Business and financial performance Tesco and Sainsburys
The topic I choose is “The business and financial performance of an organisation over a three year period”. I have selected my company has Tesco plc because of its reputation, and increases growth rate during the period of recession. I have chosen my period of study from 2007 -2009 as this is the period in which recession was at the peak. My research and analysis will be from the investor’s point of view who is interested in the financial position of the Tesco Plc in the present economic Environment.
I have chosen Sainsbury for my comparison purposes because both these company are in the same market and do similar kind of businesses. The research and analysis report derived from comparing both these company’s may differ by a small extent because of the differences in the accounting periods.
1. B - Reason for choosing the topic:
Being an accountancy student I got the necessary skills and knowledge to analyse a business. As I am employed in a small accountancy firm as a junior assistant I learnt the skills to draft and present the financial statements of a small company. So I wish to enrich my career by myself, so I thought it would be better to analyse and comment on some big companies so that it will enlighten my career.
As I have also completed ACCA exam papers such as financial reporting, corporate reporting and business analysis hence I thought of applying what I studied to my work so that I can gain a practical knowledge of what I have studied. Applying what I have studied will also help me in understand the concept and how it is used in the real world.
1. C - Reason for choosing this organisation:
Tesco is one of world’s most successful retail industries and also ranks first in the UK as a No 1 grocery retailer and it is also considering expansion all over the world. It huge expansion in the recent years and growth in the profit even during the recession time are the factors encourages me to select Tesco as my company.
It also adds value to its customers by providing a wide range of products and services.
1. D - Company Profile:
Tesco is one of UK’s largest international grocery and general merchandising retailer
Tesco carry on trade in United Kingdom, China, the Czech Republic, Hungary, the Republic of Ireland, India, Japan, Malaysia, Poland, Slovakia, South Korea, Thailand, Turkey and the United States. The main activity of the Company is their retailing services. Retailing Services includes the Company’s online shopping channels, tesco.com and Tesco Direct; Telecoms; Tesco Personal Finance (TPF)
The Company also provides retail banking and insurance services through its subsidiary Tesco Bank
It has largest retailer global sales and domestic market share with profits exceeding 2.1 billion in 2009 according to their financial statements. Tesco had a market share of 30.7% in the three months ended to November 2009 on the other hand Sainsbury’s has got only 16.1% (According to their company website).
1. E Aims and outcomes of my report:
I will carry out my research work in the following direction
Firstly – Analysing Financial Performance
An Analysis of financial performance of Tesco Plc from the share holder’s point of view
Investors are concerned more about the acceptable return for their portfolio, liquidity position, going concern of the company and dividend payments. Customers who are also one of the stakeholders of the company are concern more about the price of the products, healthy and nutritious food and as a society they need more environmental and reusable products which are eventually affects the financial statements.
I will do the financial analysis in the following ways
Calculating profitability ratio’s such as profit margin, return on capital employed(ROCE),Return on Equity (ROE ) and comment on them
Analysing sales growth trend of Tesco from 2007 -2009 and comparing it with the competitors which is Sainsbury’s
Calculating and commenting on liquidity analysis such as current ratio, Quick ratio
Calculating investor’s ratio which is so important to in order to determine the performance of the company from the investor’s point of view.
Analysing the risk ratios to know the gearing position of the company.
Secondly – Evaluating Tesco Strategy
Evaluation of business and financial performance and future business strategy with the help of financial and performance ratio’s and the company’s ability to tackle its corporate social responsibility
I will do the Strategic Analysis in the following ways
Evaluation of Tesco business and financial performance using their Strength, Weakness, Opputunity and Threats which is a summary of SWOT Analysis.
Strength and weakness which are internal to the organisation such as their brand name, highly skilled personal, and customer service Etc.
Opportunities and Threats which can be explained via Porters five forces such as competiton,customers and suppliers.
For future prospects and strategy I will look at their future growth strategy, business plans and commitments towards their business expansion.
1. G – Significance of Study
This study is purely based up on how Tesco overcomes the present economic conditions, which has a major impact on all major business which leads to reduced spending power to the customers. The outcome of my report suggests whether or not Tesco is able to give return to its share holders.
2. Information Gathering
Information gathering is one of important element in doing any financial analysis. The quality of evaluation is highly depends upon the information we gathered for analysis purposes.
Two types of information gathering which are primary and secondary source, which determines how reliable the information. For any research work we can either use primary or secondary or both sources of information gathering.
2. A – Definition of sources
Primary sources of information
Primary source are called original source or evidence which we collect directly from a person about the company through Electronic mailing system or Questionnaires or which is collected directly at the time of event. In order to learn the past, the primary source of information provides with useful information which have originally occurred such as financial position, income statement, board minutes and letters Etc.
Secondary Sources of information
Secondary source of information are information which is created by someone who did not experienced it first time or did not participate in the event at the time of occurring. Information collected from these resources cannot be relied heavily, but it can be trusted to some extent. Sources like books, newspapers, magazines, internet website etc can provide information about events that have occurred in the past.
2. B – Information gathering approaches
For my analysis I have used both primary and secondary sources of information which I have given below
2. B.1 – Review of Annual Reports
I have used annual reports of Tesco from 2007 – 2009 which I have obtained from www.tescoplc.com.Annual reports of Tesco includes statement of financial position, cash flow statement and income statement. These are the reports whereby I can base my analysis by calculating the ratio’s and comment on them. From the annual reports I can get valuable information such as total assets and liabilities, income and expenses, finance cost and finance income made, short term and long term liabilities, and net cash amount they made in the financial year.
These annual reports also consist of director’s statement, auditor’s report and opinion and the remuneration to each director and also tell us whether the company has adhered to corporate governance requirement.
Annual report also provides with more information about the internal control of the company, company structure and their corporate social responsibility, and the directors responsibility.
This information is very useful and can be easily downloaded from the internet at no cost.
I have also used the annual report of Sainsbury’s from the year 2007 -2009 to compare with Tesco plc. I have obtained the financial statements from
http://www.j-sainsbury.co.uk/ ,which I have used to calculate ratios and their financial position.
2. B.2 – Information from newspaper and media
From the day I started my ACCA my lecturers insist us to read some financial newspaper in order to obtain financial information which is necessary to our studies. Newspapers such as financial times, City A.M, The times are the easiest ways to obtain more information about a company. News papers provide lots of information about a company in relation to the current economic crisis and its effect on the company activities.
According to Evening standard on Tuesday April 29, 2008 - Tesco becomes first supermarket to use 'green score' to measure carbon footprint of products.
2. B.3 – Review of Magazine
It provides valuable information about the changes in the accounting standards and financial matter which students and other professionals should know to prepare their financial statements. By reading through the article I came across valuable information such as changes in accounting standards, tax rate and how to analyse a company financial statements through ratio analysis.
By reading through student accountant I gathered valuable information and techniques for my exams and also how changes in accounting standards affects company annual reports like Tesco, Sainsbury, Asda and Morrison’s which deals with foreign currency and foreign taxation.
The article written by Bobbie Retallack (Student Accountant, May 2010) has mentioned
“Performance appraisal is an important aspect of Paper F7, Financial Reporting. At this
Level you are not only required to prepare financial statements but understand the
Information underpinning the results”
As this article provides me with valuable information about how to analyse a company with quantitative techniques using ratios and also able to understand the movement in the ratios.
2. B.4 – Review of Relevant Book
Books always provide valuable information .By reading through BPP text books which are meant for ACCA gives me more information about financial reporting and accounting standards. As BPP every year update their books it is helpful for me to have up to date information about the changes in the accounting standards and financial reporting.
By reading through BPP ACCA books such financial reporting, corporate reporting and business analysis I came to know how to draft financial statements and to evaluate the financial statements.
Business analysis books provides me with deep knowledge about Porters Five forces and SWOT analysis and other business evaluation models which are so helpful for me to do this research on Tesco plc.
I have also gone through my lecture handouts which are also more helpful for my assignment, which provides me with brief notes about the business evaluation models.
2. B.5 – Review of internet Website
I come to know more about the Tesco products, services and their prices by going through their websites http://www.tesco.com/
By visiting http://www.tescoplc.com/ I downloaded their Statement of Financial position, Statement of Comprehensive income statement and statement of cash flows which I used for financial analysis such as ratios and trends and business analysis.
By going through http://www.j-sainsbury.co.uk/ I got the financial information about Sainsbury which I have used to compare with Tesco to make my conclusion.
By going through Financial times I got some useful information about Tesco and Sainsbury and how it has been operating in the present economic climate. And the effect of recession on consumer purchasing power. I have also read about how the banks have collapsed because of recession.
By visiting http://www.londonstockexchange.com I have gathered information about the share price changes of both Tesco and Simsbury’s. And also understand how company business and financial performances affects the share price change.
2. B.6 – Library Research
I have visited my college library too often to collect more information about the business analysis techniques by going through various books written by various authors and some of CIMA text books which specialises only on management side of business. I also found some valuable books in my local library (Walthamstow) which I have used for m analysis.
3. Analysis and Presentation:
My analysis and presentation includes calculation of relevant financial ratios of Tesco to measure company’s performances, risk and comparing it with Sainsbury’s.
Company risk can be measured by gearing and interest cover. Information used for calculating ratios was obtained from Tesco annual reports which consist of Statement of Financial position and statement of comprehensive income and cash flow statement.
Detailed ratio calculation and the formula used are shown in the appendix
Calculations and analysis has been explained below
3. A – Sales Growth Analysis
Tesco sales has been increasing every year with a increase of 15% in 2009 when compared to 2008 and 2009 it was just 8% and 11% respectively. The increase in sales due to the
Increase in number of Tesco express shops which produced best results in the sales growth because consumers wants to shop locally and more often to save cash
Reduction in fuel and diesel price by 3 Pence Per Litre on December 2008 on all its 430 Fuel Station making it the cheapest supermarket petrol retailer
Tesco announced on January 2008 Tesco will reward customers with double Club card points on every fuel purchase. With an average customer spending £27.55 on unleaded petrol each time they fill up, that’s an additional saving of 55p.
Increase in new products and range of low priced products help them to increase their sales during the period of recession.
At the third quarter the Progress over International sales was up 28.1% at actual exchange rates and by 14.6% at constant rates. This included a particularly strong performance in Asia, where sales grew by 29.4%, helped by the Homever acquisition and in spite of the depreciation of the Korean Won against Sterling.
Increase in internet sales and good performance of Tesco mobile
Good customer services, by changing to customer needs quickly, by lowering prices and offering even sharper promotion.
% Increase in sales of Tesco
% Increase in sales of Tesco
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