SWOT Analysis for UK Food Retail and UK Oil and Gas Industry - Essay Example

? SWOT Analysis for UK Food Retail and UK Oil and Gas Industry SWOT Analysis for UK Food Retail and UK Oil and Gas Industry The paper attempts to discuss SWOT Analysis for UK Oil and Gas industry and UK Food Retail industry. The paper further provides a summary of firm and industry strengths and weaknesses in relation to the future opportunities and threats. UK Food Retail Industry SWOT Analysis: Strengths: UK retail sector is the largest service industry of United Kingdom with employing over three million people in the sector. Even due to the economic downturn, it is still predicted to increase by 15% over the next five years in the future (SAS, 2011). It is still considered to be an impressive figure despite the fact that it represents a slow growth. Over 9% of GDP of UK is generated by the retail industry which is the success factor of retail companies overseas. With the increase of e-commerce, the products are able to reach through millions of consumers. Hypermarkets have become competitive in offering diversified products to their wide customer base. The major players in the market, Tesco, Asda, J Sainsbury and Wm Morrison accounts for 80% of the total market share (Lloyds Bank, 2012). London is considered to be a strong market for consumer shopping and many people including tourists are inclined towards purchasing in London. It beats out other developed cities including New York, Tokyo and Paris with total spending of ?64.2 Billion (GAIN, 2010). The recessionary periods have hit the retail sector of UK which is very disastrous for the sector, but from a wider perspective, the major players in the market have not undergone major changes which might reveal that the market is running smoothly for the longer term. This also means that the big players did not change their strategies for competition and did not find a need to undergo major changes. The UK retail sector provides biggest revenues to their companies which in turn increases the GDP growth of the nation. The presence of major players indicates that the sector is strong with major assumption of future growth (GAIN, 2010). Weaknesses: The UK retail market is a mature market which is not intended to grow in volume terms. The margins and earnings from the retail sector are threadbare and mostly the earnings are coming from the online stores. As the economy suffers from recession global downturn, it has been tough going for the UK retail market. According to Verdict research, 2012 growth rate of the UK retail sector would be 1.2% which is the third lowest growth in the history of UK retail in 49 years (SAS, 2011). It has been forecasted that the non-food items in the retail sector would decline for consecutive fourth year as it would have a decrease of -0.5% (SAS 2011). Food is an essential item in our lives, but since the recession period it has allowed people to spend more but for the same quantity. The greatest weakness is the rising food prices over the world which is affecting sales of the major companies and is resulting in slower growth. The grocery section has been badly hit by the downturn which has decreased the consumers spending and now the industry is termed to be as ‘recession-resilient’. The major price drop has resulted in the industry which has hauled Tesco to provide promotional strategies which is the biggest player in UK retail. Asda did not carry out the move to lower its price and insisted that it was the cheapest provider of consumer goods. The rivalry is intense in the sector and has accounted for low profit margins and growth (GAIN, 2010). Opportunities: Even though the margins are threadbare in UK retail sector, the big four of the retail sector, Tesco, J Sainsbury, Asda and Wm Morrison are planning to buy 4 million of retail space which is equivalent to 130 average supermarket stores (SAS, 2011). This proves that the big players consider a growth in the sector in the future which provides an opportunity to grab market shares. According to the UK economy report, a slight decrease in inflation after 2011 has been recorded and an increased global demand for food has resulted in the UK retail industries to operate globally in markets that have never been explored before. The UK retail companies need to explore in Asian markets for their growth which is unlikely to be found in UK market. Major companies have the opportunity to change perspectives of their consumers and change their behavioral pattern or either company can provide products to different market segments considering the low spending people. The companies can grow their online shopping catalogues with the growing use of technology (The Open University, 2006). Companies can also increase their inventory for non-food items and can increase their revenues likely. This would provide a hope for other retail companies to pursue those steps. It is an opportunity for the company to put less focus on managing sales on per foot space and start concentrating more on non food items. The economies of scale can be maintained by major players and put their main focus in Asian markets especially in South Korea and India (IMAP, 2010). Threats: The presence of tough competition in the retail sector has growing concerns for the producers of the consumer goods. The companies would have to survive and thrive in the market by differentiating themselves from their competitors. Due to ‘credit crunch’, the economy of UK has been affected due to which it has reduced the spending of people in the food sector which had always remained high. The lower income of the people will remain a threat in the future for companies and their strategic focus to lower price based product could result in high growth and sales (GAIN, 2010). High raw material cost for the food items is also a biggest threat for the food producers which in that case they are bound to sell the item for a higher price and to increase their profit margins. Due to the exporting restrictions from the Far East locations on non-food items, there is a probability that margins would become lower than they are currently available to companies. Preferences of consumers are changing as technology is allowing people to change patterns. The growth of purchasing food and noon food item is increasing over the internet which is becoming the main source of threat to UK retail companies (GAIN, 2010). Summary of Firms and Industries UK retail industry contributes over 9% of the total GDP of UK due to the expansion of major retail companies in overseas regions (Oil and Gas UK, 2012). The future of the retail industry of UK is slow due to the economic downturn but opportunities are very high considering the number of biggest competitors in the market. The companies can overcome with the challenge because these are the largest companies in terms of employee inclusion. The future opportunities of the industry are to target consumers whose behavioral patterns are changing and moving towards more use of technology. The firms have the tendency to target their consumers through different means and to a different market segment to increase their revenues and to enable growth in the industry. The most common future threat is the trend for lower spending of their income for food for the same quantity and credit crunch which has caused inflation to occur. The companies have the required strengths to overcome the situation as they can offer lower priced product for the market that are reluctant to spend too much food items. The big players in the market including Tesco, Asda, J Sainsbury and Wm Morrison can shift their focus on gaining a higher profit margin in non-food items and can lower its price and margin in food items. This might attract consumers who have low income to spend (IMAP, 2010). UK Oil and Gas Sector Strengths: UK Oil and Gas sector supply energy to the power industry due to which it provides fuel for vehicles and logistics to transport goods in all over the world and helps in heating homes. It employees millions of people in overall companies and it is the source of contributing growth in the UK economy in terms of tax revenues and exports. The industry has well adapted to major changes in the surroundings amongst commonly are prices, regulations with the change in perception of the society. The economy of UK relies its growth on 70% of the total Oil and Gas sector for their needs because if the country do not produce sufficient to their required needs, then they would have to import at a higher cost. Over 40% of the oil and gas reserves are still to be extracted from UK which could help the country in achieving growth till 2020 and beyond. The oil and gas industry of UK also provides a move to alternate energy sources for future generations (UK Oil and Gas, 2012). Weaknesses: Increase in the petrol prices are the major weaknesses for the sector as people are becoming reluctant to purchase fuel and businesses are unable to invest more in the industry due to its uncertainty. The oil and gas industry is referred to as a contango market in which the prices are unstable and the future is uncertain. Oil spills are the regular weaknesses faced by the companies especially British Petroleum, which has been claimed for hazardous activities in the region during oil extraction (Kelley, 2009). Accidents and punitive damage claims are also surrounded with this industry as many workers are injured and most probably result in death due to carelessness for companies for not providing the safety gadgets (Oil and Gas UK, 2012). The companies then have to bare losses for the account of their carelessness and also jeopardizes company’s good image. The natural saturation of oil wells is another big weakness for this industry because each well has limited resources and the company has to shift to find newer locations for their survival. There is a negative impression in the minds of consumers that oil companies destroys the environment and move to alternative sources or stop the usage of products produced by the companie (Oil and Gas UK, 2012)s. Opportunities: Billions of pounds have been invested in research to produce alternative energies and fuel methods in the sector which provides a major opportunity for companies of UK to come up with their expectations. The shift towards the cheaper mode of fuel methods can arouse greater demand and would also allow changing the preferences of consumers. Companies can also switch to other borders for oil reserves in the acquisition of fuel from other countries. In response to the tough competition globally, companies can change its pricing policy in order to create the demand accompanies with high quality fuel. The search for new countries in exploring oil wells and make contracts with particular countries to use their resources can play a huge factor for the development of the UK oil and gas sector (Oil and Gas UK, 2012). Companies have the best option to expand in regions that are described below which are the regions that are yet-to-find resources: (Source: UK Oil and Gas Economic Report 2012) Threats: Due to the unsound environmental policies from the UK government, highest chances are there for oil and toxic spills. The oil and gas reserves of UK is limited and 40% of its reserves is remained due to continuous extraction which poses a great threat to the economy because they have to find alternative locations or import oil and gas which would be costly for the economy (Oil and Gas UK, 2012). UK has majority of their oil and gas reserves beneath the ocean which has a highest probability that it could pollute the water which could a disaster for the people. The oil prices are major concerns for the overall economy and globally because people are going for alternative sources which is creating tensions in the business. This situation is creating doubts in the mind of people as either they should invest in providing alternative sources or either they should invest in finding different locations (Oil and Gas UK, 2012). Summary of Firms and Industries: The future opportunities for the oil and gas industry are the adaptation to the behavioral pattern of consumers which are continuously changing and their trends are shifting towards alternative sources of energy. British Petroleum, Royal Dutch Shell and BG are highly competitive companies in oil and gas industry and can cope up with the challenge of future behavioral patterns of consumers because they capture the greater market share within the industry. Royal Dutch shell has a steady financial performance over the past 10 years which ensures that the company has a strong investment and return background (Oil and Gas UK, 2012). The company can invest in newer projects by thoroughly studying the locations. The company has future opportunities to expand in China through acquisitions and merger strategies. British Petroleum’s greatest strength is the global presence and worldwide subsidiaries through which the company can acquire lands that are rich in oil and gas reserves that can be helpful for the company in the future. Oil spill and criminal charges for the spread of crude oil are amongst major weaknesses of the British Petroleum which can further increase the cost of fuel prices of the company in overcoming those claims. British petroleum has unsound environmental policies which hinder its growth and can pose a threat to its future activities. BG is the 7th largest company to be listed in FTSE index in which it has a market capitalization of almost ?45 billion (Oil and Gas UK, 2012). The company has a competitive advantage in extraction of natural gas so therefore; it can overcome the possibility of providing power generation project in the future because these projects require more gas. BG also have an advantage that its majority of business is in UK but it has a great international presence outside UK. It can have a strategic alliance with other companies in order to capture the market share and to provide long term steadiness in its future growth (Oil and Gas UK, 2012). Financial Analysis The analysis presented below takes into consideration the financial statement analysis of each of the company selected in this study. It is pertinent to mention here that the researcher has limited the financial analysis of the selected companies to a period of five years, i.e. from 2006 to 2010. The fact that the financial year 2011 has not been considered in this analysis is for the purpose of bringing uniformity in the analysis. Financial Analysis of Tesco PLC Following is the financial analysis of Tesco PLC, which takes into consideration the published financial information of the company’s operations during the financial year 2010 and 2009: Tesco PLC Ratios 2010 2009 2008 2007 2006 Current Ratio 0.73 0.77 0.58 0.51 0.52 Cash Ratio 0.56 0.61 0.35 0.27 0.33 Return on Capital Employed 0.05 0.05 0.07 0.08 0.07 Return on Equity 0.16 0.17 0.18 0.18 0.17 Cash Flow to Debt Ratio 0.15 0.12 0.18 0.18 0.20 Capitalisation Ratio 0.51 0.54 0.40 0.37 0.37 Operating Cycle 380.42 379.27 392.23 393.67 359.08 Sales Revenue per Employee 109.44 103.65 99.56 89.64 75.87 Price Earnings to Growth Ratio 179.57 1,718.41 88.45 115.88 (1,461.28) Dividend Yield 0.03 0.04 0.03 0.02 0.02 The financial position of Tesco PLC from 2006 to 2010 has been analysed briefly in the table above. The ratios calculated above show that there is a slight fall in the liquidity position of the company, due to a comparatively greater decline in the current assets of the company as compared to its current assets in 2010. On the other hand, profitability of the company also did not show any improvement in 2010 as compared to previous years, and in fact there has been a slight decrease in return on equity due to significant increase in the equity as compared to the increase in net income. The performance related ratios of the company showed improvement in 2010 as the company managed to improve its revenue generated per employee. Overall financial outlook of Tesco PLC appears to be stable in light of this analysis, however concerns related to decline in liquidity and profitability indicators are visible in 2010 (Yahoo Finance 2012, Tesco PLC 2010). Financial Analysis of J Sainsbury PLC Following is the financial analysis of J Sainsbury PLC, which takes into consideration the published financial information of the company’s operations from the financial year 2006 to 2010: J Sainsbury PLC Ratios 2010 2009 2008 2007 2006 Current Ratio 0.64 0.54 0.66 0.71 0.80 Cash Ratio 0.39 0.30 0.40 0.50 0.68 Return on Capital Employed 0.05 0.03 0.03 0.03 0.00 Return on Equity 0.12 0.07 0.07 0.07 0.01 Cash Flow to Debt Ratio 0.17 0.16 0.16 0.14 0.07 Capitalisation Ratio 0.38 0.38 0.34 0.37 0.50 Operating Cycle 365.04 364.94 337.44 343.14 354.02 Sales Revenue per Employee 195.92 185.58 175.04 168.31 157.62 Price Earnings to Growth Ratio 11.10 (140.95) (3,169.01) 4.57 (1,838.71) Dividend Yield 0.04 0.04 0.03 0.02 0.01 In contrast to the decline in certain areas for Tesco PLC, Sainsbury has shown considerable improvement in liquidity and profitability, largely due to increase in its current assets level in 2010 and net income for the year respectively. The sales revenue per each employee of the company has gone up, which indicates the operational efficiency of the retail company and also the company has managed to drag its price earnings to growth ratio into positive side of the scale in 2010 as compared to negative figures in 2009 (Yahoo Finance 2012, J Sainsbury PLC 2010). Financial Analysis of Morrison’s PLC Following is the financial analysis of Morrison’s PLC, which takes into consideration the published financial information of the company’s operations from the financial year 2006 to 2010: Morrisons PLC Ratios 2010 2009 2008 2007 2006 Current Ratio 0.51 0.53 0.46 0.49 0.45 Cash Ratio 0.24 0.28 0.33 0.25 0.23 Return on Capital Employed 0.07 0.06 0.07 0.03 0.03 Return on Equity 0.12 0.10 0.13 0.06 0.07 Cash Flow to Debt Ratio 0.19 0.21 0.15 0.17 0.07 Capitalisation Ratio 0.25 0.27 0.24 0.29 0.35 Operating Cycle 372.35 364.03 348.90 351.94 336.51 Sales Revenue per Employee 117.63 110.90 99.00 95.13 92.48 Price Earnings to Growth Ratio 42.28 (89.40) 10.09 (16.08) 9.56 Dividend Yield 0.03 0.02 0.02 0.01 0.01 The financial analysis of Morrison’s also reflects more or less similar trends as noted in the case of Tesco, apart from the fact that the profitability of the company improved slightly in 2010. The return on capital and equity for the company has improved by small percentage in 2010. However, due to decline in its liquidity levels, not only current and cash ratio is affected but also the cash flow to debt ratio and capitalization ratio have also been affected. Moreover, like other competitors in the market, the operating cycle of the company has also increased in terms of days it takes for the company to convert its inventory into cash receipts. Apart from this, there is a considerable increase in the sales revenue per employee of the company (Yahoo Finance 2012, Morrison's PLC 2010). Industry Averages In order to compare the financial performance of the companies with industry, following industry averages have been determined by the author of this report. These figures are obtained by averaging the figures for three companies under investigation in this report. Industry Averages Ratios 2010 2009 2008 2007 2006 Current Ratio 0.63 0.61 0.57 0.57 0.59 Cash Ratio 0.40 0.40 0.36 0.34 0.41 Return on Capital Employed 0.06 0.04 0.06 0.05 0.04 Return on Equity 0.13 0.11 0.12 0.11 0.08 Cash Flow to Debt Ratio 0.17 0.17 0.16 0.17 0.11 Capitalisation Ratio 0.38 0.40 0.33 0.34 0.41 Operating Cycle 372.60 369.42 359.52 362.92 349.87 Sales Revenue per Employee 141.00 133.38 124.54 117.69 108.66 Price Earnings to Growth Ratio 77.65 125.97 -1023.49 34.79 -1096.81 Dividend Yield 0.03 0.03 0.03 0.02 0.01 Financial Analysis of British Petroleum Following is the financial analysis of British Petroleum PLC, which takes into consideration the published financial information of the company’s operations from 2006 to 2010: British Petroleum Ratios 2010 2009 2010 2009 2009 Current Ratio 1.12 1.14 0.95 1.02 0.99 Cash Ratio 0.81 0.76 0.71 0.68 0.74 Return on Capital Employed (0.01) 0.07 0.09 0.09 0.10 Return on Equity (0.03) 0.16 0.24 0.22 0.26 Cash Flow to Debt Ratio 0.08 0.10 0.28 0.17 0.21 Capitalisation Ratio 0.50 0.42 0.42 0.40 0.40 Operating Cycle 348.93 425.58 385.26 387.19 383.07 Sales Revenue per Employee 3,562.43 2,868.97 4,401.12 3,494.46 3,289.16 Price Earnings to Growth Ratio 1.82 (3.06) 132.66 (575.10) 133.25 Dividend Yield 0.00 0.00 0.00 0.00 0.00 Owing to the disastrous event of oil spill at the Gulf of Mexico (Stephen 2010), the company suffered significant decline in its profitability and financial indicators for the company were badly affected by the same. In 2009, before the oil spill incident, the company earned significant profits and was able to report positive returns on capital and equity; however, after the incident took place in 2010, the profitability went down as shown by the negative figures for return on capital and equity. Apart from this, the company managed to maintain its liquidity position. In addition to this, the company also managed to report significantly higher revenue figure per employee during the year 2010 as compared to previous year (British Petroleum 2010). Financial Analysis of BG Following is the financial analysis of Tesco PLC, which takes into consideration the published financial information of the company’s operations from the financial year 2006 to 2010: BG Ratios 2010 2009 2010 2009 2009 Current Ratio 1.12 1.01 1.05 1.30 1.47 Cash Ratio 1.05 0.92 0.97 1.21 1.38 Return on Capital Employed 0.07 0.08 0.13 0.12 0.14 Return on Equity 0.13 0.15 0.24 0.24 0.28 Cash Flow to Debt Ratio 0.27 0.29 0.36 0.34 0.38 Capitalisation Ratio 0.36 0.32 0.30 0.36 0.34 Operating Cycle 450.90 451.38 462.39 439.86 467.19 Sales Revenue per Employee 2,591.09 2,330.72 1,896.75 1,251.47 1,077.13 Price Earnings to Growth Ratio 53.58 (31.23) 12.65 5,727.71 70.01 Dividend Yield 0.02 0.02 0.01 0.01 0.01 BG has been able to continue its stable performance in the year 2010 also. The liquidity position of the company improved further from 2009 to 2010. Apart from this, the operating cycle changed slightly but favourably for the company in 2010. It is a note worthy fact that although with comparatively smaller portfolio, BG has been able to maintain its financial performance in line with the industry leaders, such as British Petroleum and Royal Dutch Shell (Royal Dutch Shell 2010). Financial Analysis of Royal Dutch Shell Following is the financial analysis of Royal Dutch Shell PLC, which takes into consideration the published financial information of the company’s operations for the past five years: Royal Dutch Shell Ratios 2010 2009 2010 2009 2009 Current Ratio 1.12 1.14 1.10 1.22 1.20 Cash Ratio 0.83 0.81 0.92 0.89 0.89 Return on Capital Employed 0.06 0.04 0.09 0.12 0.11 Return on Equity 0.14 0.09 0.21 0.25 0.23 Cash Flow to Debt Ratio 0.16 0.14 0.45 0.37 0.44 Capitalisation Ratio 0.33 0.33 0.27 0.28 0.27 Operating Cycle 413.57 428.56 362.21 383.32 387.92 Sales Revenue per Employee 4,089.51 3,090.98 5,092.90 3,953.13 3,542.72 Price Earnings to Growth Ratio 0.33 (0.55) (83.49) 64.47 377.78 Dividend Yield 0.03 0.03 0.03 0.02 0.02 Based on the financial analysis presented above, Royal Dutch Shell has been the leader in UK’s oil and gas sector. The efficiency of its operations is evident from the decrease in operating cycle figure in 2010 and the increased return on equity. Moreover, the company has managed to significantly raise its sales revenue per employee. It is also worth mentioning here that the company, among the three companies selected in this report, has the largest number of employees (BG 2010). Industry Averages In order to compare the financial performance of the companies with industry, following industry averages have been determined by the author of this report. These figures are obtained by averaging the figures for three companies under investigation in this report. Industry Averages Ratios 2010 2009 2008 2007 2006 Current Ratio 1.12 1.10 1.04 1.18 1.22 Cash Ratio 0.90 0.83 0.87 0.92 1.00 Return on Capital Employed 0.04 0.07 0.10 0.11 0.12 Return on Equity 0.08 0.14 0.23 0.24 0.26 Cash Flow to Debt Ratio 0.17 0.18 0.37 0.30 0.34 Capitalisation Ratio 0.39 0.36 0.33 0.35 0.34 Operating Cycle 404.46 435.17 403.28 403.46 412.73 Sales Revenue per Employee 3414.35 2763.55 3796.92 2899.69 2636.34 Price Earnings to Growth Ratio 38.18 16.64 20.61 1739.03 193.68 Dividend Yield 0.01 0.02 0.01 0.01 0.01 Reference List GAIN. (2010). United Kingdom Retails Food. London: Institute of Grocery Distribution. IMAP. (2010). Retail Industry Global Report. London: IMAP. Kelley, C. (2009). UK Oil and Gas Sector. Norway: Norwegian Colaboration Centre. Lloyds Bank. (2012). Food Retail Sector Overview. Retrieved October 08, 2012, from www.lloydsbankwholesale.com: http://www.lloydsbankwholesale.com/insight-and-ideas/food/sector-overview/ Oil and Gas UK. (2012). Economic Report 2012. London: Oil and Gas UK. Oil and Gas UK. (2012). Health and Safety. Retrieved October 08, 2012, from www.oilandgasuk.co.uk: http://www.oilandgasuk.co.uk/healthandsafety.cfm SAS, 2011. UK Retail 2012 & Beyond. London: SAS UK & Ireland, Verdict Research. The Open University. (2006). E-strategy in the UK retail grocery sector. Leicestershire: The Authors. UK Oil and Gas. (2012). Knowledge Centre. Retrieved October 08, 2012, from www.oilandgasuk.co.uk: http://www.oilandgasuk.co.uk/knowledge_centre.cfm Read More