Safeway’s is a supermarket; they have shops covering the whole of England. Sainsbury’s do not only sell food but also a wide range of products such as CD’s, stationary, books, and now they are even providing insurance and banking. They are on average cheaper than Tesco however as they are smaller they have fewer products to offer.
British Airways (BA) offer transport by air all over the world they try to offer good quality flights. They are a very highly rated company, and that is shown in the prices. They are the UK's largest international scheduled airline, flying to over 550 worldwide destinations.
Easyjet, like BA, provides the service of air transport, however they offer value for money, meaning that you have to sacrifice comfort and convenience. They are much smaller and younger than BA.
The next 2 pages are the Tesco balance sheets/profit and loss accounts that I got the relevant data off, I got them from “Bized.ac.uk”.
Return on Capital Employment
The ROCE shows us the profitability of investments in the company. It is achieved by dividing the operating profit by the capital employed. The operating profit is the companies profit before tax and interest. The capital employment is the company’s assets excluding the debts and loans. The equation for calculating the Return on Capital Employed is:
ROCE = net profit x 100
Capital employed
Tesco: 1,166,000,000 x 100 = 23.25 %
5,014,000,000
Safeway: 397,000,000 x 100 = 20.31 %
1,954,600,000
BA: 440,000,000 x 100 = 18.92 %
2,325,000,000
Easyjet: 419,000,000 x 100 = 13.24 %
316,491,000
This shows that the larger companies are, as I predicted, more profitable than the smaller ones. This could be because they have fewer stores/services, for example Tesco have more shops in England than Safeway’s do, therefore they are likely to get more customers therefore more sales.
Gross Profit
Gross profit is the difference between the cost of producing the product and the revenue earned from the sale. This means the total profit made in year as a percentage of sales. The managers of the firms will find the gross profit margin useful to determine how well the company is doing. The equation for calculating the gross profit is:
Gross Profit = gross profit x 100
Turnover
Tesco = 1,588,000,000 x 100 = 7.57%
20,988,000,000
Safeway = 1,687,800,000 x 100 = 20.71%
8,151,300,000
BA = 521,000,000 x 100 = 5.62%
9,278,000,000
EasyJet = 72,403,000 x100 = 27.46%
263,694,000
The big difference between the percentage of Tesco–Safeway and BA-Easyjet clearly shows that the smaller companies are much more profitable than the larger ones. This is because they take fewer risks and have fewer expenses.
Net Profit
The net profit is the total profit minus all the expenses for the year, as a percentage of sales. It is similar to the gross profit, however it excludes the fixed costs from the equation. This can also be useful to managers, as they can use it to judge how well the company is doing. This can show us which company is the most efficient. The equation for calculating the net profit is:
Net profit = net profit x 100
Turnover
Tesco = 1,166,000,000 x 100 = 5.56%
20,988,000,000
Safeway = 397,000,000 x 100 = 4.87%
8,151,300,000
BA = 444,000,000 x 100 = 4.79%
9,278,000,000
EasyJet = 28,600,000 x100 = 10.87%
263,694,000
Usually in food retailing the net profit is between 3 – 5 % this means that Tesco and Safeway are relatively high, so both companies are quite efficient. The reason for Safeway’s not being too different to BA and Tesco is that they are quite a large firm, though they are not as large as Tesco. Easyjet are extremely efficient, this is because they are quite a small firm so it is easier to manage, and they are taking fewer risks. Also the larger companies will be experiencing diseconomies of scale. This means that the business has become so big that it is increasingly harder to manage, due to problems with communication and organisation.
Conclusion:
My investigation has shown that generally the smaller the company the more efficient it is. This is because of diseconomies of scale. It is easier to communicate in a small firm than in a large firm, because you have to send the message through fewer people. Also it is easier to organise a small firm as they need less stock and there are fewer people involved. Also smaller companies have fewer assets, meaning that they need fewer managers. This obviously reduces the wage bill, but also means that there are fewer connections between the workers and the director(s).
I also found out that the larger companies are, the more profitable they will be. This is because they have more stores/services, for example BA provide more flights and destinations than Easyjet do, therefore they are likely to get more customers, so more sales.
Evaluation:
I believe that I could have made this investigation much more accurate by choosing a smaller company than Safeway to compare with Tesco, for example Morrisons. I also could have analysed another year’s data so as to make sure that my results were correct. However the investigation did go as I expected, so all in all I am happy.
Bibliography:
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- Web-site
- Analysing Accounts worksheet by BP educational services - Worksheet
- Business Studies for GCSE by Rene Hugget. - Textbook
- Nuffield-Bp Business and Economics for GCSE - Textbook
