The Business and Financial Performance of Tesco Plc

The argumentation and Financial exercise of Tesco PlcIntroduction and Justification of enquiry Subject1.1. Topic SelectionOxford Brookes University allows me to assume a topic for my enquiry cast off from 20 look for proceedss relating to several(predicate) academic disciplines i.e. wrinkle relationship, securities industrying, management and I go through chosen topic spell 8 The worry and mo remune balancenary carrying out of an organization oer the ternion twelvemonths of period and select the TESCO Plc as a case film . The business and fiscal digest leave behind be based on the entropy from grade ending 2006 to 2008. I leave behind benchmark the mo shekelsary ope proportionalityn indicators of Sainsbury Plc to make comparative epitome. Comparison of both organizations will be a like-for-like synopsis as they both operate in kindred persistence i.e. retail market. The accent of my question will be life-sustainingly evaluation of financial motion of TESCO Plc and its settingualization into business outline of TESCO.The subject subject intends to conduct look that will raise remote points of view on the financial consummation of TESCO from all its stakeholders, i.e. sh beholder, Investors, Financial Institutions, G everywherenment Agencies, Customers and employees etcetera.1.2. Motivation to remove This TopicThe motivation for me to select the topic of business and financial per configu balancenance of organization is my introductory finding and academic bashledge on accounting and finance that build during my study of ACCA. I wealthy person studied the subject on preparing financial statements, financial reporting, financial entropy management and performance management inhibit. These all subjects primarily relate to study the financial performance of the organization and build my skills in accounting balance. I find this research project is an opportunity to apply these f atomic number 18ledge and ski lls in accounting in utilise manners on real business scenario. The topic likewise relates to my professional c arer objectives as my aim is to pursue my career in field of financial analysts. This research project will be an initial exercise toward my career targets. This research project besides builds my managerial skills i.e. research skills to find out appropriate financial learning for analyses, interpretation skills to save financial analytical report, integproportionn skills to contextualize the financial data within general business schema to conclude the results.1.3. Reason to Choose This OrganizationI select the TESCO Plc for my abbreviation because it is one the biggest retail giant of United res publica since 1995 and digest blend in third biggest retailer oer the world in 2008. It is operated in diverse territories of the world includes republic of Ireland, Japan, Malaysia, Poland, Slovakia, South Korea, Thailand, and United State. The TESCO Plc besides ope rates in diverse range of business and products that includes food and drink, clothing, consumer electronics, financial ser vices, telecoms, health redress, dental plans, retailing and renting DVDs, CDs, music d give birthloads, Internet run, software and gasolene filling stations. The gains keep up been exceeded everywhere 2 billion over the stratum 2009. In July 2008, TESCO Plc held 31.6% market component part of UK grocery marketing that was 3% last than the previous family while the major contender Sainsbury held however if 15.9% with increment of 1% over last year. The basic earning per share of TESCO is always change magnitude since 2006 from 19.70%, 22.36% 26.95% consecutively.The unique emulous characterizes of TESCO Plc motivate me to pursue research project on this organization. It will provide me the opportunity to analyze its business strategy and financial performance in international context.1.4. Research Aims and ObjectivesThe objective of research i s to faultfindingly estimate the financial performance in relationship with general business performance of TESCO Plc for the year starting from 2006 to 2008.The study objective is to synthesize business and financial performance to pinpoint the implications of business strategy of TESCO, its make on financial performance to sustain foresighted term warring position.The researcher aims to provide transparent opinion around business and financial position of TESCO to its all stakeholders.In order to meet this research objective, I set next research questions to be answered in my analysis.1.4.1. Research QuestionsOn what critical underpinning TESCO business strategy stands?What is the existing financial position of Tesco Plc?Does the business strategy and financial position support individually otherwises?What are the critical factors that dissemble on business and financial performance?What are the implications for TESCO prox growth?1.5. Overall Research Framework to Meet Research Objectives and to function Research Questions1.5.1. Evaluation of line of credit strategyThe research project will pronounce the prospects and growth strategy of TESCO where I will analyse retail marketing strategy, its business operations, online retailing, and intrusion of technology. In order to conduct these analysis-I will apply the generic wine Competitive Strategy manikin developed by Porter (1980) in my report to analyse the private- presentprise(a) strategy of TESCO Plc.I will apply Ansoff exploitation matrix to analyse the growth strategy of TESCO Plc.1.5.2. Evaluation of Financial Performance strategic analysisI will calculate the financial ratio of TESCO Plc over the terce year to analyse the financial position. The ratio analysis will be based in realizeability, runniness, efficiently and drapement ratios.. I will as s substantially up as conduct the strategic analysis of TESCO. I will apply wad analysis framework that will identify Strength and Weakness of TESCO and Opportunities and terror within market. I will apply PESTEL analysis I will apply Porter (1985) five forces competitive framework includes rivalry of bribeer, supplier, node and substitute products.Chapter 2Information GatheringThe chapter describes the research methodology applied for the research report and has been structured into section-2.1. Nature of Research entropyThe genius of data required for research is highly depended upon the nature of research problem and research objective. There are two types of data that tail end be used in research analysis one is called aboriginal data and second is called subsidiary data.2.2.1. Primary entropyThe primary data is first fall out information sedate by the research to check up on the research subject. The primary data is collected through personal interview, questionnaires, focus group interviews, observation, case-studies, diaries, critical incidents and portfolios. The primary data once col lected become secondary data for others.2.2.2. Secondary DataThe secondary data is information or data that has already been collected or recorded by someone else, usually for other purpose. A lot of information gathered by the presidential term, information pertaining to financial marketing such as cable prices and trading volumes is widely available in financial newspaper or online at various(a) financial portals, annual reports of public companies etc.I used secondary data for my research. This study required the financial information covering the period of three years, marketing plans, future strategy, the information about(predicate) the influencing factors on financial performance and marketing strategy such as sparingal, political, neighborly and industry competitiveness etc. The information are only possible to collect by relying on secondary source of data. The appeal of primary data on these research variables is needed long time, dim damage and perhaps impossibl e to collect.2.3. Collection of Secondary Data2.3.1. yearbook Public Report of TESCO Plc and SainsburyI used the annual reports over the past tense three years of TESCO Plc published. The annual report of TESCO provided me the information link up to financial data, organization infrastructure, organization mission and objective, organization achievement and future plan. The annual report contains the message of chairman, chief executive officers and management that will provide me information to understand the business strategy and future plan of the TESCO Plc. I used the annual report of Sainsbury to conduct comparative analysis to respect the performance of TESCO. This resource provided information to apply in calculation of financial ratios analysis, describing competitive strategy, growth strategy, and conducting study analysis. I accesses TESCO online from the internet website www.tesco.com and Sainsbury from www.sainsburys.co.uk .2.3.2. New paperI used the secondary info rmation source published in newspapers. The both organization are prominent entity of retail grocery industry and reports relates to these organization regular published in news paper. These reports provided me external views to know about the performance of TESCO and succored me to conduct the external analysis (PEST, Porter 5 forces) to identify the key threats and opportunities and internal analysis to pin point the strengths and flunk of TESCO.The Types of newspaper that I ready read include-Financial judgment of convictionGuardianThe IndependentThe TimeJournal of retailing and distribution2.3.3. BooksThe books are the traditional source secondary data. The terminus ad quem of this resource is that books are ordinarily non provide up to date data and are stress on general descriptions. But the books are very useful to understand the concepts and theories that help to company research methodology and conclude research findings. I used the book particularly to understand research model and analysis applied to my study. This equipped me to critically understand the application of financial ratios, Ansoff hyaloplasm model, SWOT summary, PEST and Porter Five Forces Analysis. I studied the hobby book-Pearce, J. and Robinson, R (2005) Strategic ManagementJohnson, G. and Scholes, K. (2008) Exploring Corporate StrategyHill, C. W. L., Jones, G. R., (2007) Strategic ManagementThompson, A. A. Strickland, J. A. (2003), Strategic ManagementMishkin, F. S., Eakins, S. G., (2005), Financial grocery stores and InstitutionsBrealey, R. A. (2002), Principles of Corporate pay2.3.4. E-ResourcesI used the resources available at internet that provided me the counter information to evaluate the financial and business performance. One of the limitations of e-resource is that it lacks credibility than books and annual reports but provides breakaway external opinion in large extent. I accessed the traceing data in conducting my analysis.Biz/ed A gateway for primary a nd secondary business and management information UK focus available at www.bized.ac.ukDirectgov. UK government published official statistic available at www.direct.gov.ukRBA Information Service Business information gateway with links to business, statistical and government country sites.UK Data Archive Collection of UK focus digital data in social science available at www.data-archive.ac.uk cyberspacemba- e-resource of management, strategy and finance available at www.netmba.comFT info company information to a greater extent than 11000 including financial performance.capital of the United Kingdom phone line Exchange available at www.londonstockexchange.com2.3.5. Library ResearchI joined the library of London school of economics that provided me the access to plenary list of book and published material around my research subject.2.3.6. credibility of Secondary DataAs it is said that the secondary data is normally deviates to the research problem as result the credibility of sec ondary data to use in research is always questioned. To make sure the pertinency of secondary data applied the deliver the goodsing check list.Where and when the data is collected?Who publish the data?Do the data cover the information I need?Is the information is detailed enough?Do the data follow the definition I apply in my research problem?argon the data accurate enough?2.4. Research ApproachThe research advance may be qualitative and quantitative. My research includes both type, it relates to quantitative when analysis and interprets the financial performance of the TESCO with the help of financial ratios and qualitative in nature when investigates business performance of the TESCO with the help of business model of SWOT, PEST, Five Forces, Ansoff Matrix. So the data should be collected in both forms quantitative and qualitative.2.5. Research EthicsI similarly considered the research ethics in my report. The research findings are interpreted in a way that provides the founda tion to TESCO to know their lacks and impediments in business strategy not in the way to disgrace the image of the TESCO. Moreover only reliable information is includes in analysing the business strategy and financial performance, most of which is published by the Tesco itself. On the other the researcher did not hide or manipulate any information and provide transport fair view of Tesco performance for all stakeholders.2.6. Business/or Accounting Techniques AppliedI have applied the following techniques in my research and analysis Project.2.6.1. Financial proportionality Analysisto evaluate the performance of Tesco and Benchmarked company Sainsbury I have used ratio analysis.The limitation of accounting ratio is that it is based on accounting reality and ignores the economic realities. It can be easily manipulate by using various techniques such as valuation of stocks FIFO and LIFO method etc. I have used geltability dimensionsGross Profit bankNet ProfitMarginReturn on Capital applyReturn onEquityLiquidity RatiosCurrent / Woking Ratio sexually transmitted disease Test/ Quick RatioEfficiency RatiosDebtors overturnDebtors eldCreditors ageNet AssetTurnoverStockTurnoverStockDaysInvestment RatioEarnings Per dispenseInterest applicationDividend Per care2.6.2 Generic Competitive Model of Porter (1980)I have also applied The generic competitive strategy model develop by porter (1980) .2.6.2. Ansoffs Product/Market MatrixI applied The Ansoff Growth Matrix to illustrate the growth strategy of TESCO.2.6.3. SWOT AnalysisThe SWOT (Strength, Weakness, Opportunities and Threat) analysis has been applied with the help of external analysis of PESTEL (political, economical, social, technological, environment and legal), 5 Forces ( customer, supplier, entrance, substitute, rivalry) and internal analysis of financial ratio, organization infrastructure, porter (1985) value image analysis is applied. The combination of these analysis eliminates the limitation of each other i. e. PESTEL analysis not captured industry competence for this 5 forces Model is applied.Chapter 3 exposition of Results and Analysis3. Financial Ratio AnalysisThe financial ratios are illustrated in figures both statistically and graphical of both organizations TESCO and Sainsbury for the period of three year from 2006 to 2008. The short description of each financial ratio is provides with individual ratio and more focus is preyn to the analyse result in context strategic analysis to conclude rational research findings.3.1. Profitability RatioThe gain groundability ratio analysis includes gross usefulness valuation account, net profit margin, harvest of capital busy and return of candor employed.3.1.1. Gross Profit MarginComparing the gross profit margins will show the efficacy of the both companies. The gross profit margin was 7.67% in 05/06 which emergence to 8.12% in 06/07 the subjoin in profit is partly collectible to emergence gross revenue receipts and partly as cribable to the fact that company made considerable gain of 258m on its indemnity fund invested in past(I.e. Exceptional Item) which is makes up 7.5% of gross profit.However gain was one off item as the GPM decrease in 07/08 to very(prenominal) level as in 05/06 that is 7.67% some other reason for this decrease is high rate of inflation. These results show that the Tesco is struggling in managing apostrophize of production even though sales have increase over three years time interval but the cost of production increase in line with sales. The results are very critical because the Tesco have douseed cost effective retail settings Tesco.com, Tesco online and cost control broadsheet i.e. electronic checkout till and efficient supply chain mechanism that it claims directly linked to store shop floor shelves but the financial result are adverse to its claims to reduce cost.Whereas Gross profit margin of Sainsbury is saturated over time period it was 6.64% in 05/06 which increa se to 6.83% in 06/07 and gone down to 5.62% in 07/08. The sales revenue was in it is crest in 07/08 the sale increased 3.80% over the year as contrast to the production cost which increased to 5.10% which indicates that Sainsbury is struggling to main(prenominal)tain its low cost of production thereby suffering.Overall, on the grounds of reason mentioned above it is work that Tesco is attaining high gross margin than Sainsbury overall and in all periods3.1.2. Net Profit MarginThe net profit margin was 4.01% in 05/06, which increased to 4.41% in 06/07 the main reason for this is increase in gross profit as these two ratios are directly related to each other. former(a) reasons are as follow in the same year, company quit one of the J.V operations and dispose its share from one of the associates, which gave rise to profit of $106m, 25m, which makes 5.6% and 1.33% of net profit. These transactions were made partly in order to comport some of the shorterm loan, which decrease fina nce cost by $25m, and partly to invest in other companies in order to gain the control. As shortterm loans are expensive source of finance reduction in the fianc cost back up by increase of 1.3% in net profit.The net profit was increased in 07/08 by 0.09% to 4.50% the main reason for this is increased sales revenue 9.80% over a year. Other reasons creation are as follow corporation revenue enhancement has reduced 99m over the year due to prior years adjustment i.e. change in tax rate, more deferred tax additions, foreign exchange movements, pension and etc. Another reason organism as property related profit increased 96m that makes up 4.5% of net profit.Despite of these all factors the net profit margin is low. It may be due the reduction of profit share with join ventures and payment of insurance claims to customers.Sainsbury net profit over the three-year period has significantly breakd. The net profit margin was .36% in 05/06 that improved to 1.89% in 06/07 the reasons in inc rease are as follow increased sales revenue, reduction in admin cost, increase in other as well as finance income. However, Sainsbury did not maintain or improved over the year in 07/08, as it was slightly down to 1.84% the main reason for this even though the sales and run profit was improved but loss in J.V of 2m and increased finance cost of 25m caused it to be lower than previous year.3.1.3. Return on Capital EmployedThis ratio is key measure of return. it measures the come of net income from capital provided by shareholders and lender. The ROCE was 15.15% in 05/06 that increased to 15.90% in 06/07 as run profit increased by 13.9% and the capital employed has also increased by 9.7% the increase in the capital employed is due to sequel of new share capital, increase in non- underway liabilities, and massive gain in the deferred tax liabilities. Eventhoug capital employed has increased but it did not increase inline with the operating profit that is also another reason for increase in capital employed. The ROCE in 07/08 has declined to 14.02% despite increase in operating profit of 5.1% and increase in capital employed 19.5%. The main reason for increase in the capital employed are as follow issue of new share capital worth(predicate) 3m, which also give rise to share premium of 135m, share based payment worth 199 massive foreign exchange and pension gains etc. Increase in the capital employed is not in line with the increase in operating profit however this increase in the capital employed will be beneficial in order to generate more operating profit as it has already started to show its effect i.e. increase in property related profit is classic example.Comparatively Sainsbury ROCE has fluctuated over the three years period. ROCE in 05/06 was 2.89% well below than Tesco but well above than it previous year where it was negative it has improved to 7.59% in 06/07. The main reason as sales have improved over the year and company also saved 170m admin c ost that shows they are managing cost well and capital employed over the year has decreased to 1082m that is 15.8% mainly due to payments due to Sainsbury bank and other banks. The ROCE in 07/08 has again decreased to 7.06% as the capital employed has increased due to the massive gain from the pension benefits and increase in provision of deferred tax that has to settle in future. Overall, Tesco results are far more better than Sainsbury.3.1.4. Return on EquityThe return on fair-mindedness is continuously increasing and has increased by 6.2% over three years and is higher than Salisbury but results are thus far not remarkable. This is mainly because of repurchase of share equity in the market not because of profitability. The Tesco is pursing the policy to buy back the share from the income coming from the leaving value of properties.3.2. Market RatioThe market ratio I have used for my analysis are as follow Earnings Per share, Dividend Per plow and Interest Cover.3.2.1. Earning Per ShareThis ratio determines portion of company profit allocated to the each share. EPS is one of most important variable factor in ascertain the share price. The EPS of Tesco has been increasing since 2006. The EPS is in year 05/06 was 20.07p it has gone up to 23.84p in 06/07 followed by 26.95p in 07/08. Better profits over the years have increased the EPS another reason for increased EPS in 07/08 as Tesco bought its own share which increase EPS by 11.5%. Sainsbury have performed very well over the three years and increase EPS 82% over 3 year as Sainsbury profit has increased significantly over the three-year period due the reason such as increase in gross profit, net profit etc. Sainsbury net profit margin has increased 80.4% over three years period. Overall, The result indicates that the EPS of Tesco share high than industry benchmark.3.2.2. Dividend per ShareThe dividend per share of Tesco increases every year since 2006. In the year 2006, the dividend was 8p in the year 200 7 9p and in year 2008 10p. It indicates that the increase in Tesco profitability positively impress on dividend per share. Another reason for increase in 07/08 as Tesco buy back its on share which directly impact on ratio. Dividend per share On the other hand paid by Sainsbury are for same 05/06 and 06/07 of 8p but has increased in 07/08 to 10p which cl primaeval indicates that it wants to pay same amount of dividend as per its competitor in order to attracts more shareholder.3.2.3. Interest CoverTesco has sustainable proportion of profit to cover care. This is mainly because of stable external borrowing and realization of growth investment in diverse products and markets. This was 10.27% in 05/06, which increased to 13.28% in 06/07 and decrease to 12.21% in 07/08. the reason for decrease in 07/08 as PBIT increase by 6% as compare to interest paid which was 13.6% The performance is quite better and stable than Sainsbury.3.3 Liquidity RatioLiquidity ratio informs the ability of Tes co to meet its short term liabilities and includes current and acid test ratio.3.3.1. Current RatioThe current ratio of Tesco is increasing over the time and indicates improving ability of Tesco to have liquid finances to repay short term obligation but it is lower than Sainsbury. The performance is better in a way that since 2006 the Tesco have grown 0.09 form 0.52 to 0.61 but still lower than ideal ratio of which is 11. Whereas Sainsbury who have declined from 0.88 to 0.66 which indicates that Sainsbury ability to meet its short term obligation is decreasing. Tesco is strengthening its liquidity power.3.3.2. Quick/Acid RatioThe quick ratio has increase to 0.38 in 2008 from 0.32% of 2007, which was 0.01 low to 2006. The maintenance of cash and banks is almost according to benchmark competitor but need to be strengthened.3.4 Leverage RatiosThe leverage ratio is being applied to measure risk factor of Tesco and these includes total debt equity ratio, long term debt equity ratio and i nterest cover.3.4.1. Total Debt EquityThe ratios of debt to equity have increased in 2008 to 68% that was 60% in 2006 followed by 59% in 2007. The change is not critical because it is the effects of equity buy back that have decreased the equity value. It is also excusable because Tesco is enjoying lower cost of debt than cost of equity. It will readjust when the Tesco will launch free share option for its employee.3.4.1. Long-term Debt EquityThe results illustrate resembling progress to total debt to equity but more precisely describes the impact equity buy back. The Tesco still have the opportunity to raise fund through external borrowing without critical leverage.3.5. Efficiently RatiosEfficiency ratio ratios are used to map to performance to mange stocks, debitors and assets of the Tesco. It includes the debtor overthrow ratio, stock turnover ratio, debtor long time, stock geezerhood, creditor age, net assets turnover and fixed asset turn over.3.5.1. Debtor Turnover Days Debtor turnover and years are directly related to each other i.e. if one goes up second will go up as well vice versa. The debtor turnover was 44.23T in 05/06, which indicate that debtor days were less(prenominal), 39.52T in 06/07 and in 07/08 36.08T that is reason in 07/08 on average each customer, took 10.12 days to pay debt. The ratio has moving trends over the time. On the other hand debtor turnover of Sainsbury have increase from 05/06 of 58.19T to 86.59T in 2008, which indicates Sainsbury is able to convince its debtors into cash frequently and enjoying having cash benefit as its debtors day have reduced from 6.27D to 4.22D. It is found that Tesco Debtor management need improvement and the debtor days are critical and need to be minimised.Debtors DaysDebtors Turnover3.5.2. Stock Turnover DaysThese two ratios also directly related to each other as Debtor turnover and days. This ratio informs how legion(predicate) times the Tesco convert stock in to sales revenue. The stock turnover ratio has decreased since 2006 that is reason why stock days for Tesco have increased over the period. As turnover was 24.88T in 05/06, therefore the days were less. It was 20.40T in 06/07 and 17.97T in 07/08, which increases the days to 20.44. Whereas the stock turnover days ratio of Sainsbury is significantly better than Tesco in all years. Inefficient stock control not only increases the storage and handling costs but also waste which impact on overall profitability.Stock TurnoverStock Days3.5.3. Creditor DaysThe creditor ratio informs the ability of Tesco to settle its creditors. It is found that the Tesco creditor days are increasing over the year but always less than Sainsbury. In 2006 the creditor days was 28.47 days, in 2007 30.97 days and in 2008 32.90. This will improve the credibility Tesco to purchase competitively than its competitors. Keeping in view of early payment to creditor it can get competitive purchasing price that help it to over good cheaper in the marketing or attain higher margin.3.2.4.6. Net Asset TurnoverThe net asset turnover ratio informs Tesco assets ability to generate sales. It is found that net asset turnover ratio is in 2006 is 2.62, in 2007 is 2.56 and in 2008 is 2.38. The ratio has been decreased in 2008. This reflects the impact of heavy investment made by the Tesco on store refurbishment, electronic tills and infrastructure. The performance is almost equal to Sainsbury.3.6. Evaluation of Future Prospects and Strategy Analysis3.6.1. Competitive StrategyThe Tesco aims to deliver maximum value and choice to customer to attain their life time loyalty. According to my analysis the Tesco is pursing hybrid strategy simultaneously is struggling to achieve low price and differentiation relative to competitors i.e. Wall Mart-ASDA and Sainsbury but influence of low cost is very high than differentiation. It has launched its low cost brand Tesco value, price discount but on the other hand have premium brand i.e. Tesco Fine st. The Tesco declares itself as discounter. The underpinning of Tesco competitive is a relentless attitude lowest cost provider of goods and services to be successful in worlds most competitive markets.Porter Generic Competitive Strategy first appearance of TESCOCompetitive AdvantageEfficiency qualityCompetitve ScopeBrand MarketLow CostTESCODifferentiation press MarketFocusCostFocusDifferentiation3.6.2. Growth StrategyThe Tesco is pursing consistent strategy since 1997, which strengthen its core UK business and help to run expansion into new product line and international markets. According to the Ansoff Matrix presentation, the Tesco is operating in all three extremes. It has introduced Non food, Tesco online retailing, launched personal finance, Insurance and enter in telecommunication sectors. The have entered into 12 international markets.Ansoff Matrix Presentation of Tesco Growth StrategyExisting ProductsNew ProductExistingMarketMarket PenetrationUK Core (Grocery)Product dev elopmentNon-FoodTesco OnlinePersonal FinanceInsuranceTelecomNewMarketMarket Development12 InternationalMarketsDiversificationThe grocery business of Tesco is the largest contributor of its revue to 51.8bn which is 40% of total sales, Asia 29% and Europe 25%. Intern