TESCO PLC1, Summaries of Business

Download TESCO PLC1 and more Summaries Business in PDF only on Docsity! 1 TESCO PLC1 1. INTRODUCTION “Every little helps”, the slogan Tesco PLC has used for so long, really seems to have helped the group in creating a successful business. With more than 440.000 employees nowadays, the UK grocery store market leader Tesco has created a renowned business model over the world. Starting in London with a little store in 1919, Jack Cohen, its founder, has jumped from the local grocery market to a multinational diversified business with several subsidiaries: supermarkets, a bank, petrol stations, telecommunications, etc. The group focuses on meeting its customers’ needs by offering a wide range of products including the own brand products and a focus on customer satisfaction and corporate responsibility. 2. HISTORY OF TESCO PLC Jack Cohen realized in 1919 that he could make profits from selling war surplus groceries and, in fact, Cohen started from a stall in East End of London. Tesco as a brand did not appear until 1924, when Cohen bought from T.E Stockwell a shipment of tea, which was its first own-brand product. The first Tesco store was opened in 1929 and during the 30’s about one hundred stores were opened in London under the business core of buying small grocery stores and selling the products cheaper than ever. During the 60’s Tesco continued its expansion and started diversifying its products for the first time. Since the 90’s, Tesco has launched a great variety of products such as books, financial services, telecoms, petrol, etc. Moreover, the company decided to attract also people who cared about quality and not just low-cost and grew by having 2.000 more shops fifteen years later. It was not until 2013 that Tesco reported its first drop in profits in 20 years. Moreover, one year later the brand was accused of manipulating the way commercial income was registered causing a deep impact into its reputation. Aldi and Lidl were taking Tesco’s position and eating it away. Nowadays is one of the world’s largest retailers and serves millions of customers per week either in physical stores or online. The following figure shows the main facts of Tesco’s history. 1919 Cohen starts selling surplus groceries from a stall in Est End London 1929 First Tesco store is opened in Burnt Oak 1932 Tesco is founded officially as a private limited company 1947 Tesco goes public 1948 First self-service stores in North America 1958 First supermarket is opened in Maldon, Essex 1 Case written by Maria Sallent, Nerea Pérez, Paula Valenzuela; with the supervision of Professor Oriol Amat. Universitat Pompeu Fabra, 2018. 2 1960 First product diversification: household goods and clothing 1968 First “superstore” in Crawley, West Sussex 1973 First petrol station across UK 1993 Tesco Value is launched offering products at a great price 1993 The campaign “Every little helps” attracts 1,3 million new costumers between 1993-1995 1995 Tesco Clubcard is launched and it overtakes Sainsbury’s in market share 1997 Tesco Personal Finance is launched 1998 Tesco Finest is launched 2000 Tesco.com is launched 2004 A new “Every little helps” campaign is launched 2007 Tesco enters in the US with Fresh & Easy 2009 Tesco Personal Finance becomes Tesco Bank 2012 Everyday Value is launched to replace Tesco Value 2012 Tesco is awarded Green Retailer of the Year at the Annual Grocer Gold Awards 2013 Major charity partnership with Diabetes UK 2014 “Healthy living” is launched 2014 Dave Lewis becomes Group Chief Executive joining from Unilever 2016 Tesco makes a commitment that by the end of 2017 no food that is safe for human consumption will go to waste. 2017 Tesco becomes the first retailer to offer same day grocery delivery nationwide 2018 Tesco completes merger with wholesaler Booker Group 3. BUSINESS MODEL 3.1. MISSION, VISION AND VALUES Tesco’s core purpose is “Serving shoppers a little better every day”. They have a simple mission: being the champion for customers by making easier their way of living and improving their quality of life. Serving customers is the core of everything they do. Tesco puts this into practice with the following values: ● No one tries harder for customers: ○ Understand customers ○ Be the first to meet their needs ○ Act responsibly for their communities ● Treat people how they want to be treated: ○ Teamwork ○ Trust and respect ○ Listen, support and say “thank you” ○ Share knowledge and experience ● Every little help makes a big difference: 5 Figure 1: 12-weekly % share of grocery market spend by retailer and value sales % change Source: https://www.campaignlive.co.uk/article/tesco-best-performing-big-supermarket-latest-sales-figures/1435036 The previous figure displays Tesco in the healthiest position of the big four supermarkets with a balanced increase in sales and a high market share. This means that Tesco’s retail strategy is carried on effectively. 4.2. SWOT OF THE INDUSTRY To better understand the situation of the industry it can be useful to check the SWOT analysis: STRENGTHS WEAKNESSES Tesco is a powerful food retailer, between the global top 100. It has around 7.000 stores. It has won many prizes due to its quality of services, products, client services. Strong financial situation, because it has significant cash reserves and many properties. People trust Tesco and believe it will last long, especially in the UK. Good use of technologies in its operations. Some subsidiaries do not work as well and are more sensitive to external damages. The retailer operates well in the UK and Europe but not so well in other markets, since it has not spent as many resources to make it work. They have a high cost of inventory because they do not renovate the products they sell and customers, with less income, are not buying them. Competitive price wars have lowered Tesco’s profits, when they should have focused on other competitive strategies. Tesco has entered in other markets to sell different products but without the due investigation to enter and succeed, which has led to failure (smartphones and tablets, for example). OPPORTUNITIES THREATS Strategic alliances with other brands of the sector. Private label market. Online shopping and home delivering. Joint ventures in markets where Tesco is not doing well, which may provide them with more knowledge on how to correctly perform. Continue investing in Research and Development so as to keep evolving and improving. Economic recessions threaten their market share and their volume of sales. Prices around the globe are rising and people cannot afford to buy as many things as in the past. Government regulations and the political situation are making Tesco impose new regulations that need to change their operational structure. Other retailers offer lower prices, which puts pressure on Tesco to lower theirs. 6 4.3. MAIN COMPETITORS Tesco targets the middle class market, as it provides both economy and up-scale products. Tesco’s main competitors in the grocery industry are ASDA, Sainsbury’s and Morrison’s, which are called the Big Four. However, Aldi and Lidl are starting to gain territory. In addition, Tesco has to compete with convenience stores, which are gaining popularity. ● ASDA: it is a subsidiary of Walmart and it has 604 stores in total, 196 of which are supermarket. ASDA also sells clothes and furniture. Of the Big Four, ASDA is the one that keeps the lowest prices. It is trying to improve the online channels to buy through the internet, the appearance of the stores and the nutritional value of its products. ● SAINSBURY’S: this is the third largest retailer and is said to have the highest quality of all Big Four members, which allows them to charge an extra price in all its food products. They are trying to expand by widening its offer and boosting their banking services, and they have announced the will to do a takeover of ASDA (pending regulatory’ approval). ● MORRISON’S: this is also involved in food production and it is, in fact, the second largest UK producer. So, we know that this company is vertically integrated and is trying to make this structure more efficient while reducing prices too. They have implemented a rigid CapEx plan and all new stores that are opened are small convenience stores. ● ALDI: their strategy to success is based on the low price of their products in relation to their quality. They have a special focus on private brands. They also have different weekly merchandise products and do not accept discount coupons. ● LIDL: similar to Aldi, Lidl does not focus on a good presentation but on offering low price products from the country where it is located. Like Aldi, they also have weekly merchandise products changing every week. ● WAITROSE: they focus on the quality of staff and production processes. They have attempted to rise prices a bit to give the image of a higher quality grocery store, matching the prices of Tesco in the most select products. Apparently, the most dangerous of competitors are discounters such as Aldi and Lidl, which are expected to grow 57% to 42.8 billion pounds in 2022. As for the non-grocery sector, such as gas stations, the largest players in the UK market are Shell (569 stores in 2017), Esso (198 stores) and BP (313 stores). As for Tesco, it owned 504 gas stations in 2017. In total there are around 8438 functioning gas stations in the UK. 7 Figure 2: Market share of grocery stores in Great Britain from August 2012 to August 2018 Source: https://www.statista.com/statistics/300656/grocery-market-share-in-great-britain-year-on-year- comparison 3.3. SALES RANKING On the one hand, Figure 3 displays a table with the best British supermarkets according to a survey carried on to 6800 members of the general public in October 2017 about their experience of shopping for groceries in different types of supermarkets or even online. Customers rated the range of products, the quality of the products, the store appearance, the value for money and finally the queuing time. When it comes to satisfaction, customers seem to give priority to price over in-store experience. Tesco is ranked the 6th, while other discounters are in the best positions. This is due to the fact that Tesco’s value for money qualification is not so good, while with discounters the value for money is five-star, and weighing more than the overall shopping experience. On the other hand, with Figure 4 on the right, it is seen that spending in Tesco was measured at almost 7.2 billion pounds in the first quarter of 2015, the highest expenditure at all British grocery stores, even if the number has slightly decreased over time. 10 5.3. KEY SUCCESS FACTORS Regarding the retail stores, location is very important. Stores have easy access for cars and enough parking places. Also, both product range and product availability, meaning big stores that offer a wide range of different products, which are always available. That is, shelves are constantly replaced. Of course, this has a cost, which is between 12 and 20% of the value of the products and it can be reduced by investing in IT, which they do. Prices are an important feature too, since they have to be competitive. Tesco offers a clubcard that rewards the clients in order to make them come back. For every purchase, customers collect some points and when enough points are collected, they can be exchanged for vouchers to be used in Tesco. This system ensures brand loyalty and gives the clients incentives to come back and only buy in their stores. Another advantage of this system is that all purchases are registered and customers can track them. However, this is also useful for Tesco because their team of analysts can examine this data so as to make improvements depending on the preferences and tastes of their clients. In addition, and thanks to the analysis of the club-card database, Tesco has launched some products of their own brand. Many of these products are labelled as premium and they really have succeeded when competing with other brands classified as premium too. And because Tesco is the owner of this brand, it can create an exclusivity environment, promoting brand loyalty. Moreover, after the crisis Tesco suffered in 2014, in 2015, it launched the Brand Guarantee scheme. This consists in the following, they promised their clients that if a branded group of 10 or more products appeared to be more expensive than their rivals’, they would made them a refund. In relation to social media and publicity, Tesco is very active in social networks like Facebook and YouTube. In Facebook, they have more than 2 million likes, and if clients have any doubt or complaint about anything regarding the company, they can post it on Facebook and Tesco will answer them in a short period of time. As for advertising, it is mainly aimed at satisfying stakeholders. It all moves around Tesco’s slogan “Every little helps”, and although publicity expenses have decreased from 110.6 million pounds in 2013 to 77.7 million pounds in 2015, it has gained efficiency. Its marketing strategy is based on an extensive use of print and media advertising as a way to communicate with current customers and potential ones. This has been done through marketing differentiations, for example, by using singular Christmas ads. For sales promotion, Tesco uses free gifts (such as promotions for specific products) and point of sale materials (conducted with the cooperation of manufacturers in a way that they may supply posters and other promotional materials). The head of marketing at Tesco, Robin Terrell, prefers to use humour as a way to attract customers. 5.4. STOCK MARKET AND DIVIDEND POLICY Tesco is listed on the London Stock Exchange and is also a constituent of the FTSE 100 Index. In 2015 it had the 28th largest market capitalization on this stock exchange, with around 18 billion pounds. The figure below displays a share price forecast, offering 12 month price targets for Tesco with a median of 280.00, which represents a 41.74% increase from the last price of 197.55. 11 Figure 5: Share price forecast (Financial Times, December 2018) Source: https://markets.ft.com/data/equities/tearsheet/forecasts?s=TSCO:LSE Figure 6: Dividends forecast (Financial Times, December 2018) Source: https://markets.ft.com/data/equities/tearsheet/forecasts?s=TSCO:LSE The figure above shows the evolution of Tesco’s dividend policy. Notice that in 2014 it distributed relatively high dividends, while in 2016 and in 2017 it did not. Nevertheless, notice that the forecasts for the next two year are positive for the shareholders, as it is expected that profits will rise. Earnings per share are also expected to increase, with an average growth rate of 21.7% (semiannual 2019 earnings are of 0.0636 per share). 6. MAIN CHALLENGES THE COMPANY IS FACING 6.1. ACCOUNTS MANIPULATION A member of staff approached Tesco’s general counsel in September 2014 to warn that something was array in the accounts. This information was passed on to Dave Lewis, the CEO, who spent days analysing the problem. It was on the 22nd September that the issue was uncovered, and Tesco’s shares in the London Stock Exchange declined 11,6%. Lewis then asked Deloitte to undertake an independent investigation on the issue, working also with Freshfields, the Group’s external legal advisers (before the scandal, it was PwC the independent auditor). This scandal was anticipated for several reasons: the company issued five profit warnings in one year and reported a decline of 3,7% in sales in the first quarter, and also cut dividends in August. Profits for the six month to the end of August were overstated by 250 million pounds due to the accelerated recognition of commercial income and delayed accrual of costs. This is a breach of the Groceries Supply Code of Practice and of the IFRS reporting requirements (recognizing premature and fictitious commercial income, overstating inventory, misrepresenting “trading profit” and “underlying profit” and delaying accrual of costs). In 2012 12 Tesco already began to misinterpret profits and losses and, more specifically, the IFRS reporting requirements violated were: IAS 18 (revenue), IAS 2 (inventories), IAS 37 (on contingent assets), IAS 34 (Interim Financial Reporting), IAS 8 (accounting policies, changes in accounting estimates and errors). The manager was asked to estimate the provisional value of rebates by an individual judgement based on future transactions and, and this methodology can be very unclear and subjective. Besides, Tesco recorded millions of pounds in discounts which the suppliers were not willing to give, and recorded reductions to cost of goods before they were actually sold, all with the aim of increasing gross margin by premature or non existing commercial income or by overstating inventory. Also, contingent gains are not recorded, but Tesco did so, and did not disclose its increased commercial income balances. Finally, Tesco delayed the accrual of costs. The scandal affected directly the board of directors of the company, as seven members were dismissed because of the issue. The SFO engaged in a criminal investigation, and three members of the board were charged with fraud (the managing director of Tesco UK, the finance director and the commercial director for food). On the other hand, shareholders were also heavily affected by the accounting scandal because of a great loss in shareholders’ equity. Stock prices went down as well as market capitalization, and some of them took legal action against Tesco. Dave Lewis took serious measures to raise capital, which involved mainly asset sales. Figure 7: Tesco’s market capitalization Source:https://www.researchgate.net/publi cation/319979994_Tesco_scandal_-_Financial_Reporting 6.2. OTHER SCANDALS In 2007, Tesco was accused of price-fixing and was put under investigation by the UK Office of Fair Trading for acting as a cartel together with four other supermarkets: Asda, Sainsburys, Safeway and Morrisons. Besides, a number of dairy companies were also involved in the scandal. The total fine amounted 116 million pounds. In the same year, it was revealed that Tesco had moved the head office of its online operations to Switzerland in order to avoid the Value Added Tax. Now about food scandals, in January 2013 it was publicly reported that horse meat had been found in some meat products, specially burgers, sold at Tesco and some other retailers. Tesco has also been targeted by protesters complaining that it sells goods made in Israel, and there was also a scandal because it was selling anti-Semitic books through their website. 15 PROFIT & LOSS ACCOUNT Average sector Average sector with profits 24/02/2018 000 EUR % 25/02/2017 000 EUR % 27/02/2016 000 EUR % 28/02/2015 000 EUR % 22/02/2014 000 EUR % 23/02/2013 000 EUR % 25/02/2012 000 EUR % Operating revenues 100 100 64.899.488 100 65.770.993 100 69.278.899 100 85.496.475 100 77.121.443 100 75.012.303 100 76.987.275 100 Sales 68,9 54 n.a n.a n.a n.a n.a n.a n.a Cost of goods sold 41,9 61,7 61.084.857 94.1 62.235.158 94.6 65.629.628 94.7 88.395.592 103.4 71.940.951 93.3 70.280.786 93.7 70.301.959 91.3 Gross profit 9,6 12 3.814.630 5.9 3.535.835 5.4 3.649.271 5.3 -2.899.116 -3.4 5.180.493 6.7 4.731.517 6.3 6.685.316 8.7 Other operating expenses 9,4 10,4 1.742.026 2.7 2.341.962 3.6 2.318.331 3.3 5.051.490 5.9 2.001.883 2.6 2.199.710 2.9 1.959.223 2.5 EBIT 1,9 1,8 2.072.605 3.2 1.193.873 1.8 1.330.941 1.9 -7.950.607 -9.3 3.178.609 4.1 2.531.807 3.4 4.726.092 6.1 Financial revenue 0,2 0,1 103.799 0.2 2.348 0.00 3 10.179 0.01 105.697 0.1 231.962 0.3 409.625 0.5 482.690 0.6 Financial expenses 0,7 0,6 711.929 1 1.026.003 1.6 1.134.990 1.6 907.347 1 681.389 0.9 673.451 0.9 660.586 0.8 FINANCIAL RESULT -0,5 -0,5 -608.129 -0.9 -1.023.655 -1.6 -1.124.810 -1.6 -801.650 -0.9 -449.427 -0.6 -263.826 -0.4 -177.896 -0.2 EARNINGS BEFORE TAX 1,4 1,3 1.464.475 2.3 170.218 0.6 206.130 0.29 -8.752.256 -10.2 2.729.182 3.5 2.267.981 3 4.548.197 5.9 Taxation 0,3 0,2 345.246 0.5 102.131 0.2 -68.710 -0.1 -901.856 -1 419.224 0.5 664.194 0.9 1.042.468 1.4 Income after tax 1,1 1,2 1.119.229 1.7 68.087 0.1 274.841 0.4 -7.850.400 -9.2 2.309.958 3 1.603.786 2.1 3.505.729 4.6 Extraordinary items 0,1 0,3 243.703 0.4 -131.479 -0.2 -110.700 -0.2 -64.516 -0.07 -1.138.065 -1.5 - 1.464.930 -2 -168.408 -0.2 NET INCOME 1,3 1,5 1.362.932 2.1 -63.391 -0.1 164.141 0.2 -7.914.917 -9.3 1.171.893 1.5 138.856 0.2 3.337.321 4.3 Table 2. Consolidated income statement (2018-2012) 16 Cash flow statement (in £ million) 2018 2017 2016 2015 2014 2013 2012 1) Earnings before taxes 1.837 1017 1046 -5750 4316 3873 5688 2) Adjustments Operating (+) profit/ (-) loss of discontinued operations -117 128 -52 (+) Amortization and depreciation 1.295 1304 1334 1552 (-) Profit/(+) loss arising on sale property and equipment and intangible assets -66 -78 164 49 (-) Profit/(+) loss arising on sale of subsidiaries and financial assets at fair value through other comprehensive income -165 3 41 (-) Profit / (+) loss arising on sale of joint ventures and associates -23 -5 -1 Impairment loss on goodwill 46 18 116 Net impairment (+) loss / (-) reversal on other investments -22 -12 -7 Impairment of loans/investments in joint ventures and associates 1 712 Net impairment (+) loss / (-) reversal on property, plan and equipment, intangible assets and investment property -167 -5 182 4171 Adjustment for non-cash element of pensions charge 4 7 -395 68 Additional contribution into defined benefit pension schemes -245 -248 -223 -13 Share-based payments 113 15 283 105 Tesco bank fair value movements included in operating (+) profit / (-) loss 156 98 72 58 3) Change in current (working) capital 592 533 -168 410 4) Other cash flows from operating activities (-) Interest Payment -351 -522 -426 -613 -496 -457 -531 (-) Income tax payment / (+)Income tax revenue -176 -47 118 -370 -635 -579 -749 5) Cash flows from operating activities (1+2+3+4) 2.782 1989 2126 484 3185 2837 4408 6) Payment for investments (-) -1685 -1399 -4438 -2943 -6168 -3260 -4589 7) Divestments costs (+) 2351 1678 3823 505 814 2982 1406 8) Cash flows from investing activities (6+7) -666 279 -615 -2015 -2854 -278 -3183 9) proceeds from issue of ordinary share capital 11 1 1 15 62 57 69 10) own shares purchased -303 11)increase in borrwings 313 185 586 4889 3104 1820 2905 Repayment of borrowings -3.721 -2036 -1328 -3185 -1912 -3022 -2720 Net cash flows from derivative financial instruments 253 475 154 -6 Repayments of obligations under finance leases -10 -12 -17 -3 -9 -32 -45 Purchase of non-controlling interests 18 -4 -89 Dividends paid to equity owners -82 -914 -1189 -1184 -1180 Dividends paid to non-controlling interests -3 17 12) Cash flows from financing activities - 3.2 36 -1387 -604 814 56 -2365 -1366 E) INCREASE / DECREASE IN CASH AND CASH EQUIVALENTS (5+8+12) 212 881 907 -717 387 194 -141 Cash and cash equivalents at the beginning of the year 383 2 3082 2174 2813 2531 2311 2428 Effect on foreign exchange rate changes 15 -131 1 78 -105 26 24 Cash and equivalents at the end of the period including cash held in disposal groups at the end of the period 405 9 3832 3082 2174 2813 2531 2311 Cash held in disposal groups 11 -9 -307 -19 -6 Cash and cash equivalents at the end of the year 405 9 3821 3082 2165 2506 2512 2305 Table 3. Consolidated cash flow statement (2018-2012)