Fundamentals of Financial Management - Case Study Example

Tesco PLC and J Sainbury plc Company Profiles Tesco PLC stands to be the largest grocery retailer in the United Kingdom (UK) and the third largest inthe world. The company’s management takes pride in their ability to respond to the prevailing needs of the market through lowered prices, newly introduced cheaper substitutes for essential products and improved promotions. Tesco’s core strengths – namely, “selling food and everyday essentials, owning our own property and having a broad business base” – have significantly boosted its resilience, as proven by the profitability of its operations even through these difficult times. It is a growth company that has been continually expanding organically, except for a few strategic cases that involved buying out existing retailers in the certain foreign markets. (Tesco website) In July 2009, the company has been under fire since the consumer watchdog, the Office of Fair Trading, claimed to have gathered new evidence that pointed towards Tesco’s involvement in fixing the prices of milk, butter and cheese. This investigation has begun four and a half years ago and the issue had slipped the public’s notice until recently when this development came about. (Ridder 2009) Unlike Tesco, J Sainsbury plc already owned that it was indeed an accomplice in the dairy price-fixing scheme that caused the public shoppers to be overcharged by £270 million (Ridder 2009). Setting this unbecoming matter aside, Sainsbury has not ceased to focus on establishing its brand based on the goodwill that emanates from their consistency in providing “healthy, safe, fresh and tasty food.” Like Tesco, Sainsbury has managed to have a profitable year in spite of the adverse impact of the significantly lowered consumer confidence and average spending capacity in UK. As the country’s third largest grocery retailer, Sainsbury is currently not keen on expansion plans. It is, instead, set on further improving its operational efficiency to be able to report increasing profits even if the economy fails to improve this year and the next. Having been operating for the last 140 years, Sainsbury can rightfully claim to have an extensive client base that has been loyal not only to the company’s food stores but also to its subsidiary bank that offers savings and loans packages. (Sainsbury website) Particulars Tesco Sainsbury Year founded 1919 1869 Number of stores operated 4,331 792 Number of countries with company operations 14 1 Total manpower (heads) 470,000 97,300 Sources: Tesco and Sainsbury websites Based on above tabulation, Sainsbury’s operations turn out to be more manpower-intensive than Tesco’s. Sainsbury has in its employ an average of 123 people for each store, while Tesco has 109. Needless to say, the latter has the more culturally diversified manpower. Tesco specifically believes in trusting the management team and personnel tapped for each store outside UK to know the best package to offer in their respective locality. (2009 Annual Report of Tesco) Horizontal Analysis of Sales and Proft Before Tax Below is a comparison of the revenue and income figures of Tesco and Sainsbury for the 52-week period that ended in February and March 2009, respectively: Particulars Tesco Sainsbury 2009 Sales (including VAT) (in millions) £58,588 £20,383 Increase (Decrease) compared to previous year 13.2% 5.7% 2009 Profit before tax (in millions) £2,920 £466 Increase (Decrease) compared to previous year 4.2% (2.7%) Sources: 2009 Annual Reports of Tesco and Sainsbury Note: While the operating year of Tesco that ended on 2/29/09 is composed of 53 weeks while that of Sainsbury, which ended on 3/21/09 is composed of only 52 weeks, the above Tesco figures are the adjusted figures representing the equivalent of 52-week operating year. This adjustment has been done to conduct a valid horizontal analysis of the sales and profits before tax of the two companies. The year-on-year sales growth of Tesco, at 13.2%, turns out to be higher than Sainsbury’s 5.7%. This means that Tesco’s overall efforts during the year have brought on a higher degree of increase in sales compared to Sainsbury. Still, it is worth noting that Sainsbury’s average annual sales per store, at £25.74 million (£20,383 divided by 792 stores), is 90% higher than Tesco’s, which is computed at £13.53 million (£58,588 divided by 4331 stores). This is a challenge that Tesco would have to work on. It means that a Sainsbury store on the average reaps revenues that are almost twice as much as that of a Tesco store. This further denotes that not all of Tesco’s stores are delivering efficient output in terms of sales. However, an analysis of the average profit before tax per store yields a different picture. Tesco’s average, at £0.67 million (£2,920 divided by 4331 stores), is 13% higher than Sainsbury’s, which is computed at £0.59 million (£466 divided by 792 stores). This means that though Sainsbury has the higher average sales per store, Tesco’s management is more efficient in managing the overall operations of their chain of stores and allied units. While Tesco delivered a 4.2%-growth in its year-on-year profit, Sainsbury’s profit in 2009 turned out to be 2.7%-lower than its 2008 equivalent. As explained in Sainsbury’s Annual Report, this has been caused by a substantial decrease in the fair value of the company’s investments in properties. This decrease had to be recognized as a loss in compliance with generally accepted accounting principles. (The vertical analysis of the financial statements and the computation of the ratios are found in the Excel document.) List of References Tesco PLC (2009) Annual Report and Financial Statements 2009 Available from < http://www.investis.com/tesco/pdf/repp2009.pdf> [accessed 7 August 2009] J Sainsbury PLC (2009) Annual Report and Financial Statements 2009 Available from [accessed 7 August 2009] BusinessWeek (2009) J. Sainsbury plc Ratios Available from [accessed 8 August 2009] BusinessWeek (2009) Tesco PLC Ratios Available from [accessed 8 August 2009] Knight, R. (2009) ‘OFT has new evidence in supermarket price-fixing probe.’ Evening Standard, London. Available from < http://investing.businessweek.com/research/stocks/news/ news.asp?ric=SBRY.L > [accessed 7 August 2009] White, G., S. Ashwinpaul and D. Fried (1998) The Analysis and Use of Financial Statements. New York: John Wiley & Sons, Inc. Brigham, E. and J. Houston (1998) Fundamentals of Financial Management. Orlando, FL: The Dryden Press. Read More