EN8 9SL. Tesco Plc is on of the largest retailers in UK and third largest in the world with an annual turnover of £ 59,426 million in 2009 and 4,331 stores worldwide in 14 countries (http://www.investis.com/tesco/pdf/repp2009.pdf).
Tesco trades on the London Stock Exchange with the symbol of TSCO. Tesco was the mastermind of a single person selling tea on stalls in East London, Jack Cohen (John Edward Cohen). But it was only until 1929 when John actually opened the first Tesco retail branch, in 1932 he changed it into a private limited company 'Tesco Stores Limited' and in 1947 Tesco Stores Ltd floated on the stock exchange. Between 1960 and 1965 Tesco had taken over of 356 stores in North England. In order to diversify Tesco opened its first petrol station in 1974 and in 1983 Tesco Stores Ltd went public becoming Tesco Plc.
By 1995 Tesco started to operate internationally with its branch in Hungary and launches its customer loyalty program with 'Tesco Clubcard'. The year 1996 could also be known as the year of diversification for Tesco as it launches Tesco Personal Finance and then in 2003 launches Tesco Mobile and Tesco Broadband. In 2005 Tesco launched Home plus and Tesco Direct in 2006. In 2007 Tesco opened Fresh & Easy in United States. In 2008 Tesco announced plans to establish cash & carry business in India and also acquired 36 hypermarkets in South Korea and also its Personal finance acquisition completed. In 2009 clubcard re-launched in UK with £150 million investment offering customers the opportunity to double up their vouchers.
(Source: Tesco. Our History. Inside Tesco)
(http://www.tescocorporate.com/plc/about_us/tesco_story/)
At present I believe that Tesco has used Differentiation and Low cost as main competitive strategies to succeed in today's competitive world.
OVERALL VALUES AND STRATEGY OF TESCO
Our core purpose is to create value for customers to earn their lifetime loyalty.
Our success depends on people: the people who shop with us and the people who work with us.
If our customers like what we offer, they are more likely to come back and shop with us again. If the Tesco team find what we do rewarding, they are more likely to go that extra mile to help our customers.
(http://www.tescocorporate.com/plc/about_us/values/)
Tesco has a well-established and consistent strategy for growth, which has allowed it to strengthen its core UK business and drive expansion into new markets.
The rationale for the strategy is to broaden the scope of the business to enable it to deliver strong sustainable long-term growth by following the customer into large expanding markets at home - such as financial services, non-food and telecoms - and new markets abroad, initially in Central Europe and Asia, and more recently in the United States.
The Group has continued to make good progress with this strategy, which has five elements, reflecting four established areas of focus, and also Tesco's long-term commitments on community and environment. Importantly, the momentum which it has given the business has allowed the Group to continue to grow well through the economic downturn.
The objectives of the strategy are:
To be a successful international retailer
To grow the core UK business
To be as strong in non-food as in food.
To develop retailing services - such as Tesco Personal Finance, Telecoms and Tesco.com
To put community at the heart of what we do.
(http://www.tescoplc.com/plc/about_us/strategy/)
1.4 Aims, objectives and overall approach of the report
The main aim of my report is to evaluate the performance of Tesco over three years period. The report consists of the ratio analysis carried out for Tesco and Sainsbury. Financial statement analysis is for gathering, computing and scrutinizing the financial information of an organisation. The main objective of this project is to understand the financial progress of Tesco and present a pragmatic evaluation so that a potential investor can decide whether to invest in Tesco or Sainsbury. I have also taken into account non-financial aspects of Tesco that an investor would look at and then decide before becoming a stake holder in Tesco. The report will consist of finding for companies, comparison and my recommendations to a prospective investor backed with logical reasoning and to achieve this I used different methods to gather and analyse the data and draw conclusions and make recommendations from my findings. The overall approach which I adopted my project is as follows:
Information gathering: This includes various sources of gathering information for the report and their limitations.
Analysis: In this section there are two analysis which are used to analyse the performance, these are; RATIO analysis and SWOT analysis. SWOT analysis is a non financial analysis whereas Ratio analysis is financial analysis.
Conclusion: In this section I have presented a summary of results and explanation.
Recommendation: In this I have given the recommendation based on the findings of my research work for the prospective investor to decide whether to invest in this company or not.
2 Information gathering
Information gathering is the process of collecting information in order to achieve the aims and objectives of the report. The information must be of the good quality and good quality information should have the following characteristics:
Relevance
Timeliness
Objectivity
Integrity
Accuracy
Transparency
Throughout this process I did not compromise on the quality of the information on quantity. The main reason for the choice of the sources used to gather information was to acquire accurate and reliable data/information.
The sources which are used to obtain data may be primary or secondary.
Primary sources
Primary sources are original materials. They are from the time period involved and have not been filtered through interpretation or evaluation. Primary sources are original materials on which other research is based. They are usually the first formal appearance of results in physical, print or electronic format. They present original thinking, report a discovery, or share new information.
(http://www.lib.umd.edu/guides/primary-sources.html)
Secondary sources
Secondary sources are less easily defined than primary sources. Generally, they are accounts written after the fact with the benefit of hindsight. They are interpretations and evaluations of primary sources. Secondary sources are not evidence, but rather commentary on and discussion of evidence. However, what some define as a secondary source, others define as a tertiary source. Context is everything.
(http://www.lib.umd.edu/guides/primary-sources.html)
For my project I used only secondary source of information as I could get this information easily from various sources and due to the time constraints I did not use primary sources. Sources which I used for the project are as follows:
2.2.1 Annual reports
The annual reports of Tesco were eminent part of the information gathering process as most of financial information related to the company was available from the annual reports. I read the annual reports of Tesco several times so that I could easily absorb the information in the reports and calculate the ratios for one of the techniques used in the project i.e. ratio analysis. Some of the non financial information such as Corporate Social Responsibility Report was also available in the annual reports which was also very useful and which aimed to give details on social, environmental and ethical policies and performances of the company.
2.2.2 Company website
The corporate website of the company, viz. www.tescoplc.com and also I used the Sainsbury's website which is one of the Tesco's competitors for comparison purposes which is http://www.jsainsburys.co.uk . These provided useful information relating to the press releases, share price information and the history of the organisation. The websites also contain information relating to the investors, offering imperative statistics concerning the performance of both companies.
2.2.3 Books
I consulted various books in writing this project. As I already have done ACCA exams so I preferred to use books published by BPP. The books which I used were as follows:
BPP study text book for ACCA paper F7 (Financial Reporting) helped me in calculating different ratios.
BPP study text book for ACCA paper F3 (Financial Accounting)
BPP study text book for ACCA paper P2 (Corporate Reporting).
'Business Accounting 1' Ninth edition by Frank Wood's
A Level 'Accounting' 3rd edition by Harold Randall
BPP study text book for ACCA paper P3 (Business Analysis) was also helpful for the purpose of SWOT analysis.
'Exploring Corporate Strategy' by Johnson Gerry, Scholes Kevan & Wittington Richard
2.2.4 Newspapers
During the process of compiling I read several newspapers i.e. Financial Times and Times which are highly read newspapers in the UK. The websites of the newspapers www.ft.com, www.guardian.co.uk and www.timesonline.co.uk were also very useful.
internet
Internet is most useful source of getting information because of ease and accessibility.
The main search engine I used for my research work was www.google.com and the main site I used was www.tescoplc.com . I also used various other websites in the course of making this report. These websites such as www.hemscott.com and www.hoovers.com gave me an insight in market analysis and performance of the company. ACCA website www.accaglobal.com gave me the full guidance about the RAP i.e. the guidance on how to write the project, the structure, information gathering and analysis. The information which I used was mostly from internet because most of the information is easily available on the internet. Because I used only secondary data for my RAP so I didn't face any ethical issues.
A full list of all the websites used is listed in the bibliography.
2.2.6 LIBRARY
I visited libraries such as in Southall (Middlesex) which is local to me and also LSE library. I was recommended some books by my mentor on Corporate Strategy and Financial Analysis by Pitman and another book Essential of Financial Analysis by John Wiley. I visited libraries and looking for the right book had been hard working and very time consuming task.
2.3 ANALYSIS TECHNIQUES USED
The techniques which I used for RAP and their limitations are as follows:
2.3.1 Ratio Analysis
Ratio analysis is an accounting technique used to calculate and evaluate the financial performance from the company's annual financial statements. Ratio analysis provides information about the company's financial position and whether the company is sound enough to make important investment decisions.
(www.finpipe.com)
The book I used for the formulae to calculate the ratios was BPP study text for ACCA F7.
2.3.1.1 Limitations of Ratio Analysis
The limitations of the ratio analysis are as follows;
(http://answers.yahoo.com/question/index?qid=20070615070221AACvBT5)
2.3.1.1(a) Different Accounting Policies
Because different companies may use different accounting policies for the purposes of accounting so it may not be possible to compare the performance with other companies in the same sector.
2.3.1.1(b) Outdated Information in financial statements
The figures in financial statements are likely to be several months old and so may not give indications of the company's current financial position.
2.3.1.1(c) Ratios are not definitive measures
They need to be interpreted carefully. It is difficult to interpret these ratios as good or bad; they can only provide clues to the company's performance or position. For example strong Current Ratio might be indicating that the company has good liquidity but on the other hand high stock is not good for the company.
'Ratios require some quantitative information for an informed analysis to be made'.
(http://cbdd.wsu.edu/kewlcontent/cdoutput/TOM505/page26.htm)
2.3.1.1(d) Price changes
Inflation renders comparisons of results over time misleading as financial figures will not be within the same levels of purchasing power. Changes in results over time may show as if the enterprise has improved its performance and position when in fact after adjusting for inflationary changes it will show the different picture.
(http://cbdd.wsu.edu/kewlcontent/cdoutput/TOM505/page26.htm)
2.3.1.1(e) Creative Accounting
Some businesses use creative accounting in order to give a better picture of the company and to hide a true picture of the company and show that the company is performing well where in fact it's not which is misleading to the users of financial statements.
2.3.1.1(f) Changes in accounting policy
Changes in accounting policy may affect the comparison of results between different accounting years as misleading. The main problem is that directors of the company may be able to use creative accounting and manipulate the results through changes in accounting policy.
(http://cbdd.wsu.edu/kewlcontent/cdoutput/TOM505/page26.htm)
2.3.1.1(g) Impact of government influence
Selective application of government incentives to various companies may also distort intercompany comparison. One company may be given a tax holiday while the other within the same line of business not, comparing the performance of these two enterprises may be misleading.
(http://cbdd.wsu.edu/kewlcontent/cdoutput/TOM505/page26.htm)
2.3.1.1(h) Ignorance of time factor in seasonal businesses
Ratios ignore the time factor in seasonal businesses, e.g. widely fluctuating stock levels and debtor levels.
(A level Accounting 3rd edition page 474)
2.3.2 SWOT Analysis:
"SWOT Analysis is a strategic planning method used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business venture. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieving that objective."
(http://en.wikipedia.org/wiki/SWOT_analysis)
Strengths and Weaknesses are the factors internal to the organization whereas Opportunities and Threats are the factors which are external to the organization.
Strengths: attributes of the person or company those are helpful to achieving the objective.
Weaknesses: attributes of the person or company those are harmful to achieving the objective.
Opportunities: external conditions those are helpful to achieving the objective.
Threats: external conditions which could do damage to the objective.
(http://en.wikipedia.org/wiki/SWOT_analysis)
The SWOT analysis plays a very important role for comparison purposes. By this analysis internal factors of one organization can be compared against the other organization in the same industry and also can be used to guard against the threats facing the organization and exploiting any opportunities. Especially in times of economic downturn this analysis plays a really important role.
2.3.2.1 Limitations
There may be biformity of strengths and weaknesses as strength can be characterized as a weakness at the same time.
SWOT analysis can be a time consuming analysis as it is dependent on the quality data internally generated.
Some experts argue that making strategic choices for the firm is less important than asking the right questions in choosing the strategy. A company may mistakenly solve a problem by providing the correct answer to the wrong question.
http://www.referenceforbusiness.com/management/Pr-Sa/SWOT-Analysis.html#ixzz0UxRpotVh
The environmental factors are classified by SWOT analysis into categories but these may not always fit into categories.
3 Analysis
The analysis is divided into two parts:
a) Non-financial Analysis: This will give analysis of non-financial factors of Tesco affecting the investors' decisions in investing into the company. Analysis of such a nature is conducting a SWOT Analysis on Tesco.
b) Financial Analysis: This will analyse the financial performance of Tesco over three year period and this will be achieved by the ratio analysis.
These analysis' are in detail as under:
