Tesco International Marketing Strategies - Essay Example

?Q1: Tesco Plc has been acknowledged as one of the biggest world’s leading International Retailer. Its trading was first used in mid 1920s, and since then has expanded to 14 countries namely UK, China, the Czech Republic, Hungary, the Republic of Ireland, India, Japan, Malaysia, Poland, Slovakia, South Korea, Thailand, Turkey and the United States with more than 2500 stores. Its principal activity encompasses retailing with other associated activities like distribution, logistics, telecommunication and financial services. The core activities of Tesco plc. include retailing, providing retail banking and insurance services through its subsidiary ‘Tesco Bank’. Q2: The auditor’s report of Tesco Plc. has shown the company in a positive manner by endorsing the accounts of the company as complied with the applicable requirements of Section 428 of the Companies Act 2006. It also shows that the company is not involved in any fraudulent activities and a ‘clean opinion’ is given by the independent auditors which will create positive sentiments for its shareholders. It is clear that auditors have carefully examined every financial recording and notes presented in the Consolidated Income Statement and Balance Sheet and have read all notes attached to be completely sure of the accounting being done in compliance with Generally Accepted Accounting Principles (GAAP). Auditor’s report acts as a guarantee that the company is not involved in any deceptive practices which may harm the company in the long run and its shareholders. Auditor’s report generates satisfaction among its stakeholders about the financial strength of the company. Also it helps increase the accuracy of investors’ perceptions by reducing investors’ overconfidence. When investors’ perceptions are more accurate, their prediction of asset worth is closer to economic predictions and the profits get evenly distributed. Q3: Ratio Expression 2010 2009 2010 result 2009 result Industry Average ROE 16.9% 17.2% 19% Gross Profit margin 8.1% 7.8% 10% Net Profit Margin 4.1% 4.0% 3% Current Ratio 0.7 times 0.8 times 1.7 times Inventory Turnover Period 18.8 days 18.7 days 50 days Payables’ turnover period 18.3days 19.4 days 20 days Gearing Ratio 54% 74.4% 4% P/E Ratio 14.3 x 12.3 x 9.0 x Note: Purchases for the year are calculated as: Cost of goods sold + closing stock – opening stock. Q4 2010 (in million $) 2009 (in million $) change Sales $56910 $53898 5.58% increase Operating Profit $3457 $3169 9.1% increase Share price $419.7 $333.2 26% increase Note: (only share price at 27th February is considered.) Q5: Analysis: Return on equity shows the return gained by shareholder by investing $1 in the organization. ROE of Tesco Plc. fell marginally from 17.2% in 2009 to 16.9% in 2010. Although the net income increased during this period, the fall in ROE is due to Tesco Plc’s focus on equity rather than on debt to finance its operations. Compared to the industry average it is below par but looking at the future growth prospects and the scale of operations which Tesco has expanded into, the company’s return would move up in the future. It is evident from the fact that the sales have climbed up by 5.58% from $53,898m to $56,910m. It is notable that Tesco Plc.’s sales have significantly increased internationally as the percentage of international sales to the total sales have increased from 24% in 2005 to 31% in 2009. This will continue to do so and would reflect with a higher percentage increase in the upcoming years. However, the gross profit margin is mere 8% of the sales which means that a higher proportion of the sales are cancelled out by the cost of goods sold. There has been an increase in the Gross Profit Margin from 7.76% last year to 8.09% in 2010 which is complimentary to the increase in Sales. Comparing it to the industry the ratio is lower, however compared to previous year the margin has increased and therefore would come up to the industry average in due time. The Net profit margin of Tesco Plc has increased to 4.1% in 2010 from 3.96% in 2009. This was due to a fall in the payment of interest from $356 million in 2010 to $356 million in 2009. It is evident from the decreased debt that the company is shifting more towards equity than staying on debt. Increasing net profit margin is a positive sign for the investors as prospects get higher for growth. In contrast to the industry average which is 3%, Tesco Plc. has a healthy net profit margin of 4.1% which means that compared to the industry, Tesco Plc. has lower financial charges. It may also be due to diversified operations internationally. Current ratio being under 1 suggests that the company would be unable to pay off its short term obligations if they came due at that point. The ratio has further worsened from 0.8 times in 2009 to 0.7 times in the current year compared to the industry average of 1.7 times. This again is a consequence of using debt to finance the business operations. Tesco Plc. will have to improve its short term liquidity position by repaying its debt and improving its cash reserves. Tesco was a highly leverage firm in 2009 with a net gearing ratio of 74.4% with a total borrowing of $15,862 million. This was mainly because of its expansionary policies. Since then there has been a rather positive change in the financial health of the company as a lot of company’s debt were paid-off due to increased performance of Tesco various sectors like Tesco Bank etc. In 2010 the ratio declined to 54% and the total borrowing reduced to $13,273 Million. This indicates that Tesco is starting to rely less on debt and more on equity to fund the operations of the business. Tesco has shown a constant inventory turnover rate throughout the two years. Negligible difference arrived from 18.7 days in 2010 to 18.8 days in 2009. But compared to the industry average of 50 days, this figure is very impressive. This indicates that there is thorough inventory control by Tesco Plc. and less money is tied up in holding inventory. Price Earnings ratio indicates investors’ assessment of a company's future earnings. P/E ratio has been rather impressive for Tesco. The P/E ratio of the company has increased by 18% from 12.11 times in 2009 to 14.31 times in 2010. Compared to the industry average of 9 times, Tesco has a very good P/E ratio. This can be reflected from the increased share value by 26% from $333 to $419. And the share price would continue to grow as the impact of recession weakens. The Payable turnover rate indicates how frequently creditors are repaid. Tesco has improved its payable turnover rate marginally which could be inferred from the statistics presented that in 2009 it was 19.4 days and in 2010 it improved to 18.3 days. Tesco has performed better than the industry average which is 20 days, and prospects are that their turnover rate will get better in the future. Currently, Tesco is rated highly by the credit rating agency which is a positive sign for its suppliers. DuPont Analysis: DuPont analysis helps us indicate which part of the company has progressed well and contributed more to Return on Equity. Taking into perspective Tesco’s performance the profitability has increased from 3.9% in 2009 to 4.1% in 2010. This may also infer that profitability has contributed more in recovering from the losses made during the recessionary phase. The firm’s efficiency in terms of Asset turnover has increased slightly. As asset turnover is a reflection of firm’s ability to generate revenue with every dollar of investment in assets, in this regard Tesco Plc. has done well to persistently increase this ratio from time to time. Also another reason of its being relatively high is the low pricing strategy of Tesco. As Tesco is a firm which relies on mass selling at lower profit margins therefore utilization of its assets are frequent. Hence, efficiency is another key contributor in prospering ROE. However, the prime reason why ROE dropped from 17.2% in 2009 to 16.9% in 2010 was Tesco’s reliance on debt. Tesco paid off a huge amount of debt during 2010 but still it is highly debt intensive which is evident from its gearing ratio of more than 50%. Although Tesco’s profits increased from 2009 to 2010, the change in profits wasn’t equally proportional to the change in equity therefore return dropped from previous year. Conclusion: Tesco Plc’s performance in terms of profitability has improved from 2009 to 2010. This is evident from the fact that their sales showed a 5.58% increase and as a result profits soured by 9.1%. Consequently, share price of Tesco showed a significant increase of 26%. However, Tesco has a very weak liquidity position compared to the industry. Tesco will have to take steps to improve its liquidity to sustain its current profitability position. Furthermore, Tesco relies mostly on debt to finance its operations and this makes Tesco a risky company. Tesco should raise funds through equity and hence improve its gearing ratio by relying more on equity and less on debt. Read More