Financial Analysis of Tesco Plc organization
Financial Analysis of Tesco Plc organization
Table of Content
Introduction………………………………………………
General Information about Tesco ………………………………………………………………4
Vision ………………………………………………………………………………
Mission Statement ………………….……..…………………………………………….
Marketing Objectives…………………………….……………………
Trading Performance ……………………………………………………………………………7
Investment Report 2009 – 2011 …………………………………………………………………9
Working Capital of Tesco ……………………………………………………………………...
Trading Outlook of the Supermarket Sector …………………………………………………11
Market Outlook ………………………………………………………………………….
PEST analysis……………..………………………………………
SWOT-analysis……………………………………………
Porter’s 5 Forces Model …………………………………………………………………15
Tesco Accounting
Policies ……………………………………………………………………...
Conclusions…………………..…………………………
References……………………………………………………
Introduction
Every business organization sets certain kinds of strategic objectives that it wants to achieve from the undertaken activities during the financial year. Strategic objectives provide effective performance of the company. My choice of the company for making the financial analysis is Tesco Plc. A strategic analysis of Tesco Plc based on the brief assessment of main aims and its objectives and its progress towards attainment of such strategic objectives.
Financial analysis refers to the assessment of a business to deal with the planning, budgeting, monitoring, forecasting, and improving of all financial details within an organization. Understanding Tesco’s financial health is a fundamental aspect of responding to today’s increasingly stringent financial reporting requirements. To avoid risks, it must quickly identify ascertain financial ratios and trends across in liabilities and assets, analyze and adjust planned and forecasted amounts and act to provide regulatory statements as needed.
The entire assessment of Tesco’s strategic performance will lead to certain recommendations that would further enable the company to attain its strategic objectives comprehensively. Finally, the findings about the strategic performance of Tesco Plc will be presented in the conclusion section of this report.
General Information about Tesco
The company was founded in 1919 by Sir Jack Cohen as a group of market stalls. The Tesco name first appeared in 1924, after Cohen purchased a shipment of tea from T. E. Stockwell and combined those initials with the first two letters of his surname, and the first Tesco store opened in 1929 in Burnt Oak, Middlesex. The business expanded rapidly, and by 1939 there were over 100 Tesco stores across the country. Tesco’s UK stores are divided into six formats, differentiated by size and the range of products sold: Tesco Extra, Tesco Superstores, Tesco Metro, Tesco Express, One Stop and Tesco Homeplus. Tesco is the third-largest retailer in the world measured by revenues (after Wal-Mart and Carrefour) and the second-largest measured by profits (after Wal-Mart). In the beginning, the company had specialization in drink and food business, but later, it expanded into segments like consumer electronics, clothing, telecoms, financial services, health, home and car insurance, dental plans. Other operating areas are garden centers, banking, beauty salons, music downloads, retailing and renting DVDs, software and Internet services. Tesco has held Platinum status in the Business in the Community Corporate Responsibility Index since 2007. 492 714 high qualified employees work incredibly hard every day to serve customers and give them the best shopping trip. Tesco has over 200,000 shareholders, including a large number of pension funds. Also the company has won awards for specific environmental and Community initiatives, including: Employees’ Most Favoured Company (Retail Industry) in China; Best Practice Award (store recycling), Repak Recycling Awards in Ireland; Investor in Human Capital, Good Employer Awards in Poland and so on (Tesco Plc, 2011).
Vision
The vision of the company is to be most highly valued by the served customers, operated communities, loyal and committed staff and shareholders; to be a growth company; a modern and innovative company and winning locally, applying its skills globally. In order to achieve its aims company has certain strategies how to grow in the UK market and also becomes an outstanding retailer in stores and online. Corporate responsibility at Tesco is about doing business in a socially responsible and sustainable way (Taking Tesco global, 2011).
Mission Statement
The clear definition of mission statement of the company followed by the identification of its target market is essential for applying marketing strategies. This statement indicates the long term goal that the company adjusts to achieve. Tesco Plc mission is to create value for customers to earn their lifetime loyalty. Their success depends on people who shop with Tesco and who work with Tesco. Company’s slogan expresses in two key values: No-one tries harder for customers, and Treat people as we like to be treated (Tesco, 2011).
Marketing Objectives
Marketing objectives are necessary for defining what you want to accomplish through your marketing activities. The strategic aim of Tesco Plc is to broaden its scope of business so that it can be possible to deliver long term string sustainable growth. In order to attain the main aim of the company successfully, there are various marketing objectives that have been set by the company. A brief assessment of all such objectives is performed below:
- To grow the UK core business by expanding it into other countries, for example, into Switzerland because of the country’s high level of life and company’s ability to provide consumers with high quality goods. Such strategic objective connects with tremendous opportunities for the company allowed by UK market because it is considered to be the largest business in the Group and also a key driver of its sales and profit (Tesco Plc., 2011).
- To increase products’ database with support of customizing products and services per needs and requirements of its customers in different markets or by the implication of technology as it enables its users to collect detail information about its business through website.
- To create good jobs and careers by offering 2 500 apprenticeship positions in UK, developing an employee engagement measure across the Group, continuing the scheme for retired colleges to become business coaches.
- To increase the number of stores in low income Communities since the company strongly highlights its commitment to food access in low income Communities. For effective implementation of this strategy, increase of stores in low income areas will be seen as a boost to its presence in the Community thereby increasing and creating customers’ retention (Tesco Plc, Corporate Responsibility Report 2011, 2011).
- To implement the new brand for food. The Company aims at building its brand name across the entire world so that it can achieve higher success primarily by giving more meaning to its customers. There are various other brands that operate under Tesco brand name such as Finest and Value (Tesco Plc., Annual Reports and Financial Statements 2011, 2011).
- To reorganized its team for creating more value. As the business of the company is growing at a rapid pace and continues to diversify, it needs more leaders who can successfully contribute their efforts towards ensuring successful growth of the business. They are not only responsible for creating value for their customers today, but will enable for this in the future (Tesco Plc, 2011). Employees are considered as one of the most important assets of the organization. So Tesco incurs huge expenditure in improving their working environment and encourages them to work in teams.
- To deliver higher returns on capital employed for shareholders up to 60%. As the owners of the business, it’s crucial that Tesco’s shareholders value highly. Shareholders want a good return on their investment and that’s what the company will continue to deliver for them.
Trading Performance in 2009 – 2011
Profitability ratios measure a company’s ability to generate earnings relative to sales, assets and equity. These ratios assess the ability of a company to generate earnings, profits and cash flows relative to relative to some metric, often the amount of money invested. They highlight how effectively the profitability of a company is being managed.
Profitability |
2009 |
2010 |
2011 | |
Operating Margin |
% |
4.66 |
5.03 |
4.98 |
Profit Margin |
% |
4.94 |
5.17 |
5.42 |
ROE |
% |
11.98 |
12.04 |
12.24 |
ROCE |
% |
11.13 |
13.06 |
14.42 |
The results show that dynamic in profitability was negligible (maximum 3%). This mean stable and constant financial health and performance of a company. Return on capital employed (ROCE) tells how well the company is using capital employed to generate returns. Return on equity tells whether the company is generating enough profits for its shareholders.
Liquidity refers to business’ ability to pay its bills, dues and similar other short term obligations (as and when they become due) without affecting the normal operations. Solvency is a measure of business ability to pay back its long term debts. Current ratio of Tesco has dropped over time and in 2011 year statement it stood at 0.68 while in 2009 it was 0.77. In retailing business, the average current ratio is low as it holds only fast moving inventories of finished goods and stock turn over period is in days. A low level of current assets keeps this ratio low. The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. So Tesco’s quick ratio has decreased from 0.61 to 0.50 because its liabilities have been raised.
The operating ratio is the ratio of production and administrative expenses to net sales. It excludes financing costs, non-operating expenses, and taxes. Essentially, it is the cost per sales dollar of operating a business. A lower operating ratio is a good indicator of operational efficiency. Tesco had an operational ration in 2009 at the level of (0.023) and in 2011 – (0.028), the ratio decreased because revenue increased from £54,327m till £60,931m (on 11%).
A company’s leverage relates to how much debt it has on its balance sheet, and it is another measure of financial health. Generally, the more debt a company has, the riskier its stock is, since debt-holders have first claim to a company’s assets. This is important because, in extreme cases, if a company becomes bankrupt, there may be nothing left over for its stockholders after the company has satisfied its debt-holders. Tesco’s debt/equity ratio measures how much of the company is financed by its debt-holders compared with its owners:
Factor |
2009 |
2010 |
2011 |
Short-Term Debt + Long-Term Debt |
(12,391) |
(11,744) |
(9,689) |
Total Equity |
12,995 |
14,681 |
16,623 |
Debt/Equity |
0.95 |
0.80 |
0.58 |
It should be concluded that company in 2009 was dependent on borrowing for 95%, but in 2011 the situation was changed for the best – 58%.
Investment Report 2009 – 2011
From an investor perspective, there are two important parameters to note when studying the performance of certain stocks. These are:
- Total Shareholder Returns (TSR is notional return from a share or index based on share price movements and declared dividends).
- P/E Ratio: P/E ratio takes into the market value of the share and the company earnings per share. PE ratio of Tesco shares has been close to 11 which indicate a good level of market confidence about Tesco future performance.
Conducted analysis of profitability, liquidity, operating and leverage ratios has brought to the conclusion that Tesco is successful company with positive and reliable reputation and efficient profits. But it still depends on borrowings (almost 60%). Nevertheless its shareholders could be calm and sure that Tesco won’t leave them without dividends.
Working Capital of Tesco
Working capital reveals more about the financial condition of a business than almost any other calculation. It tells what would be left if a company raised all of its short term resources, and used them to pay off its short term liabilities. The more working capital, the less financial strain a company experiences.
Thus, from 2009 till 2011 financial years Tesco’s working capital has decreased in 43% (from (£4,393m) to (£6,293m)) and was negative during this period. The reason is that the company has high inventory turns and does business on a cash basis. It raises money every time it opens doors, then turns around and plows that money back into inventory to increase sales. Since cash is generated so quickly, managements can simply stockpile the proceeds from their daily sales for a short period of time if a financial crisis arises. Since cash can be raised so quickly, there is no need to have a large amount of working capital available.
As for Shell, major oil company, working capital is positive and has increased in 66% (from £7,22m to £11,01m) because it is selling expensive items on a long-term payment basis, they can't raise cash as quickly.
Trading Outlook of the Supermarket Sector
Market Outlook
The market is composed primarily of major chains, with outlets nationwide. Alongside these are smaller operations with a traditionally regional bias, although most of these chains are currently expanding nationwide. In addition to these are the limited assortment discounters (LADs). In general, these are operated by European firms and offer basic food products aimed at the lower end of the mass market. Online grocery retailing continues to go from strength to strength, with the growth driven by many factors. Faster home broadband connections are making the shopping experience quicker, for example, while increasingly widespread broadband connections are opening up online shopping to more consumers. The major retailers, meanwhile, are focusing on developing the online channel and making the shopping experience easier and more flexible. Consumers are also becoming more familiar with online shopping, especially as fuel prices are making them think twice about using the car.
PEST analysis
The PEST analysis consists of various factors (political/legal, economic, socio-cultural and technological), which have a direct or indirect influence on the industry and the firms within it (Griffin, 2008).
Political factors impact on government decision making how to shape their policies:
- Stability is important factor for supermarket sector because in instable country there won’t be any economic growth.
- Political structure. As Tesco operates in globalization conditions with stores worldwide, its performance is highly under influence of these countries conditions.
- Relevant laws, statutes, policies in other countries that will connect with protection of inside industrial markets so on.
- Tesco understands that retail commerce has dramatic effect on jobs and people factors (new development of store often saw, how destruction of other jobs in sector of retail commerce as traditional stores leave business or compelled to save the cost to compete), being inherently and local labour-consuming sectors (Kotler, 2008).
Economic factors help us to understand how much to expect from the potential market:
- National accounts: some governments invest far more money in statistical research than other governments.
- Foreign currency risk that is followed by exchange rate volatility.
- High rate of unemployment decreases demand for many goods, negatively influencing on the demand of such goods necessary for manufacture.
- Household income and expenditure patterns. As Tesco is one of the largest retailers in the world its income policy is stable and positive and expenditure pattern is adequate to the market conditions. The most part of costs is for research and development that provides company with effective information for further progress.
- Salary size. Tesco provides its employees with such level of salary that supports their normal life and wide range of benefits.
Socio-cultural factors describe people, their attitudes, social behavior and impact of knowledge and cultural environment (Lancaster, G., 2005):
- Predominant social structure and gender roles. There are various ethnic groups residing over UK with different taste and penchant for diverse products and services that is favourable for the company.
- Decision-making patterns. Consumers become more and more informed on questions of healthcare, and their attitude to meal constantly change.
- Population composition and distribution. Tesco works mostly for satisfying children, youngsters and middle aged people needs. It is the target audience in spite of ageing of the population.
- Learning and educational services. Significant investment in training, development and incentives, including Talent Planning, Leadership Development and succession planning for future needs of the business.
- Decrease in house preparation of meal means, that the Great Britain retailers are concentrating on added value products and services (Lancaster, 2005).
- Providing customers with healthy choices. Tesco currently has 100% nutrition labelling on eligible own-brand food lines in all its markets and offers Healthy Eating brands in seven countries.
Technological factors are required for a higher production of food, better communication or just for luxury:
- Tesco stores utilize the following technologies: wireless devices, intelligent scale, electronic shelf labelling, self check-out machine, Radio Frequency Identification (RFID)
- The adoption of Electronic Point of Sale (EPoS), Electronic Funds Transfer Systems (EFTPoS) and electronic scanners have greatly improved the efficiency of distribution and stocking activities, with needs being communicated almost in real time to the supplier (Lancaster, 2005).
- Investments in IT systems and innovations improve business efficiency and customers’ shopping experience.
SWOT-analysis
Strengths |
Weaknesses |
|
|
Opportunities |
Threats |
|
|
Porter’s 5 Forces Model
It is a way to examine threats to a company’s success – which was competition imposes (Porter Michael E., 1998)
Bargaining power of customers affects the customer’s sensitivity to price changes. The bargaining power of the customers is at the medium level for Tesco because it has strong reliable reputation and customer loyalty using loyalty cards.
The threat of substitution in an industry affects the competitive environment for the firms in that industry and influences those firms’ ability to achieve profitability. Tesco offers unique products with worldwide fame, so the threat of substitution is significantly reduced. The differentiation of products is significant because the more alike two products are the easier it is for a customer to simply substitute a different product in its place without even noticing a difference.
Bargaining power of suppliers. Tesco has global supply chains that help to develop businesses of delivering reliable, innovative and great value brands for customers. The Tesco’s inventory turnover rate is high, so purchases that will be made by suppliers to replenish that inventory giving the purchasing company more power over the supplier.
Threat of new entrants largely depends on the barriers to entry. When customer loyalty is high within an industry, new entrants face an extremely difficult challenge to get competitor’s existing customers to switch over to their company. In this case, the new company would have to rely strictly on a high level of differentiation in order to gain any of those customers. Tesco operates in the market of high barriers to entry.
Rivalry: Such retail companies like Wal-Mart, Carrefour, J Sainsbury and ASDA are the competitors of Tesco Plc.
Tesco Accounting Policies
Tesco accounting policies adopted by the company are in general in line with industry norms and practices and that there is no specific policy which may make the comparison of some ratios or performance irrelevant merely sue to way it is applied. Until 2005, TESCO was reporting financial results in line with UK GAAP but from 2006 onwards, financial reports have been issued in accordance with IFRS which is now mostly adopted standards in almost 100 countries including EU, India, Australia, Russia, GCC, Singapore and other countries. All European companies, except Wal-Mart, have used IFRS (Tesco, Sainsbury and Carrefour).
No major differences in accounting practices are found between Tesco and its peers/competitors including J. Sainsbury and Carrefour. All of them use a straight line depreciation of definite-lived intangible assets (licenses or software etc.). For R&D Expenses, these are amortized over project’s useful life.
Stocks comprise goods held for resale and development properties and are valued at the lower of cost and net realizable value. Stocks in stores are calculated at retail prices and reduced by appropriate margins to the lower of cost and net realizable value.
Plant, equipment and fixtures and fittings which are the subject of finance leases are dealt with in the financial statements as tangible assets and equivalent liabilities at what would otherwise have been the cost of outright purchase. Rentals are apportioned between reductions of the respective liabilities and finance charges, the latter being calculated by reference to the rates of interest implicit in the leases. The finance charges are dealt with under interest payable in the profit and loss account. Leased assets are depreciated in accordance with the depreciation accounting policy over the anticipated working lives of the assets which generally correspond to the primary rental periods. The cost of operating leases in respect of land and buildings and other assets is expensed as incurred.
Conclusions
On the basis of performed analysis for Tesco Plc, it has been identified that the company is successful enough in attaining its strategic objectives to a greater extent. The entire analysis leads to the mitigating strategies for high risk components to the development of certain recommendations for the company on the basis of SMART criteria which are highlighted below:
- In the future it would be profitable for company to expand the assortment of products that lead to usage of such growth strategy as diversification. Trust in the Tesco brand enables company to grow its existing business, as well as diversify into new business areas such as personal finance and bioproducts.
- The major core business of the company is retailing. Tesco has developed its reputation from its performance in the UK market. As a result, the company should aim at paying higher attention towards further developing its core business.
- Lack of adequate marketing approaches is another major weak point of Tesco Plc. As a result, it has also been highly recommended to pay more attention to the effective marketing approaches in order to provide with better promotion of all its business segments and the attainment of its strategic objectives.
- Tesco should also increase the number of stores in low income Communities since the company strongly highlights its commitment to food access in low income Communities. For effective implementation of this strategy, increase of stores in low income areas will be seen as a boost to its presence in the Community thereby increasing and creating customers’ retention.
References
Finch, J. 2009. Tesco increases
market share [Online]. Available at: http://www.guardian.co.uk/
Griffin, R.W. 2008. Management. (9th ed.), Cengage Learning.
Kennon, J. Working Capital: Investing Lesson 3 – Analysing a Balance Sheet
[Online]. Available at: http://beginnersinvest.about.
Kotler, P, Armstrong, G, Wong, V & Saunders, J, 2008. Principles of Marketing, 5th European Edition, Prentice Hall.
Lancaster, G. & Reynolds, P, 2005, Management of Marketing , Burlington: Butterworth-Heinemann.
Porter Michael E., 1990. The Competitive Advantage of Nations. Free Press, New York: Free Press.
Taking Tesco global, 2011
[Online]. Available at: http://www.mckinseyquarterly.
Tesco Plc, 2012. Accounting Policies [Online]. Available at: http://www.tesco.com/
Tesco Plc, 2012. Investors
– Reports [Online]. Available at: http://www.tescoplc.com/index.
Tesco Plc, Annual Reports
and Financial Statements 2011, 2011 [Online]. Available at: http://ar2011.tescoplc.com/
Tesco Plc, Corporate Responsibility Report 2011 [Online]. Available
at: http://www.tescoplc.com/media/
Tesco Plc., 2011 [Online].
Available at: http://www.tescoplc.com/about-
Wilson, R. M. S & Gilligan, C, 2005, Strategic Marketing Management: Planning, Implementation and Control 3rd ed, Butterworth-Heinemann.
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