Business Model of Tesco Plc - Essay Example

? Five- Year Report for Tesco PLC Table of Contents Executive Summary 3 Business Model of Tesco 3 Summary of Income ment financials 6 Fundamental analysis of revenue and net profit 7 Fundamental analysis of other features of the Income Statement 7 Operating Margin 7 Profit after Tax 8 Numerical analysis of historic profitability 8 Comparative Analysis of Tesco PLC with its core competitors 10 Summary of cash flow financials 13 Critical fundamental analysis of historic cash flows 14 References 15 Executive Summary Tesco plc is one among the largest retailers across the globe having over more than 2300 supermarkets and convenience stores. Tesco launched its e-commerce business in the year 2000. In the year company added a new clothing brand in its UK stores. The revenues surged up to 6% which is the highest increase in the last five years which was due to the acquisition of Homeplus in South Korea. The revenues declined in the year 2011 to a extend of 14% with respect to the previous year due to hike in prices of the UK market where the core business of the company lies and the 2012 showed stable growth by offsetting the fall in profits in the UK markets by its international business. Tesco plc emerged as a prominent figure in the turn of the 21st century .In the years to come Tesco is continuously striving for its expansion efforts in its core business in UK, retail services, international operations and operations in non food business. Till the period 2004 the company has gone for massive expansion plans. The company’s growth trajectory has been exceptionally been good over the years. Business Model of Tesco Tesco has evolved as an eminent player in the market over the last five years. It is basically because of the expertise it possesses in capital, human and financial area which can be harnessed across different geographical boundaries trough its sound business model. Figure 1: Business model of Tesco (Source: Tesco PLC, 2013, p.25) Tesco PCL’s way of creating and delivering value to its customers and associated group is rather simple but yet very effective. Its core business activities in a nutshell can be summarized as buying, moving and selling of products and services to its customers and also making use of the customer’s perspective to provide better value to its customers. The core activities are explained below. The company constantly interacts with its customers through focus groups, ongoing research trackers and social networking sites to take in customer feedback with regards to the pros and cons of its available products. These valuable suggestions from customers are incorporated through adding further value to these products such that the customers can derive greater benefits. It offers to its customers a great range of products and through its broad range of supply chain it makes its products available in UK and Europe etc with much ease. The company through its vast network of distribution channel and advanced technological system is making the right kind of products available to its customers at the right time. This is achieved through making a proper forecast of customer’s needs through detailed models which takes into consideration of variables like seasonality, weather forecast and the responsiveness of the customers to the promotional efforts. Secondly, its ordering system updates itself on real time basis such that it can quickly replenish its supply stores with the right kind of products at the right time. Whether it is store or online shopping or both Tesco is acknowledged to have delivered greatest shopping experience. Its loyalty schemes, multi-format approach to the stores network ranging from large Extra stores to Metro and Express Convenience stores have made its selling a divine experience for its customers. Due to these core competencies of the company in offering value to its customers it stands out in comparison to its competitor as it market ratings suggest being the first rank holder in UK, first and second position in all markets of Asia except China and first rank in Europe. Summary of Income Statement financials Income Statement (? m) 2012 2011 2010 2009 2008 CAGR Revenue 64539 60455 56910 53898 47298 8.08% Operating Profit or Loss 3985 3917 3457 3169 2791 9.31% Net Interest -241 -333 -314 -362 -63 39.85% Pre tax Profit 3835 3641 3176 2917 2803 8.15% Post tax profit 2956 2777 2336 2138 2130 8.54% Profit from discontinuing operation -142 -106 n/a n/a n/a   Net profit 2814 2671 2336 2138 2130 7.21% Net profit attributed to shareholders 2806 2655 2327 2133 2124 7.21% Minority Interests 8 16 9 5 6 7.46% (Source: Tesco PLC, 2013, p.90) The revenue generated by Tesco PLC over the period under review is shown below. The first row revenue growth for each year is in reference to the previous year whereas the second row shows the growth of each year with respect to the last five year’s (2008) revenue1. Revenue has grown more than 8% in last five years due to some major strategic business activity. The online sales have been growing tremendously and this is one of the key drivers of revenue growth. The company also focused on many product diversifications under the Tesco brand in this time period and also expanded into new market. Operating profit growth rate is higher than revenue growth and this indicates cost efficient business operation of the company. Net profit also has increased through quite lower percentage growth than revenue and operating profit. Fundamental analysis of revenue and net profit Year 2012 2011 2010 2009 2008 Revenue 64539 60455 56910 53898 47298 Trend percentage 136.45% 127.82% 120.32% 113.95% 100% Net profit 2814 2671 2336 2138 2130 Trend percentage 132.11% 125.40% 109.67% 100.38% 100% (Source: Tesco PLC, 2013, p.90) The growth rate from 2008 to 2009 was 11%-14% was stable. During this period the growth rate can be attributed to the company’s successful efforts in increasing its customer base and market share. From the year 2009 to 2010 the company’s growth rate showed a fair rise of 6%. This can be primarily attributed to the company’s acquisition in Homeplus in South Korea in the year 2008.It attributed to 33% of the total sales growth2. From the year 2010-2011 the growth rate declined from 20% to 6% i.e. it marked a sharp decline of 14%, this decline can be attributed to the decline in the UK economy as a whole. The increase in the petrol prices has lead to inflation and increase in the VAT tax has lead to repulsion in the growth of the industry as a whole. From the year of 2011-2012 the growth has been from 6%-7%, thereby showing a stable growth rate this was because falling of business in U.K due to the prevailing recession which in turn was marginally offset by the company’s international performance in Europe and Asia. Fundamental analysis of other features of the Income Statement Operating Margin Year 2012 2011 2010 2009 2008 Operating Profit/(Loss) 3985 3917 3457 3169 2791 Trend percentage 143% 140% 124% 114% 100% Operating Margin 6.20% 6.50% 6.10% 5.90% 5.20% (Source: Tesco PLC, 2013, p.90) The operating margin has been fairly consistent over the span of last five years thereby Showing company’s efficiency in controlling cost has been have produced similar results over the last five years so it should come up with strategies in controlling its cost3. Profit after Tax Years 2012 2011 2010 2009 2008 PROFIT FOR THE PERIOD 2814 2671 2336 2138 2130 Trend percentage 132% 125% 110% 100.40% 100% (Source: Tesco PLC, 2013, p.90) The net profit over the year 2009-2008 has been consistent. Over the year 2009-2010 the increase in income can be attributed to its acquisition policies. During the period 2010-2011 it marked a rise of 15% basically due to its expansion plans in US and its good performance in the international markets except in the tsunami hit Japan and opening of the Tesco Bank has bought in new avenues for the market. Numerical analysis of historic profitability The historic profitability of the company mirrors the changes in business situations and changes in the company’s strategy with changing business situations from time to time. The revenue status of the company remained fairly stable in the year 2008-2009 because during this period the resorted to the organic way of growth that is through means of expansion of its customer base and its market share by opening of stores at different places. The year 2010 marked the highest rise in revenue generation due to acquisition of Home plus in South Africa. This acquisition yielded highest profits for the company in the international markets. The year 2011 marked a decline due to fall in the economy of UK market in general and impending looses from the markets of tsunami hit Japan. In the year 2012 the company decided to discontinue business in the Japan market because of the continuous looses it suffered from operations of this part of the globe. The UK market is on the path of recovery but for the time now the international markets are supporting the fall in profits continuing from year 2011 and keeping the growth rate stable at 7%. The increase in the operating margin is showing the company’s continued efforts to make it more and more cost effective. The annual operating profit for the last five years shows an upward or positive trend as the total operating profit increases every year. In 2008 it was 2791 million pounds; in 2009 it was 3169 million pounds. In 2010 it was 3457 million pounds while in 2011 operating profit was found out to be 3917 million pounds and in 2012 it was 3985 million pounds. From the operating profit figures another very important financial indicator is calculated. Operating margin is the measure of the company’s revenue that remains after the payment of capital to meet with the variable cost. It gives an idea to the investors and stakeholders on how much the company is earning on sales of each pound that it is selling. Operating margin is calculated by dividing the total operating income by net sales. The company’s operating margin shows a consistent positive trend as the company is making higher profits on each pound that it is selling each year. The operating margin in 2008 was 5.9% which means that that for means that by making sales amounting to one pound the company is earning 0.059 pounds. In 2010 the operating profit margin was 6.1%. In 2011 it increased 6.5% but in 2012 it came down to 6.2%. Comparative Analysis of Tesco PLC with its core competitors Tesco is the market leader of grocery market in UK. Currently the company holds around 30% market share in grocery market. Though it is the leading supermarket company in UK but it has been facing high competition from other large supermarkets mainly ASDA, Simsbury and Morrison. Among these three major competitors of Tesco, Sainsbury’s is the toughest competitor of Tesco. Sainsbury’s is the third largest supermarket chain in UK. Sainsbury’s Supermarket Limited is the parent company of Sainsbury’s. To conduct an in-depth comparative analysis of Tesco with its main competitor Sainsbury’s, similarities and key variances need to be identified in two major areas of these two businesses. These are business model and key financial indicators. Key financial indicators are the important financial parameters of income statement. There are five core business values that reflect Sainsbury’s business model whereas Tesco’s business model is reflected by four core business activates of the company. These are insight, buy, move and sell. Now, comparative analysis of business model of these two companies will be done. Offering good food at fair price is centre of Sainsbury’s offering to its customers. To get out of market competition in terms of price competitiveness, Sainsbury continuing to focus on its own brands through it can have full control on product quality and price. On the other side, Tesco has high focus on both quality and price of the products as well as profitability to the shareholders with good margin on sells. Both the companies have similar types of distribution channels i.e. large supermarkets as well as online sales platform. Online sales of both of these companies have been growing since last few years. A major difference in business model of these two companies is Sainsbury’s high involvement in property business whereas Tesco is not involved in this kind of business. Both of thee busi8ness also have focus on food as well as non food businesses. As Sainsbury’s is actively operating in the property sector, therefore, increasing its super market space has become easier than its core competitors Tesco. Five Year revenue analysis of Sainsbury’s Income Statement (? m) 2012 2011 2010 2009 2008 CAGR Revenue  22294 21102 19964 18911 17837 5.73% Operating Profit or Loss 874 851 710 673 530 13.32% Net Interest  -103 -84 -115 -96 -49 20.41% Pre-tax Profit 799 827 733 466 479 13.65% Post tax profit 598 640 585 289 329 16.11% Profit from discontinuing operation n/a n/a n/a n/a n/a   Net profit 598 640 585 289 329 16.11% Net profit attributed to shareholders 598 640 585 289 329 16.11% Minority Interests  n/a n/a n/a n/a n/a   (Source: Tesco PLC, 2013, p.90) Five Year revenue analysis of Tesco Income Statement (? m) 2012 2011 2010 2009 2008 CAGR Revenue 64539 60455 56910 53898 47298 8.08% Operating Profit or Loss 3985 3917 3457 3169 2791 9.31% Net Interest -241 -333 -314 -362 -63 39.85% Pre tax Profit 3835 3641 3176 2917 2803 8.15% Post tax profit 2956 2777 2336 2138 2130 8.54% Profit from discontinuing operation -142 -106 n/a n/a n/a   Net profit 2814 2671 2336 2138 2130 7.21% Net profit attributed to shareholders 2806 2655 2327 2133 2124 7.21% Minority Interests 8 16 9 5 6 7.46% From the two above four years income statements of the two companies, compounded annual growth rate of key financial parameter have been identified. Revenue growth rate of Tesco is near about double the revenue growth rate of Sainsbury’s. In terms of amount of revenue and net profit, Tesco is far larger than Sainsbury’s. To analysis comparative business efficiency and profitability, it can be seen that growth rate net earning of Sainsbury’s is much higher than that of Tesco i.e. more than three times. Summary of cash flow financials Figure 2: Five years Cash flow statements analysis (Source: Yahoo Finance, 2012) From the above numerical cash flows statement analysis of Tesco Plc of last five years, it can be identify that the company has generated sustainable and increasing positive cash flow from operating activities. Compounded annual growth rate of cash flow from operating activities of the company is 22.03% which shows high degree operating efficiency of the company. Cash flow from financing activities is represented by only the annual capital expenditure of the company. Growth rate of annual capital expenditure is 0.04% which is quite negligible. Cash flows from financing activities have remained negative in last three years. Change in cash and cash equivalent has increased with tremendous growth rate from 2008 to 2011 and again decreased dramatically to negative value in 2012. Critical fundamental analysis of historic cash flows There are major changes in values of each of the major parameters of cash flow statement. Operating cash flows has followed high increasing rate in last five years. This is because of mainly business expansion especially increasing number of retail stores in domestic as well as foreign markets. This indicates operating profitability as well as efficient business operating of the company. 30 stores of Tesco have been providing maximum contribution to the overall yearly increase in operating cash flow through their sustainable positive contribution of cash flow. The company has achieved breakeven in most of the new stores during this five year period due to substantial amount of overall as well as store based operating cash flow. References Fridson, M.S. & Alvarez, F., 2011. Financial Statement Analysis. New Jersey: John Wiley & Sons, Inc. Gibson, C.H., 2012. Financial Reporting & Analysis. USA: Cengage Learning. Tesco PLC., 2013. Annual Reports. [Online]. Available at: http://www.tescoplc.com. [Accesed on 12 January,2013]. Yahoo Finance., 2012. Cash Flow. [Online]. Available at: http://uk.finance.yahoo.com/q/cf?s=TSCO.L&annual. [Accessed on 16 January, 2013]. Read More