Tesco Company’s Comprehensive Analysis

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Table of Contents

Introduction
Discussion and Analysis
Conclusion and Recommendation
References

Introduction

Tesco PLC (or “Tesco”) is an international retailer. Based in the United Kingdom, where it is the leader in the grocery retailing, the company is considered to be world’s third largest retailer in terms of gross sales. The company was originally a UK-focused retailer that specialised n food and drink but eventually it has diversified both by products and geographically.

It is now into clothing, electronics, telecoms, financial services, health, car and dental insurance as retailing and renting DVDs, and software (Tesco, 2010a).

Geographically diversification has resulted to its retailing and associated activities outside the United Kingdom including that of China, The Czech Republic, India, Japan, Malaysia, Poland Hungary, the Republic of Ireland, Slovakia, South Korea, Thailand, Turkey, and the United States (MSN, 2010a).

This paper evaluates the company’s competitive environment, financial performance using ratio analysis, the corporate strategies being pursued by the company using relevant frameworks.

Discussion and Analysis

The Competitive Environment – Industry Analysis

Macro Environmental Analysis

The significant macro trends in for the past five or more years along with the telecommunication industry, and the much felt recession in the economy, not only in UK but in many parts of the world and which came about as result of the financial crisis.

The emerging trends of Internet and telecommunication have effected many changes, which can only have produced undeniable marks in business particularly in keeping the world economies running. These developments have enabled more business entities and many people as to interact to each other. Companies found themselves expanding and diversifying in not only products and services but also geographically.

These developments, believed have in fact driven business activities globally are supported by the increasing number of world internet users as by researchers. With the global online population online will grow to about more 2 billion by 2014 , or more than 40% from 1.6 billion in 2009 (Enright, 2010).

The Global financial crisis of 2008 and onwards has affected many British and American people. The US, UK and other governments needed to have bailout plans that would have to help solve the problems caused by financial crises that produced loss of many employments.

Loss of jobs means lower power of the consumers to spend and to keep the economy running (Samuelson and Nordhaus, 1992; Dornbusch, and Fischer,1990). It could also mean less trust for the financial system to encourage investors to take risks in putting once again their investments which suffered losses because also of the crisis.

Industry Analysis – Five Forces

Using the five forces model by Porter (1980) the following are the derived results. The threat of availability of product substitutes is high because retail products generally cater to basic needs and the effects of recession would cause people to look for low price products and bringing competition to more on prices and thereby affecting attractiveness of the industry.

The bargaining power of buyers is high because of the nature of the products – food, groceries, clothing – (Tesco, 2010a) and because of the low switching cost in changing brands for some products in the industry.

The intensity of rivalry by competitors as evidence by the competition for lower prices for which Tesco is known in the industry. There is also ease of entry by new entrants at to come is not requiring much capital in the retail industry. There is also a high bargaining power of suppliers since there are numerous manufacturers of consumer products in the industry.

Internal Environment Analysis

Financial Analysis

Financial analysis is constructed by comparing the overall financial situation of Tesco using ratio analysis based on its financial statements as retrieved from their Annual Report for year 2009 (Tesco, 2010b) and prior year.

The most critical for evaluation the strength of the company it is performance on whether it is profitable. Tesco appears to more profitable compared with industry average. While Tesco had a merely 4% net profit margin for 2009 as against that of competitors at 1.97 %, as represented by the industry had for the same year.

The difference becomes clearer in terms of return on assets (ROA) where the company had 5% in 2009 as against industry average of 2.13%. The same can be said on return on equity (ROE) where the company had 17% in 2009 as against industry average of 5.27%. Also using return on capital employed (ROCE), the company showed high positive ratios of 11% and 14% for the year 2009 and 2008 respectively.

The lack of available industry data for ROCE prevented the comparison with competitors. Tesco is evidently better than average competitors are when it comes to profitability. See Table A below.

Financial Ratios

Table A- Financial Ratios: Source (Tesco 2010b; Reuters.com, 2010)

As to liquidity, Tesco can be evaluated as to its strengths. If it can pay its currently maturing obligations on time then it is liquid (Helfert, 2001). The quick ratios of Tesco are 0.61 and 0.35 for the years 2009 and 2008 respective while the current asset ratios for same years are 0.76 and 0.58 the same respectively (Meigs, Meigs and Meigs, 1995).

See Table A. As against competitors or industry averages of 0.87 and 1.02 for quick ratio and current ratio, Tesco reported lower. Thus, the company is less liquid than its competitors and is therefore a weakness.

As to its gearing ratio, Tesco also showed a less superior position with its debt to equity ratio of 2.54 and 1.53 for 2009 and 2008 respectively as against industry average of 0.45. This time, the higher the ratio, the less favourable it is for the company from the point of view of an investor since it would mean more riskier investment (Helfert, 2001).

Unique characteristics of the company

By identifying unique features of the company not possessed by ordinary competitors that provide a competitive advantage, the same may also be considered as company strength. The company claims to have a consistent strategy for growth.

Using the above approach, Tesco can be considered to have strength of having consistent strategy for growth being able to outdo competitors in terms of sales and profits despite the crisis that started at the latter part of 2007 and even at present. The company is operating in many countries, which were affected by the crisis, but it was able to increase revenues and profits (Tesco 2010).

SWOT

This part in effect summarizes the discussions made in the external environment using the five-force model (Porter, 1980) and those made from internal analysis using unique company characteristics and financial analysis.

SWOT stands for strengths, weaknesses, opportunities and threats. The first two are the results of the internal environment analysis while the last two – opportunities and threats are those from the external environment analysis.

Strengths and Weaknesses

These are conditions or characteristics of the company, which could be tapped by the company in its design of its strategies. The following are the company’s strengths.

Consistent strategy for Growth – (Strength)

Tesco has a well-established and consistent strategy for growth, which has allowed the company to strengthen its core UK position and attain expansion into new markets outside UK (Tesco, 2010b).

High profitability – (Strength)

The company’s higher profitability than competitors is evident based on net profit margin, ROA and ROE as against industry averages. The company’s efficient is also evident in terms of ROA and ROCE at the same time

Generally less liquid than industry – (Weakness)

The company is generally less liquid with current ratios and quick below 1.0 for the last two years and even as against industry averages as found in the financial analysis.

Higher leverage position than industry– (Weakness)

Its debt to equity ratio is lower than its competitors. This may explain the higher stock price of the company compared with indices despite its having lower profitability than industry as earlier explained in the financial analysis.

Although the company was found to have weakness, knowledge of the same will be considered in the strategies by turning them into strengths or avoid unnecessary acts to aggravate the same so that it could accomplish its objectives.

Industry Opportunities and Threats

These are derived from Porter’s five forces and the macro environmental analysis

that may be favourable (hence called opportunities) or may cause decline (hence called threats) in the profitability of the company.

High availability of product substitutes –( Threat). This could decrease the chance to earn more profit as customers or buyers could switch to other products easily.

High Bargaining power of buyers – (Threat). This could aggravate the company’s low profitability, as customers would need to cut their expenditures due economic pressures caused by crisis

High intensity of rivalry by competitors – (Threat). As found earlier, this forces existing player to fight for profits in terms of lower prices.

Ease of entry by new entrants – (Threat). Not requiring much capital could actually encourage more to come in easily to the retail industry.

High bargaining power of suppliers – (Threat ). There are many suppliers of the industry and giving power over retailers thus reducing the latter’s profitability.

Evaluation of Existing Strategies

The corporate strategies being pursued by Tesco include that of continued organic growth and diversification. It also claimed to have long-term growth strategy, as it was able to grow despite the global recession. It strategy is staying close to customers while giving them value for their money (Tesco, 2010a).

The business of the company was originally in food retailing but it has expanded to non-food as way of showing and proving its diversification strategies. It helped the company to reduce risk as a result.

To evaluate the present strategy, there is need to know whether the company follows some of the principles that may be learn from some models for strategic management. The following questions will have to be answered in determining the strategic issues now faced by the company:

“How does present strategy competes in relation to strategic management models?”In using Porter’s Five-force-model, does it take advantage of industry opportunities, protect itself from industry threats, make uses of its strengths and correct its mistakes?

The present strategy is geared toward diversification as can be analyzed from the most expansions of Tesco’s business internationally and into non-food business. From the financial reports, the profitability performance of the company in relation to the industry is evidently better.

This is despite the industry threats and company weakness. Tesco was found to have protected itself from threats by offering value to mores customer via diversification and having efficient operations, it was able to sell at lower prices, which caused the company to have increasing revenues over the years (Churchill, Jr. and Peter, 1995, Kotler,1994).

The company has the policy of growth in annual dividends. Even during recession, the company was able also to provide dividends because of its profitable operation. The strategy would seem not to avoid its weakness of generally less liquid position in the industry. While maintaining giving its dividends, it also borrowed more than its expansion needs and thus further causing its gearing ratio or financial leverage to become higher.

Such acts also may further put the company to more risk. Since higher profitability and increasing stock price (See graph below) sustains such acts of management, it can only be inferred that company was still maximizing the returns from the increased risk and may be attaining optimization targets (Brigham and Houston, 2002; Bernstein, 1993; Byars,1991).

Proposed Strategy

The company can invest on Research and Development activities to some differentiation on its as a way of building switching costs. One basis for this is the industry threat of strong rivalry among existing players in the industry. The company could strengthen its branding strategy and at the same further develop new as products needed by the market to create an advantage over competitors.

Another basis is the industry threat of high bargaining power of buyers. By focusing R&D on what will make its product unique and different other buyers may be neutralized or at least be warned of the high risks of spending resources that will not produce the expected rewards for more profitability. Still another basis is the industry threat of high availability of product substitutes.

By differentiating its brands, it could build brand loyalty and without the need to compete basically on price. Another basis is the company strengths of high profitability. The company can make use effectively of its resources being generated from operations.

Conclusion and Recommendation

This paper has found profit maximization strategies employed by Tesco for the past year. It was has increased its gearing ratio in 2009 compared to 2008. However, it had higher profitability as against competitors in the industry. It had also increased it liquidity but still the company has below 1.0 current ratio, which may cause a problem in paying currently maturing obligations.

The financial crisis tested the prowess of the company as it adopted further diversification as way to reduce risk and increase profitability. The company has been wonderfully responding to the changing needs of its markets by lowering prices, introducing more affordable products and offering sharper promotions.

By lowering its prices, the same has the effect of protecting itself from industry threat of strong rivalry in the industry and ease of entry by new players because of nature of the industry that being not capital-intensive. Its core strengths had indeed protected the company from the economic downturn.

As the crisis appears not to have gone away completely, it would do well for the company to continue diversification. It should also invest in research and development cost to protect the company from industry threats and make use of its strengths.

References

Brigham, E. and Houston, J. (2002). Fundamentals of Financial Management, Thomson South-Western, US.

Meigs, R,. Meigs, W., & Meigs, M. (1995). Financial Accounting. McGraw-Hill, New York, USA.

Porter (1980). Competitive Strategy, Free Press , London, UK.

Samuelson, P. and Nordhaus, W. (1992). Economics. McGraw-Hill, Inc, London, UK.

Dornbusch, R. and Fischer, S. (1990). Macroeconomics. New York: McGraw-Hill Publishing Co.

Bernstein, J. (1993). Financial Statement Analysis. Sydney: IRWIN.

Byars, L. (1991). Strategic Management. Formulation and Implementation – Concepts and Cases. New York: HarperCollins.

Helfert, E. (2001). Financial Analysis: Tools and techniques: a guide for managers. McGraw-Hill Professional.

Churchill, Jr. and Peter (1995). Marketing, Creating Value for Customers. Sydney: IRWIN.

Kotler, P (1994). Marketing Management. Analysis Planning. Implementation and Control, London: Prentice-Hall.

MSN (2010a). Company Report. Web.

MSN (2010b). Stock Price Graph. Web.

Tesco (2010b). Annual Report in 2009. Web.

Tesco (2010a). Company Website. Web.

Reuters.com (2010). Industry Ratio. Web.

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