advance so as to create a protection for organizations during economic downturn. It can be said that financial distress has huge impact on customer loyalty and faithfulness. However, the effects of recession may last smaller period of time but gaining similar customer loyalty may take longer duration.

REFERENCES

  • Dagger, S. T. and Danaher, J. P., 2014. Comparing the Effect of Store Remodeling on New and Existing Customers. Journal of Marketing.
  • Dick, S. A. and Basu, K., 2004. Customer Loyalty: Toward an Integrated Conceptual Framework. Journal of the Academy of Marketing Science.
  • Flavian, C., Cristobal, E., and Guinaliu, M., 2008. Perceived quality PeSQ: Measurement validation and effects on consumer satisfaction and web site loyalty. Managing Service Quality.
  • Flick, U., 2011. Introducing Research Methodology: A Beginner's Guide to Doing a Research Project. USA: SAGE.
  • Friese, S., 2012. Qualitative Data Analysis with ATLAS. SAGE
  • Hall, J. and Fletcher, R., 2009. Tesco profits hit by economic downturn.
  • Hill, N., Roche, G. and Allen, R., 2007. Customer Satisfaction: The Customer Experience Through the Customer's Eyes. The Leadership Factor.
  • Houlihan, M. and Harvey, B., 2012. 7 Factors Affect Customer Loyalty.
  • Latham, S. and Braun, M., 2011. Economic recessions, strategy, and performance: a synthesis. Journal of Strategy and Management.
  • Lee, S. S. and Goldblatt, J., 2012. The current and future impacts of the 2007-2009 economic recession on the festival and event industry. International Journal of Event and Festival Management.
 
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