Economy EssayRetail EssayTesco Essay

The Financial and Business Performance of TESCO Essay

A company founded by Sir Jack Cohen in 1924 when its first day sale revenue was £4 and profit was £1, is the name of today’s billion-pound revenue making organization known as Tesco Plc. First Tesco store was opened in 1929 and it become private limited company in 1932. In 1947 Tesco float on stock exchange. Tesco launched its website in 2000 and in 2001 it become leading organic retailer in the UK. From 2002 Tesco reaches to international market and opened new stores in Malaysia, in 2003 it opened store in Japan and turkey etc. Now Tesco is the world third largest food retail company while in the UK it is number one. With 2115 stores, Tesco is Britain’s largest retailer for food and non-food products (Ref.1, Metro 2006).Tesco’s Group sale has gone to 11.1% and dividend per share 10.9p not only this but also impressive expansion in all over the world that makes Tesco prominent in food retail industry in the world and particularly in the UK. As an investor and an accountant, I realized the opportunity to analyse the financial statements of the Tesco which will help me to increase my knowledge and skills to evaluate the company’s performance. It also helps to understand about the future plans and opportunity in the Tesco. Therefore, I proposed to analyse the following aims and objectives.

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Aims and objectives

The aim and objectives of this research were to examine and evaluate the following factors of the business performance of Tesco Plc: Social & Economic Responsibilities towards all stakeholders. Non-financial Performance measures Financial performance measures including, Profitability measures, cash flow statement analysis, assets management performance and liquidity performance. The intention was also to compare the performance with the industry average or competitor wherever it was possible The following section examines and evaluates possible frameworks that would allow this research to effectively meet this aims and objectives.

1.3 The Conceptual Framework

Through studying for a business degree, an ACCA qualification, examining and evaluating academic literature, I have considered many conceptual framework. Financial and ratio analysis are valuable tools for evaluating the company’s performance but it only examine the financial data and ignore the non-financial perspectives which are going to be more valuable in this modern world then these were ever. Therefore, our business models were considered, such as the balanced scorecard approach, Porter’s five forces model and BCG matrix. However, porter’s five forces and the balanced scorecard approaches considered to be the most appropriate for this project as it examined the both internal and external factors. In order to obtain the relevant data the following methodology was undertaken.

2. METHODOLOGY

2.1 Research Philosophy and Approach

As the Aim and objective of this project was to explore the financial and non-financial data in order to induce a theme, it was believed that an interpretive research philosophy and inductive approach would be the most appropriate. It also allowed theories to arise as a result of and during the research, which allowed the research project to refocus during the analysis (Ref.2, Zina O’Leary, 2004)

2.2 Research strategy

2.2.1 This research project used secondary data

The research used secondary data to evaluate performances for the last three years of Tesco (2006-2008). This approach allowed trends to be evaluated and explored which gave strong meaning to the data collected or gathered. A case study approach adopted because it enable the researcher to gain richer understanding of the entity and gave the research the ability to generate answers to the question. Begin by understanding the context in which the case is being analyzed or discussed. What is the topic being discussed? How does this case relate to the topic? (Ref.3, San Jos© State University 2004)

2.2.2 Primary vs. secondary data

Primary data was considered, as it would not only have added greater insight and depth into the qualitative aspects of this research, but also it would have reinforced any secondary data obtained (Ref.4, Saunders et al. 2003). However, it was decided to use secondary data for the research of Tesco plc. Secondary data can be really effective and cost effective as it had already been collected and analyzed but problem is if the data had already been collected and analyzed then it also has been used for some other purposes and for different group of people according to their requirements. (Ref.5, A.J. Bell 1995), State: presentation could be misrepresentative as the data collected for different purposes, It could be unreliable as its origin is known and there is risk of bias. The following section examines how I improved the credibility of the secondary data, by examining bias, reliability and validity of the secondary data gathered.

2.3 Bias and Reliability of Secondary Data

I was aware of possibility of misunderstanding the data or arriving at the wrong conclusion. Therefore, in order to increase reliability, I gathered the data from the different sources and subsequently match the data that been collected from the different source and tried to use the reliable authentic one. Reliability and authentication of data depend on the source which can be company’s website, different business and financial websites, study text books, newspapers and many more.

3. SECONDARY DATA REVIEW

3.1 Academic Textbooks

Various different textbooks (especially study text books from FTC, BPP and LONDON SAM) were used to get better knowledge and understanding about the business performance. These were either from my own study text books from fundamental level paper and professional paper or from the London Library. My study textbooks are mostly base on accounting and strategy subject which really helped me to evaluate the financial and business performance of Tesco. Where ever I felt difficulties to understand any term or any point I consult with different books from the library, in contrast I found research related books very useful and innovative with regards to the methodology.

3.2 Newspapers and Magazine

Student Accountant, PQ Magazine, The financial Time and City Am amongst other been used to get higher detailed knowledge of the research topic. However I found The Financial Times more helpful for this research project because it keeps highlighting not only financial matter of the company but also non financial matters of the companies. For me it was easier to find out relevant data about the other companies within the same industry like Sainsbury, Asda in the UK and WM globally to compare and analyze the business performance over last three years.

3.3 Websites

Tescoplc.com was main website source to get research data for this project. Data mainly taken from the Tesco website was the company financial statements, annual reports, media releases and events. But when reading and analyzing financial and non-financial data, from company official website, lot of extra care and attention is needed as there can be a risk of bias. Research data was also extract and examined from some other websites such as Financialtime.com, thisismoney.co.uk, bpp.com, google.com, reuters.co.uk, investor.cisco.co.uk and many more websites been used to complete this research topic effectively and timely.

3.4 Tesco PLC. Reports

Tesco annual financial statements, annual reports and media reports were key source of information for this research topic which has been gathered from different sources. Financial reports contain mainly statement of financial position (balance sheet), statement of financial performance (company income statement), cash flow statement and statement of changes in equity. Non-financial reports may includes company social responsibility towards different stakeholders, Auditor’s annual report (qualified or non qualified) and directors basis of remuneration etc. Although Company’s financial statements prepared in accordance with the international accounting standard (IAS), even than company’s profit can be manipulated or smoothing of profit tact can be used. Other problems which may occur by using Tesco financial statements is that financial accounting base on the historic data which may not reflect the current position or future position of the company clearly. So, here again extra care is needed and more analysis is to be done in order to know the better view of the company’s performance.

3.5 Limitations

Limited access to sensitive data, time restriction and using secondary data for research project, were all limitations of this research. However, objective of this project was to evaluate the business and financial performance of the Tesco Plc. I believe, these limitations do not affect the credibility of this research project as the data I used can be compared and can be found from different sources, for this report.

3.6 Ethical Issues

Secondary data already is for general public which can be used from different groups of stakeholders according to their need. In this research project I used secondary data as source of information which is already a public domain So, there is no ethical issue regarding the confidentiality.

4. THE CONCEPTUAL FRAME WORK

4.1 The Balanced Score Card Model

Robert Kaplan and Davis Norton carried out a year- long research project and defined the balance scorecard model which enables the companies to evaluate the financial and non financial performance of the Tesco by dividing into four different perspectives (Ref.6, Accountancy College, and JUNE2008):

4.1.1 Financial perspective

Tesco financial measures can be evaluate through different heads, liquidity analysis (current and quick ratios), profitability ratio which includes gross profit margin, net profit margin, cost percentage to sale etc. Financial performance of Tesco will be analyzed in detail further in the project.

4.1.2 Customer Perspective

Demand for existing and new customers should be satisfied. Tesco policy is to provide Goods of good quality at reasonable prices to its customers. Tesco also considers the customer’s local and traditional demand.

4.1.3 Internal Business

This perspective evaluates the relationship between Tesco and its trade creditors. Recently it has been announced that Tesco asked all of its non-food suppliers to wait for an extra 30 days for payment and also asked them to reduce the prices of the products. (Ref.7, Jennifer Creevy, October 2008)

4.1.4 Innovation and Learning

Company culture and innovation approach can be evaluated from the employee productivity and training & development programs from the company to its employee. It also need to asses whether Tesco was providing its employee training and development to ensure that its work force is fully competent and providing excellent service for the best interest of the organization.

4.2 Porter Five Forces Model

Porter Five Forces Model explains the competitive strategies for the business. How success full Tesco is in non financial performance can be evaluate from its planning towards its competitors and other parties. Tesco non financial performance can be assessed in the light of (Ref.8, Michael Porter 1980) Five Forces Model.

4.2.1 New Market Entrance

Tesco is in the food retail industry which is highly competitive. New entrants in the food retail market may not feel easy but even then Tesco strategy against new competitor should be clear. Like Wall-Mart enter in the UK market by ASDA and create high level of competition for Tesco. (Ref.9, Elizabeth Rigby 2008) in her article for financial time states that: competition test has been supported by ASDA, M&s and some other but was opposed by Tesco and won the case after competition test ruling.

4.2.2 Suppliers Powers

Powerful suppliers can create problem for the business even they are really good in the financial performance. Non availability to at high cost products can reduce the profit or even destroy the image of the company when products are not available on the shelves on time. Tesco have numbers of suppliers for each products and some of the products are made by Tesco themselves or with the cooperation of the Tesco. Many products prices has been reduced in recent years as compare to the competitors and is also increasing the debtors or supplier payments days to cut the prices of the products which shows company good control on the supplier announced by the (Ref.10, Terry Leahy, chief executive of Tesco plc 2008.)

4.2.3 Substitute

Substitute quality or price of the products can affect the targets and objects of the company. Tesco adopted innovative and learning approach. In Porter’s five forces model, substitutes refer to product in other industries having the same use and for whom the demand of one product changes with the price of another similar or quite similar product. Management of Tesco focused on price and quality of the product and also timely availability.

4.2.4 Buyer power

Buyers or customers are powerful or customers are like king for the business. Companies have no or less control on the buyer but strong brand name can attract the customer’s attention. Tesco gain really good reputation in the UK market and became largest food Retail Company of the UK. But there is limited number of buyers in the market and in the competitive situation, Tesco has to be really good in price as well as in quality of the products.

4.2.5 Competitive Rivalry

Conflict among the existing competitors involves market manoeuvring, which increase product innovation for Tesco. In this situation competitive within the food industry may reduced price and spend money on advertisement to win the market share which may end up on the loss for all companies. In current situation there is price war between Tesco and its biggest competitor ASDA (subsidiary of Wall-Mart) and even then Tesco is performing well and still maintaining number one position in the UK market from many year… There are more ways to measure the Non financial performance, like The performance pyramid approach The building block approach The six sigma approach But due to some limitation I used two approaches to evaluate the non financial performance of the Tesco Plc.

5. FINDINGS

5.1 Economic Growth

Before I start my research on the economic growth, I would like to briefly discuss the economic environment and growth procedure of the Tesco. Currently Tesco UK’s sale growth is slowest since 1990s, group sale gone up by 11.1% as compare to 2007 figure but the group profit increase by 5.7%. The different between sale percentage and profit percentage identifies higher cost of sale and other operating expenses. Tesco is a large group that can cut the prices to win the more customers and can share pain of that lower price with supplier: (Ref.11, Robert Peston, BBC news). And this is the approach, Tesco is going to apply on supplier and asked them to reduce product prices and extend payments terms which also reduces the finance cost. Tesco is growing on a fast track in international markets especially in Asia (814 stores in Asia and Thailand is on top of the list with 476 stores), Europe, and USA region by introducing new names like Fresh and Easy same as WM did by entering as ASDA in the UK’s market. During last three years, Tesco international market as numbers of stores grown by 80%, Group sale revenue rose by 20% in total, out of this 46% is UK share, 29% is Asia share and 25% is Europe . Although number of stores are increasing in Non UK market (508 stores open only in 2005 out of which 350 were outside the UK) But about 50% of total group profit is contributed by UK’s market. (Appendix A)

5.2 Tesco Operational Performance

Bearing in mind the current economic situation in the world where financial crises melting down world biggest financial institutions and other well known companies, Tesco has secured a remarkable position with solid growth globally. There is no doubt about the good operational performance over the last there years. Market share of Tesco and other food retail stores are given below.

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Ref.12: TNS World panel, (2008)

Tesco’s share of the UK grocery retail market in the 3 months to 20-05-207 was 31.32%, which is 0.03%below as compared 3 months to 22-04-2007. UK market Share: On 20/04/ 2008 consumer spends £6336887000 in the Tesco which is 31.1% of the total groceries market in the UK but it reduce to 0.3% comparatively from last time in 2007 market shares in the UK which was 31.4%. Sainsbury’s share also reduced to 0.4% from last period. ASDA and Morrison’s market share rise by 0.1% and 0.3% in this period till April 2008.these figures shows that there are limited number of customers so if one will win then second has to lose. However, Tesco group sale hiked to £51.8bn in 2008 by employing 440,000 plus people worldwide. Tesco has shown extra ordinary non financial performance and good financial performance when there is price war between ASDA and Tesco. And it’s expecting to rise in 2009 when fresh and easy stores are really successful in USA. Tesco was successful not only in food or other products items but also remain successful in services business in 2008 by gaining demonstrating growth, breadth of the group supported by increasing strength as a leading internet retailer. Dotcom was an excellent form, with sale in Tesco gone up by 30%, telecoms performed well. And joint venture with O2 turned into profit for this first time in 2008. (Ref.13, Financial Statement (2008). Tesco is not only successful company but also considered to be a green company working for society and environment. Charity, donation and gifts amount of £4.4 million to British Red Cross. Tesco is also playing an important role in local community and has opened cultural centers in all countries of operation. In recent years Tesco spend £600,000 for new automated recycling machines for customers in some stores in 2006. Following the community plan in 2006 now Tesco have expand this to nine different countries, bearing together a range of community, environmental and health project, according to local market needs, and also have plan to start this programme in the remaining three countries quite soon.(Ref.14, David Reid 2008)

5.3 Sale Performance

UK sale are gone up 6.7% and trading profits grew by7.1%- after Tesco start-up cost in the US and on the Tesco direct – TO £2050m, helped by a solid margin performance. Group sale have increased by 11.1% to 51.8bn in 2008.group non food sale rose 12% to £11.8bn and none remains an important contribution to Tesco. Total international sales grew by 25.9% to £13.8bn. People are a little bit more interested in value – they have become cannier. But there is an opportunity for ‘Finest’ food because people are eating out less.” She added that furniture, tied to the fortunes deteriorating housing market, had been hit by consumer cutbacks, while pushing promotions and value lines, Tesco had “a good track record of margins being pretty steady”. The chain has set aside £450m for its “step change” efficiency savings program coming year, up from £350m year end 23/02/2008. Stated by (Ref.15, Lucy Neville-Rolfe.2007). In 2007 Tesco has been knocked out from its leading position in neighbourhood retailing, mean merging between co-op groups which created UK’s largest neighbourhood retailer with a share of 7.9%. However, Tesco not only keep its leading position in the UK market but also improved sale revenue from previous years. Clearer picture about the sale performance can be seen in following chart.

(Appendix-A)

Group revenue (excluding vat) rose 20%, in the rest of Europe revenue increased by 35% and in Asia by 27% from £4369m to £5552m during last three years, UK revenue up but not the percentage as in the other areas of operation, which mean Tesco working on the policy of extending and growing overseas and keep maintaining the position of the as leading grocery retailer in the UK’s market where revenue increased 16% from £29990m to £34874m over last three years.

5.4 Profitability Analysis

Group profit before tax is up by 5.7% or by 15.3% if exclude the last year pensions, here it seems to show higher profit in last year when actually gross profit before tax was not healthy and transferred last year pension against current year profit. This profit smoothing has been forbidden by 1AS. However, these results demonstrate the strength of the group. UK trading profit rose 7.1% to £2050m, with the trading margins at 5.9%, slightly up on 2007 and 2006.

(Appendix-B)

Profitability analysis shows Tesco has not deteriorated significantly over last three years. All three profitability measures have remained almost same from 2006 to 2008, there are slightly changes in measures but it went down to the previous position in 2008. ROCE numerator represent profit before interest & tax and denominator being the sum of net assets.Net debts & dividend creditors excluding asset held for resale (net). Shareholders would obviously be concerned about profit reduction which was 6.2% in 2007 and then 5.78% in the 2008 because when operating profit is low obviously profit for distribution to shareholders should be lower. Earnings per share rose to 20.20p in 2006 (26.95p in 2008). Over last three years group revenue increased to 20% and operating profit increased to 22% when inflation rate was 3% to 4% and cost the products kept increasing but after all these was kept growing and had good control on the prices. Operating profit margin decreased .42% in the UK market its mean company operating cost is higher than the last years, advertising cost going out of control due to high level of competition and war for the prices. Tesco direct cost increased while it price of products remained same or cut the prices to win the customers which affect the gross profit margin. Tesco’s International markets or non UK markets contributed £701m to trading profit; in Europe sales raised by 23.9% to £7.8bn which £6.3bn in 2007. Trading profit increased to £379m, up 24.8% in Asia and sale rose by 27.2% to £6.0bn (2007- £4.7bn)

5.5 Assets Management Efficiency

Tesco total net assets have increased by £1,331m (in 2007) to £11,902 and noncurrent assets increased by £3,633m after charging depreciation to tangible assets and amortization to intangible assets of £992m. Inventory rose 66% to 243000 in 2008 (from £1464000 in 2006) compared to sale increased by 20% in last three years while inventory as percentage of revenue was 3.7% in 2006, 4.5% in 2007 and 5.1% in 2008 or 4.4% average over last three years. This constant level of inventory shows Tesco policy to keep sufficient inventory of avoiding inventory shortage and enjoying trade discount for bulk purchase. This can be one aspect on the other hand there is huge difference between the percentage of inventory and revenue so, company should reduced the inventory level and pay to supplier earlier to get more discount or invest this sum of money in short term security to get some returns. Inventory holding period reduced by 3 days (23days in2007 and 20 days in 2008), but over three years inventory holding period increased as it was 14 days in 2006. Inventory holding period need to improve, Tesco is well known food retail store for fresh food and management should improve inventory control system & new scanning gaps using hand held computers on constant cycle. Tesco also introduced delivery to stores in shelf-ready packaging which will helps in efficient management of stock delivery on time and improve in turnover period. Trade and non trade payable increased 43.2 and cost of sale gone up 20% during last three years showing consistency while creditors as percentage of coast of sale also remained between 14%-16%. This consistency show trade creditors or supplier not been used as free source of finance and paid them on time. In (Ref.16, Tesco Annual report 2008), Tesco is one of three signatories to the UK Government statutory supermarkets code of practice. It takes supplier relationship very seriously and has introduced in the KPI Steering Wheel. Last confidential supplier survey on Feb 26th showed more than 90% supplier consider Tesco as reliable, trustworthy & fair. T Tesco’s asset turnover y rose 12% to 1.96 times in 2007 (in 2006 1.75 times) and then reduced 20% in 2008 to 1.56time. So, over last three years assets turnover reduced 11%. This result shows assets management efficiency been affected and it can be seen that £1 worth of assets earn 11% less than the previous years (before 2006). Non-current assets increased 28% over last three years. Another aspect of reducing current assets and increasing non-current assets can be the Tesco’s expansion to all over the world opening new stores and exploring new markets, which increased company fixed or non -current assets by using current assets like cash.

5.6 Short Term Liquidity

Tesco’s ability to pay its customers or supplier can be analyzed by Current ratio and quick ratio. Indicators of current ratio show company’s ability to pay current liabilities. If all the supplier demand for the payment at the same time, is company able to pay all demanded creditor, can be assessed by quick ratio approach where inventory do include as liquid assets.

(Appendix-B)

Over the last three years Tesco’s Current ratio increased 17.3% (0.61:1 from 0.52:1); this is mainly increase 60.75% of current assets. Most likely its due to increase in cash, short term investments and inventory which help to increase the liquidity ratios. Inventory was increasing at high percentage as compare to percentage of sale; company increased the level of inventory it’s either to get more trade discount or to keep secure the business not to run out of stock. Quick ratio increased 15% to 0.38: 1 (0.33: 1 in 2006) but if compare to industry average 0.57:1 in 2006, quick ratio indicate company is facing liquidity problem. Tesco’s inventory increased 66% while sale by 20% over last three years. So, this extra 46% of inventory should convert into cash as soon as it can be. By converting inventory into cash will not stable liquidity position but also reduce the holding cost which will affect on the company annual profit. Current liabilities increased 3% while current assets increased by 60.75%, here is big difference between current assets and current liability which shows liquidity position of Tesco healthy while by analyzing quick ratio it seems company facing cash problem and Tesco should convert its current assets in more liquid form (cash or cash equivalent form)

5.7 Shareholder Interest

Dividend paid increased 26% to 10.90p (from 8.63p) over three years while 13% increased from 2007 and also in line with EPS.non availability of enough cash and other liquid assets also posed no threat to dividend payments. Tesco announced to pay dividend in line with EPS.A final dividend of 7.70pence per ordinary share brings the full year dividend to 10.90 pence (including 2.80 pence interim dividend).an increase of 13.1% in 2008 as compare to 2007 when dividend per ordinary share was 9.64 and 26.3% as compare with dividend of 2006 when dividend per share was 8.83 pence

(Appendix-B)

Diluted earnings per share grew by 20.8% to 27.02 pence in 2008 which was 22.37 pence in 2007. Price earnings ratio (P/E ratio) decreased to 14.8P in 2008 from 19.9P in 2007. It shows how much an investor is willing to pay for making one pound return. Earnings per share (EPS) increased 33.4%, investors hesitating for further investing as share price remained almost same although dividend on the investment increased but it is arguable that investor can make money just by depositing into bank accounts and get interest from that deposit without having any risk. Some analysts considered a high P/E is due to overpriced share market value. Highest dividend yield was 2.7% in 2008 over the last three years.

5.8 Balance Sheet Analysis

Balance sheet net assets have increased by £1331m to 11902m while non -current assets increased after depreciation and amortization for the amount of £992m.Gearing measures borrowed funds against equity, which include retained earnings, provisions, premium and ordinary share capital. Tesco’s gearing increased by 56.93% compared to 45% in 2007 and 49.4% in2008.company ability to pay interest increased by 8% to 10.70 times from last year figure and 23% over the last three years. Financial leverage continues to improve as net finance costs have reduced in last three years due to good credit control management. Tesco’s finance cost can be reduced more if company use trade creditor as free source of finance.

5.9 Cash Flow Analysis

Overall, the group generated a net cash inflow of £801m, leaving net debt of £6.2bn at the yearend 2008 which is £1.3bn more than the last year.

(Appendix-B)

Tesco’s cash and cash equivalent position strengthen and increased 72% in 2008 with cash inflow of £801m but even than I am not confident that company is able to pay current liability by cash. This is in Tesco’s plan to increase the creditor payment period and reduce the inventory level to the level of sale percentage. Company should also plan to sale noncurrent assets which are not really in use or giving low productivity to generate some cash.

Financial and Non-Financial Key Performance Indicators

We operate a balanced scorecard approach to managing the business that is known internally within the Group as our ‘Steering Wheel’. This unites the Group’s resources and in particular focuses the efforts of our Staff around our customers, people, operations, finance and the community. Its prime focus is as a management tool for the company so that there is appropriate balance in the trade-offs that need to be made all the time between the main levers of management – such as operations measures, Financial measures or delivery of customer metrics. It therefore enables the business to be operated and monitored on a Balanced basis with due regard to the needs of all stakeholders. For the owners of the business, it is simply based around the philosophy that if we look after customers well and operate efficiently and effectively then shareholders’ interests will always be best served by the inevitable outputs of those – growth in sales, profits and returns. (Ref.17Tesco Annual Report 2008) Dependency on UK market to 74% of the total group revenue Nearly one third (31%) of UK’s total market share Excellent distribution network and new self-service checkouts systems been introduced Tesco is the world’s third largest grocery retailer with operation in 12 international markets and employing over 440,000 people.

6-CONCLUSIONS

6.1 Objective 1-The effect of social and economic responsibility towards all stakeholders on Tesco’s business performance.

Tesco was recognized as an Example of Excellence in the Barclays Environmental Leadership category at the Business in the Community Awards in July 2008. In 2006, as part of Community Plan, Tesco announced a string of long-term targets aimed at minimizing environmental impact and till now going ahead to achieve these targets. (Ref.18, Press Releases, 18 July 2008). Tesco policy to its customers is key factor of success and (Ref.19, Dr. Paul Temporal) states, When Tesco says, “Every little helps”, it really means it. Its CRM program is certainly one of the best in the world, and customers love it. Tesco has been principally a food retailer in the U.K., in a mature market that has grown little in the last 20 years or so. That Tesco has grown its business at all which is a source of consumer attraction, when the only route to growth is taking market share from competitors. Tesco is fully aware of its social responsibility and really committed to provide best level of service to all stakeholders. And therefore I believe Tesco’s relation with local community, government, employees and others stake holders is impressive.

6.1 Objective 2- The effect of Non-financial performance in the UK and outside the UK on Tesco.

30,000 new jobs to be created across the group in 2008 and total number of employee reached to 440,000 in 3738 stores. Tesco’s plan to open over 11.5m square feet of new group space this year, 80% of it outside the UK. Easy and fresh retail stores in USA opened another door of haven for success. £5bn- plus property funding programme going well. £200m transaction with the prudential plc completed before the year ended 2008. Strong start in 2008-13% growth in first five weeks Clearly Tesco had a strong growth across the group and produced above the competitors and average industry performance, and therefore I do believe that Tesco deserved to be number one retail grocery store of the UK and third largest in the world

6.3 Objective 3- The effect of financial performance including profitability, cash flow, assets managements and liquidity analysis of Tesco plc.

Terry Leahy, Chief Executive, comments:

“The breadth of the Group and the strength of our business model have enabled Tesco to deliver another year of double-digit sales, profit and earnings per share growth – in challenging market conditions. We begin the new financial year confidently – with a good start in the UK, excellent progress in our established international markets and promising early performance from our investments in future growth, particularly in the United States, China and Turkey.” Clearly, not only was Tesco, profitability, with good control of its costs, but also had a high level of total assets over total liability which present Tesco’s balance sheet really strong. But if we focus on the quick ratio in liquidity situation it will not be difficult to analyse that it may face cash problem although there is positive movement in 2008. Therefore I believe that close analysis of cash flow statement will reflect cash shortage to Tesco and can be seen from the Tesco’s quick ratio 38% compare with industry average 57%.

7. RECOMMENDATIONS

“At a time when others appear to be faltering in their international commitments, Tesco is getting stronger” (Ref.20, Rachel Sanderson 2008) Tesco should increase the number of stores in the low-income. Since Tesco strongly highlights its commitment to food access in low-income communities. It should be identified a goal for how many of Tesco’s store locate in the communities that have low rate of income and they are food insecure. Tesco needs to insure that a substantial percentage of its store-based peoples are full-time employees who are paid a reasonable wage and have affordable quality health benefits. Tesco should establish a positive relationship with labour unions and not seek to influence employee decisions on whether to join the labour unions or not. Tesco should make a mechanism for community input into its operations. Advisory committees or similar community mechanisms for dialogue that can help stores stock products desired by local customers or community. Tesco should establish mechanisms to increase local sourcing for its products and support small local farmers. It could help to make this goal through labels identifying the origin of product like from California or from Arizona. Tesco should design and site new stores according to the principles of green design and smart growth that will helpful to minimize climate change impact. Tesco should achieve green building certification for its stores to demonstrate commitment to sustainable design, and should make information on stores’ environmental features available to customers and community member. Tesco should accessible to pedestrians, bike riders and public transportation and specially for disable people reasonable measures should in place that make easy their accessibility into stores. The authors view Tesco’s entrance into the U.S. market as an opportunity to challenge all food retailers to think broadly about the social and environmental impacts of the way they conduct their businesses. Perhaps Tesco spokesperson Simon Uwins (2007) put it most aptly in describing why he loves retailing, “It’s so democratic: our customers and our employees will decide whether or not we’ve been successful in creating a great shopping trip and a great place to work and that’s how it should be.”1 Tesco currently paying huge amount as interest and foreign exchange rate change, Tesco should deal in local currency or open foreign currency account with the reserve Tesco’s International expansion in lucrative markets like India, China & US would help expand customer base but bearing in mind mature markets like US would not be an easy task as it is the home to WM parents of ASDA. Research needs to be done and lesson learned from Marks & Spencer and Sainsbury’s expansion in US. Tesco’s inventory holding period should be improved. Use just in time method (where it is possible) or make an arrangement with supplier to build up system according to the demand of the Tesco’s customers. Tesco’s sale over last three years increased by twenty percent while inventory gone up by sixty six percent. Tesco should reduce the level of inventory to a little up then the sale that will also reduce the holding cost and handling cost. Tesco should transfer some of its fixed assets or less liquid assets to current assets. It improves the level of cash and liquidity ratio. Grocery retail industry average for liquidity ratio is 57% while Tesco’s liquidity ratio in 2008 was 38% which is below the average industry rate. Tesco should use trade and non trade creditor as free source of finance. Current assets increased 60.75% (mainly inventory) while current liabilities increased by 3% only so, the difference of percentages can be used as short term investment and gain return on it.

BIBLOGRAPHY

Tesco to create UK’s biggest store. Metro 27 November 2006. O’Leary, z. (2004). The Essential guide to doing Research. Sage publication Ltd, London. SjSU, (2004). Case Study Approach to Learning, California USA. https://www.sjsu.edu/depts/it/itcdpdf/casestudy.pdf: ( visited 28February 09) Saunders, M. & Lewis, P. Research Method for Business students. 3rd addition, Essex: Person education Ltd. Bell, Anthony J. (1995), Doing your Research Project, A guide for first time researchers in education and social science. 2nd Ed: Open University press. Accountancy College, (2008). ACCA, Paper F5, Performance Management, study text book, Holborn, London. Creevy, Jennifer (27 October 2008).Tesco extend supplier payment terms, Retail week. https://www.retail-week.com/Food/2008/10/tesco_extends_nonfood_supplier_payment_terms.html (visited 02 March 2009) Porter, Michael E. (1980). Competitive Strategy, 1st Ed: USA. Rigby, Elizabeth (2008).Tesco Victory after Competition Test Ruling, Financial Time, 29 November 2008. Leahy, Terry (2008), Tesco tells suppliers to cut the price, Tesco Annual Reports 2008, Tescoplc.com, UK. Peston, Robert (2009). BBC News, BBc business news 27, February 2009, UK. TNS, World panel (2008). UK Market share, https://en.wikipedia.org/wiki/Tesco (visited 3rd March 2009 ) Annual financial report, Tesco plc (2008). Growth in Non-food Sector, https://www.tescoreports.com/ (visited 26 February 2009) Reid, David (2008), Non- Executive Chairman. Tesco Annual report 2008, Tescoplc.com. UK. Neville-Rolfe, Lucy(2007). Tesco’s corporate and legal affairs director. The guardian 2nd August 2007. Tesco’s Annual Report 2008.Assets management Performance, Page number67 69. Tesco’s Annual Report 2008.Key Performance indicator, Page number7. Press Releases 18 July 2008. Tesco to get power from straw. Media release, Tesco Plc. https://www.tescoplc.com/plc/corporate_responsibility/news/press_releases/pr2008/2008-07-18/ (Visited 14 March 2009) Dr Temporal, Paul. Tesco- the brand experiences everything, Hi-Tech Hi-Touch Branding, January 2001. Sanderson, Rachel (2008). Reuters, Recommendation, from Tesco Plc Annual Reports 2008 https://stocks.us.reuters.com/stocks/incomeStatement.asp?symbol=TSCO.LHYPERLINK “https://stocks.us.reuters.com/stocks/incomeStatement.asp?symbol=TSCO.L&WTmodLOC=L2-LeftNav-17-FinancialStatements&period=A”&HYPERLINK “https://stocks.us.reuters.com/stocks/incomeStatement.asp?symbol=TSCO.L&WTmodLOC=L2-LeftNav-17-FinancialStatements&period=A”WTmodLOC=L2-LeftNav-17-FinancialStatementsHYPERLINK “https://stocks.us.reuters.com/stocks/incomeStatement.asp?symbol=TSCO.L&WTmodLOC=L2-LeftNav-17-FinancialStatements&period=A”&HYPERLINK “https://stocks.us.reuters.com/stocks/incomeStatement.asp?symbol=TSCO.L&WTmodLOC=L2-LeftNav-17-FinancialStatements&period=A”period=A 16-3-09 Uwins, Simon, marketing a spokesperson, Growth in: USA. https://www.tescoplc.com/plc/ir/pres_results/presentations/p2007/tesconov07/introfresheasy.pdf (Visited 16 March 2009) All annual reports and Executive Summary has been taken from Tescoplc.com, https://www.tescoplc.com/ (Visited 26 February 2009 and different times during project.)

APPENDICES

APPENDIX – A

A

2008

2007

2006

3-Year Change

£bn

£bn

£bn

Group Sales(£bn) 51,773 46,611 43,137 20% No of Stores 3,751 3,263 2,672 40% Non UK stores 1636 1275 774 111% UK Stores 2,115 1,988 1,898 11%

REVENUE EXCLUDING VAT

UK 34,874 32,665 29,990 16% Rest of Europe 6,872 5,559 5,095 35% Asia 5,552 4,417 4,369 27% Total 47,298 42,641 39,454 20%

OPERATING PROFIT

UK 2,097 2,083 1,788 17% Rest of Europe 400 324 263 52% Asia 294 241 229 28% Total 2,791 2,648 2,280 22%

OPERATING MARGIN

UK 6.0% 6.38% 5.96% 1% Rest of Europe 5.8% 5.83% 5.16% 12% Asia 5.3% 5.46% 5.24% 1% Total 5.9% 6.27% 5.78% 2%

Ref.22, Financial statements Tesco for year of 06/07 and 07/08

APPENDIX – B

A

2008 £m

2007 £m

2006 £m

3 years change

PROFITABILITY

ROCE 12.9% 12.6% 12.8% 1% Operating Profit Margin 5.9% 6.27% 5.78% 2% GP Margin 7.68% 8.12% 7.67%

ASSET MANAGEMENT/ EFFICIENCY

Inventory Turnover (Days) 20 23 14 42% Inventory as a Percentage of Revenue 5.1% 4.5% 3.7% 38% T. Payable as % of Cost of Revenue 16.7% 15.3% 14.0% 19% T. Asset Turnover (Times) 1.56 1.96 1.75 -11%

SHORT TERM LIQUIDITY

Current Ratio 0.61 0.56 0.52 17% Quick Ratio/ Acid Test Ratio 0.38 0.32 0.33 15%

SHAREHOLDER INTEREST

Return on Shareholder Fund 23.5% 25.1% 23.7% -1% Dividend Per Share 10.90p 9.64p 8.63p 26% Earnings Per Share 26.95p 23.61p 20.2p 33% Dividend Cover 2.48 2.32 2.34 6% Price – Earnings Ratio 14.8% 19.9% 16.5% -10% Dividend Yield 2.7 2.2 2.6 4%

FINANCIAL LEVERAGE

Net Gearing 56.93% 45.41% 49.41% 15% Interest Cover (time) 10.7 9.9 8.7 23%

Ref.22, Financial statements Tesco for year of 06/07 and 07/08

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