This Research and Analysis Project report concentrated on the `Business and Financial performance` of Tesco Plc over a three year period from 2008 to 2010. The analysis report throws more lights on the operational and financial performance of Tesco Plc by having regard to its business strategy. One of its major rivals in the industry which is J. Sainsbury's Plc has been used as a benchmark in order to compare Tesco plc performance.
REASON FOR CHOOSING THIS TOPIC
This topic was selected because there has been much and extreme competition in the retail supermarket industry in recent times. With most of these businesses having to compete for their share of the market. Most them are thinking and aiming of becoming a market leader one. But at the heat of this competition is the issue of survival and going concern which is at the centre of every these retail businesses since failure to consider them could result to total collapse of their entire operations. To this end I decided to investigate Tesco which is one of the UK`s most successful and also one of the world`s biggest retail supermarkets to find out how it has operated so far and to see the level of it business and financial success over the last three year period.
REASON FOR CHOOSING THIS ORGANISATION
Tesco plc was chosen because it has become one of the world`s biggest retail supermarkets in recent times. Considering the size of its market share compare to most of its major competitors, the company has grown so rapidly thereby increasing in profitability. Therefore I wanted to find out whether or not the profitability levels have come as a result of its rapid and consistent growth, since growth and profitability do not always move hand in hand. I also wanted to know more about the company`s strategy which has seen it expand so quickly and rapidly than its rivals do.
AIMS AND OBJECTIVES OF THE PROJECT
The main aims and objectives of this project are to analyse the business and financial performance of Tesco plc. It should be noted that most companies are not managed and directed by their owners (shareholders) but rather appoint Directors and entrust in their hands with stewardship of their investments. Therefore it is appropriate for these Directors to account to these owners the stewardship of those investments entrusted in their care.
Shareholders and stakeholders of every company including Tesco plc will like to know whether or not their investments and interest are been managed properly since this will help them decide whether to sell off their shares or keep them and even invest more. Stakeholders alike may also want to know the company`s performance, progress and its success in order to take an informed decisions.
The project will find out whether Tesco plc`s shareholders are properly rewarded for their investments and risks they have taken or not. And also to ascertain how satisfactory Tesco plc stakeholders are.
To achieve this, ratio analysis was employed to analyse the company`s last three years financial statements (2008, 2009, 2010) and this was compared with the rivals three results in order to obtain objectivity and fairness.
There was also a consideration regarding the going concern status of the business as it is central to the company`s long term survival. As a consequence, tools such as SWOT and 5 Forces analysis were considered to assess its non financial information in order to establish Tesco plc`s current competitive position in the market, any strengths and weaknesses they have as well as opportunities and threats they are faced with.
RESEARCH QUESTIONS
As part of this project the following research question were generated in order to respond to them in the analysis:
Has the shareholders investment managed properly?
How well have Tesco plc shareholders are been rewarded for risks taken?
Have stakeholders interest been kept satisfied?
Is the company`s current business strategy sustainable?
What is the company`s long term survival strategy?
Will the company be able to continue to enjoy rapid increase and expansion?
2.0 INFORMATION GATHERING
Sources and their reasons
Tesco Plc`s 2008, 2009, 2010 Annual reports
These individual annual reports provided me with detailed and adequate information which I used for analysing the business and financial performance of the company. The annual reports were very useful in calculating and analysing since they were the most current results.
J. Sainsbury`s Plc Annual Reports for 2008, 2009, 2010
Like the Tesco Plc annual reports, these ones from J. Sainsbury`s Plc also assisted me in analysing the business and financial performance of the company and again the most recent financial reports.
The Chairmen and the Chief Executives statements from both companies
These were useful in that they provided me with the companies operational highlights which helped my analysis to reflect those highlights
Quarterly Reports on their trading activates
There was vital information that I gathered from these quarterly reports as well, which aided my analysis.
Unaudited interim company financial Reports
Even though these reports were unaudited and may not provide much positive signs, however they supplied me with trends on these companies` operations to establish its performance and also to see if there was the need for issuance of profit warning.
News papers
Information gathered from the news paper publications included experts opinions, comments and suggestions which could affect the share price of the company on the market. And as such was useful to the shareholders and potential shareholders.
Expert Reports
These were other independent expert views gathered apart from the news papers which throw much more lights on the future and potential prospects of the company by showing trends, projections, forecast, diagnosis, etc.
Libraries
Continuous visit to libraries such as the Woolwich library, British library, white chapel, etc. These libraries gave me the chance to have access to the data bases of all the listed companies' information.
Books and journals
Most of the ACCA text books such as Paper F3, F7, and P3. I also used ACCA students` magazines, Financial accounting books, etc for this exercise in getting a deeper understanding of the financial analysis.
2.2 Method used in information gathering
The secondary data were gathered and used for the conduct of this report which was collected through the following means:
Libraries- Libraries attendance was used to collect data from sources such as articles, News papers, Textbooks, journals, magazines, CD ROM, etc.
Search engines (Websites)- Websites that were considered important were visited to collect data including that of Tesco Plc website, J. Sainsbury`s Plc and others. They are (www.tesco.com), (www.j-sainsbury.co.uk), http://www.emeraldinsight.com, http://www.ssrn.com, http://search.ebscohost.com, etc.
Request Letter- A formal written letter was sent to both the secretaries of Tesco Plc and J. Sainsbury`s Plc to request a copy of their 2008, 2009, 2010 annual reports which helped in the analysis.
Marketlineinfo.com/ Datamonitor.com - Specialised information were sort from these sources to help analyse the non- financial information such as SWOT AND 5 Forces analyses techniques.
Financial Analysis Made Easy (FAME)- This source gave me financial information including Tesco Plc and J. Sainsbury`s Plc and contained ratios analysis for companies. There was also non- financial information such as the employees` numbers, structure of company ownership, issues relating to corporate governance.
Accounting techniques used
The under-listed techniques were used for the conduct of this research in order to arrive at a reasonable and an objective conclusions which helped to give recommendations:
Revenue growth ratio
Profitability and Returns ratios
Administration expenses
Liquidity and risk (Gearing) ratios
Investor ratios/ Stock market ratios
As part of the conduct of this research these financial ratios were computed in understanding of the company performance in answering the research questions mentioned in 1.5 above were. They included:
Revenue /Sales Growth ratio: this showed the movement of growth in revenue for the years 2008, 2009 and 2010 for both Tesco Plc and J. Sainsbury Plc.
Profitability and returns ratios: These ratios indicated well Tesco Plc has superiority in terms of Profit generation for the three years as oppose to its rival J. Sainsbury Plc.
Administration expenses: The administration expenses is a measure of the management efficiency in controlling their general expenses apart from those that are directly associated with sales.
Liquidity and risk ratios:
Under this ratio consideration was given to the company`s ability to settle its short term liabilities as and when they fall due and even how fast they are been settled. These ratios are pointers of short-term financial standing of both companies. The idea was to establish these companies ability to remain in business by been able to finance its short term debts with short term sources of finance without having to result to the use of long term finance (fixed assets).
Investor /stock market ratios: the investor ratios measured how well have the shareholders been adequately rewarded for the risk taken. And also these ratios could assist potential shareholders to take any informed decision(s).
3. ANALYSIS AND PRESENTATION
3.1 Profile of Tesco Plc
Tesco is one of the largest food retailers in the world, operating around 2,318 stores and employing over 326,000 people. As well as operating in the UK, it has stores in the rest of Europe and Asia. It also provides online services through its subsidiary, Tesco.com. The UK is the company's largest market operating under four banners: Extra, Superstore, Metro and Express. Tesco sells approximately 40,000 food products in its superstores, as well as clothing and other non-food lines. The company's own-label products are at three levels, value, normal and finest. Tesco Plc own brand accounts for approximately 50% of sales. As well as convenience produce, many stores have gas stations. The company has become one of Britain's largest petrol independent retailers. Other retailing services offered in the UK include Tesco Personal Finance and Tesco.com. Tesco Personal Finance is a joint venture with the Royal Bank of Scotland. It has over 3.4 million customers, and provides various financial products and services. The company has operations in the rest of Europe, including the Republic of Ireland, Hungary, Poland, Czech Republic and Slovakia. Tesco's Republic of Ireland business operates in the region of 82 stores, and around 60 stores in the Hungarian market. Tesco's Polish operations include former HIT operated stores. It operates around 66 hypermarkets and supermarkets in this country. In the Czech Republic and Slovakian markets, Tesco operates 22 and 23 hypermarkets respectively. Tesco also operates stores in Asia, including Thailand, South Korea, Malaysia and Taiwan. The company operates 64 stores in Thailand and 28 stores in the South Korean Market, while in the Taiwanese and Malaysian markets it has three stores in each nation.
www.datamonitor.com
3.2 profile of J. Sainsbury`s Plc
J. Sainsbury plc operates a total of 890 stores comprising 547 supermarkets and 343 convenience stores. It jointly owns Sainsbury's Bank with Lloyds Banking Group and has two property joint ventures with Land Securities Group PLC and The British Land Company PLC. The Group also holds 294 freehold and long leasehold stores. It employs approximately 150,000 staff. The company's stores offer a range of food, and complementary non-food products and services primarily under the Sainsbury`s brand. It also provides an Internet-based home delivery shopping service. In addition, it provides insurance, credit cards, savings products, and loans. The Sainsbury's brand is built upon a heritage of providing customers with healthy, safe, fresh and tasty food. Quality and fair prices go hand-in-hand with a responsible approach to business. Sainsbury's stores have a particular emphasis on fresh food and strive to innovate continuously and improve products in line with their customer needs (http://www.j-sainsbury.co.uk). Its businesses are organized into three operating segments: Retailing (Supermarkets and Convenience); Financial services (Sainsbury's Bank joint venture), and Property investment (British Land joint venture and Land Securities joint venture) (http://uk.reuters.com).
Companies Strategy
3.2.1 Tesco Plc business strategy
Tesco Plc has a well-established and steady strategy for growth that has assisted in strengthening its core activities in the UK and its further expansion in to new markets (abroad). The basis for the strategy is to widen the scale of it operations to enable it deliver well-built sustainable long-term growth by way of pursuing the customer into large growing markets at home. By that it offers customers with products including financial services, telecoms and non-food and new markets abroad, originally in Central Europe and Asia, and more lately in the US. The company`s 1997 diversification strategy lunched has successful become its foundation in recent times. The company has become market leader in most of the markets that saw the creation and development of their new businesses out the UK for the last twelve years since these businesses are highly competitive and profitable. Tesco plc strategy has shown a massive progress consistently. The strategy has five essential rudiments which reflect on the company`s four conventional areas of concentration and the business` long-term commitments regarding the society as well as the environment. The objectives of the Tesco Plc strategy focus on:
To become a successful global retailer
To develop its core business in the UK
To become as strong in non-food as in food.
To build up retailing services - such as Tesco Personal Finance, Telecoms and Tesco.com
To put the community at the heart of what it does (http://www.tescoplc.com)
3.2.2 J. Sainsbury's Plc business strategy
J. Sainsbury`s Plc strategy focuses on five main areas which are underpinned by the company's strong heritage and brand which consistently sets it apart from its main rivals. One of such strategies is great quality products at fair prices - the company with its consistent innovation provides its customers with healthy, safe, fresh and tasty food that are also sourced with integrity. With over 19 million customers been served every week and increase in market indicate how successful the strategy has been. The company`s second strategy is on the acceleration of the growth of its complementary non-food and services through its philosophy of quality and value, and to offer a broader shopping experience for consumers. The company opened 51 convenient stores during 2009/10 as part of its strategy of reaching as many customers as possible with it brand. I also expanded its groceries online business to reach almost 90% households with non food products lunched in July 2009 making 8,000 products now available nationwide. J. Sainsbury Plc plan to open 75 to 100 more in convenient stores in 2010/11. Since operational flexibility can be improved by property/ assets ownership and even further exploitation of potential development opportunities, J. Sainsbury Plc increased the value of it freehold property portfolio to £9.8 billion (http://www.j-sainsbury.co.uk)
FINANCIAL ANALYSIS
The use of Ratio analysis was employed under this heading since it involves a comparison of the relationships between financial statements so as to analyze the financial position and strength of a firm, in this case Tesco PLC.
3.4.1 Sales growth
This ratio measures a percentage increase or decrease in sales between time periods. The sales revenues for Tesco Plc have increased steadily from 2008 to 2010 indicating 83.11% increase. This massive increase may be due to the expansion in its shops because the number of its shops expanded to 3218 from 2291. The other factor may be as a result of the increase in its customer base due to the offering of club cards to become loyal customers and also given the customers to shop at the confines of their own home through online sates.
On the other hand, its competitor J. Sainsbury also enjoyed an increase in sales of 89.35%
Table A: Sales growth
2010
2009
2008
Companies
£m
£m
£m
Tesco Plc
56,910
54,327
47,298
J. Sainsbury Plc
19,964
18,911
17,837
Source: Tesco plc annual report and J. Sainsbury Plc annual report 2008, 2009 and 2010
Figure 1: Sales growth of Tesco Plc and J. Sainsbury Plc
3.4.2 Profitability and Returns ratios
This ratios measure the relationship between gross/ net profit and sales, assets and capital Employed. Companies use these ratios as a performance measure since they are of a vital concern to the company`s shareholders as their dividends levels may depend on them. They are also essential to creditors as they assess the entity`s ability to settle them from these profits (Gibson, 1995). They are the following:
3.4.2.1 Gross profit margin
This ratio measures the gross profit made on the operating activities only. It does however consider the cost of sales but not other costs and the higher the gross profit margin the better (Gibson, 1995).
Tesco Plc reported an increase in gross profit margin of 8.10% compared to 7.76% and 7.67% in its previous years 2009, 2008, respectively. This is due to the increase in the levels of sales that increased. However, the cost of sales also increased in the same period from £43,668m in 2008 to £52,303m in 2010 representing an increase of 83.49%.
J. Sainsbury saw a decrease in its gross profit margins from 5.62% in 2008 to 5.42% in 2010 and this may be due to the company paying more on cost of sales.
This however indicates how Tesco has been able to control its levels of cost of sales by negotiating for better deals reflecting in an increase in gross profit margins. These are shown on the diagrams below.
Table B: Gross profit margins
2010
2009
2008
Companies
%
%
%
Tesco Plc
8.10
7.76
7.67
J. Sainsbury Plc
5.42
5.48
5.62
Source: Tesco plc annual report and J. Sainsbury Plc annual report 2008, 2009 and 2010
Figure 2: Gross profit margin of both companies
3.4.2.2 Profit after interest and tax
Profit after interest and tax is a measure of the profit available for the shareholders and also from which the company can reinvest further from. This is after having considered all other expenses including taxation. It also shows management ability in controlling other costs, other than cost of sales
Tesco Plc recorded an increase in profit after interest and tax for the years 2008, 2009 and 2010 respectively. This increase represents 91.18%. Even though the interest expense and tax levels went up, for instance interest expense increased from £63m in 2008 to £362m in 2009 but decreased slightly to £314m in 2010. The tax paid in 2008 was £673m but this saw a rise in 2010 0f £840. Notwithstanding these expenses that increased, management has been efficient in managing all the other expenses reflecting the increase in profit after interest and tax margins.
J. Sainsbury's Plc also increased in its profit after interest and tax by 56.24% which was less than the percentage increase in Tesco Plc. This may be due to the rise in the payment of its interest that moved from £49m in 2008 to £115m in 2010, a percentage increase of 42.61%. The company`s tax liability increased from £150m in 2008 to £177m in 2009 but then reduced again to £148m in 2010.
The table and the graph below explain the movements.
Table C: Profit after interest and tax
2010
2009
2008
Companies
£m
£m
£m
Tesco Plc
2,336
2,166
2,130
J. Sainsburys Plc
585
289
329
Source: Tesco plc annual report and J. Sainsbury Plc annual report 2008, 2009 and 2010
Figure 3: Profit after interest and tax
3.4.2.3 Return on capital employed
The significance of this ratio is that it measures the efficiency of invested funds in the business at generating profits. The idea is to determine and establish how much profit has been made for distribution from the total amount of assets employed by these businesses, and the higher the return on capital employed the better. This calculation however ignores interest and taxation expenses.
Tesco Plc recorded a decrease in its return on capital employed from 14.08% in 2008 to 10.58% in 2010. This is because Tesco Plc`s net assets reduced significantly due to huge amounts of current liabilities such as loans, bank and other overdraft. These liabilities have however affected the companies ROCE.
J. Sainsbury`s Plc on the other hand, recorded a 75.14% increase in its ROCE compared to Tesco Plc. J. Sainsbury`s had a lower levels of liabilities, thus given them better nets assets levels than Tesco resulting in a percentage increase in their ROCE. These are shown in the table D and further on the `graph 4` below.
Table D: Return on Capital Employed
2010
2009
2008
Companies
%
%
%
Tesco Plc
10.58
10.55
14.08
J. Sainsbury Plc
9.09
6.55
6.83
Source: Tesco plc annual report and J. Sainsbury Plc annual report 2008, 2009 and 2010
Figure 4: Diagram depicting levels of Return on Capital Employed
3.4.2.4 Cost of Sales to turnover ratio
The cost of sale to turnover ratio assessed the levels of cost the company incurred regarding its sales. Tesco Plc incurred -£52,303m in 2010 as compared to the -£43,668m it incurred in 2008, a percentage increase of 83.49%. This is more the percentage increase in its sales revenue of 83.11%. This could be as a result of not negotiating for discount or not getting good offers. This could be as a result of too much waste hence paying for more materials.
J. Sainsbury Plc cost of sale to turnover ratio was 89.16% (£16,835 in 2008 and £18,882 in 2010). However, their cost of sales increase was less than their turnover increase of 89.35%.
These are further shown on the diagrams below table E and figure 5.
Table E: Cost of Sales to turnover ratio
2010
2009
2008
Companies
£m
£m
£m
Tesco Plc
-52,303
-50,109
-43,668
J. Sainsbury Plc
-18,882
-17,875
-16,835
Source: Tesco plc annual report and J. Sainsbury Plc annual report
Figure 5: Movement of cost of sales to turnover
3.4.2.5 Return on Total Assets
This ratio measures company`s earnings before interest and taxes against its total net assets. This indicates how efficient management have been in utilising its available assets to generate earnings. It is before interest and tax because it shows how much of the profits are left after cost of production in settling those other contractual obligations.
Tesco Plc unfortunately declined in its return on total assets from 9.29% in 2008 to 6.41% in 2009 and a further decreased again to 6.90% in 2010 which is a percentage decrease of -2.39%.
This is not too good since it affected the company`s ability to pay it creditors and other contractual obligations. This has resulted in Tesco Plc depending on huge levels of short term loans, bank overdrafts and other forms of financing its short term liabilities. For instance the total current liabilities have risen to £16,015m in 2010 from £10,236m in 2008, a percentage increase of 63.92%.
On other hand, J Sainsbury Plc rather increased from its 4.98% in 2008 to 6.75% in 2010. Even though it decreased slightly to 4.64% in 2009 but then rose again in 2010. These shown on the table F and figure 6 below
Table F: Return on Total Assets
Companies
2010
2009
2008
Tesco Plc
6.90%
6.41%
9.29%
J. Sainsbury Plc
6.75%
4.64%
4.98%
Source: Tesco plc annual report and J. Sainsbury Plc annual report 2008, 2009 and 2010
Figure 6: Returns on Total Assets
Administration expenses
The administration expenses is measure of the management efficiency in controlling their general expenses apart from those that are directly associated with sales.
Tesco Plc saw its administration expenses moved from -£1,037m in 2008 to -£1,550 in 2010 indicating a percentage increase of 66.90%. This may be due to the additional shops that were opened and may have contributed the sales revenue increment of 83.115 in 2010.
On the contrary, J. Sainsbury`s Plc was able to control its administration expenses to as low as -£399m in 2010 from -£502 in 2008 which represented a percentage decrease of 79.48%.
Table G: Administration expenses
2010
2009
2008
companies
£m
£m
£m
Tesco Plc
-1,550
-1,280
-1,037
J. Sainsbury Plc
-399
-420
-502
Source: Tesco plc annual report and J. Sainsbury Plc annual report 2008, 2009 and 2010
Figure 7: Administration expenses incurred by both companies
Liquidity and Risks (Gearing) ratios
Under this ratio consideration was given to the company`s ability to settle its short term liabilities as and when they fall due and even how fast they are been settled. These also assessed the financial stability of the firm.
The gearing ratio included here assessed the long term financial stability of the company.
Current ratio
Current ratio relates to the capacity of firm`s ability to settle its short- term debts as they become due. Thus, the focus is on the relationship between current assets and current liabilities. It provides information on a company's ability to meet its short term and immediate obligations. It is however suggested that a threshold of 2:1 is generally acceptable. But any below the 2:1 threshold indicate a signal that the entity has problems with liquidity. Therefore, if the firm`s current ratio is less than 2:1 then the indications are that the firm`s current assets cannot cover its current liability. On the contrary, if the current ratio becomes too high then the firm may be doing over capitalisation meaning not investing its short term assets and that is not acceptable either (O'Regan, 2007).
Tesco Plc current ratio moved from 0.61 in 2008 to 0.73 in 2010, however irrespective of the increase it was still not good because 0.73 is less than the threshold explained above. And this has a relationship with Tesco Plc not able to pay its short term debts. As indicated earlier on the company`s short term loans, bank overdrafts and other form of overdrafts have all gone up. Trade payables have equally risen high from £3,936 in 2008 to £5,084 in 2010, representing 77.42% increase.
J. Sainsbury`s Plc also decreased in its current ratio from 0.66 in 2008 to 0.54 in 2009 but saw a slight increase in 2010 to 0.66. Again this is not within the acceptable threshold and may lead to difficulty in paying its current liabilities.
Table H: Current ratio
Companies
2010
2009
2008
Tesco Plc
0.73:1
0.78:1
0.61:1
J. Sainsbury Plc
0.66:1
0.54:1
0.66:1
Source: Tesco plc annual report and J. Sainsbury Plc annual report 2008, 2009 and 2010
Figure 8: Current ratio
3.4.4.2 Acid test /Quick ratio
This ratio excludes inventory from the current ratio equation on the justification that this will often take a considerable time before translating those into cash. The threshold unlike the current ratio is 1:1 as the acceptable level. And at this level the indications are that the firm can settle its short term obligations without its inventory (O'Regan, 2007).
Tesco Plc saw a minimal increase in its quick ratio from 0.37 in 2008 to 0.61 in 2009 but went down to 0.56. This is not too bad since 0.56 can be converted to a whole number given 1.
J Sainsbury`s Plc recorded 0.30 in 2009 which was a decrease from 2008 0.39, however 2010 saw a slight improvement from 2009 recording 0.41 but this is below the threshold of 1:1
Tesco Plc
Table I: Acid test /Quick ratio
Acid test Ratio
2010
2009
2008
Tesco PLC
0.56:1
0.61:1
0.37:1
J Sainsbury PLC
0.41:1
0.30:1
0.39:1
Source: Tesco plc annual report and J. Sainsbury Plc annual report 2008, 2009 and 2010
Figure 9: Acid test /quick ratio
Gearing ratio
The use of gearing ratio focused on the company`s long term financial stability. It measured the proportion of the capital employed by the business that is provided by long term lenders as against the proportion that has been invested by the owners. Thus, indicating how much of the firm`s financing are made up of debts. The general assumption is that if the debts represent more than 50% then the company is highly geared.
Tesco Plc`s gearing ratio increased dramatically from 87.06% in 2008 to 116.35% in 2010. The levels of debts involved in Tesco Plc financing seem too high since its gone above more than 505 of the company`s capital employed.
The high levels may be due to the company`s strategy for rapid growth and expansion.
J. Sainsbury`s Plc also had its gearing ratio risen from 44.54% in 2008 to 63.81% in 2010.
Table J: Gearing ratio
2010
2009
2008
Companies
%
%
%
Tesco Plc
116.35
149.14
87.06
J. Sainsbury Plc
63.81
66.09
44.54
Source: Tesco plc annual report and J. Sainsbury Plc annual report 2008, 2009 and 2010
Figure 10: Gearing ratios
Interest cover
The interest cover ratio measures the number of times a business entity can settle it interest on debts.
Tesco Plc `s interest cover decreased to 6.49 almost half of how much it had in 2008 which was 12.21. Meaning the number of times it took to settle its interest reduced to just 6.49 times. This indicated that Tesco does not have enough to settle its interest on debts and could discourage lenders from given them long term funding and delay in paying early may lead to additional penalty charges.
J. Sainsbury`s Plc experienced a slight improvement in its interest cover from 4.63 in 2008 to 5.95 in 2010 even though there was a decrease in 2009 of 4.15.
Table K: Interest cover
Companies
2010
2009
2008
Tesco Plc
6.49
7.18
12.21
J. Sainsbury Plc
5.95
4.15
4.63
Source: Tesco plc annual report and J. Sainsbury Plc annual report 2008, 2009 and 2010
Figure 11: Interest cover
Working capital and Efficiency ratios
These are indicators of short-term financial credibility of an entity. The entity depends on these liquid resources for carrying out its day to day operations.
Stock/ Inventory turnover
This ratio measures the number of times in one year that a business turns over its inventory for sale. From this calculation the average length of time (in days) that inventory is held by the firm can equally be established.
Tesco Plc spent 28.44 days to turnover its inventory in 2010 which was above how many days it took in 2008, 26.19 days. This delay is a reflection on the low and decline levels of current ratios with Tesco having difficulties in settling its short term debts.
J. Sainsbury`s Plc in the same way spent additional 1.39 days in 2010 as compared to 2008.
Table L: Stock/ Inventory turnover
Companies
2010
2009
2008
Tesco Plc
28.44 days
27.45 days
26.19 days
J. Sainsbury Plc
20.85 days
20.35 days
19.46 days
Source: Tesco plc annual report and J. Sainsbury Plc annual report 2008, 2009 and 2010
Figure 12: Stock turnover period
3.4.5.2 Receivables (Debtors) collection period
This measures how long on average it takes an entity to collect debts owed by receivables.
Tesco Plc had a nil figure which means the company does not keep receivables. In order words does not sell on credit.
J. Sainsbury Plc spent 1.2 days in 2010 more than the 0.65 day it spent in 2008.
Table M: Receivables (Debtors) collection period
2010
2009
2008
Tesco PLC
Nil
Nil
Nil
J Sainsbury PLC
1.2
0.94
0.65
Source: Tesco plc annual report and J. Sainsbury Plc annual report 2008, 2009 and 2010
Figure 13: Receivables (Debtors) collection period
3.4.5.3 Payables (Creditors) payment period
Payables payment period like the receivables collection period assess how many days on average the entity takes in paying its trade payables.
Tesco Plc increased in its number of days in paying trade payables from 32.89 days in 2008 to 35.47 days in 2010. This is due to the company not having enough cash and therefore resulted to using these funds rather than paying early. However care must be taking not to exceed it too much since this may affect them getting discount for prompt payment and a further discouragement on the part of the trade payables from given them credit.
J. Sainsbury`s on the other hand spent a lower day in paying its trade payables in 2010 than it did in 2008 which was a good signal for attracting discount and good offers.
Table N: Payables (Creditors) payment period
2010
2009
2008
Tesco PLC
35.47
34.86
32.89
J Sainsbury PLC
34.44
35.28
36.92
Source: Tesco plc annual report and J. Sainsbury Plc annual report 2008, 2009 and 2010
Figure 14: Payables (creditors) payment period
3.4.6 Stock market (Investor ratios)
Shareholders and potential shareholders are primarily concerned with assessing the level of return they might receive from an investment in a particular company. Therefore these ratios are of importance to measure the returns.
3.4.6.1 Earnings per share (EPS)
This is the amount of an entity`s profits that belong to a single ordinary share (http://moneyterms.co.uk/eps).
Tesco Plc dividend per share rose from 26.95p in 2008 to 29.33p in 2010 which was a good signal and investors expectation to see a rise in EPS. This could attract other potential investors.
J. Sainsbury`s Plc however, performed extremely better than Tesco since it rose from 19.1p in 2008 to 32.1p in 2010.
Table O: Earnings per share
companies
2010
2009
2008
Tesco PLC
29.33p
27.14p
26.95p
J Sainsbury PLC
32.1p
16.6p
19.1p
Source: Tesco plc annual report and J. Sainsbury Plc annual report 2008, 2009 and 2010
Figure 15: Earnings per share
3.4.6.2 Dividend per share (DPS)
This is simply the total divident an entity declared which is divided by the number of shares the entity has issued. Generally a higher DPS is acceptable.
Tesco Plc increased in its DPS from 10.09p in 2008 to 14.2p in 2010 a figure investors may appreciate since it showed an increase.
J. Sainsbury`s Plc also showed an increase in its DPS from 12p in 2008 to 14.2 in 2010.
Table P: Divided per share
Companies
2010
2009
2008
Tesco PLC
13.05p
11.96p
10.09p
J Sainsbury PLC
14.2p
13.2p
12p
Source: Tesco plc annual report and J. Sainsbury Plc annual report 2008, 2009 and 2010
Figure 16: Dividend per share
3.4.6.3 Dividend yield (DY)
This is the dividend per share for the entire year expressed as a percentage of the market price of the share.
Tesco Plc`s levels of Dividend Yield are not encouraging since they are too low.
J. Sainsbury`s Plc have shown a steady rise in its dividend yield
Table Q: Dividend yield
Companies
2010
2009
2008
%
%
%
Tesco PLC
0.0309
0.0354
0.0247
J Sainsbury PLC
4.26
4.21
3.60
Source: Tesco plc annual report and J. Sainsbury Plc annual report 2008, 2009 and 2010
Figure 17: Dividend yield
3.4.6.4 Price Earnings ratio
This ratio compares the price of a share to the EPS. It directly relates the price of a share to the proportion of the company's profits that belong to the owner of that share (http://moneyterms.co.uk/pe).
Tesco Plc price earnings ratio saw a decline from 15.18 in 2008 to 14.4 in 2010
J. Sainsbury`s Plc also recorded a decline in its P/E ratio.
Table R: Price Earnings ratio
Companies
2010
2009
2008
Tesco PLC
14.4
12.46
15.18
J Sainsbury PLC
10.37
18.8
17.4
Source: Tesco plc annual report and J. Sainsbury Plc annual report 2008, 2009 and 2010
Figure 19: Price Earning ratio
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NON FINANCIAL ANALYSIS
The pest analysis
James and Akharaserani (1988) indicated that external phenomena have impact on internal ones. By PEST, attention is paid to Political, Economic, Social and Technological (PEST) factors which could influence positively or negatively on the growth or otherwise of the organisation. The discussion below throws more light on these external issues of the organisation.
Political
According to Lancaster et al (2002 p. 55) 'The political environment is the starting point from which many other macro-environment forces originate.' Tesco operates in a variety of political environments; the head office being in the UK. The UK has a functional democracy with elections and multi-party political system. The USA has a similar democratic setup. The political factors in both countries are stable and promote the growth of private enterprise. Most of the European markets are situated in Eastern part and the markets are Czech Republic, Poland, Hungary and Slovakia and Turkey. The political factors here are not as stable as UK or USA. Asia is the largest market outside of the UK. It has presence in Malaysia, Thailand, South Korea, China, and Japan. Of these Japan is quite stable. The most political problems are from Thailand where there is opposition from local businesses and so Tesco faces the biggest problems here.
Economic
The UK and the US are both rich countries even though faced with a recession at present. The East European markets are much poorer in comparison, but Lancaster et al (2002) indicate that there is a massive improvement in the economic environment of the Far East with the likes of Singapore, Thailand, Malaysia and China. To prevail in the economic condition of the Far East, Tesco has lowered its prices which are welcomed by the local population there.
Social
The social structure in USA and UK are quite akin where shopping in supermarkets has existed for a long time. But for the Asian countries, the concept is relatively new. Turkey and Malaysia are both Muslim countries; hence their religious laws have to be taken into consideration by Tesco.
Technological
Assessing today's technology, Headrick (2009) says, it has brought the world to a stunning advancement. It is in the light of this that Lancaster et al (2002) establish that technology is a very important tool which has a huge impact on the marketing firm. By technology, Japan, US, UK and Malaysia have similar facilities. South Korea is also strong in this regard. Thailand might be the least technologically advanced of the markets. This is also the case with the East European markets. China has technical capability, but is mainly limited to its cities. But it can be said that the level of technology needed by Tesco in all these markets are available and hence not much obstacles in this area are anticipated.
The value chain
The concept of value chain has been widely and intensively spoken about by astute authors. The concept was propounded by Michael Porter. Explaining the value chain concept, Porter (1985) describes it as, 'A general framework for thinking strategically about the activities involved in any business and assessing their relative cost and role in differentiation.' Writing on the same concept, Longbottom (2006) intimated that information dissemination across the value chain has increasingly become indispensable to organisations which want to stay in competition. To support Longbottom's assertion, Dekker (2003) expressed that the importance of the value chain cannot be over-emphasised as it grants the organisation an opportunity to achieve the maximum.
According to Porter (1985) the value chain has two major parts, namely; Primary and Support activities. He says the Primary activities are those directly linked with production. They are: Inbound logistics, Operations, Outbound logistics, marketing and Sales and Service. The Support or the Secondary activities he identified as: Procurement, Human Resources Management, Technology Development and the Firm's Infrastructure.
Below is a demonstration of how Tesco applies the value chain in its activities.
Primary Activities
Inbound logistics-Tesco gets its materials from the suppliers who are mostly the producers and stores them in its depot.
Operations- Those that need to be turned into finished products are processed as such
Outbound logistics- Tesco has trucks of different types which supply the various stores.
Marketing and Sales- Tesco has various means of marketing its products which include the application of the promotional mix producing to meet the needs of the customer
Service-Tesco has a track record of providing an outstanding service to customers, especially after sales. This is to find out the impression of the customer after the usage of the product.
Support Activities:
Procurement- Tesco has been getting in touch with its suppliers without middlemen, hence minimising procurement cost in its purchases.
Human Resources Management- Tesco employs people who have the expertise and the commitment to serve the company with all the loyalty. Mention could be made of Terry who committed his business acumen to Tesco for fourteen years as Chief Executive Officer before resigning.
Technology Development- This is an area Tesco cannot be beaten to it, as it has created a formidable e-commerce for its activities through Tesco.com
The Firm's Infrastructure- In terms of infrastructure, Tesco has high class modern facilities for its stores and spacious parking places in most of its stores.
3.5.3 Competitive advantage through information system/IT
Speaking on the advent of technology, Goessi (2008) expressed that 'Technology has taken the business environment by storm.' Throwing more light on that, Headrick (2009) intimated that due to technology, there has been an excessive threat to the business environment. Gone are the days when every single activity that was done in organisations was manual. In recent years, automation has taken business to another level and those organisations wishing to stay and aspire ought to follow suit. The points discussed below would afford Tesco, the opportunity to gain competitive advantage.
Strategic Differentiation
According to Hitt et al (2009) a good IS would afford the organisation to strategically differentiate itself to be competitively ahead. In line with this, Tesco differentiates itself and gain competitive advantage by offering special services like club cards to the customer.
Integration of Supply and Distribution
Tesco could apply IS as a tool to assess and track inventory. By that the supply chain could be monitored with minor problems detected before they become major ones.
Communication
The Information System being practised in the organisation would determine how expeditious information would be disseminated. A communication system which is automated in nature would minimise cost and improve the image of Tesco as an organisation.
Quick Decision Making
Information System paves way for important information to be delivered at the right time. Any manager who wants to make a quick decision in the current business dispensation should find IS as an indispensable tool. This will provide the manager to do a quick assessment on a bordering issue and find a solution.
4.0 CONCLUSIONS
Profitability:
Overall Tesco plc is more profitable than Sainsbury's though Sainsbury's NPBIT is increasing over the last three years. Issues that are highlighted for further research are-
Sainsbury's low gross profit margins than Tesco in 2010 and a sudden decrease in Sainsbury's return on capital employed in 2008.
SEE FROM THE TESCO RESEARCH FD FOR CONCLU
Tesco as an organisation has made a tremendous impact on the business landscape. Even though it had gone through rough times and still faces some competition which is inevitable in contemporary business circles, Tesco has become a household name. With its performance in both the local and the international scenes, couple with the vast technological incorporation, the sky could still be its limit as Goessi (2008) expressed, 'Many businesses today are still realizing the power their technology possesses, but once strategic knowledge is realised, the potential is endless.'
5.0 RECOMMENDATIONS
