Financial Performance Evaluation of Tesco free essay sample

This project will mainly focus on the business and financial performance of Tesco plc (a supermarket of UK) from year 2009-2011. Through this report and analysis project, we will know the detail of how the company is running and how well or badly the company performed in last 3 years. This will also help shareholders to realize whether and how their agents performed in their interests. The following main elements are included in Introduction section: * 1. 1 Background and Context -why Tesco: Tesco is the largest food retailer in UK, operating around 2,318 stores worldwide. Tesco operates around 1,878 stores throughout the UK, and also operates stores in the rest of Europe and Asia. Tesco. com is a wholly-owned subsidiary offering a complete online service, including tescodirect. com and tesco. net. The company also offers a range of both online and offline personal finance services. Tesco is headquartered in Hertfordshire, UK. For the year ended 26 February 2011 Tesco PLC achieved revenues that totaled ? 60,931million, an increase of 8. % against the previous year’s revenues that were ? 56365million, compared with UK sale growth 5. 5%. Undoubltly Tesco play a key role in UK supermarket industry as well as in world supermarket industry. Also it is worthwhile to be chosen to be analyzed, to some extent it also can be imitated by other supermarket company, e. g. supermarkets in similar internal and external environment, with Tesco, other supermarkets in developing countries. 1. 2 Scope and Objectives This project will cover 2 aspects of performance of Tesco plc: business and financial performance . Business performance includes the impact of mission statement, vision and strategy, management structure on Tesco plc, SWOT and PESTEL analysis of external environmental of Tesco plc, threshold capabilities and distinctive capabilities analysis towards internal environment, and also value chain ,VRIN analysis. Financial performance mainly focus on all kinds of financial statements, it will be analysed through some key performance indicators (KPIs), such as sale growth percentage, ROCE, profit margins, assets utilizations liquidity indicators: gearing, current ratio etc. 1. 3 Achievements What I have achiveved in this project will be based on the detail information of the target company,especially the annual report of the company over last 3 years (2009-2011). At the same time a comparator will be required to compare the performance with Tesco plc. I choose Morrisons as the comparator, through the comparison, it will help Tesco plc to identify the area which need to be improved and how to improve it. 1. 4 Overview of Dissertation This project will include the following main elements: Research: A survey will be include in this project, based on the current awareness of kinds of people to Tesco plc and Morrisons plc. The primary data will be analyzed in the business performance section, through the survey between these two companies, it will give the evidence to the last main section of this project which is Recommendation Analysis: this is the main body of this project, business and financial performance will be analysed in detail using different business model and financial indicators. Similarly comparison between similar companies is vital in this section, especially the information based on the annual report, which include massive information I needed to strength the evidence of my arguments. Conclusion: 3 elements will be included in this section. Summary, Evaluation and future works. Summarise the past performance of target company, Evaluate the current situation of target company, Recommend what’s future work need to implement to cover the shortage. Recommendations: this will continue the future works in last section, but differently, the recommendation will be specific according to the weaknesses of Tesco plc, it will refer to other companies towards the improvement, other companies which do not have significant market share may did well in the weakness area of Tesco plc, in this situation Tesco will also need to se for reference. The remaining of this project will include the reference list and several appendixs. Research: BUSINESS DESCRIPTION Tesco is one of the largest food retailers in the world, operating around 5380 stores and employing over 492,714 people up to 2011. As well as operating in the UK, it has stores in the rest of Europe, Asia and US.. It al so provides online services through its subsidiary, Tesco. com. Tesco set out a strategy to grow the core business and diversify with new products and services in existing and new markets. Tesco sells approximately 40,000 food products in its superstores, as well as clothing and other non-food lines. It was largely a food retailer and it sets itself the challenge of becoming as strong in non-food as in food. As its business has grown and it offers a wider variety of products to customers. It now aims to be as strong in everything it sells as it is in food. It has followed customers into large expanding markets in the UK – such as financial services, general merchandise and telecoms – and new markets abroad, initially in Europe and Asia and more recently in the United States. As well as convenience produce, many stores have gas stations. The company has become one of Britain’s largest petrol independent retailers. Other retailing services offered in the UK include Tesco Personal Finance. As Tesco grows and diversifies, it is able to offer more jobs and broader roles to people in the communities around our stores, depots and offices. This year it has recruited 21,000 people worldwide. One of its People Promises is that it will provide an opportunity to get on. t promises to support and develop our people so that they are able to advance in their careers Its people do a great job for its customers and it wants them to feel valued and rewarded. It also believes that staff rewards should be competitive, simple and sustainable to build trust and loyalty amongst our employees and assist with hiring and retention. It invest in pay and, in the UK,I t has the highest basic pay rates for customer assistants of any major supermarket. All of its staff move to higher rates of pay within a year of joining its business. It works continually to improve service for its customers. It has trained over 80,000 staff this year in Every Little Helps skills for checkouts, supporting them to deliver helpful, friendly and efficient service. It has also opened over 200 new stores in 2010/11, The company recorded revenues of: ?67. 6bn during the financial year end 2011,increase of 8. 1% over 2010. ?62. 5bn during the financial year end 2010,increase of 6. 8% over 2009. The operating profit of the company was: ?3. 8bn,increase of 11. 3% over 2010. ?3. 4bn increase of 8. 9% over 2009. Its Site Research departments in each country direct the property acquisition strategy by identifying optimal locations for new store developments and extensions. This work is underpinned by advanced spatial analysis and a data-led approach that considers our customers, competitors, local market shares and existing store performance. It has exceeded its target of donating at least 1% of pre-tax profits to charities and good causes. In total, this means that it has donated over ? 64 million this year. We have also raised ? 7. 2 million for our UK Charity of the Year,(CLIC Sargent. Building brands enhances the value of our business by benefiting all of its stakeholders, including customers, staff, communities and shareholders. Being viewed positively by its stakeholders supports the creation of a successful, sustainable and profitable long-term business. Having multiple formats – from large shopping malls to Express convenience stores – allows it to fulfil the full range of shopping missions for customers and flexibility to adapt to different local markets and planning regimes. In some cases it also develops mixed-use projects, combining new retail space with residential development on the same site. This enables us to build a store on a desirable site when otherwise it would not be economically viable. As a retail business, it knows that we can make a real difference in tackling climate change – cutting its own emissions, working with suppliers and helping customers to cut their carbon footprint. In its UK business,it has led the work on climate change and for the second year running, it has reduced its absolute emissions – this year by 5% despite space growing by 7% as well as significantly reducing emissions from its baseline portfolio of buildings. Analysis Business performance analysis: Several frameworks can be used to analyze the business performance, here I will focus on the SWOT,PESTEL and VALUE CHAIN analysis. SWOT Analysis A strengths, weaknesses, opportunities and threats (SWOT) analysis of Tesco has been provided below. Strength Tesco has lots of strengths that have make it to be successful UK. They have a simple but effective brand image which plays a key role in development of Tesco plc, also any large operating company should pay attention to it. Using of technology is a strength to Tesco. The internet is used,so customers can buy their products online, which is quick and sufficient. The choice of locations is a big strength. Tesco was launched in the UK in 1924 and has since grown to support over 2,000 stores nationally (Tesco, 2009). They are good at setting stores up in sufficient areas and almost have a store in all major townsand cities in UK.. Drawing upon Datamonitor (2010), Tesco was ranked third largest grocery retail company in the world, running over 4,331 stores primarily within the USA, Europe and Asia. Tesco’s strategy focus on product affordability in orser to ensure that customers get the product within their budget ,at the same the good quality is also maintained. Customer retention strategy have been proven by its loyalty scheme called ‘ Tesco Clubcard’ . Drawing upon DunnHumby (2008), the company collected data using clubcard and these information is used for effective direct marketing and other promotional techniques. Tesco have also expanded into different market and it has been proved successful. Such as food and accessories, mobile phone services insurance, and home ware. Expanding has made them more competitive and because of the customers strong brand loyalty, they may stay with Tesco with the different services they provide. The company holds the largest market share in the grocery market in the UK. Tescos innovation and attitudes towards its emplloyeeshas made it successful The company held 30. 7% share of the UK grocery retail market in 2010 Â  (Euromonitor, 2010) Tesco have cut down on climate change. The year-on year greenhouse emission is 7. 8% 2010,and 7. 7% 2011. Weakness: The main operations of the company are focused on the UK retail sector, it was more than 75% of its revenue during the fiscal year 2009 (Tesco, 2010). This is a weakness because of lack of geographic diversification, it will lead to systemic risks of the UK market. According to Mintel (2010), a number of products were recalled by Tesco in 2009 that has resulted in a financial loss, it also damaged its brand image. . Tesco has heavy competition and has done well compared with Asda. However, due to the current recession. price becomes more and more important to attract consumers. A large number of consumers are switching to hard discounters, such as Lidl and Aldi. Tesco has launched a ‘Discount Brands’ promotion which offers prices similar to hard discounters (Mintel, 2009) Over 80% of European salesare made by UK, if pound weakens against the Euro. Tesco’s European market share will be impacted negatively. The recession is one of Tesco’s main weaknesses as with most businesses in the UK (Mintel,2009). To some extent online shopping is a weakness for Tesco. it is difficult to browse and find products. It is a long and boring task. Opportunities: Analysing Tescos opportunities in the current environment look very promising as Tesco can explore more different and new markets. The number of store is increasing. They opened over 620 new stores in 2009 of which 435 were international (Mintel, 2010). This will help the companyto get economy of scale. Tesco. com is increasingly more popular. Making up over 1 million customers in 2010 (Guardian, 2010), whichcan help the company to attract new customers and reduce the average cost. Global expansion can be evidenced by the entry into the Indian market. This entry strengthened its global market position. A limited franchise agreement has been signed by the largest industrial corporations of India. (Daily Mail, 2010). Tesco has a very well know band image thatis good to Tesco , showing potential growth opportunities is indicated that they are trying to be more awared in Central Europe. Threats: The biggest threats Tesco faced was the recession, because the public will worry more about their money,e. g. how they spend it. This is also why Aldi and Lidl have significant growth over the past year as more customers try to save money by buying at cheaper supermarkets. Another threat is its competitors are using lowest prices to try to attract customers. price is replacing convenience as the key element. In January 2009 Tesco announced growth sales of just 2. 5% which is their lowest among all other major competitors. his may be due to Tesco’s attempt to repel Aldi and Lidl by offering more discount brands. The decline in income and the rise in unemployment have affected the buying behaviour of consumers which has adve rsely impacted the company’s sales. There has been fierce competition in the UK grocery market . Tesco though has been leading this sector for 15 years (Mintel, 2010), but is now faced with intense competition from its competitors which are gaining in market share. including the rest,i. e. , Asda, Sainsbury’s and Morrisons respectively. Another possible threat to Tesco is government intervention, in recent years the government may monitor the operations of large supermarkets. So that they can ensure what’s going on is legal and to stop any individual firm becoming too powerful. PESTEL analysis: PESTEL framework below analyses the dynamic and unpredictable environment in which Tesco operates and how Tesco deal with it. It helps to identify the impact on Tesco’s performance. Political: There is a free trading policy setting by governments to benefit from globalization,especially in Europe. Also, here is the immersion of countries in the European Union (EU ). It promotes trade between countries in different area. This provided Tesco with a platform to expand its retail network across the EU. Because that Tesco has numbers of stores globally, Tescos performance will be influenced by the political and legislation of these countries, including the European Union. According to relevant regulations,Tesco employs lots of student, disabled and elderly people , paying them lower rates. Because of high staff turnover in industry, these employees offer a higher level of loyalty, so they will not abandon their jobs at their pleases. Economical: Tesco plc will pay more attention to this factor, because it will influence demand, costs, prices and profits. High unemployment rate is an important element of economic factor,, which will adversely affect the good demand, therefore it can reduce the productivity of the manufacture. Usually, economic factors are outside the control of the company, but it has a profound impact on performance and the marketing mix. Although international business is still growing, Tesco plc is still highly dependent on the UK market. Therefore,Tesco would be badly affected by any slowdown in the UK food market,so Tesco still need to focus more on UK industry. Another point is that the customers will eat out less and eat more at home which will enable grocery retailers like Tesco to increase their output (Guardian, 2010). It must be noted that food is the last thing that customers will cut back on. The percentage of spending on food has increased over the years, as shown below (Euromonitor, 2010): Soacial: This will focus on the analysis of the UK population, the old population is discouraging food retailers as older people always eat less. Another point need to notice is ageing population would not find online shopping more convenient. All of these will discourage the retailer industry. Customers’ attitude towards food is changing as they have become more health- conscious. More and more people are demanding organic food,reflecting the change in demand. , Tesco has also allow customers to pay in cheques and cash at the checkout first. British customers are moving towards ‘one-stop and ‘bulk shopping, which is due to a variety of social changes . e. g. Tesco have increased kinds of non-food items available for sale. Technological: Technology is a major macro-environmental factor, It influences the development of Tesco products. Technologies can benefit both customers and the company. On one hand, customer satisfaction rises because,it will be more convenient to customers. Tesco stores use the following technologies: Wireless devices Electronic shelf labelline Self check-out machine Mobile technology performed as a platform for distribution within food retailing. Customers can browse and order the goods they require before they buy them. Loyalty programs are being introduced through information technology which discourage customers from switching over to their competitors (Sun, 2009). Online shopping has gained significant popularity due to the increased access to internet in UK. Environmental Environmentally friendly, the government is promoting reducing the packing. Office for National Statistics (2010), the percentage of consumers using reusable bags has risen from 71% to 74% and the number of those trying to cut down the number of plastic bags has risen from 65% to 68%. This helps to reduce the overall cost and it is good for Tesco to maintain corporate social responsibility image. Consumers reusing bags, recycling mobile phones and aluminium cans and preferring bagless deliveries are being rewarded through Tesco’s green Clubcard points (Tesco, 2009; Datamonitor, 2010). That is an important and advocate step in industry. Legislative Factors The performance of Tesco can be influenced by various legislations and laws of the operating country. The presence of competitors with established brands creates a threat, e. g. price wars and product differentiation.