Finance TESCO CASE STUDY – Master’s 2500 words 2.2






Tesco Case Study







A Case Study




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The competitive environment in the super market industry

The underlying reality is that supermarkets are fungible.  A supermarket is a big store with a great many aisles crammed with merchandise of all sorts.  Most of the merchandise is either branded or carries a store brand also known as private label merchandise.  Tesco, Morrisons and Sainsbury’s all carry Heinz baked beans and ketchup.  There are also own brand products: Morrisons baked beans and ketchup, Tesco baked beans and ketchup and Sainsbury’s baked beans and ketchup.  Obviously, the Heinz product is identical in all three while there may be very marginal differences in the private label products.  All will sell the private label and Heinz products at prices that, if not identical, are very close to each other with a variance of a few pence at most.

What is clear is that there is very little difference between the main competitors. Tesco is the largest supermarket chain in the UK and enjoys a market share of better than 30%, while second place Sainsbury’s holds only 16.4% (Wood, 2010). Consider the competition based on the comment from which this material is drawn. “Tesco, meanwhile, saw its first gain since May to win 30.7% share of the market compared with 30.6% a year ago. Sainsbury’s was the star performer raising its stake to 16.4%, from 16.1% a year ago.”  (Wood, 2010)  Imagine an industry so competitive and fixed that a gain of 0.3% in market share makes one of the competitors a “star.”

The Tesco, as illustrated in the table below, dominates the UK supermarket industry, and indeed the entire food and grocery industry: apparently, one pound in every seven spent on groceries is spent in Tesco.  The “majors” have roughly three quarters of the total, with almost a third of the market controlled by Tesco.




Tesco’s UK market share has not been growing significantly in the recent past as it has focused more on international expansion. There is also the problem that historically its loyalty card was an important feature in the growing market penetration.  Over the years, the competition have introduced their own loyalty cards in effect negating the power of the tool to gain share. (Supermarkets Handout, no date)

The other element in the supermarket industry is selection and promotion within the stores and in advertising.  All the major participants in the industry offer various selections aimed at different income sectors, low-medium-high end budgets.  Tesco, for example, offers value and finest where Sainsbury’s respective terms are economy and “taste the difference”.  (Supermarkets Handout, no date)

A discussion of the stateof the industrycontained in the “supermarket handout” concerns the number of stores, the demise of ‘specialist shops,” and the ability of the major supermarkets to influence local councils into accepting supermarket planning applications.  The studies by “Friends of the Earth” support the contention above and are cited in the handout.  As a result the handout contends that, “Tesco controlled sites that would allow it to build as much as all its competitors put together whilst Asda accounted for approximately 25 per cent of new space and Sainsbury and Morrison each accounted for less than 10 per cent.”  ”.  (Supermarkets Handout, no date)

One of the things that becomes apparent, but is not mentioned in any references to supermarket marketing located in research for this project, is that store location is a key factor and one that is not lost on Tesco management.  In an urban setting where people tend to work in a centre and commute by car to and from work in the urban core the locations a location on the way home from work would be key, though an out-of-town location would also appeal to those doing the weekly shop. Convenience and familiarity are also probably very important considerations in supermarket marketing and planning.  Another important element in supermarket marketing is promotions.  The object is to attract customers into the store with very low prices, even below cost on popular items, in the expectation that they will spend more in-store and make the supermarket a profit, despite tight margins; it is a policy that has worked well.

For a Tesco shopper it is simply easier to find things among the proliferations of aisles as the stores tend to be laid out similarly.  This makes them preferable to Sainsbury’s or Asda that supposedly “put things in the wrong places.”  Obviously, the reverse is true for Sainsbury’s regulars for whom Tesco has things in the wrong place. Almost everyone that shops regularly has experience the frustration of finding the baked bean section of a strange super market. Moreover, supermarkets regularly change things around, perhaps to make shoppers traipse around aisles (and past products) while trying to find them again”

The financial performance of Tesco

The simplest presentation of the long-term progress of Tesco is to look at group sales, which have approximately tripled from 2001 to 2010 rising from £22.8 billion to £62.5 billion.  Operating profits have also roughly tripled from £1.2 billion to £3.5 billion and total shareholder return has more than tripled.  This sort of record is difficult to fault.  Clearly, the company has and continues to perform very well in spite of the economic problems of the past few years.

The presentation above presents the key items from Tesco financial statements from 2006-2010 based on the end of February fiscal years.  It should be pointed out that the company presents it financial results in accordance with International Financial Reporting Standards and formats its financial statements in accordance with this standard.  There is a substantial difference between IFRS and Financial Accounting Standards Board FASB conventions and approved formats for financial statements.  There are also within the accounting community considerable differences in both conventions and appropriate conventions as set fourth in the Generally Accepted Accounting Principles (GAAP).

The method of presentation of financial data and the details on UK as opposed to domestic growth and the differentiation of food products from other goods sold is less than clear.  The ratios analysis presented here is distorted by the inclusion of a small bank in Tesco’s group financials, and the mix of UK and international sales and profitability distorts the result and makes analysis difficult.  To compare Tesco to a “conventional” and primarily UK based supermarket operations such a Sainsbury’s is not really enlightening.  With these caveats a discussion is presented.

Revenue growth slowed in fiscal 2010 compared to 2009 while gross margins grew somewhat to 8.10% from 7.76%.  The pattern in gross margins has been consistent over the five years examined running between 7.67% and 8.12%.  This level of consistency is indicative of a well-controlled merchandising operation.  It does not indicate anything significantly different in the international component and the UK component, but there obviously are some as the US operation is still operating at a loss.  The pre-tax margin improved slightly in fiscal 2010, but was slightly below the historic average.  Over the five-year period included in the calculations margins have been very stable.  What is not explained is how the bank is included in either the balance sheet or the income statement.  This presents some challenging analytical questions.   Interestingly, the profits on “property items” are growing substantially in spite of the global and UK real estate problems.  In 2010 these items comprised slightly more than 10% of pre-tax profit, and the growth in this item comprised about 90% of the annual increase in pre-tax income.

As a company, Tesco has negative working capital and this has been true historically.  It turns it inventory about every 18 days or slightly less.  Actually in the period covered by the ratio analysis in the project, inventory turns have actually slowed from almost 27 to slightly less than 21.  What this high turn rate permits the company to do is force its suppliers to finance its working capital requirements.  Current liabilities exceed current assets and accounts payable of £9.4 billion are almost equal to total current assets including cash and equivalents.

Part of the problem with conventional ratio analysis as a tool to understand and analyse Tesco is its format and financial presentation.  The financial statements are based on group figures, which make isolation of the retail operation and the identification of earnings streams and assets very difficult.  When this is combined with the use of IFRS standards and non-GAAP “underlying earnings” the analytical problems are legion.  It sometimes appears that the financial reporting is deliberately made obtuse to make “real analysis” difficult or impossible.  It is not the intention of this project to attempt to reconcile GAAP, IFRS and FASB accounting, but it must point out that Tesco does make creative use of the problems.

Tesco Corporate Strategy

The underlying element of the corporate strategy for the past decade is the conversion of the company from a UK supermarket operation into a global retailing entity.  The overall strategy is broken down into four components, UK retail, international retail, non-food retailing and retailing “services” such as the bank and insurance.  The UK core business is focused on growing through helping customers to spend less, emphasis on the Clubcard loyalty scheme, and based on these initiatives the company continues to outperform the UK market segments.  As recent promotional strategies to offset economic problems the company has introduced double Clubcard points and an additional voucher mailing.  Based on these initiatives management hopes it will be a good Christmas for both Tesco and its customers. (Third Quarter report, 2010)

In the non-foods area Tesco feels it is making good progress, particularly in the areas of electricals, entertainment and toys.  The company has also introduced a proprietary clothing line, F&F, which has been doing well in European markets and has been introduced into four Asian countries.

In retail services the bank has been growing for some time and is working toward becoming a full service retail bank.  To move further in this direction as insurance operation has been initiated.  Chief executive Terry Leahy wrote in the 2010 annual report, “Our positions in high-growth international economies and non-food meant we were always likely to face strong headwinds during the recession but it will be these parts of our business which will grow fastest in the recovery and beyond.” (Annual Reports, 2010 p.8)

The stated strategy of the business is established as broadening the business to enable it to deliver sustained long term growth by appealing to customers in large expanding markets in the United Kingdom such as financial services, telecoms and non-food retailing.  The second element in the strategic approach to sustained growth is new markets such as central Europe, Asia (especially China) and the United States.  The outlook for the US operation is unclear as it has not been able to achieve profitability.  The US operation is based in California and covers Nevada and Arizona. The vestigial US operations are built of modest sized “niche” stores as opposed to full line super markets.  These are small footprint operations named Fresh & Easy.  Thirteen of the stores have been “mothballed” as a result of the real estate problems in the US Western states, particularly California. (Meat Trade News Daily) The underpinnings of this strategic initiative consists of five elements

  1. To be a successful international retailer
  2. To grow core United Kingdom businesses
  3. To be as strong in non-food retailing as in food retailing
  4. To developing retailing components such as financial services
  5. To put community at the heart of what we do.

The basic strategy dates back to 1997 with the community component added in 2007.  What the strategy actually realizes is that the food selling business in the UK is a mature industry with only nominal real growth.  The company still is aggressive in terms of opening new stores and expanding existing ones in UK market where opportunities present themselves.  The real emphasis is to build on the base of food retailing into a broad based retail operation that involves many of the elements of traditional department stores such as clothing and “hard” goods (appliances and electronics).  With the financial strength of the company and its strong operations and earnings it has been and will be able to continue to invest to build growth on an international basis.  (Tesco annual report, 2010)


Future strategic growth suggestions—Balanced Scorecard

Harvard Business school professors Kaplan and Norton devised the balance scorecard in 1992, and the success of the initial Harvard business Review article lead to the publication of their book in 1996. It is primarily an analytical tool that is particularly useful in formulating strategy.  (Kaplan & Norton, 1996)


Source:12 Manage

The first element in the balanced scorecard is financial.  Here the objective is not only to understand the historical financial results of the company as presented in the section of this project concerning finance and ratio analysis but the ongoing financial objectives of the organisation.  The demonstrated financial history of the company indicates good and stable financial performance and there is no reason to expect this to change over time.  The weakest element from an ongoing financial perspective is the declining returns on assets.  While there is no way to determine this conclusively the fixed asset, which in the case of a supermarket chain are land and buildings, appears to be high relative to the overall assets of the company.  This probably reflects a “future locations bank” to allow for future growth.  As the company continues to grow and economic vitality of the global economy improves this will probably begin to correct its self.  The stockpiling of future locations to allow for growth is a positive and should and will continue. This will in time reduce the proportion of fixed assets on the balance sheet.  It also reflects the strategy of owning rather than renting locations.  There is no need to change this strategy at this time.

The business process component of the Tesco strategy must do two things. First and most important, it must please customers.  Tesco has been doing this very successfully since it was founded, and particularly over the past 15 years of so.  The growth of the business’s revenue and earnings and the gains in market share in the UK market historically are indications that its business processes are highly successful.  The chances for significant gains in UK market share as a supermarket are unlikely as it already has about a third of the market and almost as much as its two closest competitors combined.  Where it does have the possibility of market share gains are in retails services and non-food sales, as well in city-based convenience stores (Tesco Metro).  It has been and should continue to pursue these areas aggressively.  The only change that would be suggested to the company’s strategy would be improvement in the transparency of its operations and financial statement to investors and analysts.

There is no really good way to measure Learning and Growth externally.  The success in the business processes area would indicate that the company does a competent job in this respect.  The skill sets of supermarket employees are often basic.  The levels of learning and training of supermarket shelf-stackers and checkout staff or their levels of job satisfaction are not critical.  At some of the higher levels these questions become relevant, but retailing is not a business that requires extraordinary personnel to succeed.

The question of how the company appears to its customers is also positive.  It growth and market share are indications of good customer satisfaction.

The basic strategy outline above in the strategy section is clearly successful.  The only shortfall pointed out in the balanced scorecard was in the area of financial transparency.  The existing strategy of the company for the past decade and a half has been highly successful, and as the global economy improves it should continue to be highly effective in the UK and beyond.



BBC NEWS (2007) “Grocery probe eyes local markets” Recovered 14/12/2010 from:

Hall, J. (2010) “Tesco unveils US food chain expansion” The Telegraph. Recovered 15/12/2010 from:

Kaplan, R Norton, D. (1996) “TRANSLATING STRATEGY INTO ACTION: THE BALANCED SCORECARD.” Cambridge, Harvard Business School Press

Meat Trade News Daily (22/10/2010) “USA – Tesco Mothball 11 stores” Recovered 16/12/2010 from:

Supermarkets Handout—an undated study with no author indicated apparently related to the University of Bristol downloaded 14/12/2010 from:…/supermarkets_handout.doc –

QuickMBA (2010) “The Balanced Scorecard.” Recovered 16/12/2010 from:

12 Manage (2010) “Clarifying and communicating vision and strategy into action.  Explanation of the Balanced Scorecard of Kaplan and Norton” Recovered 16/12/2010 from:

Tesco Annual Reports 2007-2010.  Recovered 14/12/2010 from:

Tesco Third Quarter report 2010.  Recovered 14/12/2010 from

Wood, Z. (2010) “Tesco retains market share as Morrisons slips” Recovered 14*12/2010 from: