Reasons For Choosing Topic And Organisations Marketing Essay
|✅ Paper Type: Free Essay||✅ Subject: Marketing|
|✅ Wordcount: 3477 words||✅ Published: 1st Jan 2015|
After some consideration I have selected the topic “The business and financial performance of an organisation over a three year period”. Business and Financial analysis of an organisation is main indicator of its performance which focuses on financial as well as non-financial aspects. I have chosen to write my research and analysis report on Tesco Plc. I will do business and financial analysis of Tesco plc in this report over the past three years using appropriate Analytical techniques such as ratios. Ratios are of little use in isolation, that’s why I will compare them with past years and with some of Tesco plc main competitors in order to identify trends.
REASONS FOR CHOOSING TOPIC AND ORGANISATION:
A company true strategic position can only be known by analysing its business and financial performance which the chosen topic will help me to do in case of Tesco; moreover it will enable me to use my academic knowledge in a better way.
Throughout my study in ACCA mainly papers F5, F7 and F9 focuses on financial statement, which has helped me in maintaining my personal interest in this field.
Assessment of financial performance usually starts with analysis of financial ratios. The ratio system of financial performance comprises metrics designed to convey the comprehensive picture of financial performance. (Analysts and investors current and potential use financial ratios because financial numbers in isolation are not especially informative).
In this time of recession when people (investors) are more concerned about the company true performance it only can be done more appropriately using the business and financial analysis. By using financial analysis, one can easily explore a winning and fundable strategic plan; conduct financial planning, carry out business valuations, and much more.
UK grocery and food retailing is dominated by large ‘supermarket’ chains. The main key players in the food retailing are Tesco plc, Asda, Sainsbury and Morrisons, also known as the “Big Four”. The progress and efforts Tesco plc made over the last few years are remarkable which makes it debateable, quite interesting out of “Big Four” and my target industry.
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UK retail industry is certainly dynamic and has been a major driver of economic growth; it’s also fiercely competitive, adding to UK national wealth and creating over a quarter of a million jobs since the start of decade it now directly employs around 2.9 million or 11% of the work force. It has been noticeably more dynamic than the retail industry in many countries… (Source: The retailer Year book2008 Article by John Hutton MP)
Market share is seen to be a good indicator of competitive strength, during 1990, Tesco and Sainsbury (Tesco’s arch rival) enjoyed similar market shares (of 20 to 25%), but since then (1995) Tesco have competitive edge in UK retail market. According to recent data of market share Tesco possess 30.4% highest in the UK followed by Asda (17.5%), Sainsbury (16.6%) and Morrisons (12.3%). (Source: TNS March 2009)
History of Tesco plc
Tesco was founded in 1919 by Jack Cohen, who opened a market stall in London’s East End. The Company introduced its first own-brand product Tesco tea in 1924 and opened its first store in 1929 in Burnt Oak, Edgware, London. In 1947 Tesco floated in stock exchange with a share price of 25p. Tesco’s first self service store was opened in Maldon in 1956. Company established is first gasoline station service in 1974. Tesco took over chain of 212 stores in 1960s and in the same time period added another144 stores. Group announced to invest £500 million in opening another 29 stores in 1987.
Group started expanding its business by entering in overseas markets in 1990s and by the end of 1990s it has entered in Poland, Hungry, Slovakia, Czech Republic, Taiwan, Thailand, and the South Korea. In year 2000 Group launched Tesco.com. In 2000s Group continued its international expansion and entered in Malaysia, Turkey, Japan, China, and India. In 2005 Tesco left Taiwanese market by making an agreement with Carrefour, Group swapped its assets including stores and operations in Taiwan by taking 11 Carrefour stores in Czech Republic, and Slovakia.
In 2007 company opened its Fresh & Easy stores in United States and it acquired 36 hypermarket stores in South Korea in May 2008. In the same due to bad economic conditions in UK group launched its discount brands. Thereafter Group made agreement with Royal bank of Scotland to buy its 50% shareholding in Tesco Personal Finance and following the approval of Financial Services Authority in December 2008 Group got full control of Tesco Personal Finance.
Recently in 14 August 2009 Tesco announced to double its club card point and in 20 August 2009 Tesco has created 800 new jobs in Glasgow which is warmly welcomed by the Chancellor Alistair Darling MP.
Tesco’s success appears to have been based both on increasing operational efficiencies and meeting customers’ demands. It also based on its well established consistent strategy of diversification. A well established strategy formulation is a continuous process of refinement based on past trends, current conditions and estimates of future, resulting in a clear expression of strategic direction which many companies forget to realize. Tesco had adopted strategy of “Value for money” as many people agree that it “sells good quality food at low prices”.
Tesco PLC the Group principle activity is food-retailing its other operations focus on retail, purchasing, property investment, property development, personal finance however its operations can be examined by store formats operated by it:
It has 960 Express stores offering high quality fresh food at convenient locations. First Express store was opened in 1994.These stores sell a range of up to 7,000 products including fresh products, wines and spirits and bakery products.
There are 170 Metro stores which bring convince of Tesco in towns and city, the first Metro store was opened in 1992. It offers a tailored range of food products including ready-meals and sandwiches, such as in the East London areas where most of Asian lives it also offers Asian products.
Tesco operates about 450 superstores at which it offers food as well non-food products such as DVDs and books.
This one stop store has proved very popular since its opening and currently it have 175 Extra stores which offers a variety of food and non-food products lines ranging from electrical equipment to homewares, clothing, health and beauty and seasonal items such as garden furniture.
Tesco’s Homeplus stores are dedicated to non-food including clothing. Additionally, about 115 Extra and Homeplus stores have opticians and around 270 of them have pharmacies.
Tesco offers retailing services through its online shopping channels, tesco.com and Tesco Direct. Shopping online has benefited those who have busy lives and those without access to transport. Over one million of its customers like to buy online. Which is increasing very rapidly as there has been 20% growth in tesco.com new customers in 2008.
(Source: preliminary results Andrew Higginson finance and strategy director)
It also provides broadband internet connections (Tesco broadband) and telecommunications services (Tesco Mobile and Home Phone) through a 50-50 joint venture with O2 mobile company. Company is enjoying 1.8 million mobile customers by the end of year 2009.
Tesco also provides financial services through Tesco Personal Finance (TPF) which offers a choice of 28 products ranging from savings accounts and credit cards to car and travel insurance. All its financial products are also available for online purchase. It currently has 1.5 million car and home insurance customers.
Recently (25 June 2009) Tesco Personal Finance (TPF) has announced partnership with Fortis UK (Insurance UK) [source: Available at: www.tescoplc.com/plc/media/pr/pr2009/2009-06-25a/ Accessed 25 July 2009]
Aims and Objectives:
This research will be composed of depth Financial and business analysis of the Tesco plc which includes,
The important information about Tesco plc, its key competitors.
Analysis of Financial statements to produce valuable information for the related parties (stakeholders). This financial analysis was done using analytical techniques such as Ratio analysis (A key aspect of performance measurement), statistics and simple figures analysis for the last three years. A comparison of Tesco is done with its rival Sainsbury to see Tesco plc position with respect to its competitors.
Major study of internal and external forces affecting the company in the form of a SWOT analysis, it is a strategic planning method which provides a snapshot of the business position with respect to its Strengths, weaknesses, opportunities and threats at a specific point in time. As Strengths, weaknesses, opportunities and threats change with the market and with the growth of the business and Porter’s Five Forces to know the industry attractiveness.
Annual Reports and Financial Statements:
Annual reports have been used as the key source of information. This gives in depth knowledge about Tesco’s annual results, other financial achievements and its current and future strategies. Ratio analysis was done using financial statements and it also helped me to do some non-financial analysis which is necessary to know the complete picture of business.
Competitor’s Annual Reports and Financial Statements:
This information helped me to find out trends and Tesco plc performance and position with respect of its competitors, by doing some financial and business analysis of its rivals. This also helped to see Tesco responses to outside world.
Newspapers were used to know the present changes in the food retailing and current situation of the business. It is a very useful source of information gathering for research which really contributed a lot in this report. Recent steps taken by Tesco such as “TESCO AND FORTIS CREATE NEW INSURANCE PARTNERSHIP”, “TESCO ANNOUNCES NEW PROPERTY DEAL” and to enhance customer loyalty “TESCO IN £150 MILLION CLUBCARD RELAUNCH” was very helpful. Some article also helped a lot in preparing this research work such as
Magazines proved very informative in preparing this report such as “The Economist” “Student Accountant” “The Retail year book”.
Study Notes and Text books.
Study notes were one of best source used to do Ratio analysis (ACCA F5, F7, F9) and it also contributed a lot in doing business analysis (ACCA P3).
I went to many libraries such as London Business Library and London School of Economics (LSE) library which proved very productive for this research. During my visit in libraries I went through the past news papers, journals, books, magazines and analyst reports on the retails and on chosen topic such as ” IGD- Grocery Retailing & retail analysis” “Economic Note on UK Grocery Retailing by Defra (Department of Food and Retail Affairs)” “OXIRM (Oxford institute of retail management)”
Internet is one of most widely and readily accessible way of getting information and in this report it played an important role. Tesco plc and many other big companies publish their annual reports on their websites which really helped me in preparing my project. Online websites such as business.timesonline.co.uk, ft.com, uk.reuters.com, bbc.co.uk and some online articles and magazines were also used to get information.
There was some limitation in preparing this research project. The result available for 2009 is on 53 weeks basis whereas others are on 52 week basis, which makes comparison difficult.
ACCOUNTING AND BUSINESS TECHNIQUES:
Sales Revenue and Profit:
The group sales have grown in last 3 years (by 27%). Company achieved revenue of £42.6 billion in year 2007, an increase of 8.1% over 2006 (£39.5 billion in year 2006). In financial year 2008 sales grew by 10.9% to £47.3 billion (£42.6 billion in 2007) and in year ended 2009 it recorded revenue of 54.3 billion, a solid increase of 14.9% despite the eroded economic conditions.
(Graph source: Tesco Financial Statements, Tescoplc.com)
(Graph Source: Tesco plc and Sainsbury Income statement)
This increase in sales is generally because of Tesco strategy of constant growth and expansion. Tesco has expanded its overseas business quite a lot in last few years, which has contributed more than half of its sales and it has also grown its UK business. In UK Group has opened 2.0 million square feet of sales area in 2008/2009, of which 362,000 square feet was for extension of store, mostly for Extra. It opened another 11 hypermarkets and 21 new superstores and 125 new Express stores brining overall Tesco stores to 2,282 in the UK.
In year 2008 company international business contributed 54% of growth in Group sales and 50% of growth in its trading profit, during the second half of the year 2009 sales growth of its Europe business reduced, which represented deteriorated economic conditions in number of markets.
On the other hand Asia has shown a strong performance and sales have grown faster, which is mainly driven by the acquisition of 36 Homever stores in Korea in the second half for a total consideration of £958 million. During the same year it also announced its plans of developing a wholesale cash-and-carry business in India and company is also entering a franchise agreement with Trent (Tata Group retail branch), making the overall investment in expansion during the year 2009 of £6.6 billion. In year 2009 international sales have grown by 51% and a 45% of growth in trading profit. The overall increase in Group number of stores in last three years can be seen as follow:
(Graph Source: Tescoplc.com)
Group have invested in price cuts which have also contributed towards its sales. Company Price Check survey continuously compares prices weekly against its rivals to keep competitive prices of products. By end of year 2008 it has already cut prices of 7500 products and in last decades.
Tesco have grown its online business over the last 3 years significantly. Sales of Tesco.com continued to grow with 29.9% increase in the year 2007 to £1,226 million and 31% increase in 31% increase to 1.6 billion in year 2008. In the year 2009 it delivered another strong performance and sales increased by 20% to £1.9 billion.
Company has expanded its Non-food offer substantially since 2007 and to make it easily accessible for customers it is being offered through tesco.com and its catalogue. By the end of year 2009 it have 12,500 products available online and have already issued 11.5 million catalogues last year. Group non-food sales rose by 6% to £12.5 billion in 2009.
The overall effect of this expansion and investment in price cut can be seen by Group performance in last three years.
As mentioned above company have recorded a solid increase in sales of 14.9% in the financial year ended February 2009.
As a result of sales growth, Tesco have delivered a strong growth in underlying profit before tax of 10% by the end of year 2009 and 12.4% rise in Group trading profit.
Achieved as planned acquisition of Royal Bank of Scotland Group PLC’s 50% shareholding in Tesco Personal Finance (TPF). Recently in August 2009 TPF has created 800 jobs in Glasgow.
Company saved £540 million in productivity and by using double decked trucks saved 52,000 deliveries to its stores, which in turn have saved 12 million road miles. Saving overall around £550 million in 2009.
In contrast Sainsbury sales have decreased by 2.8% in 2008 to 4%, which is due to the UK economy downturn. But in year 2009 Sainsbury sales growth has slightly increased to 6%, which is much less as compared to Tesco sales growth of 10.9% and 14.9% in 2008 and 2009 respectively. This is due to the reason that Sainsbury have only a UK operated business and is not secure from economic downturn whereas Tesco have hedge itself from these economic uncertainties by diversifying in international markets.
Gross Profit Margin:
This is margin that company makes on its sales and would usually be expected to remain reasonably constant. Tesco plc gross margin has decreased in 2008 by 0.45% to 7.67% but slightly increased in 2009 to 7.76%.Despite an increase in turnover of 27%, the gross profit margin has fallen by 0.36% to 7.76% in last 3 years.
Company made some pensions adjustment due to change in Finance Act 2006 which brought one off gain of £258 million in year 2007 and pushed the gross profit up.
The decrease in the gross margin in 2008 could be due to Tesco investment in price cuts, as mentioned above during the year 2008 company cut prices of 7500 products and in year 2009 it made £100 million investment in price cuts.
Group introduced a new discount range of about 500 products aptly named ‘Discount brand at Tesco’ with the aim to compete with discount stores and offer customers value for money in this time of recession so that customer can have a product to match their budget without compromising on choice or quality.
The moves come as official figures show the rate of inflation has risen to 4.7% – with food inflation hitting 13%, in order to attract more sales in this time of recession and Tesco’s chief executive Sir Terry Laehy claimed that sales of its discount range was rising faster than that of Aldi or Lidl (discount stores).
Between 2000 and 2006 Tesco prices fell by 17% in real terms which can be illustrated by the following graph.
Trend in real food prices since 2000
The falling gross profit margin may indicate that the company is not as efficient at controlling its costs (purchases, productions) but in case of Tesco it’s not the case as the cost of sales have increased in line with the sales over the last three years(27%).
The decrease in the profit margin is a small decrease despite the challenging economic conditions and this trend of decrease and increase can be seen in all other retail sectors.
Sainsbury gross profit margin has slightly decreased in year 2008 by 1.21% to 5.62% and in year 2009 it slightly decreased to 5.50%.Tesco gross profit margins are greater than Sainsbury which gives indication of its stability.
(Graph source: Tesco and Sainsbury Income Statement)
Return on Capital Employed (ROCE):
This is a key measure of profitability. Tesco plc return on capital employed in 2008 has slightly decreased from 17.60% to 16.75%. This decrease in ROCE is due to the decrease in gross profit margin.
(Graph Source: Tesco and Sainsbury Financial report)
Operating Profit Margin:
Tesco plc operating profit has slightly increased by 5.4% in 2008 to £2,791 (£2,648 in year 2007) and operating profit margin has remained constant in the 2007 and 2008 at 5.9%.
The operating profit has been calculated after deducting “administration expenses” and adding “profit arsing on property-related items”. In year 2008 operating profit include profit arising of property-related items of £188 million which is more than double as compared to 2007 figure of just £92, which brought administration expenses less in year 2008. This has helped in maintaining the operating profits same in both years.
Company’s operating profit margin has increased from 5.90% to 6.21% in year 2009 this is because of the reason as operating profit has increased in line with sales by 14.9%.
Overall Tesco operating profit has steadily increased, which shows that company is very efficient in managing its expenses.
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