Tesco and Morrison - Essay Example

Tesco and Morrisons – A Comparison Historical development Tesco is considered as the top supermarket in the UK with its activities spreading in 12 countries across the world. This company was launched in the year 1919 and its founder was Jack Cohen. The first shop was opened in a market stall in London’s East End. Initially, he used to sell surplus groceries; first day’s stock was purchased by his demob money which he received after he had left the Royal Flying Corp at the end of the Great War. It was in the year 1924, that Cohen for the first time sold his own brand of tea which was Tesco Tea, and it was before the company got its name. In the year 1929, Cohen opened the first ever Tesco store in North London. During the 1930s, the company experienced growth as Cohen began to buy stores in the expanding London suburbs, and in the year 1947 the company became a public company. It was in 1958 that the first supermarket was inaugurated in Maldon, Essex. Household goods became item of sale for the company from the year 1960. In the year 1993, the company introduced Tesco Value which allows the customers to choose goods from a wide range of products at attractive prices. The company gained international status in the year 1995 after capturing the Hungarian market. It entered the Chinese market in the year 2004 by opening 100 stores and the US market in the year 2007 under the name Fresh & Easy. In the year 2012, Tesco for the first time started online shopping service with a wide range of fresh and frozen food. Since its inception the company has consistently flourished and today it has more than 53,000 people working for the company, and caters to more than millions of customers every week (“Tesco: History”). The company’s mission is to provide the ultimate shopping experience to its customers. Morrisons Supermarket is the fourth largest retail chain in UK with more than 500 stores. Food and grocery are its main products sold in weekly stores. For over 100 years, Morrisons Supermarket has ruled the retail market of the UK. The founder of this chain of retail stores is William Morrison, an egg and butter merchant, who opened his first store in the year 1899 in Bradford market. In the year 1967, Morrisons was declared as a public company with 80,000 shares becoming instant demand among investors. After showing high sales and a consistent increase of profit for 35 years, the company joins the FTSE 100 for the first time in April 2001 (Morrisons: Company History). As of 2013, Morrisons has captured 11.8 percent of the £101bn value of UK grocery store market. Morrisons is focusing on expanding its online grocery channel due to consumers’ increasing desire to buy from the convenience of remaining at home. In the year 2012, there has been a growth of online grocery market by 15.7 percent with sales having 3.9 percent of the market share. Because of the growing popularity of smartphones, tablets and other technologies that make online services more easily accessible, it has been estimated that by the year 2017 online grocery retail will become almost double. Moreover, convenience stores are becoming increasingly more popular as customers now tend to shop three or more times in a week to avoid wastage. In recent years, Morrisons has made much progress in this respect with the company opening nine convenience stores in the year 2012. It has plans to open 100 convenience stores by the end of 2013/2014. It has been estimated that the company will experience a 28.6 percent growth in convenience sales from 2012 to 2017, and a whooping 98.2 percent growth in online sales in the same period (“Annual Report 2012/13”, 5). Corporate and business strategy Morrisons is known for its fresh food supply which is an advantage over its competitors. Food is prepared in-store and this provides the customers wide range of fresh food offers to choose from. Being source and processor of own food products, such variety in fresh food items acts as an advantage for the company and is also extremely popular among the customers. Morrisons believes in providing fresh quality food at reasonable price. Morrison also has strong and efficient supply chain and distribution channels. This is a great advantage for any retail business. Being the fourth largest retail chain in UK, it has a reach to a large customer base thus ensuring high profit every week. Another strength of Morrisons Supermarket is that it has more than 500 stores with an employee base of 128,705 including part time workers according to Annual Report 2012/13 (p.110). Since Morrisons produces and processes food products in-store, therefore the company has great opportunities to enhance the quality of its products. This is especially a good opportunity to secure more customers during economic recessions as during these periods customers are inclined towards best value at low cost rather than premium quality goods. Such customers can be satisfied by Morrisons thereby increasing profit. Online shopping of grocery items is increasingly becoming popular among customers. Therefore, Morrisons can focus on developing their website to cater to the online customers. So far Morrisons operates only within the UK. Therefore, it has the opportunity to expand its business in growing economies like India, China and Brazil to further strengthen its position as supplier of fresh quality food products at moderate price. Like any business, Morrisons invested in technological innovations to boost its sales by attracting more customers. In 2013, the company invested £27m to launch online food business in order to capture the internet market (Ruddick). Also, to facilitate the customers it has introduced self-checkout and scanner systems which can reduce the waiting time for customers. In addition, Morrisons has introduced electronic system of counting money. Tablets are used in all stores, and to keep track of stock there is a new Oracle-based technology (Steiner). Thus Morrison is known for its liberality which means it is open to new ideas. Unlike its largest and closest competitors like TESCO and Sainburys, Morrisons does not offer loyalty schemes to attract customers in order to enhance sales. These schemes allow customers to add points to their accounts for every pound spent in the retail stores. The points can be redeemed in the company’s retail stores. Such schemes induce customers to revisit stores in order to accumulate points. Tesco introduced Clubcard in the year 1995 which allows customers to garner one point if they spend £1 in any Tesco store in UK. The points can be exchanged as monetary value in any Tesco shop or in one of Tesco’s participating restaurants, pubs or attractions (Christie). The biggest supermarket in UK, Tesco is known for selling food and non-food products. Being the largest retail chain in UK, it has a reach to a large customer base thus ensuring high profit every week. With people becoming more health conscious, there is growing demand for organic food, i.e. food that is produced by using scientific technologies in order to meet certain beneficial standard for human consumption. In Tesco, there has been a growing demand for organic fruits like sale of bananas increased by 60 percent in 2013. Similarly, there has also been a boost in the sales of organic grapes and apples, organic feta cheese (95 percent), organic mature cheddar (45 percent), and organic milk (Doward). In the last thirty years, the formula of Tesco’s immense success and expansion has been the result of efficient strategies and management. This supermarket’s mission has always been to cater to all sections of the market like the upper, middle and the lower classes. Tesco’s strategy has been to sell superior quality products at competitive prices. For this purpose, Tesco has introduced four levels of its own-label products – “Finest range” of premium products launched in 1998, “Tesco Organic” range launched in 2006, “Tesco Healthy Living” range, and the “Value” range (Aaker & McLoughlin, 127). Thus, Tesco is successful in providing its customers quality products at affordable prices in order to satisfy the varied demands of customers. Additionally, in 2011 the company introduced Venture Brands as part of their own-label program which include chocolates, ice cream and toys for children. In order to cater to the health of children, Tesco provides nutritious products for children under its sub-brands Gourmet and Eat Well in Fresh & Easy and Goodness (Annual Report 2012, 7). One major strength of Tesco, unlike Morrisons which is mostly dependent on its megastores with only a few convenient stores, is that it focuses on opening convenience stores which is a great benefit for customers. In the year 2012, Tesco purchased the second largest convenience store group in UK called One Stop and Day & Nite. Such acquisitions are extremely value oriented for shareholders (“Tesco buys convenience store chain”). As of February 2014, Tesco owns 722 stores in the One Stop convenience chain (Annual Report 2014, 139). Tesco’s success strategy is more customer oriented than shareholder oriented. Although profit maximization is the ultimate goal, Tesco believes in enhancing its customer service so as to derive maximum satisfaction from the customers. Executive leadership and its stability In the first quarter of 2014, there has been a steep decline to 28.7 percent in Tesco’s share in the UK grocery market. Although still considered the largest retailer in the UK, Tesco’s market share has shown a record drop since January 2005 when it was 28.5 percent. During its peak time, Tesco experienced market share as high as 31.7 percent which took place in the year 2007. It can be concluded here that the supermarket experienced a period of maximum glory under the leadership of Sir Terry Leahy who was the chief executive during 2007. His successor, Philip Clarke had to struggle in order to halt the declining sale of groceries by way of renovating the stores and reducing prices of the basic grocery items like carrots, cucumbers and milk. A similar situation can be seen in the case of Morrisons; this supermarket’s sales have declined by 3.2 percent as compared to Tesco which had 0.6 percent fall in sales (Ruddick). In this condition when sales are continuously declining, both Tesco and Morrisons have been taking drastic remedial measures. In July 2014, Morrisons hired Andrew Higginson who formerly worked as finance director in Tesco as its next chairman while Tesco has removed Clarke from the position of chief executive. Morrisons took this decision as a measure for reversing its declining sales, and to fight the fierce competition from discounters like Aldi and Lidl (Trotman). Revenues and profits The sales value, gross profit ratio and net profit ratio of Tesco and Morrisons for the last 4 fiscal years have been tabulated below in order to compare the revenues and profits of the companies. Table 1: Sales value of Tesco and Morrisons from 2010-11 to 2013-2014 (All figures in £m) 2010-11 2011-12 2012-13 2013-14 Tesco 60,455 64,539 63,406 63,557 Morrisons 16,479 17,663 18,116 17,680 It can be observed from Table 1 that the total sales value for Tesco and Morrisons have increased in the fiscal year 2011-12. For Tesco there was increase in sales value by 6.8 percent in 2011-12 while for Morrisons sales value had increased by a higher margin of 7.2 percent in the same year. However, in the subsequent year Tesco has experienced a decline in sales value by 1.8 percent where in Morrisons there has been growth of sales value by 2.7 percent. In the last fiscal year, 2013-14 Tesco managed to boost its sales value by a very small margin of 0.2 percent while Morrisons for the first time in the last 4 years incurred a substantial decline in sales value by 2.4 percent. Table 2: Gross profit ratio (gross profit / net sales) and net profit ratio (net revenue [after interest and tax] / net sales) of Tesco and Morrisons from 2010-11 to 2013-2014 2010-11 2011-12 2012-13 2013-14 Gross profit ratio Net profit ratio Gross profit ratio Net profit ratio Gross profit ratio Net profit ratio Gross profit ratio Net profit ratio Tesco 0.09 0.05 0.09 0.05 0.07 0.03 0.07 0.03 Morrisons 0.07 0.04 0.07 0.04 0.07 0.04 0.08 (0.01) As can be seen in Table 2, gross profit ratio has remained steady at 9 percent from 2010-11 to 2011-12, and again at 7 percent from 2012-13 to 2013-14 for Tesco. This means the gross profit ratio has been in a declining state in the last 4 fiscal years for Tesco since it dropped by 22.2 from 2011-12 to 2012-13. On the other hand, the Morrisons has seen an increase in gross profit ratio by 14.3 percent from 2012-13 to 2013-14. In the previous 3 fiscal years from 2010-11 to 2012-13 the company’s gross profit ratio had been steady at 7 percent. This ratio gives the information about how well labor and other materials are used in the production process and subsequently the cost of production as well as pricing of finished goods is also indicated. Gross profit ratio discloses the relation between gross profit and revenue earned from net sales. Higher ratio means a company earns more profit from each monetary unit of sales. Morrisons has shown an improved performance in the fiscal year 2013-14 with much cash in hand for the company to make payments to creditors, suppliers etc. However, Tesco has experienced a setback in its gross profit ratio in the fiscal year 2012-13 and the situation has not improved in 2013-14. Hence it can be said that Morrisons had shown more effectiveness in planning their activities in a more economic way than Tesco in 2013-14. The net profit ratio for both Tesco and Morrisons had been steady at 5 percent and 4 percent respectively in the fiscal years 2010-11 and 2011-12. There has then been a major setback in the net profit ratio for Tesco in 2012-13 as the year witnessed a drop of the ratio by as high as 40 percent indicating the supermarket has experienced extreme crisis in converting the revenue earned from its sales. For Morrisons, the situation is even more acute as the company has actually experienced a net loss of 1 percent in 2013-14. A high net profit ratio means the company is efficient in transforming sales revenue into profit. In the last two fiscal years, both the supermarkets have been struggling with maintaining efficiency in increasing their net profit ratio. Financial analysis The current ratio and gearing ratio of Tesco and Morrisons for the last 4 fiscal years have been tabulated below in order to understand the financial condition of the companies. Table 3: Current ratio (current assets / current liabilities) and gearing ratio (long term loan / equity capital) of Tesco and Morrisons from 2010-11 to 2013-2014 2010-11 2011-12 2012-13 2013-14 Current Ratio Gearing Ratio Current Ratio Gearing Ratio Current Ratio Gearing Ratio Current Ratio Gearing Ratio Tesco 0.65 0.58 0.64 0.56 0.67 0.60 0.65 0.63 Morrisons 0.54 0.35 0.57 0.38 0.57 0.41 0.50 0.48 A current ratio means the company has enough cash to pay all short term and long term debts and obligations, while a low ratio can also indicate insolvency possibility. Both Tesco and Morrisons had their current ratios fluctuating from 2010-11 to 2013-14 as can be seen from Table 3. In the fiscal year 2011-12, Tesco saw a decline in its current ratio by 1.5 percent while Morrisons saw an increase in its current ratio by 5.6 percent. In 2012-13, Tesco recovered its current ratio by 4.7 percent while Morrisons’ ratio remained steady. Both the supermarkets experienced decline in their current ratio in the fiscal year 2013-14; Tesco by 3 percent and Morrisons by as high as 12.3 percent. It is necessary to see that current ratios do not decline below a certain level as this can lead to difficulty in meeting short term and long term debts and obligations. In this regard, Morrisons has suffered in more acute manner than Tesco since the former’s decline rate of current ratio has been extremely high in the last fiscal year. Gearing ratio can assess the company’s financial position in the long run. For both the supermarkets, gearing ratio has been steeply rising in the last 3 fiscal years. Although Tesco has experienced a decline in the ratio by 3.4 percent in 2011-12, since then the ratio has been increasing in the next 2 fiscal years. In the fiscal year 2013-14, Tesco’s gearing ratio has increased by 5 percent while Morrison’s has increased by as high as 17.1 percent. Higher ratio means risks are greater. This means both the supermarkets are in a critical position and need to control the increase of their gearing ratios since a company with high gearing ratio can be in an unstable position and can find it difficult to acquire loans from financial institutions. Future direction Most retail companies in recent years have focused more on customer satisfaction resulting in battling over profit maximization and value creation. In food industry, consumers are becoming more health conscious and so retail companies are focusing more on food quality and consumer health. In this context Morrisons provides food prepared in-store thus ensuring fresh food while Tesco is focusing more on organic fruits. Tesco has been emphasizing on expansion and in the next 3 to 5 years its attempt will be to capture the markets in South Korea, Malaysia and Thailand with more focus in convenience stores (Annual Report 2014, 13). Since investment on convenience stores can be lighter compared to developing supermarket areas and with the growing trend of online shopping by consumers therefore Morrisons is contemplating rapid increase in their convenience stores in the near future along with expanding their online facilities (Annual Reports 2014, 9). In the next 3 years, Morrisons will be focusing on three areas – improving end-to-end operations, loss prevention, and more effective commercial investments (Annual Reports 2014, 22). During this period, Morrisons has planned to invest £1 bn for reducing prices and stronger promotions of their own-brand food range (Trotman). References Aaker, David A. & McLoughlin, Damien. Strategic Market Management: Global Perspectives, John Wiley & Sons, 2010 Annual Reports of Tesco and Morrisons from 2011 to 2014 Christie, Sophie. “Tesco Clubcard vs. Nectar: Best Loyalty Schemes”, The Telegraph, August 30, 2013, December 4, 2014 from: http://www.telegraph.co.uk/finance/ personalfinance/household-bills/10273842/Tesco-Clubcard-vs-Nectar-Best-loyalty-schemes.html Doward, James. “Organic food back in vogue as sales increase”, The Guardian, February 8, 2014, December 4, 2014 from: http://www.theguardian.com/environment/2014/feb/09/ organic-produce-sales-increase “Morrisons: Company History”, morrisons-corporate, 2014, December 4, 2014 from: http://www.morrisons-corporate.com/About-us/Company-history/ Ruddick, Graham “Morrisons spent £27m on developing new online technology”, The Telegraph, September 12, 2013, December 4, 2014 from: http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/10303755/Morrisons-spent-27m-on-developing-own-online-technology.html Steiner, Rupert “Morrisons reveals strategy to haul its business into the 21st century”, thisismoney, July 11, 2013, December 4, 2014 from: http://www.thisismoney.co.uk/ money/markets/article-2361173/Morrisons-vows-bring-tech-21st-century.html “Tesco buys convenience store chain”, The Telegraph, October 30, 2002, December 4, 2014 from: http://www.telegraph.co.uk/finance/2831954/Tesco-buys-convenience-store-chain.html “Tesco: History”, tescoplc, 2014, December 4, 2014 from: http://www.tescoplc.com/index.asp?pageid=11 Trotman, Andrew. “Morrisons hires former Tesco finance director Andrew Higginson as chairman”, The Telegraph, July 29, 2014, December 7, 2014 from: http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/10996639/Morrisons-hires-former-Tesco-finance-director-Andrew-Higginson-as-chairman.html Read More