Business Financial Tesco
This report analyses the business performance and financial position of Tesco. Tesco has been the market leader in UK grocery market for years and is still growing steadily. This analysis is made from an investor’s point of view. By both quantitative and qualitative analysis methods, in a way of comparison with itself before and it peer group in the same market in UK, the author presented a detailed analysis of it strength, weakness, opportunities and threats. Tesco is a company listed on London stock exchange.
Reasons for choosing the topic
The reason why the author chose to study the topic of analysing the business performance and financial position of Tesco are as follows:
1. Major part of Tesco’s business is UK grocery market.
This is a market worth £133.3bn in the calendar year 2008 with an increase of 4.0%. Groceries account for 12.8% of all household spending, making it the third largest area of expenditure, first is housing and second is transport. The UK’s leading grocery operators create 10% of jobs. (IGD research 2007)
From above date we can have an impression of how important is grocery sector’s contribution to economy and society.
2. Tesco has been the market leader in UK grocery market for many years.
Tesco has been keeping a faster growth pace than it competitor for a decade and widen the gap with its nearest runner ASDA. Although it lost some field to Morrison, Tesco still hold over 30% market share, nearly twice than its closest rival ASDA. This is a remarkable achievement in business world especially in a mature market like UK grocery sector. What strategies Tesco adopted to achieve and maintain its market share attract the author to choose this topic.
3. UK economical slowdown had many effects on grocery sector
Customers become more prices sensitive and tighten their spending. Competition is getting stiff, some of customers have tempted by discounted store such as ASDA, Morrison. Price campaigns in grocery sector have enormous pressure on Tesco’s profit margin.For last decade Tesco have proved its competence in booming period, however when economy slow down, can Tesco still keep its pole?
4. Personal experience
The author has personal experience with Tesco both as a customer and a former employee. This allows the author to have a close look on how Tesco runs.The author has just take Paper P3 recently. Applying this relevant knowledge, skills, and exercising professional judgement in a business case would help author have a good understanding of the book knowledge.
5. Easy to gather information needed
As a public listed company Tesco has to provide much more detailed financial information to its investor than other private and unlisted company.
Tesco has made many efforts to ensure this information accessible, for example Tesco has an online investor centre where investors can find the last information of Tesco to help them understand Tesco’s business.
Tesco also has investor relationship department dedicated to maintain their relationship with its investor.
Aims and objectives of the report
This report attempts to present a thoughtful analysis of Tesco’s current business performance and financial position and its future development.
The main aims of this report are as follows:
- To understand how Tesco is run, for example Tesco’s liquidity, profitability and its ability to compete.
- To find out what aspects Tesco is doing well and why it can manage to do that.
- To find out what risks Tesco facing and the impacts on Tesco’s development in future.
- To understand how Tesco manage these risk and evaluate whether these strategies are adequate to solve those issues.
- 4. To give a forecast of future development of Tesco and generate some ideas for possible improvement.
Overall research approach
- Establish aims and objectives of this project
- Describe how to collect information and the methodology used. Due to the time limitation most of date using in this project will be secondary date.
- Process information collected including internal information and external information for further analysis
- Using accounting and business technique to carry out a critical analysis with an explanation of my findings.
- The final step is drawing conclusion which derived from and consistent with date analysis, and providing recommendation.
Sources used and reasons:
1. Annual report of Tesco
These annual reports are made up of reports and financial statements, which include directors’ report, corporate governance, directors’ remuneration report and group financial statement including statements of directors’ responsibilities, independent auditors ’ report, group income statement, group balance sheet, group cash flow statement.You can get expert help with your essays right now. Find out more...
The financial date extracted from annual report is important information used to further analyse Tesco’s financial position and further direction.
As these reports are audited by PricewaterhouseCoopers LLP of its compliance with relevant law and regulation, the date from annual can be seen as reliable source.
2. Interim report of Tesco
These reports are reviewed by PricewaterhouseCoopers LLP providing reasonable assurance to Tesco’s investors.
These reports provide a more pictures on how Tesco is running and how much outside environments affect the performance of Tesco. Also we can compare it with the annual report of last year. They are necessary for the complete analysis of the company.
3. Quarterly report of Tesco
These reports provided the status of Tesco in a shorter period of time than interim. Although these reports are normally concise, they are necessary for analyst to make detailed analysis of a company. By report of each quarter, the analyst can pursue the track of the thoughts of the managers.
4. Annual reports of other main grocery stores in UK
They can help the analyst to make comparisons of Tesco with other main competitors in relative field so as to locate the position of Tesco in its main business portfolio. They are good yardsticks to measure Tesco’s performance.
Comments on newspapers are sources of up to date information about the company of Tesco. Along with the analysis from skilled experts, they contribute much to my analysis on this company.
6. Student accountant magazine and Kaplan textbook for paper P2 and P3.
These textbook is the source of author’s reading for the paper. They provided the author with useful ideas and ways to make much a detailed analysis on Tesco.
7. Viewpoints made by the managing levels of Tesco
They contribute much to the analysis on Tesco. They give the thoughts on further development direction in managing levels’ head. They can help the analyst to make a good forecast on its future prospects.
Information in relative journals gives us knowledge on the situations of Tesco and research, development and study in grocery retailer field. They help the analyst to realize the trend of grocery retailing development both in UK and world.
9. Analysts’ evaluation reports of FMC.
They provide profound professional study results on FMC in aspects of current situations, problems met by it in company running and future prospects by the viewpoint of the skilled professionals. They are great references for the coming analysts.
- Changing accounting framework
Accounting policy has been made changes during these 3 years which made the year on year result less comparable. For example underlying profit for 2005 using IFRS is different from the figure using UK GAAP.
- Lack of qualitative date
i.e. customer satisfaction, demographic descriptions of users, clients, and stakeholders.
There is no such secondary date available. Limited to time and resource, this kind of resource can not be acquired in this project.Find out how our expert essay writers can help you with your work...
- Lack of insider information such as terms of contract
Terms of contract can decided the accounting treatment for specific events. Due to lack of this kind of information the author can only assume Tesco had made correct treatments.
4. Inflation effects
Inflation has effects on some figures in annual report such as sales revenue and value of fixed assets so on. This project did not consider the inflation effects due to the complexity of bringing in inflation. This may affect the accuracy of some figures in this project.
6. Different companies use different accounting treatments
In current international accounting framework company have option to choose their treatment for same accounting event. These different treatments could make the figures in different company incomparable and meaningless.
For example: Ratios such as ROCE are not well defined which made comparisons with other competitor difficult.
Methods used to collect information
Tesco’s corporate website, regulators’ website, online discussion board and any other financial organizations’ website were methods to gain important information materials. The information materials include press releases and financial reports on Tesco and its competitors. Though the website provided much important information materials, but it took time to pick up the essential information for the analysis report from the abundant information
These website provide most updated information, and covered wide rage of information from political to environmental.
Observation in Tesco store gives first hand information on how Tesco implemented its strategies and whether these strategies have met their objectives. Observation can also help to identify customer and employees reactions to these strategies.
Look up all the information materials related with related sectors and Tesco in the libraries. Generally read different books, newspapers, magazines, journals relative to the topic to understand in detail the company and its operating environments. The information materials helped me to know the situation of the grocery sector in the world.
And the UK competition commission provides the detailed information on all grocery retailers. Also, abstracts, brokers’ reports and forecasts for Tesco and industries worldwide were included.
- Environmental scans help identify emerging trends and issues that may have strategic importance for the initiative.
- Give rich contextual information
- Help identify emerging opportunities and problems.
- Specific reading
On searching through some unclassified information materials relative to Tesco in the ‘information materials’ section of Tesco and found detailed financial data, ownership, other descriptive information of the company and some comments from the advisors and analysts. Annual reports, interim reports and quarterly reports were all included.
Libraries used for general reading and specific reading includes: Loughborough University Library.
Accounting technique used and their limitation
- PESTLE would be used to analyse macro environmental variables – political, economic, social, technological, environmental and legal.
- Ratio analysis would be used to analyse the extract of annual report
Benchmarking would be used to compare the performance and financial position of Tesco in order to improve its competitive position.
Because some ratio has different definition this made comparison between different companies difficult.You can get expert help with your essays right now. Find out more...
SWOT analysis is a very useful tool for position analysis including internal and external factors.
- BCG matrix analysis
This model would be used to perform position analysis using two measures-- market growth and market share.
This model has some limitations:
A. only two measures are considered. Other factors can be important such as strength of competition.
B. a danger that a product is treated differently depending on which ‘side of line’ it is
- Ansoff’s matrix analysis
This model is usually used to generate product/market strategy.
Tesco was set up in 1919 by Jack Cohen. Over several decades, it grew up from a stall in east end of London to a World 3rd largest retail store and operates over 2,500 stores in 13 countries. It is listed on London stock exchange and its market capital worth over £29 billion. It sales revenue in 2008 is £51.8 billion and it made £2,846 million underlying profit.
Tesco is the biggest private sector employee in UK employing over 260,000 across UK. It has nearly 2,000 own brand primary suppliers in 98 countries.
Tesco set up a business strategy to ensure that a long term benefit can be delivered to all of its shareholders.
This strategy has four elements, which was as follows:
- To grow the core UK business
- To become a successful international retailer
- To be as strong in non-food as in food
- To developing retailing service (annual report 2006)
Over years Tesco has been expanding its product and market coverage to suit its customer needs.
As a leading supermarket Tesco is not only selling the staples such as food and drink, clothing, consumer electronics, but also introduced some new products to adapt the changing world i.e consumer financial services(2007 joint venture), retailing and renting DVDs, CDs, Music downloads, Internet service, consumer telecoms, consumer health insurance.
Tesco has already established the biggest market share in U.K. According to recent market analysis report, Tesco has over 30% market share with 51 billion pounds sales which almost the twice of its nearest competitor.
It is still expanding its territory, in 2007/08 118 new stores has been opened. 92 of them are Tesco express which is neighbourhood convenience store providing food and drinks alongside with everyday essentials and 28 are Tesco Extra which is supermarket situated on the edge of cities providing full range of products.
Tesco.com, the ecommerce operation of the supermarket, is the leading online grocery retailer who enjoys rapid growth in recent years thanks to technical and social changes.
Tesco is also aiming to compete in global market. International expansion has played a significant part in Tesco’s strategy. Tesco has been investing heavily in foreign market and it has over 1000 stores over 13 countries.
Analysis of information
Over the past three years sales revenue has increased from £43 billion in year 2005 to £51.8 billion in 2008. The year-on-year growth rates are 8% (06-07) and 11.1 %( 07-08).
U.K market is still the core segment of Tesco, however its contribution of total revenues slightly drops from 76% in 2006 to
73.7% in 2008.
The sales growth rate of U.K market is slowing down from 9% to 6.7%. That is understandable because U.K market is mature it can not grow like the emerging market.
Non-food sales in U.K grew from £7.9 billion in year 2007 (Y2006 6.8 billion) to £8.3 billion, however the growth rate is getting slower from 11.6% to 9%. Since its market share in non-food sale has been improved from 8.0% in 2007 to 8.5% in 2008, Tesco is still outperformed the general competitors in non-food market.
The market condition in U.K has become more and more challenging due to economical downturn and fierce competition from discounted retailers.
The international market shows a more encouraging picture, over 20% growth at constant rate both in rest of Europe and Asia in 2008. This figure is even higher when counting at actual exchange rate. They delivered £13.8 billion sale revenue in 2008.
The rapid expanding in foreign market has compensated the slow U.K market growth and delivered much more sales revenue growth than before. Tesco hopes the contribution from international market could reach half of its total sale revenues. That objective seems going in a right way.
Tesco.com is another encouraging area. Online sale made by Tesco.com has been keeping a high growth rate of 31% in recent years. As the leader of U.K online grocery retailer, its sales revenue reaches £1.3 billion in 2008.
Gross profit has risen from £3,028 million in 2006 to £3,630 million in 2008, however the gross profit margin has been dropped from 8.5% in year 2007 to 7.6% in year 2008.
This suggests that the growth of gross profit is driven by the growth of sale revenues,
Operating profit has risen from £2,280 million in 2006 to £2,791 million in 2008. The growth rate has been drop quite dramatically from 16% to 5%. The reason for that is the start-up cost of £87 million on U.S. and Direct reported in operating profit.
Operating profit margin has been remained around 6% in U.K market which is significant higher than its competitors. (see appendix 2) Introducing high margin products and seizing high margin market such as neighborhood store –Tesco Express could be the reasons.
Margin in foreign market is bit lower than domestic market. It seems that Tesco has been using a lower margin in international market to stipulate its sales revenue.
Stoke loss is up 20% from £581 million in 2007 to £700 million in 2008 while cost of inventory is only up 13%. This suggests that the inventory control measures were a bit loose in recent years. Tesco needs to keep eyes on the enforcement of stock control measures in case of unnecessary loss go up the roof.
In year 2007 administrative expense was £907 million (Y2006 £827 m) while the figure in year 2008 was £1,027 million. Administrative expense has been well controlled in below 2% of total sales revenues.
Return on capital employed (ROCE)
ROCE have been maintained at a satisfied level. The figure made a little progress from 12.7% in year 2006 to 12.9% in year 2008.
Tesco outperformed its main competitors such as Sainsbury’s 7%, Morrison 11%.
Revenue per 000sq
Sales revenue per 000 sq went up from £25,919 per 000sq in year 2006 to £29,549 per 000sq in year 2008.
Revenue per employeeFind out how our expert essay writers can help you with your work...
Revenue per employee has gone up from £177,084 in year 2007 (Y2006 £170,923) to £179,840 in year 2008. That is significant higher than its competitors such as Sainsbury’s £121,032 per employee.
Inventory day is up from 14 days in year 2006 to 20 days in year 2008.
This above figure indicates that Tesco has been operating at a more efficient ways than its main competitors; however the increase in inventory days may has adverse effects on the relationship with supplier.
Finance cost has gone up from £216 million in year 2007 to £250 million in year 2008 while finance income also has gone up from £90 in year 2007 to £187 million in year 2008. That brings down the net finance cost from £126 million to £63 million.
Interest cover has been improving from 12.6 times in year 2006 (Y2007 16.8 times) to 25.8 times in year 2008.
Debt has gone up from £4.8 billion in year 2007 to £6.2 billion in year 2008. The increased debt spent in three areas:
- Capital expenditure on new stores and extension in U.K and international market
- Sterling deflation caused unfavourable currency movement (Although Tesco used forward currency contract and currency option to hedge its enormous transactional currency exposure exchange rate volatility still caused £600 million loss.)
- Investment in acquisition of Dobbies garden centre
Even though the equity expanded for 26% from year 2006 to year 2008 financial gearing is up from 0.47 in 2006 to 0.52 in 2008. The fact that financial gearing is getting worse suggested the risks of Tesco became higher.
Tesco has £1,788 million cash and cash equivalent at the end of 2008, going up 72% on the figure of £1,042 million in year 2007. Operating cash flow was up from £3.5 billion in year 2007 to £4.1 billion in year 2008 which was higher than the capital expenditure.
Current ratio has been improving in recent years, Figure is up from 0.56 in year 2007 (Y2006 0.52) to 0.63 in year 2008. This figure suggested Tesco’s ability to meet its short-term liability improved.
Quick ratio has also made a bit improvement going up from 0.32 in year 2007 to 0.37 in year 2008.
The above indicates that Tesco’s capacity to maintain its usual operation with current cash and cash equivalent improved.
Diluted EPS has grown up steady from 19.79 p in year 2006 to 26.61 p in year 2008.
Growth rates are 17% and 14% respectively in year 2007 and year 2008
Dividend increased in line with the growth of earning per share, therefore dividend cover has been kept at a healthy level of 2.6 times.
Share price was up from 369.7p in year 2007 (Y2006 317.8p) to 443.6p at the start of year 2008, but the shares have fallen 15.4 per cent since the start of the year - broadly in line with the rest of the food and drug sector.
PE ratio in last three years has been kept still at 16 times. This figure is lower than Morrison and Sainsbury, suggesting that Tesco is not quite as loved as the rest in the stock market.
In sum up, the financial analysis of Tesco shows that Tesco is still in a very good shape. Sale revenue, profit margin in core U.K market is still the top in industry. International expansion has gone well. Sales revenue has been growing strongly; profit margin is also getting better. Tesco also made efforts to keep its financial risk under control while not sacrifices long-term goals. Its return to shareholder is much higher than its main competitor.
However recent economical downturn made market condition more and more challenge. It already affects the growth rate of sales performance. Tesco may have to face a fierce competition in U.K market which could cause a lower profit margin and market share. Debt level rose rapidly due to heavy investment.
Presentation of findings
- Tesco recognizes the importance of good corporate governance in improving corporate performance and accountability and in creating long term shareholder value. Tesco follows the best practice of corporate governance and set a full set of committees to direct the company.
It has an experienced management team that lead by Sir Terry Leahy
They are hard working, intelligent, willing to learn from its competitor and have very detail knowledge of Tesco’s business.
They have been doing very well, especially since Sir Terry took over as chief executive of Tesco ten years ago Tesco has more than doubled profits and pulled a record number of customers. As the leader of Tesco they set tone from the top, they used a simple philosophy – every little helps- united every part of its business. Management team is driven by providing value for money to Customer is the centre of this philosophyYou can get expert help with your essays right now. Find out more...
Tesco also uses a flat management structure in this large organization. From a check-out to chief executive, there are only six levels which allow better communication and encourages employee to participate into company’s development. Tesco has more employee Shareholders than any other British company which can keep individuals goal in line with organization goals.
Tesco is a powerful retail brand. It has been identified by brand valuation consultancy Intangible Business as Britain’s most valuable retail brand worth £8.6 billion Brand value.
It has a reputation for value for money, convenience and a wide range of products all in one store.
3. Economy of scale
Tesco is the biggest retail store chain in U.K and increases its market share in recent years.
Due to the size and the ability of Tesco they have competitive advantage in lower cost by buying in bulk. That will allow them to enjoy Economies of scale, give them price advantage in fierce market competition and maintain their profit margin.
Considering its suppliers are diverse and Tesco have a huge range of products, Tesco can exert its enormous buying power on supplier to have larger discount and/or favourable terms.
As a multinational company Tesco can also bring economies of scale in logistics.
4. Using Ansoff’s matrix we can find out Tesco carefully chose the low risk strategy to expand and avoid diversification – the high risk one
Comprehensive market development
I. Domestic market
a. There has been a significant increase of number of Tesco retail stores, from 2741 stores in year 2006 to 3729 stores in year 2008. Also with the introduction of the different stores such as Tesco Metro Tesco express and Tesco department store it has made it more convenient and accessible for customers. These stores diversified from large super centres to local and mall-based sites to exploit different market segment.
Existing product new domestic market
b. Tesco is the UK’s largest online grocery retailer and has gained a lot of experience in efficient stock-picking, replenishment systems, comprehensive delivery networks and user-friendly website design over recent years. Those experiences plus a huge start-up cost have build up a barrier for new entrant.
Internet grocery shopping market is still a fast growing market. It is estimated that the UK online retailing market would reach £78 billion by 2010. So far Tesco has already bagged two-thirds of online grocery market. In BCG matrix model, Tesco.com can be seen as a star which has a potential to become a cash cow in the future. (the only one making profits)
II. Existing product new International market
Foreign division set to prosper in Asia and east Europe， sales grew from £10,480 in year 2006 to £13,824 in year 2008.Number of stores increased from 814 from year 2006 to 1614 stores year 2008.
UK market is a mature market which has not grown very much for many years. By investing in countries which are in different economic cycle, Tesco has diversified its risk embedded in core UK market. Tesco can also gain synergy effect in international expansion using existing experience, system, resource.
Market development new store, oversea expansion
III. Existing market and new product
Merging or forming a strategic alliance with another company is a great way to improve their services and overcome some of their weaknesses. It would be a good idea to form alliances with companies in the areas they are not doing so well in and could do with the expertise of a specialised company. In this way Tesco might be able to get access to the market with limited risks.Find out how our expert essay writers can help you with your work...
- Tesco entered into Fast growing person finance market by setting a joint venture with royal bank of Scotland.
- Tesco also entered into telecommunication market by setting a joint venture with O2
- Those joint ventures provide growth opportunity outside of retailing sector.
5. Market penetration
Unlike those discounted superstore chain Tesco uses a “good, better & best” policy for its products to attract different groups of customers.
No matter a customer is wealthy or poor he can find the goods he needs at a reasonable price.
6. Technology innovation
Tesco has invested heavily in IT over the years, and this has played a strong role in improving sales, the supply chain, and efficiency across the company.
The most well-known example is Tesco club card system.
In February 1995, Tesco became the first British retailer with a loyalty card when it introduced the Tesco Club card and now it has one of the largest databases anywhere in the world. Through this system Tesco has build up a database of 12 million customers and watch what its shopper are purchasing. It then explores linkages between the products people presently buy and the ones they might be persuaded to buy next.
This knowledge allows Tesco to bring attention of customers by giving them discounts on things that they buy routinely and adjust its shelves to suit the profile of the local area.
1. New market and new product involve risks.
Tesco's new US convenience store chain is struggling to attract shoppers; sales were substantially short of its initial estimate of 100 million USD or more.
Tesco is relatively new to the phone and insurance market therefore may lack experience and expertise. Tesco has recently entered many different Markets, so therefore not specialise and focusing on one particular market like other companies, which can have a negative affect. For example Tesco would not be able to provide a better service in Books than Waterstones can, as they specialise in this region.
While 'fill the gap' strategy would be useful to the company, as has been the case with the UK convenience market, there is the danger of Tesco becoming a serial acquirer, as this tends to reduce earnings visibility and quality.
Tesco is company that has 380,000 employees in 13 countries and sells many products from groceries, books, clothing, and furniture to insurance etc. As the size of Tesco grows there is always a potential risk of being bureaucracy. Tesco may not as flexible as small stores to adapt environmental change.
Upon the UK market Although international business is still growing, and is expected to contribute greater amounts to Tesco's profits over the next few years, the company is still highly dependent on the UK market (73.7% of 2008 revenues). While this isn't a major weakness in the short term, any changes in the UK supermarket industry over the next year could alter the balance of UK supermarket power, and affect share. Recent market share report shows Tesco came in at the bottom of the pile over Christmas and has lost market share for the past three quarters according to TNS data (although it did gain share in March).
Revenue from new market grows rapidly but still contributes a small partition of total revenue. This makes Tesco vulnerable from downturn of UK market.
4. Debt level
Tesco has a large capital expenditure program - mainly due to its huge investment in space for new stores. Since its expansion is so aggressive, Tesco has little free cash for any other operations.
Serial acquisitions also demand a large amount of funds, even with an enterprise value of £29 billion, Tesco still found out tight on budget.
Tesco needs to sale and lease back its stores to raise £605 million fund to buy royal bank of Scotland share in personal finance joint venture.
Further Expansion internationally and domestically
Emerging markets in east Europe and Asia still is growing quickly. This provides a good opportunity to reduce its reliance on UK market and reduces recession risk of UK market on its whole performance.
Tesco also announced its town centre department store plan. The plan represents a significant shift away from the traditional out-of-town sites favored by the UK's biggest supermarket chain, which pockets one pound in every seven spent by British consumers.
This plan creates a new customer experience not usually associated with grocery sector
The UK has Europe's second-highest and the world's fifth-highest number of broadband subscriptions. These higher consumer usage rates of broadband have enabled the UK to become a leading centre for online sales in general, and for online sales of grocery products in particular. At the present time, the UK is considered to have one of the world's most developed Internet grocery industriesYou can get expert help with your essays right now. Find out more...
Population growth is the basic driving force of the growth of grocery market. Immigration has been the biggest factor in increasing the population in recent years and half of UK’s ethnic minority populations choose Tesco. This means Tesco will attract a major part of new customers.
Because Inflation rate just hits a record high of 4% and interest rate is also kept at high level customers have to spend more on mortgage and house bill.
They become more prices sensitive and attempted to discounted store. Tightening spending customer will affect the performance of retailers.
Recently Tesco began its prices campaign “food pledge” to attract customer in a response to defend its market share. Profit Margin will face pressure because of this price war.
Being number one means that you are the target of competition. One big threat that Tesco faces is Asda. The reason this is a threat is because Asda was took over by world largest retail store Wal-Mart it is the largest Global Competitor and therefore has the necessary skills, resources experience and funds to cause Tesco problems.
The price followers in the UK market are about to become aggressive investors in price. Morrison and Sainsbury are bound to see lower prices as one of the basic changes necessary to drive its recovery. With both Asda and Tesco committed to price leadership, this could result in a step down in industry profitability.
Government & Regulator attacks dominator
Tesco has nearly one third of UK grocery market share. There is a growing concern that Tesco is getting too big and driving out competition. The Government, Monopoly and Mergers Competition could get Tesco in trouble for this.
A major threat to Tesco current strategies of expansion is the government and the Monopoly and mergers commission. Also there is a Growing public concern and annoyance that Tesco is threatening the smaller retailer. The smaller shops are disappearing due to the growth of supermarkets and this is annoying some people. So there is a social and legal implication as well.
International market risk overseas returns could fall if economical downturn turns out a world wide crisis.
Regional unrest, political dispute could cause overseas operation difficulty.
Tesco has recently announced it would end trading with Zimbabwe because of the political crisis. Although it does not affect Tesco much it still showed how vulnerable overseas operation could be.
By the above qualitative analysis on the status of Tesco, I believe that Tesco will keep the modest speed development in the future. Firstly Tesco has a sound corporate structure and leadership to keep it running effectively. Secondly Tesco also has a good reputation, favor market position to allow it has a lower cost and higher margin. Thirdly, well designed product matrix and market development strategy let it enjoy sustainable sale growth. Finally technology innovation enhanced its ability to further development.
There are also some problems too.
Firstly a worse outside industry environments including customers, competitors, regulators make future development uncertain.
Secondly targeting on too many markets and products would be a challenge for Tesco’s resource such as human resource and funding.
Administrative team may need to more cautious for Tesco’s debt level and market conditions change.
In financial status respect, Tesco showed fast growing sales revenue, solid profit margin, healthy ROCE and a commanding market share. Financial risk is well under control. Current ratio, quick ratio and interest cover has been improving over three years. From an investor’s perspective EPS also improved although grew up at a slower rate.
Tesco use some market development strategies to support its sustainable growth.
More stores constructed in international and domestic market. More products also introduced in existing market.
In grocery market Tesco use price cutting to defend its market share.
Tesco has a well balanced products portfolio. It has Tesco.com in star quad, UK grocery market as a cash cow quad and international market and other retailing market as Problem children.
Customer spending is tightening and competitors is using price to gain market share. Regulator also attacks Tesco’s dominance. The external environment does not show a very encouraging sign.
Tesco is facing two major risks:
Earning visibility is reducing and Debt level is rising because of its serial acquisitions and unfavourable market conditions.
The strategies do not solve these problems effectively.
Underperformed acquisitions and worsen UK market condition put a shadow on Tesco’s earning visibility. Profitability could experience further drop.
Price cutting measure may causes further margin pressure and product and market development cause debt going up.
Tesco could sell out business in unprofitable sectors such as US market division. That would help Tesco to focus on its core business and keep debt level under control.
Plus Tesco need to generate more measures to respond market condition change and be more cautious on market condition change.
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