Tesco Plc Financial Statements Analysis

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Assignment Module Financial Statement Analysis

1. Introduction to the company and its role within the wider international market; including competitors and current market conditions that may impact on its financial performance. Tesco plc is a British multinational grocery and these days the third- largest retailer worldwide in terms of revenues, operating in 14 countries across Europe, Asia and Nord America.The retailer was founded in 1919 and operated exclusively within the UK until the early 1990s when it started diversifying geographically. Tesco in its early years only offered foods and drinks in its stores but then successfully diversified its product range to electronics, books, household appliances, clothes, financial services and telecoms to mention only a few as examples. Tesco employs more than 500,000 people globally in more than 6,500 stores, whereof more than 290,000 people are working in more than 3,000 stores in the UK where Tesco has a market share of around 30 %. Globally Tesco’s main competitors are the US-retailer Wal-Mart and the French retailer Carrefour, in the UK its main competitor became recently Sainsbury’s plc - which is compared regarding its performance to Tesco in the second part of this paper – as well as Asda Stores Ltd. and William Morrisons Supermarkets plc. Recently, Tesco had to struggle with financial problems, especially in the UK where its profits fell for the first time in 20 years (cf. Graham Ruddick, The Telegraph, 30 September 2012) and in the United States where its subsidiary Fresh & Easy only during the first half in 2012 made losses amounting to £ 74,000,000. Generally the retail market is especially due to the high competition quite saturated and the retailers have to struggle with the “challenging economic backdrop” (Justin King, chief executive Sainsbury’s) as well as the external environment which “continues to present challenges all over the world” (Philip Clarke, chief executive Tesco). In the UK Tesco had to face the tremendous growth in sales of its competitor Sainsbury’s during the recent years (cf. Graham Ruddick, The Telegraph, 3 October 2012) and lost additionally its market share to low-cost grocers such as Aldi, Lidl and Iceland whilst one of its most important competitors, Asda, got boosted by its acquisition of the low-cost grocer Netto (“Tesco loses more market share”, the guardian, 24 April 2012). According to Morgan Stanley another reason for the dropdown in sales was its strong focus on short-term profitability, neglecting sustainable proceduressuch as the modernization of its stores. In order to remain competitive in the UK, Tesco announced in April 2012 a £1bn commitment for the years 2012/2013 under the motto “Building a better Tesco” to make the shopping for its customers more attractive. The commitment consists of 6 key elements to improve Tesco’s performance and revenues as well as enhance the customer perceived value (all points taken from Tesco’s website and complemented with the help of the article of Harry Wallop, The Telegraph, 18 April 2012): ▪ “Service and staff”: One of Tesco’s problems in the recent years has been a staffing shortage hence the retailer tried to cut costs too severely in that way. As this shortage had a direct impact on the performance in the stores and led to gaps in the shelves, Tesco decided within its new plan to hire 20,000 additional staff within the next two years. ▪ “Stores and formats”: Recently, customers were complaining about the “clinical” look of some of the stores which was a consequence of the lack in implementing modernizations. Tesco therefore is introducing a warmer look and feel to its stores in the next time. ▪ “Price and value”: Tesco launched a ‘Big price drop’ campaign in September 2011 and slashed 3,000 products everyday which was connected to additional costs for the

retailer amounting to £ 500,000,000. This campaign turned out to be a flop as customers associated poor quality with the low...
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