Oxford Brookes University RESEARCH AND ANALYSIS REPORT TOPIC 8 AN ANALYSIS OF THE BUSINESS AND FINANCIAL PERFORMANCE OF TESCO PLC [pic] (6444 words) MARCH 2008 1. INTRODUCTION 1. 1 TOPIC CHOSEN This research analyses the financial situation of Tesco Plc; topic number 8. The analysis is carried from an investor’s point of view and will be achieved by evaluating key financial ratios, past trends and other key aspects with an aim to serve the current and prospective future investors in making investment decision.
As the financial aspect is just a quantitative measure and cannot always give the true picture, so it is important to look at the qualitative aspect as well. Thus, this research will also look at the qualitative side of the story. In this report, the financial situation of Tesco Plc has been compared with one of its close competitor J Sainsbury Plc and looks at the last 3 years of both the companies. 1. 2 REASON FOR CHOOSING THE TOPIC Tesco is currently market leader in the field of supermarket retail industry with group profit of ? 803 million for the year ending 2008 and with maximum market share of around 31% in UK, so it was a natural choice for me to choose Tesco and this topic as I had always had an interest in retail sector and a keen interest on this business and wish to develop my career in this field. And also to add to the fact that, as an ACCA student, analysing the business and financial performance of a company will provide me with the opportunity to enhance my ability and increase my knowledge in accounting and financial field and the situation and strategy a company needs to adopt to be successful.
J Sainsbury Plc was chosen as Tesco’s comparator because of the fact that it has always traditionally been the Tesco’s competitor and is also the third largest retail store in UK with market share of 16%. Tesco is not just a food retail store anymore and truly defines the meaning of shopping under one roof, offering various product such as furniture and DIY, electrical, mobile, financial service etc.
Tesco was also the topic for my research as it has always been in the news and the talking point with it being involved in 13 countries throughout the world (UK, Ireland, Czech Republic, Poland, Slovakia, Hungary, Turkey, China, Japan, South Korea, Malaysia, Thailand and United States). Its continuous expansion plan has always attracted the news and its debut in US on 7th November, 2007 was a major development in Tesco’s history.
US has always proved to be a challenging ground for UK companies and the fact that even Sainsbury had to pull out from US makes its even more interesting, as to whether Tesco’s venture is going to be successful or not. Tesco opened its store in California, US with the name, “Fresh & Easy”. “Tesco is breaking with tradition by moving into the hard-discount market in an effort to build a substantial US convenience chain that could hit 1000 stores with the next five years”, www. ft. com , published on December 2, 2007. But for Tesco, plans have not been going according to the plan. According to the recent article on www. imesonline. co. uk , Tesco has 113 outlets and plans to open even more but has been put out back due to recession by atleast 6 months. But in a recent article(February 22, 2009) on “The Sunday Times”, Tesco admitted that it had gone wrong in US which read as “The head of Tesco’s US operation, Fresh & Easy, has said its early market research was mistaken and it may make big changes to the stores” with the heading “Tesco admits: We got it wrong in US. ” Tesco is also trying to enter new market again, with India being the highlight of all. According to the www. telegrapgh. co. uk , Tesco is trying to enter the ? 50 billion a year store sector in India with possible talks of joint venture with Tata Sons, a part of the Tata group. After all this, I was even more interested in Tesco Plc as my topic for this research. 1. 3 AIM AND OBJECTIVE OF THE REPORT For any investor, the key to their decision will always be risk and the return. Any investor will always look for the risk and the return he expects from his investment and for this one cannot just concentrate on the financial data but also has to look at the industry as a whole, the company’s strategic plans, the trend, the market in which it operates and the economy.
Therefore, the aim of this report is to analyse the company’s past financial performance, current financial situation and its prospective for the future from investor’s perspective. Hence the main objective of this report will primarily be: ? To identify Tesco’s current market situation. ? To identify Tesco’s result over the past 3 years and the contributing factor to it. ? To compare the findings with one of its closest rival, J Sainsbury Plc. ? To see if Tesco is a good future investment or not from investor’s point of view. ? To analyse the non-financial factors contributing to the results of Tesco Plc.
For these aims and objectives to be achieved, a detailed ratio analysis, trend analysis, SWOT analysis and strategy analysis has been performed. RATIO ANALYSIS Ratio analysis of the following key ratios has been performed: Growth ratio: ? Sales revenue growth Profitability and asset activity ratio: ? Gross profit margin ? Net profit margin ? Return on capital employed ? Net asset turn over Risk ratio: ? Current ratio ? Quick ratio ? Gearing ? Interest cover Investors Ratio: ? Earning per share ? Dividend per share ? Price / Earning Ratio
Past three year’s annual accounts: year ending 28/02/06, year ending 28/02/07 and year ending 29/02/08 has been used to show the trend analysis. Along with these, share price comparison has also been performed. This research also assesses the SWOT (strength, weakness, opportunity, threat) analysis and the strategic evaluation to analyse the Tesco’s current and future prospect and growth. 2. INFORMATION GATHERING 2. 1 SOURCES USED AND REASONS Annual accounts of Tesco: The annual account of Tesco provided detailed annual results year upon year upon which the ratios are based.
These figures were vital in analysing the company’s financial performance for the period 2005 to 2008 and evaluate the trend in the accounts (Trend Analysis). This also helped in predicting potential future risk and return for the investor. Annual accounts were used as the main source for figures used in the ratio calculation for the Tesco PLC. Annual accounts of Sainsbury: The annual report of Sainsbury also provided the detailed figure upon which ratios were based. It allowed to carry out comparison with Tesco for the same time period which was useful in assessing the performance of Tesco compared to Sainsbury.
Sainsbury annual report used were from 2006 to 2008. The figures obtained from the financial statement of Sainsbury were also used for the analysis purpose. Interim Report: These were useful in analysing trend but one has to also keep in mind, that these reports were unaudited. Newspaper, magazine and journals: These were also one of the main sources for gathering information which were of significant importance. These provided the news of the current affairs and situation of the company and any development the company entered into. These also provided the information about the market situation and acted as a neutral source of information.
Financial Times, The Independent, The Economists Magazine, etc were used as the source which included various articles including the expert’s view on the company’s results and share price movement as well. Financial analyst’s report: They act as an independent source which provided insight information of the company. These can be considered to be one of the factors that investors would look before making any decisions. These reports were particularly used while analysing the ratios and any significant changes that were seen. ACCA’s Student Accountant magazine and text books:
Monthly magazine published by ACCA also helped in gathering information and updating my knowledge on ratios analysis techniques and accounting standards. These techniques were used while analysing the financial information of Tesco and Sainsbury. These were particularly helpful as it not only provided information about the current market situation but were also useful in updating any changes made to the rules and regulation. Many of the ACCA text book were also used to analyse the key ratios and to interpret them. Some of the ACCA books used were: Financial Reporting (F7), Business Analysis (P3).
These were also useful for the SWOT analysis. Oxford Brookes University’s research and analysis project: This provided useful information on the requirement of the report including the format and the content. 2. 2 METHOD USED TO COLLECT INFORMATION Library research: British Library and City Business Library were primarily used for this purpose and were one of the main source which provided the datas and information required for the research. Frequent visits were required which involved reading different newspapers, related books and journals, magazines, etc which helped in understanding the company and their operating environment.
CDs were also used to get specific informations regarding Tesco and Sainsbury. FAME (Financial Analysis Made Easy) 1. It is a database that provided financial and other descriptive information of the companies in the UK and Ireland. It provided details of the past 10 years and also provided various facilities which were very useful for the research. Annual accounts, ownership information and key ratios of the two companies were some of the datas used from FAME. Market line and Business Information Centre (DATA MONITOR)
It provided company profiles analysed by Data monitor Plc, a premium business information company specializing in industry analysis. Internet research: Internet was one of the secondary sources of information gathering. A number of websites were visited to collect information. Only reliable websites were used for the purpose. Some of the websites visited were: www. tescocorporate. com www. j-sainsburys. co. uk www. ft. com www. timesonline. co. uk www. guardian. co. uk www. telegraph. co. uk www. londonstockexchange. com Google search engine was also an effective tool for searching for information over the internet.
In-store visit: As a part of research, Tesco store in Lewisham was visited to gather information: a chat with manager and other member of staff. It was a great source as meeting people in person gave how they perceived their business and a firsthand look of how Tesco provided its services to their customer and the variety of product they had available. 2. 3 LIMITATION OF INFORMATION ? As the figures and data were of past years i. e historic figure, they only showed the past performance of the company as the investors are always more interested towards the future of the company. As significant part of ratio analysis were based upon the figures obtained from the annual report of Tesco PLC and J Sainsbury PLC which cannot always considered to give a true picture of the inside story as companies will more often than not will try and hide their problems and maintain or improve their image at the public. ? Many of the information that were collected from secondary source could not give a detail information; only providing the surface information which was of very little importance. 3. ANALYSIS AND PRESENTATION
Tesco Plc, a truly international grocery and general merchandising retail chain is the world’s third largest retailer, only behind Wal-Mart of United States and Carefour of France and is the largest retailer in UK with group revenue of ? 47,298 million (for year ending 29/02/09) of which around 75% coming from UK alone and with a group profit of ? 2803 million. The following provides an in-depth analysis of the company’s performance over the past 3 years. 3. 1 GROWTH ANALYSIS 3. 1. 1 SALES REVENUE GROWTH [pic] TESCO ? The group’s major sales contributor was UK with sales of ? 7949 million (m) for the year to 2008, ? 35580m for the year to 2007 and ? 32657m for the year to 2006 which saw an increase of 8. 9% for the year to 2007 from 2006 and 6. 6% for the year to 2008 from 2007. ? Asia and rest of Europe saw increase in their sales, showing improving market for Tesco throughout the world. ? Asia increased its sales to ? 5998m for the year to 2008 as compared to ? 4707m of last years figure which was a significant increase of 27. 4% ? Sales in rest of the Europe grew by 23. 9%, from ? 7836m for the year to 2007 to ? 6324m for the year to 2008. Tesco’s group revenue has grown gradually over the past 3 years with an increase of 8. o8% for the year to 2oo7 (? 42641m) and a further increase of 10. 92% for the year to 2008(? 47298m) from 2007. ? Increase in sales in the year to 2008 was especially due to increase in non-food sales, another year sales increase up again by 30% on its online business and increase in the sales of healthy food. [pic] SAINSBURY ? Sainsbury’s revenue also increased gradually over the past 3 years with revenue of ? 16061m during 2006, ? 17151m during 2007 and ? 17837m during 2008. It showed an increase in revenue growth with 6. 8% during 2006 to 2007 and an increase of 4% for the year to 2008 from 2007 which was lower than that of Tesco for both of the year. ? This was due to the fall in sales because of the tough competition between other supermarkets such as Tesco, ASDA, Morrison, etc and due to the current recession. 3. 2 PROFITABILITY AND ASSET ACTIVITY RATIO 3. 2. 1 GROSS PROFIT MARGIN [pic] TESCO ? Tesco’s gross profit saw a gradual increase over 3 year period form ?3028m during year 2006 to ? 3630m during year 2008. ? However Tesco’s gross profit margin increased from 7. 7% to 8. 12% for the year to 2007 from 2006 but again decreased to 7. 67% for the year to 2008. Even though the gross profit margins were better than Sainsbury, the fall in gross profit margin to year 2008 was mainly due to the rising energy cost and raw material cost. Increase in gross profit margin in 2007 was mainly due to high sales and good productivity. SAINSBURY ? Sainsbury’s gross profit saw an increase for the year to 2007 (from ? 1067m to ? 1172m) from last year but again, for the year to 2008 it saw a decrease of ? 170m (from ? 1172m to ? 1002m) compared to last year’s figure. Sainsbury also saw an increase in gross profit margin for the year to 2007 from last year from 6. 64% to 6. 83%. This was mainly due to the increase in sales volume during the period and achievement of cost saving targets set out in the “MSGA” (Making Sainsbury Great Again). ? However Sainsbury saw a decrease in its gross profit margin for the year to 2008 compared to last year from 6. 83% to 5. 62% which was mainly due to higher cost of sales and the increasing market competition. 3. 2. 2 NET PROFIT MARGIN [pic] TESCO ? For the past 3 years, Tesco’s net profit margin is very good as compared to that of Sainsbury’s. Tesco’s net profit margin increased from 5. 66% to 6. 22% for the period 2006 to 2007. This was due to increase in sales and better management of its expenses. ? But a decrease in net profit margin for the year to 2008 to 5. 93% from 6. 22% compared to last year was seen. This was due decrease in sales growth rate as compared to last year and according to, Tesco PLC Annual Report and Financial Statements 2008, the change in sales pattern was due to unseasonal summer weather which impacted the sales growth in first half and a combination of recovering competitors and more subdued customer demand in some non-food product ategories also held back sales progress in second half and was also due to absorption of initial operating loss in Tesco Direct and establishing operations in US. SAINSBURY ? Sainsbury’s net profit margin increased from 0. 65% to 2. 78% for the year to 2007 which was mainly due to the increased finance income from the bank deposits and return from pension scheme. However, the net profit margin slightly decreased during the year 2008 to 2. 69% as compared to last year. 3. 2. 3 RETURN ON CAPTITAL EMPLOYED [pic] TESCO ? Tesco’s return on capital has been better than that of Sainsbury on all 3 years to 2008. Return on Capital of Tesco increased slightly in 2007 from 14. 86% to 15. 93% than in 2006 and saw a decrease in 2008, with return on capital employed of 14. 08% ? The decrease seen was due to the investment in new stores and market infrastructure. ? The return on capital for Tesco for the year to 2008 can still be considered good as according to, Tesco PLC Annual Report and Financial Statements 2008, as it was after absorbing the initial operating loss of around ? 90 million on Tesco Direct. SAINSBURY ? Sainsbury’s return on capital employed has increased significantly from 1. 31% to 6. 6% for the period of 2006 to 2007 which was mainly due to the increase in net profit margin. ? This can also be considered due to the increase in sales and importantly due to the effective control on cost which was set out in ‘MSGA’ (Making Sainsbury Great Again). However a slight decrease was seen from 6. 96% for the year to 2007 to 6. 38% for the year to 2008. 3. 2. 4 NET ASSET TURNOVER [pic] TESCO ? It has been in the decreasing trend with 2. 62 times in the year to 2006 and 2. 56 times in the year to 2007 and 2. 38 times in the year to 2008 which was due to the increase in total asset. For the year to 2008, increase in total asset was significantly due to the acquisition of free hold land worth ? 15,209 million. ? Decreasing trend of net asset turnover figure was due to decreasing efficiency of asset used, but before coming to conclusion one has to keep in mind that these assets acquired now will give benefits in the future and these capital expenditure were not fully operational by the year end. SAINSBURY ? Sainsbury’s net asset turn over increased for the year to 2007(2. 50 times) compared to the year to 2006 (2. 02 times) but again showed a decline for the year to 2008 with net asset turn over of 2. 8 times. ? This was due to the significant amount of capital expenditure made during the year to 2008 and also to the fact that all of the assets were not fully operational by the year end. 3. 3 RISK RATIO 3. 3. 1 CURRENT RATIO [pic] Current ratio indicates the ability of a company to meet its short term obligation and higher the current ratio, the better position the company is thought to be or say the more liquid and is considered to have a good short term financial strength. ? Tesco’s current ratio is constantly increasing from 0. 52 times in 2006 to 0. 56 times in 2007 and 0. 61 times in 2008.
This was due to the increasing stock level. ? However Sainsbury’s current ratio is on decreasing trend from 0. 80 times in 2006 to 0. 71 times in 2007 and 0. 66 times in 2008 which was mainly due to the increase in trade creditors, short term loan and overdrafts and bank overdrafts. 3. 3. 2 QUICK RATIO [pic] It is also known as the acid test ratio because of the fact that it eliminates the stock from current asset and is a measure of a company’s liquidity and ability to meet its obligation. ? Tesco’s quick ratio seems to be below the industry average but has slightly increased from 0. 3 times in 2006 to 0. 38 times in 2008 over the three years. ? Sainsbury’s quick ratio been on the decreasing trend with 0. 68 times in 2006, 0. 50 times in 2007 and 0. 40 times in 2008. 3. 3. 3 GEARING RATIO [pic] In simple terms gearing is measured as debt to equity. The higher the level of burrowing (gearing) the business has the higher the level of risk the business is thought to be in as the interest on loan must be paid regardless of the company’s financial position and high level of gearing means the reduced ability of the company to borrow. Tesco’s gearing ratio has decreased to 74. 54% to 78. 78% from year 2006 to 2007 and again increased to 87. 06% for the year to 2008. The increase was due to the increase in debt which was due to the increase in further investment and growing plans. ? Sainsbury’s gearing was at alarming rate with 169. 92% in 2006 (although debt taken here is sum of short term loan, overdraft and long term debt). This however decreased to 65. 67% in 2007 and to 54. 57% in 2008. This was due to the payment of significant amount of bank overdraft and debt. 3. 3. 4 INTEREST COVER [pic] Tesco’s interest cover seems far impressive than that of Sainsbury’s showing Tesco’s better performance. ? Tesco’s interest cover was 10. 27 times in 2006 and increased to 13. 28 in 2007. This was primarily due to the increase in profit but in 2008 Tesco’s interest cover decreased to 12. 21 which was mainly due to the increase in burrowing for further expansion resulting in interest expense. ? Sainsbury’s interest cover in 2006 was just 1. 67 times which was mainly due to high burrowing and low sales resulting in low profit. But in 2007, it in increased to 5. 6 times which was mainly due to repayment of major part of burrowing and better sales growth and profit. But interest cover again decreased slightly in the year to 2008 as compared to last year because of the increase in finance cost by ? 21m. 3. 4 INVESTOR RATIO 3. 4. 1 EARNING PER SHARE Earning per share is one of the most important investor’s ratios and is generally considered to be the single most important variable in determining a share price. Earning per share is calculated by dividing profit after tax less dividend on preferred stock by average outstanding shares.
Generally, higher the earning per share would be, higher the expectation of share holders receiving higher dividend. ? Tesco’s earning per share is in increasing trend and since 2006 it has increased from 20. 2 pence (p) per share to 23. 61p per share 2007 and 26. 95p per share in 2008. This was due to the buying back and cancellation of almost ? 470 million worth of own shares and increase in net income. ? Sainsbury showed a significant increase in its earning per share from 3. 80p per share in 2006 to 19. 20 p per share in 2007 but saw a slight decrease in 2008 to 19. 0 per share. [pic] 3. 4. 2 DIVIDEND PER SHARE [pic] ? Dividend per share for Tesco was 8. 63p for 2006, 9. 64p for 2007 and 10. 90p for 2008. This is in increasing trend and is due to the continuous increase in net profit in UK as well as in international market and increased online sales. Buying back and cancellation of almost ? 470m worth of shares has also played a major factor in it. ? Sainsbury’s dividend per share also seems to be in the increasing trend and in 208 it seems a lot better than as compared to Tesco with 12p per share. Sainsbury’s dividend per share was 9. 5p in 2007 and 8p in 2006. ? Dividend should not always be taken as a main reason for investment before considering other factors as dividend could very well be home made. 3. 4. 3 PRICE / EARNING RATIO [pic] ? Price / Earnings ratio shows how much the investors are willing to pay per pound of earnings for a share. In general, high P/E suggests investors are expecting higher earnings growth in future. ? Tesco’s P/E ratio has decreased to 14. 61 times in 2008 from 18. 30 times in 2007 which in turn had seen a slight increase from 2006 (16. 73 times) to2007. Sainsbury’s P/E ratio has also decreased over time from 2006 (31. 43 times) to 2008 (16. 84 times). 4. SHARE PRICE Share price in p [pic] Source: ft. com ? Tesco’s share price was on the increasing trend up until 2007 with share price of 33. 8p in 2006 and 43. 2p in 2007. In the year to 2008, share price has decreased to 39. 4p has also been decreasing further after that towards the 2009 and the start of 2009 due to the current economic crisis. ? For the 3 years Sainsbury’s share price has been fluctuating abnormally. It increased from 330 pence per share to 550 pence in the year 2007.
It was due to the approach from Qatar Investment Authority which made an indicative offer of 600 pence per share but has declined to 332 pence after the bid from Delta Two was abandoned. 5. NON FINANCIAL ANALYSIS 5. 1 SWOT ANALYSIS STRENGTH: ? Tesco has a strong performance in domestic market as it is the market leader in its sector in UK and hence makes very hard for the competitors to challenge it and new competitors to enter. ? Tesco being a diversified business which operates in different market sector such as food, clothing, petrol, finance, telecom, online, etc makes it a strong player with diversified risks as well. Tesco also operates in 12 different countries apart from UK making Tesco a global business and improving its reputation worldwide with strong performance and diversified business. Hence one can imply that Tesco does not depend on specific product or market for its success. ? As Tesco operates in huge quantity, economy of scale cannot be forgotten. ? Tesco has a strong brand name associated with good quality products at low price and a strong customer satisfaction. This has enabled Tesco to attract even more customers and retain its existing customer and launch new products under its name. Tesco has also been able to retain its existing customer and attract new ones through the introduction of its Club card; a loyalty scheme. This can also be seen as one of the way to lock its customers and a way to better understand its customers and their shopping habit making Tesco even stronger and customer focused. ? In 2000 Tesco became the first shopping retail to introduce ? 100 cash back offer, attracting more customers. ? Tesco has been adopting the strategy to adjust its operations according to the country it is situated making it more flexible to the local environment and as a better response to local customer. Tesco has been recording high rate of financial success in international market as well as in UK with increasing sales year per year giving them the financial stability and the ability to fund further expansion strategies. ? Tesco has also been expanding its business through online services. It has more than 1 million online active customers right now and has been a revolution since its launch. Although there is cost to providing online services, it is significantly less than providing in-store as there is no cost of running stores, warehouse and uilding physical infrastructures; crucial for the operation and ultimately achieving even better margins. ? Tesco’s success also comes from its strong and experienced and skilled team helping Tesco grow with good and innovative strategies. ? Tesco’s success also comes from its stores being located on prime locations and use of its multi format store making it more customer friendly and more accessible to people. ? Tesco’s success is also the reward of it continually being involved in the betterment of society and with the inclusion of Community as its fifth part in its previous four part strategy giving a strong signal of its commitment.
WEAKNESS: ? Tesco’s much of the revenue comes from the UK itself, around 75%, making Tesco open to risk if anything were to go wrong in UK. Tesco’s much dependent on UK market makes it vulnerable to UK’s economy, and customer behavior and spending. As UK provides tough competition for retail market with likes of ASDA, Sainsbury, Morrison, etc maintaining same share of market could be a difficult proposition in the long run as well as short, effecting the company’s revenue, profit and growth. And with current recession hitting the market hard, it could be an issue which Tesco needs to consider. Tesco entered into international market from mid 90s and could face a tough competition from its local competitors and may lack the experience that it may require in international market that some of its other experienced competitors may have, especially those who specialize in one particular type of product. ? As Tesco prides itself in providing a range of product, it might be difficult to keep the quality checks to standard which could affect its reputation and potentially create mass losses in inventory and negative media reporting. Tesco also lacks the specialization on many of its product that other industry have as they usually deal on one type of product and hence creating a name for themselves as well. Overcoming them could be a very hard job as Tesco looks after a full range of products from food, clothing, finance, insurance to telecom and the online aspect as well. And a negative report on one of its product could significantly impact the sells of other and the brand image of the company as a whole. ? Tesco has entered into many new markets with US eing the highlight of them and is planning few more with India being its top most target; which means requirement of huge investment. This has increased its debt significantly and has also resulted in huge amount of cash outflow and lack of free cash raising some concerns, particularly if these growth strategies were not to go according to the plan. OPPORTUNITY: ? As Tesco has already established itself as an international giant, there are still huge opportunities for it to grow with many of the countries providing good environment. Growth in international sector would give Tesco an opportunity to decrease it reliance on UK market which accounts for much of its profit. ? With Tesco’s entrance in US in November 2007, it provides huge opportunity to grow due to the sheer market size of US. ? With only around 8% of market share in non-food sector in UK, it has a vast amount of opportunity within UK and as well as internationally. Tesco deals in electronics, DIY, clothing, health and beauty, etc and with growing demand for these products, there is a great potential and opportunity for Tesco to capitalize on them with better strategy and increase its market share. Entering into new market or production or launch of new product cannot always results in a good result, especially when one deals in a variety of market and product as it would lack the proper knowledge and understanding of that market and business. Forming a strategic alliance could be one of the best solution to the problem. For Tesco, this could mean as an opportunity to enhance its product and increase its market share and help itself better understand the economy, law and the market in which in it operates. THREAT: ? Its biggest threat has always been its competitors.
Over the years competitors have grown significantly and so has the competition. With competitors such as ASDA, Sainsbury, Morrison increasing their market share, a need for new strategies should always be the prime focus. ? As Tesco operates in a variety of market and a full range of product it can be said to lack specialization in many of its product and hence could lose its market share for particular product and even brand image which could hamper other products as well. ? A potential threat from more specialized competitor should never be neglected. Economy has and will always play an important role in determining the result of not only of a particular company but of a whole industry as well. Economic conditions are unpredictable and currently unstable as recession is on the rise impacting the customer’s purchasing power. So it is necessary for Tesco to tackle these conditions with better strategy especially as UK has also been hit by the recession and as UK is its main market. ? There has been a significant external cost increases such as increasing fuel prices and local business taxes but so far Tesco has been able to absorb them with increased productivity and good cost control. Change in interest rate also plays a great role in deciding the final profit figure as Tesco is a highly geared company with huge debts it obtained for the further expansions as rise in interest can easily impact the cash flow and threaten its financial position. ? Tesco’s launch in many market has forced many of the local business and market to suffer or diminish, hence creating a resistance, different social and legal claim and negative publicity. ? Changing law and not being up to date with different legislation can hamper the business as it operates in many countries round the world. Different culture and economy and to adjust to each of them can never be easy. 5. 2 FUTURE PROSPECT AND GROWTH STRATEGY Tesco’s main strategy has always been growth with an aim to strengthen core UK business and expansion in UK markets and international. “The rationale for the strategy is to broaden the scope of the business to enable it to deliver strong sustainable long term growth by following the customer into large expanding market at home – such as financial services, non-food and telecoms – and new markets abroad, initially in Central Europe and Asia, and now also in the United States. ”, www. tescocorporate. om/plc/about_us/strategy/ Tesco has also been increasing its activity in the welfare of the society and environment and according to the Chief Executive’s statement (Terry Leahy), “To make sure this work gets the right focus and priority in the business, we made an important change in 2007 by adding it to our four-part strategy for growth – so making Community the fifth element. As the first change of any kind of Tesco’s strategy in more than a decade. ”, Tesco PLC Annual Report and Financial Statements 2008. Tesco’s long term strategy has always been growth and seeks to achieve through its 5 main aims: ?
CORE UK UK is the home for Tesco with around 75% of sales and profit coming from UK. Tesco has dominated UK market with market share of 30. 3% which is nearly the double of its next close competitors ASDA and Sainsbury. Success for Tesco comes via its knowledge of local market and customer needs and customer loyalty which has increased with its introduction of loyalty card scheme; Club card. Tesco’s success and growth also comes from its new spaces, extension of existing stores and multi format approach such as EXPRESS, METRO, SUPERSTORE, EXTRA.
Core UK has also been contributed by sales of other non-food items as well. ? COMMUNITY Tesco has always taken Corporate Social Responsibility (CSR) as an essential part of its business but by adding community as the fifth element in its previous four – part strategy for growth shows Tesco’s seriousness and commitment towards the community. Tesco has been supporting local communities, buying and selling products responsibly and also have had a keen interest on environment. According to the, Tesco PLC Annual Report and Financial Statements 2008, in Chief Executive’s statement, “We have invested ? 5 m in creating a Sustainable Consumption Institute at the University of Manchester, bringing together world – leading experts from various disciplines. The Institute will help lead the way to a low – carbon economy and society. ” ? NON – FOOD Tesco’s aim in its non-food business is to be as strong in non-food as it is in food. Non-food products mainly include electrical, home entertainment, clothing, health and beauty, stationery, etc with some stores even providing opticians and pharmacies. ? RETAILING SERVICE
Tesco’s another key strategy is to follow customers into new retailing service by allowing customers to shop in more than one way with different retailing services. I. TESCO PERSONAL FINANCE (TPF) Tesco’s Personal Finance, a joint venture with Royal Bank of Scotland (RBS) has grown to be the UK’s most successful supermarket bank providing a range of services such as saving accounts, credit cards, insurance, etc. II. TESCO. COM Tesco. com has been a revolution growing from strength to strength with over 1 million active customers especially for people with busy lifestyles. III. TESCO telecoms
Tesco telecoms have been providing services such as mobile network, home phone services, internet access and an internet phone services with wider range of product in store and online. ? INTERNATIONAL Tesco has been entering international market since mid 90’s and is now operating in 12 countries outside UK (Asia, Europe and US). Tesco is currently trying to enter Indian market as a joint venture with TATA Sons, a part of TATA group. According to www. tescocorporate. com/plc/about_us/strategy/international/ Tesco’s international strategy are based on six elements: I. Be flexible II. Act local III.
Maintain focus IV. Use multi-formats V. Develop capacity VI. Build brands 6. CONCLUSION Tesco is truly an international retail chain with its operation running now in 13 countries including the UK. Tesco’s performance over the past 3 years seems impressive and far better than that of Sainsbury. Tesco is the market leader in UK and has been able to capture a market share of around 31% which is nearly the double than that of its next two competitors; ASDA and Sainsbury. Tesco’s revenue has increased to 10. 92% for the year to 2008 with noticeable increase in its sale in Asia and rest of Europe.
Tesco’s growth in international market means its better image and potential growth opportunities in many of the countries which have similar operating environment as in the countries in which it already operates and also indicating the success of growth strategies. Tesco accounted for a net profit of 2,803 million in the year 2008 with net profit margin of 5. 93% even after absorbing initial operation loss of ? 90 million on Tesco Direct and establishing operation in US; which is a very impressive figure. Tesco’s dividend per share has also increased constantly, giving its investors a reasonable return on their investment.
With further plans of investment in new countries and India being the talk of all, Tesco seems to be ruthless in its approach (growth strategy) to lead the world market as well and increase its performance even more. Tesco has planned to enter Indian market as a joint venture with TATA Sons, a part of the TATA group. However its venture in US has not gone according to plan, and needs to develop new strategies to overcome these hurdles. Tesco is now even more committed towards the environment showing its care towards the environment by adding “Community” to its previous four – part trategy. Overall Tesco has been growing over the past 3 years and is continuing to do so and its figure speak for themselves. Tesco has understood its market well and has been able to cope and adjust with the changing customer behaviour. Over the years Tesco have been able to create a strong brand name for itself and with better customer service and excellent and skilled team they have always been able to maintain a high level of performance. Hence it would be recommendable for investors to invest in Tesco and its performance can be seen to be far better than that of its rival Sainsbury.