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Business and Financial Performance of Tesco Plc over three years

THE BUSINESS AND FINANCIAL PERFORMANCE OF TESCO PLC OVER A THREE YEAR PERIOD

Oxford Brooks University

Submitted by: TAHIR GHAFOORACCA Registration # 1969183Date Submitted: 21 Nov, 2011

Word count: 6495 approximately.

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Table of ContentsPart One....................................................................................................3

Introduction......................................................................................................................................3

Reasons for choosing the topic:....................................................................................................3

Research Aims and Objectives:....................................................................................................4

Overall research approach:...........................................................................................................5

Part Two:...............................................................................................................................................5

Sources of information used:.........................................................................................................5

Methods used to collect information:............................................................................................6

Limitations of information:..............................................................................................................7

Accounting and Business techniques used and their limitations:.............................................8

Part Three............................................................................................................................................10

Ratio Analysis................................................................................................................................10

Business Analysis.........................................................................................................................16

Conclusion:....................................................................................................................................22

List of references:................................................................................................................................24

Bibliography:........................................................................................................................................25

Appendix I:...........................................................................................................................................26

Appendix II:..........................................................................................................................................27

Appendix III:.........................................................................................................................................28

Skills and Learning Statement..............................................................................................................29

Meetings with my Mentor:............................................................................................................29

Answering the research questions:.............................................................................................35

Demonstration of interpersonal and communication skills:.....................................................36

Help obtained by undertaking the research and analysis project:..........................................37

Part one2 | P a g e


Introduction

The topic I have chosen for my research paper is the Analysis of business and financial

performance of Tesco plc for three consecutive years. TESCO PLC is a super market giant

in United Kingdom retail industry and has earned its name over the years since its inception.

This research paper aims to evaluate the company’s overall financial and business activities

during the year 2009-2011.

Reasons for choosing the topic

In the time when recession was taking its toll, Tesco plc successfully managed to run its

various businesses given a very competitive retail market. The inspiration in choosing Tesco

plc for my research comes from my work experience with the company for over a year.

Being an employee of the Tesco Group and a chartered accountancy student, I have always

been keen in assessing business and financial factors that has kept the company going over

the years. Moreover, I am pursuing the core examinations of ACCA at present in which

Corporate and Financial Reporting and Business Analysis are imperative elements of those

subjects. After getting hold of self-belief in my ability and grip over these subjects, I came to

know that I would write my research paper on the above mentioned topic. This paper will

assess the business and financial performance by taking into account the key factors that

lead the company to its name.

Tesco plc is a global grocery and general merchandise retailer which is based in Chesnutt,

United Kingdom. It 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).It has

extended its operations in 14 countries across Asia, Europe and North America and is the

grocery market leader in the UK (where it has a market share of around 30%), Malaysia, the

Republic of Ireland and Thailand. This gives Tesco a competitive edge over its competitors

like ASDA, Sainsbury and Morrison in UK. (Source: http://en.wikipedia.org/wiki/Tesco)

It was Jack Cohen who founded Tesco in 1919 when he began to sell surplus groceries from

a stall in east end of London. His turnover, on very first day, was £4 which guaranteed him a

profit of £1. In 1929, he made further progress when he opened his first Tesco store in Burnt

Oak, Edgware, Middlesex. The Tesco name first appeared after Cohen purchased a

shipment of tea from T.E. Stockwell and combined those initials with the first two letters of

his surname. (Source: http://www.tescoplc.com/about-tesco/our-history/).

Tesco plc has grown through organic and in-organic growth in the past. Organic growth is

when a company strives to increase its output/production in order to achieve greater profits.

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http://www.tescoplc.com/about-tesco/our-history/

http://en.wikipedia.org/wiki/Middlesex

http://en.wikipedia.org/wiki/Edgware

http://en.wikipedia.org/wiki/Burnt_Oak

http://en.wikipedia.org/wiki/Burnt_Oak

http://en.wikipedia.org/wiki/Carrefour

http://en.wikipedia.org/wiki/Wal-Mart

http://en.wikipedia.org/wiki/Wal-Mart

http://en.wikipedia.org/wiki/Cheshunt


In this the company does not expand by means of mergers or acquisitions but carries on its

course of business. This is generally termed as the most authentic way of growth for the

companies. It is also a prime indicator of how effectively the management has used it

resources. The company benefits from increased revenue which could refer to an increase

in customer base and market share. Organic growth does not require outside investment

and is safer than rapid growth. This is due to the tried and tested business models where

the profits are reinvested into the company avoiding outside sources of finance.

There are factors that can perhaps affect organic growth. If a business is aiming for rapid

expansion it may not find organic growth worthwhile. Rapid expansion could mean that a

company is looking to get into the market with a view of making big profits. This would

require an injection of outside finance to support rapid growth.

On the contrary to organic growth is inorganic growth. Inorganic growth is much more

dynamic and responsive, involves less time as compared to organic and more finance.

Inorganic growths strategies like mergers, acquisition, spinoffs and takeovers are regarded

as important factors that help companies expand, cut competition, increase customer base,

employ new technology and increase in size fairly quickly. The company results in achieving

substantial growth in good time. Tesco has taken 45 acquisitions though taking stakes in 20

companies and has 30 divestitures throughout this period. Although its main focus is UK

supermarkets initially, however it has diversified its business into areas such as clothing,

electronics, furniture, petrol, software, and telecom.

Research aims and objective:

As I have mentioned before, this research paper is being taken exclusively with the aim to

evaluate the Tesco’s performance in both financial and business terms over a three years

period. Since the financials will be compared with its three year performance, this will put

forward the facts and figures in a more understandable manner for the reader. Financial

statements and other accounting notes will be a primary and important source of information

to accomplish required results of my research.

Research questions are as fallow.

How has Tesco performed financially in last three years in comparison with its other

competitors, like Sainsbury?

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Has it maintained its market share when supermarkets in United Kingdom were

facing downturn?

What are Tesco weaknesses and what kind of threats does it face?

Research Approach.

I tried to adopt a strategy which would answer effectively all my

research questions while keeping the reader obsessed in the research. I also made sure that

I fallow the guidelines that were mentioned in the information pack provided by ACCA and

the Oxford Brookes University. To strengthen my approach for this project, I will follow these

points:

Analysis of external environment (PESTEL) of Tesco plc.

Study and analysis of company’s strengths weakness, opportunity and threats.

Ratio analysis will be performed on financial statements including income statement

and statement of financial position.

Part 2

Source of information used

Relevant and meaningful information are vital to produce a conclusive research project on

any organization. Information sources are categorized as either primary source or secondary

source.primery data is original data broadly used by researchers to answer the research

questions. The popular ways to collect primary data consist of surveys, interviews and focus

groups, which shows that direct relationship between potential customers and the

companies. In contrary to primary data, data collected from a source that has already been

published in any form is called as secondary data. Published financial statements, books,

journals, newspapers are important sources of secondary data.

During the course my research, different wide range of resources were available to me to

write this paper. Tesco Plc annual audited financial reports were available to me to draw my

conclusion on financial aspects of the company. Audited financial statements of any

organization, without any shadow of doubt, are of utmost importance and are a key source of

making comparisons and analysis of different aspects of the organization. Hence, the

audited financial reports of Tesco plc have been comprehensively used in this research

report

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The importance of internet in modern age cannot be denied as its emergence has provided

the researchers a valuable means of accessing information to write their research papers.

For my research paper, I did visit websites of various renowned business newspapers in UK

including financial times, guardian and this helped me to sort out information of my interest

from a hundreds of business articles. Financial time is an international business newspaper

published in London and printed 24 cities around the world. It reports business and features

share and financial product listings. The information given on its websites is considered

authentic in business world in view of the fact that its name is trusted one. This helped me to

build up my trust on genuineness of information.

Although this research paper is extensively based on the data taken from the secondary

source, however a quantity of information was gathered by having meetings with the store

management as it was easy for me to get first hand information being an employee of the

company. Store management has been very helpful and they encouraged me to go ahead

for successful completion of my research project.

Method used to collect information:

There were different resources available for me to equip myself to write this research paper

as Tesco plc is UK’s largest retailer and known as super market giant. It has set up its

operation internationally in more than 14 countries including USA.Throughout research, it is

always crucial to process all information in such a way that will satisfy the requirements of

project. I have made my best efforts to achieve this milestone by taking into account

diversified methods of information collection while ensuring the information gathered is

factual.

Financial statements show the financial performance of a company for a given period and

consequently, are widely used internally and externally to assess the financial strength of

company. It was my primary task to seek access to those audited financial statements of

Tesco plc to perform an effective financial analysis. I downloaded the soft copies of financial

statements of 2008, 2009, 2010 which were readily available on Tesco’s official website

(http://www.tescoplc.com/investors/), although London Stock exchange was a practical

source available as listed companies are required to submit their audited financial reports

annually in UK. Any document provided by a company to its shareholders, must be made

available pursuant to rule 26 and its provision must be notified. An electronic copy of any

such document must be sent to the Exchange. (Source: London stock exchange.AIM rules

for company February 2010, page no 8).Financial evaluation of Tesco alone was insufficient

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http://www.tescoplc.com/investors/


to achieve required research objective unless its financial performance was compared with

the other company for the same period in same industry. Hence, I decided Sainsbury, a

bitter revival, to compare with Tesco plc in order to make financial analysis meaningful. I

downloaded its financial statement from its website. A full list of the websites used can be

found in the bibliography section of this report.

As I have mentioned earlier in this report, I have used different business newspaper

websites to grab information from different business articles related to Tesco’s performance

over the past few years.

Text books are useful means of information did use all my text books, particularly text book

for P2 – corporate business reporting (London school of business finance edition 2011) to

review how to calculate financial ratios and what does it mean. I also used text book for

paper P3-business analysis (LSBF 2011 edition) to get some guidance on the application of

techniques.

Limitations of information

As with all sources of information, my sources too

had some limitations. I tried at my levels best to confront with those shortcomings by keeping

them down to minimum level as it was my intention to limit them. I would not have been

successful to accomplish my aim if I relied on just one source of information. I did try to verify

the information gained from a particular source when it made a serious claim or fact.

Financial statements help to evaluate company’s financial performance relatives to its peers

however, there are some limitations attributed to them. Financial statements reflect the past

performance of an organization and don’t provide sufficient information for the future. They

don’t predict any change in sales as a result of increased research and marketing and have

also failed to forecast the impact on profitability, in case a competitor enters or leaves the

market. It is sometime difficult to assess how reliable the financial statements are.

Companies often release unaudited financial statements which, by definition, are less

reliable as compare to audited financial statements. However, an audited and publically

disclosed financial statement no longer provide any guarantee of a company’s health as

companies routinely face financial problems to run its operations.

Newspapers and its websites possess a threat to its reliability as a source of information as

they are vulnerable to be biased towards an organization for any reason and sometimes for

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no reason. To combat this shortcoming, I made it strict point to only use information by

credible newspapers so as it would be helpful to reduce the risk.

Last but not least, discussion with colleagues and meeting with store manger may carry

limited of biasness. It was quite obvious management always tried to hide the negative

aspects of the organization. However, I tried my best to verify information gained and

presented them without any prejudice even though I am an employee of the company.

Accounting and Business techniques used and their limitations:

I was required to use most useful techniques in order to adequately assess the business and

financial performance of Tesco plc. I was quite familiar with the analysis of financial

statements during the course of my study and it guided me to use ratio analysis

technique.PESTEL analysis and SWOT analysis techniques are very common to assess the

business performance of the any organization and hence, used in this report.

Ratio analysis is a dynamic way to assess the financial strength of companies. This

technique involves taking two or more figures and comparing them to get a result that

accurately displays the business’s financial strength and weaknesses. This technique is

widely understood and used diverse group of people. For example, managers and owner are

interested in financial ratios within organization and at the same time also have importance

for the investors, share holders, analyst outside the organization. Ratios are of various types,

including profitability ratio, liquidity ratio, debt ratio and assets ratio.

As for as limitations are concerned, financials ratios could provide misleading information

when these are used to compare one company with the other company. It is very hard to

believe that two companies are identical even when they are competitor in the same industry

or market since their business and financial profile is different to eachother.One company

may be able to get loan at lower interest and may show high gearing level while other

company may not be able to secure loan at cheap rate and it may demonstrate that

company is operating at low gearing. Companies may have different capital structure. It will

not be useful analysis if equity based company’s performance is compared to a geared

company’s performance.

Sometime, it is very complicated to interpret whether a particular ratio is bad or good. For

instance, a high current ratio may indicate a strong liquidity position, which is good or

excessive cash which is bad. Similarly Non current assets turnover ratio may signify either a

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company that uses its assets efficiently or one that is under capitalised and cannot come up

with the money to buy enough assets.

Swot analysis stands for Strengths, Weaknesses, Opportunities and Threats. It is a business

planning method that is used to measure four very fundamentals of the business that are the

Strengths, Weaknesses, Opportunities, and Threats that are faced in different perspectives

of the business. It is extremely useful tool used for understanding and decision making for all

type of situation in business and organization and well known for audit and analysis of the

overall strategic position of the organization.

The technique is credited to Albert Humphrey, who led a convention at Stanford University in

the 1960s and 1970s using data from Fortune 500 companies (www.wikipedia.com).its

usefulness is not limited to the profit seeking organization. It can also be used to assess the

prospective of any individual projects on any level for decision making purposes.

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http://en.wikipedia.org/wiki/Fortune_500

http://en.wikipedia.org/wiki/Stanford_University

http://en.wikipedia.org/wiki/Albert_S_Humphrey


Part 3: Analysis, comparisons and results.

Company overview:

Tesco plc is one of the largest retailers on the face of earth, originally based in UK. It is

operating in 14 countries across Asia, Europe and North America through 5380 stores

approximately and providing employment around 472,000 people. It provides online services

through its subsidiary, Tesco.com. (Source: 2010 annual report).The company sells more

than 40,000 range of products including clothing and non food items. Tesco is

headquartered in Hertfordshire, UK.

The group has recorded £60,931 million revenue for the year ended February 2011, an

increase of £4021million as compare to 2010 and £7816 million to 2009.Company earned a

profit of £2627 million in comparison with a profit of £2336 million in fiscal year 2010 and

£2138m in 2009.

Financial Analysis

Ratio analysis is extensively used to determine the past, present and future financial aspects

of businesses. In this section, I will compare the financial ratios of 2009, 2010, 2011 with its

bitter revival Sainsbury in order to determine financial health of Tesco over the past 3 years.

Profitability ratio:

Profitabity ratios are used to measure a business’s ability to generate profit as compare to its

expenses and other relevant cost during a specific period of time. It is a projection of how

productively a firm can cope with its assets and debts.

Return on capital Employed:

This is a measure of the underlying performance of the business before finance. It means

the PBIT is an operational measure of how the business has performed that is not affected

by its capital structure. It takes into consideration the overall return before financing and is

not affected by gearing. It is calculated as

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ROCE = profit before interest *100

Capital employed

Year Tesco plc Sainsbury

2009 12.8% 10.1%

2010 12.1% 11.00%

2011 12.9% 11.1%

(Source: annual reports)

This ratio shows how productively a business is using its capital by relating overall profit

performance to the amount of capital employed in business. It is quite evident from the

above ratios that Tesco’s ROCE drop to 12.1% in 2010 and company failed to use its capital

efficiently. In fiscal year 2011, it increased significantly to 12.9% due to operational

improvement in the form of profit growth, working capital improvement and greater capital

efficiency by entering into sale and lease back agreements. On the other hand, Sainsbury

experienced a steady increase in its ROCE ratio. (Source: http://ar2011.tescoplc.com/)

Return on Assets

Following formula is used to calculate it.

Net profit after tax/total assets

YEAR Tesco Sainsbury

2009 0.046 0.028

2010 0.051 0.053

2011 0.057 0.056

(See appendix for detailed calculations)

This ratio demonstrates how effectively the assets of Tesco plc are working to make profit.

Above situation is satisfactory and positive for both revival companies as figures show an

increasing trend which means they are increasing their earnings in accordance with the

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http://ar2011.tescoplc.com/


assets. Both companies have made capital expenditure in recent years and it seems to be

paid off.

Gross Profit Margin

The purpose of gross profit ratio is to show the margin on each £1 of sale. It provides an

insight into the relationship between purchasing/production costs and revenue. If the gross

profit margin is low or declining, this is usually a dreadful indication for company.

Formula:

Gross profit *100

Turnover

year 2009 2010 2011

Tesco plc 7.76% 8.0% 8.30%

Sainsbury 5.47% 5.41% 5.4%


In comparison with Sainsbury, tesco plc has displayed a consistent increase in its gross

profit ratio, which is good sign for the company as it is successfully managing its operations

by lowering its purchasing and production cost.

Liquidity ratio:

Liquidity ratios indicate entity’s ability to meet short term liabilities from current assets

available. There will be a going concern implications if company unable to meet its liabilities.

In this section we will focus on current ratio as it is main determinant of firm’s liquidity.

Current Ratio

Formula = Current Assets / Current Liabilities

year 2009 2010 2011

Tesco plc 0.77 0.73 0.66

Sainsbury 0.54 0.66 0.58


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From the аbоve figures, it is clear that the trend in the current ratio is decreasing which

means that Tesco’s ability to pay its short term debt is decreasing.sainsbury also following

the same trend .It seems as if whole industry is experiencing problem.

Lower current ratio is not necessarily meant the company is facing financial problems and

higher current ratio does not necessarily indicate good liquidity position. Current ratio

focuses on amount of current assets and liabilities although the fact is that turning current

assets to cash require time which varies company to company. The above results may also

explain the fact that both companies are using their current assets (i.e. cash) properly and

they are not laying idle which is a good signs for both revival companies future.

Efficiency ratio

Efficiency ratios assess how efficiently an organization is using its resources. It defines the

performance of company in terms of turnover from its assets, inventory and receivable.

These ratios are very important since an improvement in ratios interpret the improved

profitability by and large.

Assets turnover ratio

It shows the efficiency of an entity’s ability to use its assets to generate sales. It means how

many £ turnover is generated by each £ of assets.

Formula = Sales / Total Assets

year 2009 2010 2011

Tesco plc 0.091 1.25 1.302

Sainsbury 1.88 1.84 1.85

(See appendix for detailed calculation)

Above calculations shows that both companies are following an increasing trend in total

assets turnover which is good sign for both companies. This means that for every роund of

аѕѕet the соmраny own, the ѕаle is increasing. However, it is quite evident that Tesco plc

has used its assets less efficiently as compare to Sainsbury having turnover ratio of 1.85

better than Tesco plc (1.302) in 2011. Thiѕ аreа requires more attention and consideration

for Tesco.

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Gearing Ratios:

These ratios measure the proportion of borrowed funds (which earn a fixed return) to equity

capital (shareholder funds) and provide information about the financial risk of a company.

Following formula has been used to calculate leverage ratio.

Formula =Debt/capital employed

Capital employed = debt +equity

year 2009 2010 2011

Tesco plc 74% 54% 40%

Sainsbury 33.30% 32.29% 30%


Statistics above shows an encouraging signs for Tesco plc as its leverage ratio is on decline

which means company is switching over to equity finance to reduce its financial risk which is

always associated with debt financing. Same trend is followed by Sainsbury as well.

However, Tesco have high gearing ratio as compare to Sainsbury.

Interest coverage ratio:

It measures the ability of the company to pay the interest on its debt out of the profits that is

paid to equity. It is calculated as

Formula= profit before interest and tax/ interest

year 2009 2010 2011

Tesco plc 7.10times 6.4 times 8.31 times

Sainsbury 4.14 times 5.95 times 8.12 times

(See appendix for detailed calculation)

Interest coverage ratio demonstrate an increasing trend for both entities it means Tesco plc

can pay interest payment without facing any difficulties. The company has switched over to

equity finance in 2011 which have reduced the interest payments hence resulted in the

improvement of interest converge ratio in 2011.

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Investors Ratios

Diluted Earnings per share ratio:

This is one of the most significant ratios that the shareholders look out for.

It is the calculation of profit after tax and minority interest

divided by the diluted weighted average number of shares

in issue during the year hence the higher it the better it is.

If the Company determined to hand out all its profits as

dividends instead of retaining some for future expansion subsequently, it could be paid out

on each share. (Source: http://ar2011.tescoplc.com/).

It is obvious from above calculation that Tesco plc diluted earnings per share is increasing

every year and in 2011 it is gone to 35.72p which means companies future is prosperous

and quite attractive for the new investor.

Financial Ratio analysis

All ratios indicate the good performance of the company in 2011. It is quite evident from

previous two year results that company was facing problem to improve its ROCE in 2010

and it was tough year to beat although company was able to improve its gross profit ratio

and which rose from 8.0% to 8.30% in 2011.it has successfully reduced its gearing ratios in

2011 which has led the company to improve its interest payment ability. All ratios are

indicating a bright future of company.

Sales and Рrоfitаbility Аnаlyѕiѕ

Tesco plc was able to reports the income of £2671 millions in 2011, which is higher in

comparison with the previous two years at £ 2,336 million and £2138 million in 2010 and

2009 respectively. Group sales (including VAT) improved by 8.1% to £67.6 billion in 2011.

Group trading profit was £3,679 million for the year ended 2011, which is an increase of

7.8% as compared to last year. Company’s trading margin is at 6.0% now.Tesco’s

underlying profit before tax increased to £3,813 million, a rise of 12.3%.Underlying profit

before tax grew by 12.2% before property. For the year ended 2011, Tesco’s operating profit

rose by 10.2% to £3,811 million on statutory basis and profit before tax increased 11.3% to

£3,535 million.

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DEPS 2011 2010 2009

Tesco.plc 35.72 31.66p28.87 p

http://ar2011.tescoplc.com/


Operations in UK

The UK economy is still in improvement process but consumers have been under strain this

year due to high petrol prices, food and utility inflation and, VAT increase in recent time. As a

result, company is experiencing a period of unusually passive industry growth. Apart from

petrol, growth in the industry has been considerably lower than last year. Tesco’s business

has delivered a solid performance despite the downturn in economy. Total sales have grown

by 5.5% to £44.6 billion in 2011, which is ahead of the market. UK trading profit increased by

3.8% or by 6.4% before the effects of sale and leaseback programme.

Swot Analysis

Tesco plc is considered one of the largest food retailers in the world. The company’s largest

market is United Kingdom where it does operate under four banners of Extra, Superstore,

Express and Metro. The company sells approximately more than 40,000 food products,

which also includes clothing and other non-food lines. There are three levels of company’s

own product that are value, normal and finest. The company owns many stores, having gas

stations and this have made it one of Britain's leading independent petrol retailers. Company

is also offering retailing services consisting of Tesco Personal Finance.

Market share.

Tesco win a market share of 30.7% in UK retail market in 2010 compared with the 30.6% a

year before. Its multi-format capability has enabled company l to grow share in food on

continuous basis, although rising space contribution from hypermarkets will provide

opportunity to make a higher share in non-food.

Brand Image and value

The brand name is the greatest strength for the company. It has been around for centuries

and is widely trusted by its customers. The company has established an image that has

turned out to be its greatest strengths after years of effort that it has put in the communities,

with its corporate responsibility.

UK market leadership protected.

Tesco has developed a successful multiform strategy that has speed up its improvement

since gaining number one standing in 1996. Its UK sales are now 71% larger than its revival

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Sainsbury’s Sales and in the light of Competition Commission's report; it is hard nut to crack

for a competitor to confront its scale. It has successfully ruined Wal-Mart's chances of

pinching UK market control. Hence, Tesco is in extremely strong position in its domestic

market.

Tesco online:

Tesco.com, the world's biggest online supermarket, had another strong year. Taking into

account its operations in UK, it continued to grow well, with double-digit growth in grocery

and a further 30% increase at Tesco Direct. Tesco online now operates in over 300 stores

around the country. The company has a strong platform to develop this revenue stream

further as company's online services are being used over a million households on a

nationwide.

Tesco Telecoms

TESCO telecoms grew well during the year and have been successful in maintaining its

strong market share, driven mainly by the growth of Tesco Mobile. Tesco Mobile was one of

the fastest growing UK mobile networks in 2010. Its customer base is grown by 24% to over

2.5 million in 2011.

Weaknesses

Dependence on the UK market:

The company is still highly dependent on the UK market (68% 2011‘s trading profit),even

though company’s international business is growing consistently (13.8% growth in 2011) and

it is expected that it will contribute greater amounts to Tesco's profits over the next few

years. If any changes occur in the UK supermarket industry over the next year for instance,

like the cooperative group successfully overtake Somerfield chain, could change the balance

of power in UK supermarket, and affect share.

Potential serial takeovers:

Tesco plc evidently has massive firepower with an enterprise value of £3.26t in 2011

(source: http://uk.finance.yahoo.com/q/ks?s=TSCO.L). Its product range is also vast and can

justified almost any takeover, particularly in the UK.There is the danger of Tesco becoming a

consecutive acquirer, as this might tend to trim down earnings visibility and quality.

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http://uk.finance.yahoo.com/q/ks?s=TSCO.L


Opportunities

Non-food retail:

Tesco has held a massive market share in UK market and it is expected that it will increase

over the next few year. Its low cost structure and improved merchandising skills can be

helpful to grow further in non- food retail market domestically and overseas as well. It is

estimated that Tesco's non-food sales will double over the next four years.

In financial year 2011 Tesco saw some tough competitions in its non food business and its

sales were accounted for £5.3 bn of £ 44.2 bn UK sale. Increasing petrol prices have been

an important headache for the consumers as they spend £750 m on forth courts during that

period and it had been hard for them to manage their budgets.

Merging into international market.

Apart from UK, Tesco plc is operating in six countries of Europe including hungry, republic of

Ireland Czech republic, Slovakia, Turkey and Poland. It has also invaded Asian markets

including South Korea, Thailand, Malaysia, Japan and Taiwan. For the year ended

2010/2011, its international sale has grown 13.7% in comparison with last year’s sale and

reached to £ 21.1bn land mark.

Tesco is earning more than two-thirds of its profit growth from external markets. It started its

international operations in 1995 and today Tesco has been able to manage its operations in

13 markets of world. It has successfully built its diversified businesses across the world and

have developed market-leading, highly lucrative businesses by now many

countries.Comapny’s largest international business is in south Korea. Tesco has proved that

it is competent to develop gainful and market-leading businesses in a number of markets

during its first decade of international expansion. Over the next decade, Tesco is aiming to

focus on achieving growth in china, India and the United states, world’s largest economies,

which will offer company decades of future growth.

Due to its international growth, Tesco has developed a serious attitude towards

hypermarkets and this has had constructive implication for growth in the UK. In 2011

company entered into one of the fastest growing market in south Asia (Indian markets) with

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tremendous forecast growth by having an exclusive franchise agreement with Trent, the

retail subsidiary of the Tata Group. This will provide a number of opportunities for Tesco.

Health and beauty:

Tesco's UK health and beauty is growing continuously continue, and it is considered to be

one of the the fastest growing skincare retailer presently in the market. The company is

known to lead the market in baby goods, health care and toiletries. It continues to invest in

price in order to deliver the value expected by the customers and have invested

approximately more than £27m on health and beauty pricing alone.

Threats

Overseas profits may fall:

Tesco is expending sharply in international market with the expectations that overseas

investment will drive higher group returns as each country moves past significant mass. This

might not happen, either because of trade and industry conditions, strong competition, or

collapse in its business model. It also could come as a consequence of an aggressive move

into a larger market, such as r Japan, India and China.

Wal-Mart challenge:

Tesco's position as the top UK supermarket has been threatened as Wal-mart, the US

supermarket giant, has successfully taken over Asda.This takeover has facilitated Asda to

compete tremendously well on price and range of goods. For the moment, Asda is the

second largest supermarket in the UK after Tesco and directly challenging its supremacy.

Tesco has so far been responsive, quick and efficient by keeping up with price cuts or

special offers at Asda.Tesco's brand dominance in the future may be end if the American

supermarket giant also decides to exercise its buying power more heavily in the UK.

International expansion:

Entering into new markets with a new brand is expensive as it requires heavy investment in

marketing, land prices, distribution and operation expenses. This may lead Tesco to use

debt to fiancé its international operations. Hence, Tesco might be exposed to financial risk.

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Price War.

The supermarkets in the UK are becoming more aggressive in their price strategies.

Morrison, Lidle, is reducing their prices and Sainsbury is bound to bring down its prices as

one of the crucial changes required to drive its recovery. Whereas, Tesco and Asda

committed to price leadership. Consequently, this may hinder the industry’s growth in

profitability.

INDUSTRY (PESTEL) ANALYSIS

Political Factors:

Tesco has set up its operations in a globalized environment having its stores around the

globe including Europe, America and Asia. Hence, its performance is highly influenced by

the political and legislative conditions of these countries, together with the European Union.

For employment legislations, retailers are usually encouraged by State Government to give a

mix of job opportunities to locals, lower-paid and flexible including highly-skilled, higher-paid

and centrally-located jobs. (Balchin, 1994) Tesco is well aware of the impact of retailing on

jobs and people factors (new store expansions has often perceived as wiping out other jobs

in the retail sector because traditional stores go out of business or they have to cut down

their expenses to contend), being local and labour-intensive sector. A large numbers of

disabled, student, and elderly workers, are working in TESCO at lower rates. These workers

tend to be more loyal in high staff turnover industry hence, are attractive employees.

Economic Factors

Economic factors are expected to influence company’s demand, expenditures, prices and

profits, therefore are of great concern to Tesco. High unemployment level has been one of

the most influential factors which reduce the valuable demand for many goods, therefore

badly affecting the demand required to produce such goods.

These economic factors have profound effects on performance and the marketing mix of

company and are largely outside the control of the company. Although Tesco is growing

internationally and is expected to generate more returns over the next few years, the fact is

that it is highly dependent on the UK market. Hence, Tesco has seen downturn in its non

food business this year.

Social Factors:20 | P a g e


Due to a variety of social changes in British culture, customer’s approach towards shopping

have also changed and they have moved towards ‘one-stop' and ‘bulk' shopping, which have

forced Tesco to raise the amount of non-food items available for sale.

Demographic changes, like increase in female workers which resulted decline in home meal

preparation provide opportunity to UK retailers to concentrate on value added products and

services. In addition, Tesco is focusing in the direction of own-label share of the business

mix, improvement in the supply chain and other business operations, which will obviously

reduce its cost. (Clarke, Bennison and Guy, 1994).

Consumers are becoming more health conscious, and this has changed their attitudes

towards food. Tesco has developed its product mix in order to accommodate an increased

demand for organic products.

Technological Factors:

Advent of new Technology has influenced the development of a number of Tesco products

and both company and consumers is beneficiary of new technology. Customer satisfaction

increases since goods are readily accessible, services have become more personalised

along with more convenient shopping. Following technologies are being used by the Tesco.

Intelligent scale

Electronic shelf labelling

Self check-out machine

Wireless devices

Radio Frequency Identification (RFID).

Electronic Point of Sale, Electronic Funds Transfer Systems and electronic scanners have

enhanced the efficacy of distribution and stocking activities to a great extent.

Environmental Factors

Environmental concerns are key communal issues intimidating food retailers. Tesco’s

corporate social responsibility is concerned with the ways in which an organization goes

beyond the minimum obligations to stakeholders specified through regulation and corporate

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governance (Johnson and Scholes, 2003).In 2003, companies and managers have been

under a great pressure to acknowledge their responsibility to society, and act in a way which

benefits society overall (Lindgreen and Hingley, 2003).

According to Graiser and Scott (2004), the government has proposed to launch a new

strategy for sustainable consumption and production to slash waste, condense consumption

of resources and minimise environmental damage in 2003. David Cameron (prime minister)

has recently announced that the government will consider introducing a "fat tax" to tackle

Britain's growing obesity level (http://www.guardian.co.uk/politics/2011/oct/04/uk-obesity-tax-

david-cameron).This so called "fat tax" would directly affect a number of Tesco product

ranges that have subsequently been adapted, distressing affairs with both consumers and

suppliers.

Legislative Factors

Government legislations and policies have a direct impact on the performance of Tesco. For

instance, National Minimum Wage Act 1998 prohibits the employers from recruiting workers

or employees less than a given hourly, daily or monthly rate. Minimum wage across the

United Kingdom, currently £6.08 per hour for workers aged 21 years and older, £4.98 per

hour for workers aged 18–20 (www.wekipedia.com).

Conclusion:

After doing a painstaking research work and a methodical analysis of Tesco plc, I considered

myself in a position to conclude my research project.

Despite the downturn in UK and world’s economy, Tesco has been very flourishing in the

past few years and continues to enjoy a good market share in food business although it

experience a decline in its non-food business in 2011 due to rising fuel prices. Having more

than 100 years of business experience, Tesco earns great respect and benefits from its loyal

customers. This has helped the company to stay profitable and keep a positive position even

in its troubled times. Things are still looking encouraging for company even though recession

has done much harm to the economy and the businesses in general.

The Ratio analysis performed on the Tesco has produced mixed results. The company has

witnessed an improvement in its return on investment rations rising from 12.1% in 2010 to

12.9% in 2011 which is a massive increase due to improved working capital

management.However its total share holders returns dip from 9.6% in 2010 to 6.5% in 2011.

22 | P a g e


The EPS also rose from 31.66p in 2010 to 35.77p in 2011 which mean that investor’s

confidence level has grown up in Tesco and continues to grow.

Tesco has built a trustworthy relationship with their customers over the year which is evident

in the loyalty that they have shown in return. Company has launched some great new

telecoms and banking services. Its banking sector has now over 6.5 million customer

accounts and generates annual profits of £264 million and it has been successful to make

good progress in credit cards. In February 2011, one in eight of all MasterCard and Visa

credit card transactions in the UK was made on a Tesco credit card (source:

http://ar2011.tescoplc.com/pdfs/tesco_annual_report_2011.pdf). Tesco Mobile now has over

2.5 m customers. It has changed the way that customers purchase phones, services and

accessories by delivering quality service through 194 phone shops in UK. Undertakings and

new products development defines the aggressive selling style of Tesco. Such initiatives are

handy for the company in order to maintain its interest and confidence.

Keep in view the above mentioned summary; Tesco is likely to dominate the world’s retail

industry and company’s future the looks bright and optimistic.

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http://ar2011.tescoplc.com/pdfs/tesco_annual_report_2011.pdf


References:

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http://www.marketingteacher.com/


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http://www.google.com/

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rap

Documents

super market

company web

gross profit

london stock

audited financial

acca study

customer base

current ratio