Financial Analysis of Sainsbury - Case Study Example

Sainsbury Table of Contents Part 3 Overview 3 Value Chain Analysis 3 3 Core Competency Analysis-Outbound Logistics 5 Financial Analysis of Sainsbury 6 Strengths and Weaknesses of Sainsbury 7 Part 2 9 SWOT Analysis 9 TOWS Matrix of Sainsbury 10 Strategies Developed from TOWS 11 Evaluation of the Strategies Mentioned 12 Change Management 15 15 References 16 Part 1 Overview Sainsbury is one of the largest supermarkets chains operating in the geographical location of the UK. It has considerable market share in the UK market where it operates in quite larger scale with several numbers of stores. The company has an operational experience of more than 140 years which further makes it the oldest supermarkets chains of the world. The company has a commendable reputation of providing high quality products and services to the customers which further ensure it to acquire maximum number of loyal customers through ensuring higher satisfaction level amid them. However, the major success factor of the company is its effective value chain framework that ensures long-term sustainability and profitability for the company (Sainsbury Plc, 2014). Value Chain Analysis The value chain structure of the company includes components such as inbound logistics, operations, outbound logistics, services and marketing and sales among others. 1. Inbound Logistics Notably, the company has fully automated depots in its inbound logistics which further depicts the extensive use of IT in its business operations. This not only enhances the operational efficacy of the company but also results in establishing it as one of the competent business unit in terms of implementing and utilizing IT (Sekhar, 2009; Clark, 2004). 2. Operations The operations of the company are conducted in a three store formats which includes the local, regular and the central domain. The company has more than 500 local stores operating in the UK that has diverse branding approach and fascia. The central formats are used for the stores of the company which are small to medium in size and operate in the center of the city. Apart from the regular products, the company also sells some specific mainline brands through its stores in the UK market (Prezi Inc, 2014; Khosrowpour, 2004). 3. Outbound Logistics The outbound logistics of the company includes two picking centers and it follows a warehousing model. The aim of this model is to establish dedicated picking centers in the UK with the aim to enhance the delivery of its products and services to the urban area further expanding their services to new potential customers. Notably, the company has faced immense competition from the rival supermarket chains which has forced it to develop effective strategies which can ensure the sustainability for the business. This has influenced the company to adopt the warehousing model (Prezi Inc, 2014; Khosrowpour, 2004). 4. Marketing & Sales In the value chain domain of marketing and sales, the company targets both the customers including high income group as well as the potential buyers falling under the low income group. However, the company mainly focuses on providing high end products and makes a mark for itself in the global market. The company also targets for bulk selling through minimizing the price of the products for a specific period of time through various schemes and offers which again provides the business with competitive edge amid the rivals up to a considerable extent (Prezi Inc, 2014; Khosrowpour, 2004). 5. Services In the value chain domain of services, the company ensures the deliverance of high quality after sales services to the customers. The company provides the services to the customers for both the food and the non-food products. Furthermore, it will also be vital to mention that the company provides services for both the online and in-store customers (Khosrowpour, 2004). Apart from that the extent of operations of the company can also be comprehended from its services deliverance to the housing and the financial sector of the UK that assures a wider market presence for Sainsbury (Prezi Inc, 2014). Core Competency Analysis-Outbound Logistics From the above analysis, it can be depicted that the value chain structure of the company is one of the major element of the business that has ensured long term sustainability of the company over the years of its operations in the UK market. However, the outbound logistics operations of the company are among the core competencies of the business in the recent times. As depicted above, the company implements a picking or warehousing model in its operations to reach maximum number of customers. Notably, with the increasing level of competition from competitors like ASDA and Tesco, the company has dealt with severe issues in the domain of growth and profitability which further hampered the position of the company in the UK market. Owing to this particular aspect Picking-Up Centre (DC) model to serve a large customer base in the UK market especially in the urban area where the number of potential customers is quite large in number. As per this particular model the company also developed a new information system within the business that has further resulted in the formation of electronic shopping services i.e. ‘Sainsbury to you’ which further entail the capacity of home delivery across London. This approach of the company was quite unique in nature and is not seen in the operations of other companies in the same sector (Khosrowpour, 2004). Hence, it can be considered to be quite rare. This aspect also enhanced the market presence and market share of the company up to great extent. Financial Analysis of Sainsbury ROCE The mechanism for calculating ROCE includes dividing the earning before tax of the company with the capital employed for a particular financial year. The ROCE of the company in the year 2012 was 10.6 % while in 2013 it reduced marginally to the figure of 10.4 %. Though the ROCE figure is showing a declining trend in the last two years, it is deemed to be marginal and hence can be depicted to be stable in the last two years i.e. 2012 and 2013 (Sainsbury Plc, 2014). [N.B. ROCE Formula: “Earnings before Interest and Tax (EBIT) / Capital Employed] Gearing Ratio The gearing of a company depicts the relationship amid the equity capital of the company with regard to its long term funding. Notably, in the year 2012, the gearing ratio of the company was around 33.4 % which further rose to 50.76 % in the year 2013 which depicts a considerable increase in the figures and consequently the performance of the company. This shows that the company had greater long term solvency in 2012 in comparison to that of the figures of 2013 (Kalmarova, 2012). [N.B. Gearing Ratio Formula: Long-term debt + Short-term debt + Bank overdrafts/ Shareholders equity] Current Ratio In general, current ratio depicts the ability of the business to pay its short term debts. Contextually, in case of Sainsbury, the current ratio for the company in the year 2012 was 0.65% which showed marginal decline in the year 2013 when the figure reach to 0.61 %. This shows that the company lacked a bit in the domain of meeting its short term debt in the year 2013 as compared to that of the financial year of 2012 (Kalmarova, 2012; The Telegraph, 2011). N.B. Current Ratio Formula: “Current Assets/Current Liabilities] Strengths and Weaknesses of Sainsbury Strengths 1. The strengths of the company include its approach of diversified investment in which the company is deemed to be quite successful over the years of their operations - For example, the company has diversified business units that are not correlated with one another. 2. The company believes in diversified operation which further reduces the operational risk up to an extent – For example, the company is an extreme believer of product diversification which further enables it to minimize business risk. 3. The competency of the company in the domain of IT has also been one of its major strengths. For example, the company has an extensive presence in online selling which accounts for more than 20% of its total sales. The company intends to reach a wider customers base with the assistance of internet which is deemed to be quite valuable for the overall business Source: (Khosrowpour, 2004). Weaknesses 1. The company is deemed to be less effective in the domain of business expansion and growth in comparison to the operational growth of competitors like Tesco and ASDA, despite of the aspect that it has more experience than of the other players in the UK market 2. The marginal presence of the company in the global market is also considered to be one of its major weaknesses in the long run 3. Lack of Large Scale Operations 4. Limited global presence Source: (Khosrowpour, 2004). Resources 1. The efficacy of the business resources is another important component that works positively with regard to the operations of the company 2. The human resources within the company are deemed to have utmost level of dedication and efficiency in their approach which is an important factor of success for the company 3. The company also believes in maintaining a diversified set of workforce for its operations which has also been a potential success element for the overall business Source: (Khosrowpour, 2004). Culture The coupon culture that the company has engrossed on the shoppers has been quite helpful in saving the money of the people. The initiative of the company catches maximum attention of the customers in the UK as more than 90 % of the people in the UK market uses coupon in their day to day shopping further saving a lot of money on a daily basis (Sainsbury Plc, 2014). Part 2 SWOT Analysis Strengths 1. Diversification of Investment 2. Employing a Diversified Workforce to deliver noteworthy services 3. Strong base of Information & Technology (IT) in the business Weaknesses 1. Marginal Presence in the global market 2. Lack of Expansion in comparison to competitors like Tesco and ASDA 3. Lack of Competitive Advantage 4. Limited global presence Opportunities 1. Increased number of shoppers in the grocery industry owing to recession 2. Increase number of elderly customers who intends to shop at discounted rates 3. Customers in the market get attracted by product diversification 4. The need for grocery products amid customers of all ages and culture 5. Appreciation of the customers with regard to innovation in the food retailing sector 6. Advancement of technology is also a potential benefit for the grocery sector 7. Several environmental programs are being initiated to reduce the negative impact of companies of grocery sector to the environment Threats 1. Negative impact of the stern governmental laws and regulations 2. Impact of taxation and trading policies of the UK government 3. Fluctuating behavior of the UK economy effects and sustainability and growth of the companies in the industry TOWS Matrix of Sainsbury Weaknesses-Opportunities (WO) 1. Ensure expansion of business leveraging the aspect of increased number of shoppers 2. Gain competitive advantage through adopting advanced technology in their operations 3. Ensure utmost product diversification to create the platform for global business expansion Strengths-Threats (ST) 1. Through the strong base of IT in the business, the company can ensure its long term sustainability in the fluctuating UK market 2. Through employing a diversified workforce in the workplace the company could be able to adhere to the stern laws of the government up to an extent 3. Through diversified investment approach it the might be able to mitigate the threat for changing taxation policies Strengths-Opportunities (SO) 1. Employing the diversified investment approach to attract the increasing number of elderly customers 2. Ensuring effective deliverance of services through diversified workforce to attract the increasing number of shoppers in the UK market 3. Leveraging the strong base of IT and ensure utmost level of innovation to attract the attention of the customers Weaknesses-Threats (WT) 1. Lack of widespread market presence of the company can hinder the company to ensure sustainable operations in the fluctuating business market of UK 2. Lack of competitive advantage might also act negatively for the company in the ever changing market of UK Strategies Developed from TOWS From the matrix, it is quite apparent that the company has several opportunities for itself which can further help in minimizing its present weaknesses and maximizing its present strengths. Contextually, the company needs to develop the strategies of “enhancing market presence through product diversification” and “adopting advanced technology to gain competitive advantage”. Accomplishment of these strategies will surely enhance the growth and competitive edge of the company i.e. Sainsbury over its competitors. Evaluation of the Strategies Mentioned The strategies can be evaluated on the basis of its suitability, feasibility and acceptability. Suitability The strategy of “Adopting advanced technology” will ensure that the company is able to attract maximum number of customers through its innovative operations which can further provide it with competitive advantage. This strategies has been developed from the comprehension gained through analysis SO of the TOWS matrix. The strategy of “Enhancing market presence through product diversification” might also be a potential measure to ensure widespread operations of the company in the UK market. This strategy has been developed from the analysis of WO from the TOWS matrix. Feasibility Adopting advanced technology: This strategy can be depicted as feasible for the business in the long run as it will allow the company to attract the customers of UK who appreciate innovation in the retail sector. Moreover, the feasibility of the strategy can also be depicted from aspect that the company already has a strong base in the domain of IT which will work positively for it. Again the gearing ratio of the company is seen to have increased from the preceding year by a considerable margin but owing to the positive prospects associated with this particular strategy, the investors might find it interesting to invest in this particular project. Hence, funding might not be an issue in the implementation of this particular strategy. Additionally, since the company is already a competent unit in the domain of IT its human resource might easily adapt to the changing environment after the adoption of this particular strategy. This aspect makes the strategy feasible up to an extent. Enhancing market presence through product diversification: With the changing environment of the business, customers in the UK market are revealing fluctuating trend in terms of their choosing products in the retail sector. Hence, the company will be able to attract a large customer base by adopting this particular strategy. Again the aspect of funding/investment for this particular strategy might not be a problem despite of the fact that the gearing ratio of the company has increased marginally in the year 2013. This is because despite the increasing gearing ratio company has performed increasingly well. Thus, implementation of this strategy will have no adverse impact on the company’s performance. Additionally, this strategy might also require the people in the business to develop skills to handle product diversification within the organization for which the company can provide proper training and development to its employees. Acceptability Adopting advanced technology: The adoption of this strategy might be accepted by most of the stakeholders of the business. Shareholders: It might be acceptable by the shareholders as it will enhance the operations along with the profitability of the company which is valuable prospect for the shareholders. Evidently, the current ROCE of the company is 10.4% which implies that it is able to earn £0.10 for investment of £1. Contextually, if the companies invest £1,000,000 on the implementation of this particular strategy, it is expected to deliver a return on investment of £ 140,000 which might be considerable as a favorable return for the shareholders on their investment. Employees: Since this strategy is expected to bring several changes in the functioning of the business, the employees may show reluctance towards the implementation of this particular strategy. However, with the implementation of proper change management strategy along with training and development for the employees, this particular obstacle could be eliminated. Government: Since the government of UK is quite appreciative towards technological development, this strategy should be accepted by the government. The government will be able to ensure the long term development of the economy when the company gets benefitted from this particular strategy. Enhancing market presence through product diversification: Shareholders: Since this strategy will involve a considerable investment from the end of the company, shareholders may not find this strategy to be feasible. However, the long term benefits associated with this strategy can be recognized to attract the shareholders to invest on this particular strategy. Employees: This particular approach will have long term benefits for the business which is again valuable for the employees with regard to their personal growth. Customers: With this particular strategy the company will be able to emerge with different range of products for the customers which will ensure long term benefits for them. Hence, there might not be any problem for the customers end to accept this particular strategy. Change Management Owing to the strategy of diversification of products, the operations of the business might become marginally complex as new products will be introduced in the business. This might also result in reluctance amid the employees as it might increase their job responsibility and a greater level of commitment might be demanded from them (Paton & Mailman, 2008). This is a potential issue for the business. References Clark, L., 2004. Sainsburys Writes Off £260m as Supply Chain IT Trouble Hits Profit. Home. [Online] Available at: http://www.computerweekly.com/news/2240058411/Sainsburys-writes-off-260m-as-supply-chain-IT-trouble-hits-profit [Accessed May 06, 2014]. Kalmarova, Z., 2012. Sainsbury’s Vs. Morrisons – An Investment Decision Based on Financial Analysis. Roehampton University Business School, pp. 17-28. Khosrowpour, M., 2004. The Social and Cognitive Impacts of E-commerce on Modern Organizations. Idea Group Inc (IGI). Paton, R. A. & Mailman, J., 2008. Change Management: A Guide to Effective Implementation. SAGE. Prezi Inc, 2014. Copy of Sainsburys vs Tesco. Home. [Online] Available at: http://prezi.com/irou_fzkgjyb/copy-of-sainsburys-vs-tesco/ [Accessed May 06, 2014]. Sainsbury Plc, 2014. Return On Capital Employed. Financial Review. [Online] Available at: http://annualreport2013.j-sainsbury.co.uk/financial-review/return-on-capital-employed/ [Accessed May 06, 2014]. Sainsbury Plc, 2014. About Us. Home. [Online] Available at: http://www.j-sainsbury.co.uk/about-us/ [Accessed May 06, 2014]. Sainsbury Plc, 2014. Middle Britain Cashes In As Coupon Culture Becomes The Norm. Media. [Online] Available at: http://www.j-sainsbury.co.uk/media/latest-stories/2012/20121012-middle-britain-cashes-in-as-coupon-culture-becomes-the-norm/ [Accessed May 06, 2014]. Sekhar, G. V. S., 2009. Business Policy and Strategic Management. I. K. International Pvt Ltd. The Telegraph, 2011. Fundamentals for Sainsbury (J). Finance. [Online] Available at: http://shares.telegraph.co.uk/fundamentals/?epic=SBRY [Accessed May 06, 2014]. Read More