This analysis considered the performance and position of Tesco Plc for the financial years ended 28 February 2008 to 28 February 2010.The financial performance measured the return made by the company which was then matched against the resources used during the accounting period to ascertain how well or otherwise the company has performed. Investors are key stakeholders in the company and they measure management stewardship by the performance of the company.
On the other hand position relates to the business strategy the company use to compete in the industry, by matching the company's strengths and resources with the changes in the external environment, this will help determine its Business performance (Johnson et al., 8th Edition).
J. Sainsbury, one of Tesco's major competitors in the UK retail industry is used as a benchmark for this project.
1.2 REASON FOR CHOOSING THE TOPIC
With adequate knowledge from my ACCA studies such as Business Analysis and Corporate Reporting, I view this topic as the best. This topic will also give me the opportunity to broaden my analytical skills which will be important to me through my accountancy career.
I have always taken personal interest in Tesco's consistent growth and profitability, especially in the current economic environment. Since Tesco is the leading supermarket in the UK, I believe this is a good opportunity for me to ascertain the impact of the recession on its Business and financial performance.
1.3 RESEARCH QUESTIONS
This report explored the following research questions:
Are shareholders wealth being maximised?
Is the company achieving its corporate strategy?
Does the company hold a strong position in the industry?
1.4 AN OVERVIEW OF THE UK RETAIL INDUSTRY
In order to understand Tesco's position in the industry in which it operates, it is important to have a basic understanding of the retail industry as it gives an insight into the research.
The food retail industry in the United Kingdom consist of different market segments for example supermarkets, discounters, independent grocers etc that focuses on different customers. The supermarket segment has been proven to be the most profitable with a growth rate of 3.1% in 2009 of which Tesco holds a strong leadership position, owning the biggest market share of 30.8%. Food and Grocery accounts for nearly .50p of every pound spent in the industry.
However, recently there have been dramatic changes in the industry since it is nevertheless sensitive to the global economic turbulence (Datamonitor, 2010).
Retailers in the middle of the market could struggle from the recession, if they do not focus on strong price and quality. The key issues for Retailers in the industry at the moment are: rising food prices, tough economic condition, changing consumers and space expansion. (www.verdict, 2010).
1.4.1 KEY DRIVERS IN THE RETAIL INDUSTRY
Product and supply chain innovation: as consumer taste changes rapidly.
Technology driven: both online and in store that changes the way customers shop.
Pricing and Positioning: The recession have shifted people's priority to focus on how much they are spending ( www.Mintel, 2010).
1.4.2 AN OVERVIEW OF TESCO PLC
Tesco is a food and grocery retailer that was established in 1919. The company is listed on the London Stock Exchange (LSE) and is on the FTSE 100 index list. This is a list of the '100 most capitalised companies listed on the LSE' (Financial Times, 2010). Tesco is the third largest food retailer in the world and the leading supermarket in the UK; its major competitors include J. Sainsbury, Asda and Morrisons. Tesco recorded an employee number of 372,338 in the year ended 28 February 2010. The company has about 4,881 stores worldwide in fourteen different countries (Tesco's annual report, 2010). Tesco continues to achieve strong growth in sales internationally and in the UK, irrespective of the current economic downturn.
The company's Corporate Governance structure appears to be in consistence with Best Practice, which requires the Board of Directors to have a balance of power, as a balanced board will deter an individual director from having unfettered power over the other directors in decision making, since there is an independent chairman, eight executive directors and seven Independent non executives. (Tesco's Annual Report, 2010).
1.5 AIMS AND OBJECTIVES
The objectives of this project were to analyse the Business and Financial
performance of Tesco from the shareholders point of view by:
Determining whether shareholders are getting value from their investments;
To determine Tesco's overall performance as oppose to its competitors and;
To determine whether Tesco's corporate objectives are being met.
Many companies including Tesco are funded by their shareholders. In order for
the company to continue as a going concern, it is very important for it to maintain
its existing shareholders and attract potential investors.
Shareholders are interested in dividend payment and capital growth. Shareholders are also interesting in the financial and business performance of the company, since they hold their investment in it.
The performance of Tesco will help existing shareholders to determine possible dividend to expect in the future, and also as a basis for predicting the future growth of the company. For potential investors, the performance of Tesco will help them to determine whether or not to make investment in the company.
1.6 OVERALL RESEARCH APPROACH
The researcher used only secondary source information which is mainly from the city business library database, local library, books, magazines, newspapers and the internet for insight into the company's affair. Ratio analysis was used as a basis in assessing the company's financial performance, and non financial information such as SWOT analysis and Porter's five forces were used to assess the company's business performance. These are explained in more details in part two. Part two also identifies and explains the research methods used and their limitations. Part three records the analysis and findings using the frameworks explained in part two and ends with a conclusion and recommendations.
PART 2: INFORMATION GATHERING AND ACCOUNTING /
BUSINESS TECHNIQUES
2.1 INTRODUCTION
Two major sources of information gathering, which are primary and secondary sources.
2.1.1 PRIMARY SOURCES
These can be defined as information that are collected first hand, generated by the original researcher tailor - made to answer specific research questions (Hollensen, 2007).
2.1.2 SECONDARY SOURCES
These are information that have already been collected for other purposes and are thus readily available (Hollensen 2007). This entire research project has been undertaken using secondary sources of information.
2.2 METHODS USED
2.2.1 Tesco's Annual Accounts
These accounts provided the researcher with the company's detail results which are important as its content was used for the ratio calculations and assessing the financial health of the company.
2.2.2 Sainsbury's Annual Accounts
These accounts also provided me with detail results, which were used to benchmark Tesco's financial performance over the last three years.
2.2.3 Quarterly and half yearly financial Statements
This information provided the researcher with highlights on the company's operation for the first quarter and half year report of its financial year; the Chairman's statement was also included in these statements.
2.2.4 Library
City business library was used to access information on listed companies and as a medium for specific information.
2.2.5 Newspapers
Articles and commentaries helped the researcher in qualitative and quantitative analysis of Tesco. These sources of information give independent expert opinions and report business activities on a regular basis such as:
Financial Times
The Grocer
Retail Week
City AM
2.2.6 ACCA Text Books
These books provided the researcher with background knowledge of effective analysis of a company. Financial Reporting (F7) gives the model to be used when carrying out appropriate ratio calculations, Business Analysis (P3) gave the researcher guidance regarding the SWOT analysis and advance performance Management (p5) were used as a guide to analyse performance.
2.2.7 Business and Financial Websites
Websites such as the Institute of Grocery Distribution (IGD) and Financial
times online (FT.COM), The Independent online, Mintel online, Verdict
online were used. These websites contain important financial information
relating to activities of companies in the retail industry and the performance
of the industry.
2.2.8 Other Publications
Other books titled, Exploring Microsoft office 2000 professional, written by Robert T. Grauer and Maryann Barber, this book helped to do the graphs and other applications in Excel, Exploring Corporate Strategy by G. Johnson, K. Scholes and R. Whittington, and lastly interpreting Company Reports and accounts by G.Holmes, A. Sugden and P. Gee. These books aided the analysis of the financial and non financial aspects of the company.
DESCRIPTION OF METHODS USED TO GATHER INFORMATION
2.3.1 INTERNET
Both Tesco (www.tescocorporate.com) and J Sainsbury (www.jsainsbury.co.uk) websites were visited for direct access to corporate information provided by them. Other business related websites, such as the Financial Times etc, were visited.
2.3.2 LIBRARY RESEARCH
The city business library provided access with most of the information needed including company's report, magazines, news papers, FAME database, business and accounting books and business databases, as well as printed reports of Tesco and J. Sainsbury. Local library and London School of Economies library were also used for daily news papers and business books.
2.3.4 DATAMONITOR
This information provided industry and company overview, as well as information that relates to the company's SWOT Analysis.
2.4 LIMITATIONS OF INFORMATION GATHERING
There were no significant limitations encountered during the information gathering, mainly because the sources of information used were secondary and could be accessed easily; however the time span for the project submission had limited further work that could have been done by gathering more vital information.
2.5 ETHICAL ISSUES
There has been problem with some information from the internet, as not all information from this source could be relied upon. There were also restrictions to few databases and retrieval of past news papers in the library, which needed permission from the librarian before access was received.
METHODS OF ANALYSIS
This research was done by using ratio analysis and Business models to ascertain how shareholders funds have been managed and whether shareholders wealth is being maximised. Tesco's performance were analysed in relation to:
Profitability ratios such as: gross profit margin, net profit margin, asset turnover and ROCE were calculated. For example, ROCE used by the shareholders to measure the performance of management. It assesses profit growth in relation to the capital/ funds employed in generating the profit (BPP, 2009).
Shareholders Return ratios such as: dividend cover and earnings per share were used.
Dividend cover measures how many times dividend can be paid from available profit. Normally a dividend cover of 2 times would indicate that 50% of profit been paid as dividend and the other 50% been retained by the company for further investment (BPP, 2009).
Liquidity ratios such as: Current ratio, Creditors days were used. These ratios give an indication of a company's liquidity position and its ability to settle its debt as and when they fall due. Trade creditor's payment period also help to assess the liquidity position of the company. An increase in creditor days may indicate that current assets may have been managed poorly or the company is taking advantage of an interest free finance.(BPP, 2008).
Gearing is concern with, the long term capital structure of the company in terms of the amount of debt finance the company has in proportion to its equity finance. Gearing ratio also gives an indication of the amount of financial risk associated with the company. Gearing ratio calculated to know if the company is reliant on debt or equity funding.
LIMITATIONS OF TECHNIQUES USED
The possible causes that may limit the effective utilisation of techniques. Not all companies have the same year end; this could distort the ratios being calculated by giving one company significant favourable or unfavourable result over the other. This could be as a result of seasonal differences, therefore consideration should be given regarding the financial year end of the companies being compared.
There is a need to recognise that no two entities are the same, even though they operate in the same industry. Companies in the same industry may face different business and financial risk. For example, gearing ratio could be significantly higher as a result of one company using more debt finance than the other; therefore using ratios to compare the entities could result in limitations. If this is the case, then other commentaries on the company's account should be looked into.
Return on capital employed (ROCE) could be heavily distorted by the two companies having significant differences in non current assets lives and depreciation charge. Another possible weakness is where one company uses historic cost and the other uses revaluation method to value assets; therefore the older the asset life, the less depreciation charge will be made giving a higher ROCE percentage.
Profitability ratios can also be distorted by having different sales mix in the two companies. For example, Tesco's philosophy by its founder has been to 'pile it high and sell it cheap' while Sainsbury on the other hand had an image of better quality; expenses will be affected and eventually margins in Sainsbury would be higher than Tesco.
2.8 OTHER CRITERION FACTORS
In addition to ratio analysis, SWOT analysis has been used in evaluating the company's business performance in the following areas: strengths, weaknesses, opportunities and threats in relation to the business as a whole. The strengths and weaknesses are internal factors that can be created or destroyed, while opportunities and threats are external factors presented by the environment that the company cannot control. However, SWOT analysis has its own limitations for example; it appears not to prioritise what the company needs to focus on in order to achieve its corporate objectives.
Porter's five forces model have been used to analyse Tesco's business position at the industry level, that determined whether Tesco holds a strong position or otherwise in the industry. Porter's five forces must be used with caution as it might encourage the company that uses it to believe that all factors have been considered and dealt with and as a result becomes complacent. The five forces are: Threat of entry, Treat of substitute, Power of suppliers, Power of buyers and competitive rivalry (www.researchandmarkets, 2010).
Treat of entry relates to new entrants into the retail industry in which Tesco operates.
Substitute products are from another industry that can deliver similar benefit to the Tesco's customers.
Power of suppliers relates to those who supply Tesco, if the suppliers have high power they can demand higher prices for goods and services.
Power of buyers in this context relates to Tesco's ultimate consumers, where price sensitive buyer's power would be weak.
Competitive rivalry is where companies in the same industry as Tesco focus on the same group of customers.
PART 3: ANALYSIS AND PRESENTATION
3.1 INTRODUCTION
This section of the report dealt with the analysis of the information gathered, both quantitative and qualitative in order to determine the financial performance of Tesco and its strategic business performance in the supermarket industry. The ratio analysis covers a three year period from 2008 to 2010, and the results have been compared with J. Sainsbury. This was used as the basis for drawing a conclusion and making recommendations to shareholders and potential investors.
3.2 RATIO ANALYSIS
These figures used in the analysis were taken from the FAME database where the two company's financial reports have been compiled.
3.2.1 SALES GROWTH (PERFORMANCE)
TESCO (FAME DATABASE)
YEAR ENDED
2008 (£)
2009 (£)
2010 (£)
SALES
47,298
54,327
56,910
% GROWTH
10.92%
14.86%
4.75%
Figure 1
J. SAINSBURY (FAME DATBASE)
YEAR ENDED
2008 (£)
2009 (£)
2010 (£)
SALES
17,837
18,911
19,964
% GROWTH
4.00%
6.02%
5.57%
Figure 2
The tables and graphs above shows sales figure of Tesco and Sainsbury from the year 2008 to 2010. Gross revenue of Tesco grew from £47,298m in 2008 to £56,910m in 2010, representing an increase of 20.32% which confirm Tesco's consistent sales growth.
Tesco sales growth could partly be as a result of an increase in customer base due to the introduction of the "Clubcard Scheme" that rewards loyal customers; and the introduction of online shopping. Another reason for the growth could be as a result of the company's acquisition of new stores particularly in its overseas market which has increased the market share substantially. The number of stores has increased from 3751 in 2008 to 4881 in 2010, representing an increase of 30.13% (Tesco Annual Report, 2010).
However, sales revenue in 2010 over 2009 only grew by 4.75%, which could be contributory to the tough economic condition, leaving consumers with less to spend.
Although Tesco had higher gross revenue than J.Sainsbury, second quarter like for like sales for Sainsbury increased by 2.9% in 2010, while Tesco saw an increase of only 1.9% in the same period .The strong growth of the Asia and US markets help compensate Tesco for the slower growth in its UK market which will also reduce Tesco's reliance on its home market (The Independent, 2010).
Meanwhile, J.Sainsbury's sales grew from £17,837m in 2008 to £19,964m in 2010, representing an increase in sales growth of 11.92%.
3.2.2 PROFITABILITY
GROSS PROFIT MARGIN TO SALES (%)
Figure 3
Tesco recorded an upward trend in gross profit from £3,630m in 2008 to £4,607m in 2010 as shown in Figure3 above, representing an increase of 26.91% which could be as a result of the increase in sales revenue and efficiency to reduce cost of sales.
Gross profit margin increased from 7.67% in 2008 to 8.09% in 2010. This shows a consistent upward trend from 2008 to 2010. Cost of sales also increased from £43,663 in 2008 to £52,303m in 2010 representing an increase of 19.77%, this appears to be in line with the growth rate of sales which is 20.32%.
J. Sainsbury gross profit increased from £1,002 in 2008 to £1,082 in 2010 as shown above representing an increase of 7.98%. Although there have been a slight improvement over the last three years, the result shows that cost of sales increased by 12.16% from 2008 to 2010 which had increased faster than sales growth of 11.92% over the same period.
NET PROFIT MARGIN TO SALES (%)
For the year 2008, Tesco recorded profit before tax of £2,803m, which grew to £3,176m in 2010, giving an increase of 13.30% Profit before tax appears to be consistent from 2008 through to 2010. However, profit margin in Tesco decreased from 5.93% in 2008 to 5.58% in 2010, this could have been as a result of the price reduction on various items to boost sales during the recession.
Profit before tax in 2009 appears impressive, since Tesco paid interest of £478m to the bank; this is more than 100% of the amount paid in the previous year.
Although there were no payments for other interest in 2009 and 2010 as it were in 2008, there is an indication that operating costs/expenses are under control.
The access to consumers to purchase online could also be a contributory factor for the increase in profit before tax; this would therefore reduce the cost of employing new staff in store.
J. Sainsbury on its part recorded profit before tax in 2008 of £479 with a decrease in 2009 to £466, this represents 2.30%. This could be contributory to the high interest payment in 2009. However, in 2010 profit before tax increased to £733, a massive increase of 53% over 2009.This could partly due to the increase in other income and interest received of £171. Tesco and J.Sainsbury paid a higher interest in 2009 and 2010 than in 2008. These results are reflected in figure 4 below.
Figure 4
OPERATING PROFIT TO SALES (%)
Tesco's operating profit in 2008 was £2791, this increased to £3457 in 2010, representing a growth of 23.86% from 2008 through to 2010. The other operating income of £377 recorded in 2010 could be a contributory factor for such increased.
Administrative expenses also increased by approximately 49.46% from 2008 through to 2010 , this could be as a result of the additional stores being opened that would give rise to an increase in the number of employees, and also increase in employees salary.
J.Sainsbury operating profit in 2008 was £530 increasing to £710 in 2010, which represents a 33.96% increase from 2008 to 2010. Administrative costs reduced significantly in 2010 to £399, this cost was £502 in 2008 and represents a reduction of 20.51% over the last three years. This could be partly due to efficient cost control over operating expenses. These results are reflected in figure 5 below.
Figure 5
RETURN ON CAPITAL EMPLOYED (R.O.C.E) (%)
Tesco's ROCE decreased from 14.08% in 2008 to 10.58% in 2010. In 2008 Tesco's long term liabilities were £8,086 this amount increased significantly to £15,412 in 2010. If the cost of debt increases, it would depress profit as a result of the higher interest payments which is evidenced in 2009 and 2010. Tesco aggressive investment overseas that caused the increased debt, may not generate high profits until later years.
J.Sainsbury's ROCE in 2008 was 6.83% increasing to 9.09 % in 2010; this could indicate capital investments are put on hold or cancelled as a result of the recession and therefore less interest payment from profit. These results are reflected in figure 6 below.
Figure 6
ASSET TURNOVER (SALES TO CAPITAL EMPLOYED)
Asset turnover measures how efficient assets being used by the company to generate sales. Tesco's asset turnover decreased from 2.38 times in 2008 to 1.90 times in 2010, this shows some relationship with the decreased in ROCE. The global economic downturn could be a contributory factor for the under capacity of the company's assets, resulting in the decrease in asset turnover.
J. Sainsbury asset turnover increased slightly from 2.48 times in 2008 to 2.54 times in 2009. J. Sainsbury appears to be using its assets more efficiently than Tesco. These results are reflected in table below.
YEAR
TESCO
.J SAINSBURY'S
2010
1.90 Times
2.48 Times
2009
1.94 Times
2.66 Times
2008
2.38 Times
2.54 Times
LIQUIDITY
CURRENT RATIO (CURRENT ASSET TO CURRENT LIABILITY)
Tesco's current ratio shows consistent improvement of 0.61:1 in 2008 to 0.73:1 in 2010. Tesco's nature of activities involves the sale of perishable goods that can be turned over quickly, giving a low current ratio. Also most of Tesco's sales are for cash, giving the assurance that paying for current liabilities will be less problematic. However, Tesco's cash flow statement shows a positive balance of £1,601m in 2009 and a negative balance of £739k, this could be slightly worrying if improvement is not made.
J. Sainsbury current ratio in 2008 was 0.66:1 which is appropriate for this type of industry. Although in 2009 current ratio decrease to 0.54:1, in 2010 there has been an improvement of its current ratio to 0.66:1. There has been an improvement in bank and deposit over the period to 31/03/2010 and cash flow statement shows significant improvement from a negative £2k in 2009 to positive £235k in 2010. Although Tesco has got a higher current ratio than Sainsbury in the same period, the net cash inflow balance shows a different picture all together. These results are reflected in figure 7 below.
Figure 7
CREDITORS DAYS
Tesco's trade creditors amounted to £3,936 in 2008 and increased to £5,084 in 2010, representing an increase of 29.16.% It took Tesco an average of 30 days to pay its creditors in 2008 increasing slightly to 32 days in 2010. This could be as a result of a more generous credit term given by trade creditors, and this allows Tesco an extra 2 days to raise cash.
Tesco's bank overdraft shows a significant decrease from £3,992m in 2009 to £575k in 2010, representing a decrease of approximately 595%. This is quite impressive and could partly due to the extra days taken to pay trade creditors, which is a source of interest free finance as oppose to bank overdraft.
J. Sainsbury creditor's days decreased from 34 days in 2008 to 32 days in 2010. This appears really good as it's the same time taken by Tesco, the biggest player in the industry. Bank and deposits increased over the same period indicating that Sainsbury is not in much difficulty in paying its short-term debt.
GEARING RATIO (DEBT TO EQUITY)
The gearing ratio of Tesco in 2008 was 87.06% this increased significantly in 2009 to 149.14%, representing an increase of 86.43% over 2008. However, 2010 saw gearing decreased to 116.35%.This would be considered very high compare to 50% that has been theorised as safe. Tesco's net debt amounted to £7.9bn for year ended 2010. (www.ft, 2010).
A closer look at Tesco's accounts revealed a significant increase in long term debt from 2008 through to 2010. This would therefore be a contributory factor to such a high gearing ratio. Long term liabilities in 2008 were £8,086 and in 2010 this amounted to £15,412 an increase of £7,326 or 90.6% over the past three years. This also reveals that Tesco has more debt finance in its capital structure in 2009 and 2010 than equity finance that is provided by ordinary shareholders in the form of shares.
J. Sainsbury had a gearing ratio in 2008 of 44.54% this increased slightly in 2010 to. 63.81%. These results are reflected in figure 8 below.
Figure 8
INTEREST COVER
Interest cover measures the amount of time the company can comfortably pay its interest cost from its profit before interest and tax (PBIT). In 2008, Tesco's interest payment on bank barrowing was £250; therefore profit (PBIT) would cover this amount 12.21 times before any significant effect on the profit available to shareholders.
In 2010, interest payment to the bank rose to £579; therefore profit (PBIT) would cover this amount by 6.90 times. Although this is still safe, but it indicate how vulnerable Tesco's profit that is available to shareholders could be if interest charges increases. This is a sharp fall over the three year period as shown below.
J. Sainsbury had a lower interest cover in 2008 of 4.63 times; this increased to 5.95 times in 2010. These results are reflected in figure 9 below.
Figure 9
INVESTOR RATIOS
ARE SHAREHOLDERS WEALTH BEING MAXIMISED?
These ratios help investors and ordinary shareholders to assess the value and quality of the ordinary shares when making investment in a company (BPP, 2009).
EARNINGS PER SHARE
Tesco's earning per share (EPS) which measure profit earned by shareholders in relation to shares held increased from 26.95p in 2008 to 29.33p in 2010. The increase in the EPS indicates the increased in profitability. If EPS grows then dividend and share price will normally grow as well.
The consistent increase in Tesco's EPS indicates that shareholders will continuously be rewarded with an increase in dividend, which is evidenced by the increase in dividend payment from 2008 through to 2010.
J. Sainsbury's EPS in 2008 was 18.83p with an increase in 2010 to 31.45p this is evidenced by the increase dividend paid over the past three years, despite the decrease in profit in 2009 of approximately 13.8% below 2008. These results are reflected in figure 10 below.
Figure 10
DIVIDEND COVER
Tesco's dividend cover in 2008 was 2.68 times, this is more than enough to pay dividend, whilst in 2010 dividend cover fell slightly to 2.40 times. This is could be a result of the increased in dividend payment by 22.22% while profit for the period increased by only 9.69% from 2008 to 2010.
This indicate that although the company have a rapid growth expansion, it still reward it shareholders by paying dividend and reinvest some of the profit to maximised shareholders wealth.
J. Sainsbury recorded dividend cover in 2008 of 1.8 times, slightly lower than Tesco. While in 2010 dividend cover increased to 2.42 times, this indicates that Sainsbury also rewarded its shareholders and retain some profit for further investment. These results are reflected in figure 11 below.
Figure 11
3.3 BUSINESS PERFORMANCE
3.3.1 IS TESCO ACHIEVING ITS CORPORATE OBJECTIVES?
In order to get a better understanding of Tesco's overall performance, an insight into the non financial aspect of the company is necessary as ratio analysis on its own will not give a complete account of the company's affairs. The business performance of Tesco have been analysed below by using SWOT and Porter's five forces models. This section of the report has helped the Researcher to address the research question above.
Strengths
Tesco holds a market leadership position in the UK with a strong brand name in the industry. This helps the group to produced standard goods and services that enable it to benefit from economies of scale and as a result reducing operating costs. Despite the recession the Group still managed to maintain its sales growth for the financial year 2009 with an increase of 14.9% over 2008. Although sales growth in 2010 fell to a surprising 4.75% when compare to 2009.
Tesco is the market leader in customer loyalty, with 16.5 million Clubcard customers which proved invaluable, particularly in the current recession. (www.independent, 2010).
Tesco has a strong management team headed by Sir Terry Leahy who has implemented a clear strategy for the company since 1997. A pound strategy was implemented by the team to launch a discount brand in respond to customer's need in the current economic downturn. (Datamonitor, 2009).
Weaknesses
Tesco is highly reliant on its UK market and the current recession has impacted on the group market share in the UK which decline from 30.9% to 30.8% .This affected its UK revenue that could have been much higher. The increase in overseas sales compensated the group for its poor performance in its home market. (Retail Week, 2009).
The company has a net debt of £7.9bn and a gearing ratio of 116.35% in 2010 and 149 %in 2009.This has caused the company credit rating to be lowered to 'A-/A-2' from 'A/A-1'.(www.advfn,2010)
Opportunities
Tesco continues to focus on its international market, which will make the company less reliant on its UK market. According to the Chairman's statement: Tesco has opened their first three lifespace shopping mall in China and has made good progress for the Tesco bank. Tesco's entry into India will help to diversify its revenue and strengthen its position in the global market.(www.Tesco Annual Report, 2010)
Threats
Tesco is facing an intense competition from its major competitors: J.Sainsbury, ASDA, and Morrison; and discounters as consumers seek cheaper goods. Tesco has seen the slowest profit growth in 15 years in the UK, eroded at the expense of its Rivals price cutting, both ASDA and Sainsbury are growing faster (www.alphavilleft, 2010).
As the UK is currently in the recession, there is increasing unemployment and as a result there is a decline in income per household. Consumers have less disposable income and as a result become more vigilant of spending. This therefore reduces the demand for the company's products, particularly its non food items (Datamonitor, 2009).
Next, the clothes retailer has filed claim with law court alleging that Tesco has illegally copied its clothing range. The amount in damages that Next seek is not yet known as it is still a contingent liability. However, if Tesco turns out to be unsuccessful in the case, this will impact on the company's reputation and also reduce profit as a provision will have to be made for such claim.(City AM, 2009).
3.3.2 PORTER'S FIVE FORCES
WHAT IS TESCO'S POSITION IN THE UK RETAIL INDUSTRY?
From the above findings by the SWOT analysis it is therefore appropriate to use Porter's five forces model to analyse Tesco's position in the retail industry.
Threat of Entry
Tesco and its main competitors are concentrated in the UK market, this therefore put new entrant at competitive disadvantage. Tesco benefited from economies of scale, this allows the company to have aggressive pricing schemes that are not viable to smaller retailer, as its products can be produced at a lower cost, which would not be easy to achieve for a new entrant.
Threat of Substitute
Tesco sell cheaper food ranges, but fast food restaurant and pubs represents a relevant alternative where consumers would be provided with the convenience of a ready meal to 'eat in', where the meal maybe provided with a free drink. This could reduce Tesco's customer base (Datamonitor, 2009).
Power of Suppliers
Tesco's market leadership position increases its ability to exploit its suppliers, since it buys in bulk and demand discount which can be detrimental to the suppliers. The company also uses IT to weaken its suppliers by having databases of all the suppliers in the industry where prices can be compared.
Power of Buyers
Although there is a rise in health consciousness for more healthy food, price and convenience are two central concerns for most consumers, particularly in the current economic climate. Tesco achieved this by opening more shops close to their homes and sometimes with free parking facility and the maintenance of its price reduction policy.
There is also an issue of switching cost which includes loss of benefit from loyalty cards (Clubcards). The company also has a large number of consumers and therefore not reliant on any specific consumer.
Competitive Rivalry
There is an intense competition among the 'big four' key players in the industry, which makes competitive rivalry very high. The exit barriers are also very high, so it would be less costly to remain in business for the leading retailers, looking at the huge investment that they have made in the industry.
3.3.3 TESCO'S GROWTH STRATEGY
The Group growth strategic objectives are outline as follows:
To be a successful international retailer;
The Group continue to focus on its international expansions, with the acquisition of 36 hypermarkets in South Korea in financial year 2009 being its largest market outside the UK.
To grow the core UK business;
The sustained growth in its UK market has now been expanded by following its customer (customer pull) into non-food activities.
To be as strong in non-food as in food;
Although there is a general decline in the retail market, Tesco have seen excellent growth in its non- food area with Tesco.com growing strongly selling a broader range of products.
To put community at the heart of what it does.
Tesco opened the world's first zero-carbon store at Ramsey, Cambridgeshire. The company has reduced carbon emission by 7.8%. (Tesco Annual Report 2010). In the 2010 report the Chairman was quoted saying, 'This year we have donated over £60m to charities- once again exceeding our target to give the equivalent of 1% of our profit to good causes.'
3.4 CONCLUSION AND RECOMMENDATION
The researcher designed a project plan that focused on what is to be achieved for the purpose of this research. As a result, the objectives and questions of this research were used as guidance to obtain the required results reflected the findings.
For the purpose of this research, the business and financial performance of Tesco over a three year period were considered. The retailer continues to achieve strong sales growth over the three year period of over 20%. Turnover per employee rose from £136,797 in 2008 to £152,845 representing an increase in employee efficiency of 11.7%. However there was a fall in profit margin from 5.93% in 2008 to 5.58 in 2010. Half year profit were reported at £1.6b, representing an increased of 12.5 % (www.theindependent, 2010).
Tesco showed impressive result in almost all its profitability measures used, with the exception of ROCE which fell from 14.08% in 2008 to 10.58% in 2010. Although the global economic downturn impacted on the retail industry, Tesco still managed to continue its aggressive store expansion internationally. This however, may have impacted on ROCE as the assets have not yet generated enough profit.
In 2010 Annual Review, it was reported that dividend to shareholders were up by 8.06% over 2009. The Chairman also reported saying, 'I am also pleased to announce that we again increased our dividend- for the 26th consecutive year'. This shows that Tesco's shareholders are still being rewarded, despite the economic downturn and the fall in ROCE. Tesco's Dividend Cover fell slightly in 2010 by 8.3%. However, the company increased dividend payment by 22% over the three year period.
Considering the liquidity ratios calculated, the company cash position appears normal for a retail company as sales of perishable goods can be turn over quickly. Bank overdraft reduced considerable in 2010, whilst Trade creditors have the potential to improve as the company emerge from the recession.
Tesco's financial gearing would be considered high at 116% due to the high level of long term debt. It would be tempting for existing and potential shareholders to conclude that Tesco is a high risk company with a net debt of £7.9bn. Most of these funds were used for opening of new stores. However, the company has a long term credit rating of A-/A-2 by Moody's which is stable with a future potential of a positive re-rating. Tesco also have a robust risk management system in place to manage these risks. The company owns most of its properties which can be used as security against long term debt (Tesco Annual Report, 2010).
Regarding the non- financial analysis, it can be said that the group is performing well in most areas than its competitors. Tesco is the market leader in the UK and the third largest leading retailer in the world. Although the company's market share fell slightly recently in the UK, the overall continuous expansion in other geographical areas helped to strengthen its market position internationally and as a result reduced its reliance on the UK market which is one of its weaknesses (Datamonitor, 2009).
Although the Group faces intense competition in the industry, its unique resources and core competence allows it to have competitive advantages by implementing strategies that would exploit the company's capabilities and as a result enhance stakeholder's value.
The CEO of Tesco, Terry Leahy in the 2010 Annual Review commented saying, 'Tesco has made a solid start to the new financial year. We are making good progress with our strategy; investing in shopping trip for customers; driving strong productivity gains; growing space and winning market share'. Although Tesco share price fell by 1.5% at the announcement the CEO retirement in March 2011.
Looking at the above consistency in growth and profitability, its strong market leadership position, how its shareholders have been taken care of by maximising their wealth, how it has been reported to be complying with Corporate Social Responsibility (CSR), a half year profit of 1.6bn and current share at 418.25p the company is worth investing in, it is a modest BUY. (www.londonstockexchange, 2010).
APPENDICES
APPENDIX A: TESCO PLC RATIO CALCULATION
2008
2009
2010
Sales Revenue(£m)
47298
54327
56910
Cost of Sales(£m)
43668
50109
52303
Gross Profit(£m)
3630
4218
4607
Operating Profit
2791
3206
3457
Profit before Interest & Tax
3053
3432
3755
Profit before Tax(£m)
2803
2954
3176
Profit after Tax(£m)
2130
2166
2336
Profit for the Per.(£m)
2124
2161
2327
Shareholders fund(m)
11815
12938
14596
Dividend paid (£m)
792
883
968
Interest expense (£m)
250
478
579
Ordinary shares(£m)
7881
7859
7933
Number of employees
345754
364015
372338
Number of stores
3751
4332
4811
Fixed Assets
23864
32008
34258
Current Assets
6300
14045
11765
Stock and W.I.P
2430
2669
2729
Short term loan & overdraft
2200
4221
1571
Long term Liabilities
8086
15075
15412
Total Debt
10286
19296
16983
Current Liabilities
10263
18040
16015
Trade Creditors
3936
4748
5084
Capital Employed
19901
28013
30008
.
PROFITABILITY
Gross Profit Margin%
7.67
7.76
8.1
Profit Margin %
5.93
5.44
5.58
ROSF%
23.72
22.83
21.76
ROCE %
14.08
10.55
10.52
Asset Turnover
2.38
1.94
1.9
FINANCING
Gearing%
87.06
149.14
116.35
Interest Cover
12.21
7.18
6.49
LIQUIDITY
Current Ratio
0.61
0.78
0.73
Creditors Days
30.37
31.9
32.61
.
GROWTH
Sales Growth %
10.92
14.86
4.75
INVESTMENT
Earnings per Share
26.95
27.14
29.33
Dividend Cover
2.68
2.47
2.4
APPENDIX B: SAINSBURY'S RATIO CALCULATIONS
2008
2009
2010
Sales Revenue(£m)
17837
18911
19964
Cost of Sales(£m)
16835
18875
18882
Gross Profit(£m)
1002
1036
1082
Operating Profit
530
673
710
Profit before Interest & Tax
611
614
881
Profit before Tax(£m)
497
466
733
Profit after Tax(£m)
329
289
585
Profit for the Per.(£m)
329
289
585
Shareholders fund(m)
4935
4376
4966
Dividend paid (£m)
178
218
241
Interest expense (£m)
132
148
148
Ordinary shares(£m)
1747
1753
1860
Number of employees
98600
97300
97300
Number of stores
890
Fixed Assets
7898
8463
9002
Current Assets
1722
1570
1853
Stock and W.I.P
681
689
702
Short term loan & overdraft
118
154
73
Long term Liabilities
2080
2738
3096
Total Debt
2198
2892
3169
Current Liabilities
2605
2919
2793
Trade Creditors
1703
1728
1782
Capital Employed
7015
7114
8062
PROFITABILITY
Gross Profit Margin%
=B6/B4*100
5.47
5.41
Profit Margin %
2.69
2.46
3.67
ROSF%
9.71
10.65
14.76
ROCE %
6.83
6.55
9.09
Asset Turnover
2.54
2.66
2.48
FINANCING
Gearing%
44.54
66.09
63.81
Interest Cover
4.63
4.15
5.95
LIQUIDITY
Current Ratio
0.66
0.54
0.66
Creditors Days
34.85
33.35
32.58
GROWTH
Sales Growth %
4
6.02
5.57
INVESTMENT
Earnings per Share
17.6
16.48
33.48
Dividend Cover
1.84
1.33
2.43
APPENDIX C: CELL FORMAULAE
