International Scenario
Tesco has achieved substantial growth by carrying out its operations across the world. High Populations in Asian markets is the main reason of success and enormous growth for Tesco. Early in 2004, Tesco reported that its international sales were up 29% to £6.7bn, with a 44% rise in profits to £306m. Tesco has favored large hypermarkets for its international stores.
Industry’s Future
The retail sector will continue to grow as population is increasing but it is also correlated with global economy. Uptill now, Tesco has been successful in tackling some of the industry challenges effectively but other future challenges are yet to overcome. The retail sector continues to undergo enormous change, creating a multitude of challenges and opportunities. Trends in retailing are changing fast. E-commerce and online shopping is getting popularity. To maintain the top position Tesco would have to adapt to the changing situation, making the industry threats into opportunities. As the margins are very low, the basis for competition is attracting a greater number of customers thus price schemes are of significant importance.
Their domestic markets are saturated, so they are looking for countries with large populations, high population growth, per capita GDP edging toward consumer levels, high income growth, and low supermarket presence. Countries with all five of these characteristics are a good bet, and companies rush to get there before everyone else.
Products and Operations
Tesco is Britain’s largest and most profitable supermarket chain. The company runs more than 2,300 stores (supermarkers, hypermarkets and convenience stores) in the U.K, Ireland, Czech Republic, Hungary, Japan, Malaysia, Poland, Slovakia, South Korea, Taiwan, Thailand and Turkey. The complete range of services includes retailing, property investment, property development, personal finance and also telecom.
The operations include convenience and gasoline retailing (Tesco Express), small urban stores (Tesco Metro), hypermarkets (Tesco Extra), and financial services through Tesco Personal Finance. It is also a global leader in online grocery sales. It also owns a 35% stake in US grocery chain Safeway's GroceryWorks.
Tesco.com, launched in 1995 has a 65% share of the UK Internet grocery market and has expanded beyond boundaries to South Korea as well as the US. The Internet grocery service caters 96% of the UK and delivers over 110,000 orders a week.
Food and Grocery : It is the core of Tesco's retailing operations. Tesco’s supermarkets and food stores provide an immense range of grocery goods. One can find all sorts of food items in a Tesco store, ranging from fresh vegetables and fruits, baked products, ready-to-cook products. The store also provides food items from other popular brands that are popular in the public not provided under the Tesco brand. So, Tesco tries to cater for all the grocery needs of the person who enters the Tesco store premises.
Non Food: The company is actively expanding its nonfood offerings too. They include clothing, gasoline, travel, music, electronics, books, dvds, flowers, health (pharmacies), nutrition and cosmetic goods. Tesco is openning the first of a chain of stand-alone non-food stores by the end of 2005. These stores will offer apparel, electronics, cosmetics and other merchandise. This will challenge Marks & Spencer and ASDA(which is owned by Wal-Mart). Tesco also has an exclusive agreement with famous US brand Cherokee to provide fashions to its stores. So one can get an idea that Tesco is effectively working in the clothing and fashion industry as well. Tesco Personal Finance was launched as a joint venture with the Royal Bank of Scotland. The products include a visa card, home insurance, motor insurance, pet insurance and travel insurance. Tesco has also moved into Telecom by providing Tesco Mobile and Tesco Talk(a landline service).
Clothing: Tesco’s clothing offer, Cherokee, Florence + Fred, and Value, has shown remarkable growth in the past 12 months. Tesco’s market share of the total clothing market has increased by 26% and this growth has been in all areas. To put this in perspective, the clothing offer has expanded by six times the national rate. In the last four years clothing sales have doubled.
Health and Beauty : Tesco’s UK health and beauty ranges continue to grow as they improve the offer for the customers. Being the fastest growing skincare retailer in the market, this year they sold twice as many Christmas beauty gift sets as they did in 2002 and their Skin Wisdom range is now the second biggest skincare brand in Tesco. They have a volume market-leading position in both toiletries and healthcare and are number one retailer in the baby goods markets.
The rapid growth in both grocery and nonfood sectors has given the retail giant a 12% share of the entire UK retail market and a tremendous 29% share of Britain's grocery sales. For details of Tesco’s outlet distribution, refer to appendix A.
Management of Tesco
The unprecedented success that Tesco has met in the last decade can be primarily attributed to the management of Tesco. The current CEO, Sir Terry Leahy, has led the organization from the front and his management has been integral in differentiating the "two Tescos" – the unfashionable chain of the early 1990s, which held the No3 spot in Britain and operated only in the UK, and the modern day company, which leads the UK market and ranks No3 in the world.
Sir Terry joined Tesco straight after graduating from the University of Manchester Institute of Science and Technology (UMIST) in 1979. He entered the supermarket chain as a marketing executive, was appointed to Tesco's board of directors in 1992, and by the time he was 40 he had worked his way up to become chief executive in 1997.
Under the leadership of Sir Terry, Tesco has followed expansion strategy both geographically and in terms of products and segments, and has now gained 24 percent of the UK market. Tesco's international expansion has given it a presence in 11 markets in Ireland, Eastern Europe and Asia. While in the UK, an acquisition spree into the convenience stores market has given it a strong urban foothold in London. In most countries Tesco's preferred tactic seems to be to buy an existing retail chain, or a significant share of one, and turn it into a Tesco subsidiary. Then it can begin the usual tactics undercutting local traders, aggressively competitive pricing, selling petrol, launching loyalty card schemes, 24 hour opening and so on.
Tesco’s overall strategy centers around its customers which is evident from their stated core purpose: "To create value for our customers, to earn their lifetime loyalty" and two values that drive the way they do business: “No one tries harder for customers” , “ Treat people how we like to be treated”. Tesco’s management is firmly committed to corporate responsibility, and sees it not an additional burden or a distraction from serving their customers but rather as an essential part of sustaining themselves as a responsible company.
As revealed by the CEO himself at a conference that the reason secret behind the success of the organization is the adoption of the Professor Kaplan's "Balanced Scorecard" approach to management through Tesco's "Steering Wheel" system. This approach emphasizes parts of a business that do not figure in conventional accounting i.e so called 'intangibles', such as customer relationships. Tesco's version of the plan divides the business into four sections. Managers are asked to monitor customers, operations, staff and finances using a "traffic light" system where green indicates that targets are being met and red flags a problem.
The company currently employs 336,000 personnel globally of which 237,000 are UK based, and the number continues to grow. To sum up Tesco aims to grow profitably and responsibly - at home and abroad.
Financial Summary
* Refer to Appendix B
Tesco’s financial performance has been very impressive, for the 6-months ended 14th August 2004, Tesco PLC’s total turnover increased by 12% to 15.14 billion. Net Income for the period increased 30% to 560M has performed quite well over the past few years. However, 2001-2002 has been a year for them where in fact the sales growth was negative. This may be due to the 2-3% deflation in general groceries prices over the UK in the 2000-2002 period, this deflation was triggered primarily by the suppressed demands brought about by the September 11 attacks. Tesco’s reduction of prices was greater than the general decrease(4%) in order to capture the market. It did eventually manage to get a larger share of the market by using this strategy as it is evident by an average turnover growth rate of 30% in the last 2 years.
Financial Strength
Financial strength looks at the business risk. The current and quick ratios are increasing over time but are considerably less than 1. This means that for every dollar of current asset, there is more than a dollar of current liability attached to it. The fact that the quick ratio is approximately half of the current ratio reveals that inventory constitutes half of the total current assets. This phenomenon is generally true for retailers like Tesco. This poses a serious risk as high inventory levels have a tendency to mount losses in crisis situations. On the positive side, that Tesco’s inventory as a percentage of current assets is falling over time, this evident from the rising quick ratio as a percentage of current ratio. This is indicative of the fact that company is focusing on the efficient inventory management techniques. The company is also managing its long term risk effectively as its long term debt to equity is also going down and coming close to 0.5 in 2004.
Profitability
These margins explain the overall profitability or the bottom line. All three margins are quite stable over the 5-year period. Operating and Net Incomes have grown quite consistently with Sales, which reflect that costs and operating expenses have grown in line with sales expansion. However, it is noticeable that the gross margins have actually declined to 6% in 2004 against 7.4% in 2000. This is quite possible for a food company or a grocery. The reason being that cost doesn’t increase proportionately with turnover in the food products.While, the gross margins in other forms of retailing like clothing and electronics grow more easily.
Management’s Effectiveness
These ratios measure how well a company’s management uses its assets and equity to generate profits. On a general trend these three indicators have declined but they have improved a little in the last 2 years. So, one can be positive about the management’s performance. In addition, it should be realized that ROE is still in the double-digits which considered to be quite high and attractive.
Per Share Data
The most important item is the Earnings per share. The price of a stock is related in some way to the earnings attributable to that share. The EPS has grown at a very high rate. This is due to the expansion of Tesco in the UK and overseas, furthermore the implementation of “Balanced Scorecard” (a strategic management technique) has also contributed to the cause. Consequently they have been successful in lowering costs and increasing the overall efficiency, and thus Earnings Per Share (EPS).
Yearly Stock Prices Prices
Mar-00 208.75
Mar-01 251.00
Mar-02 242.99
Mar-03 178.25
Mar-04 245.75
Mar-05 317.12
The Stock price of Tesco follows an increasing trend over the last 5 years under consideration, reaching its peak of 321 pennies on January 2005. It reaches its ebb of 161 pennies on the March 2003. The graph above displays the trend of stock prices, if we superimpose the graph of Tesco’s stock prices over the FTSE index we get to know that Tesco stock price movements are in perfect accord with FTSE index (shown in the graph below).
The index’s sharp decline around the first quarter of 2003, was due the US-Iraq hostilities and the stock ebb coincides with the official declaration of the war in Iraq. This was the largest and most prolonged deterioration in equity values since the decline in the early 1970s.After the swift fall of Baghdad, the FTSE bounced back and began a steady rise, and this is often termed by commentators as the “Baghdad bounce”.
Market capitalization
The market capitalization = no. of shares outstanding x stock price of share
=7760 x 3.17
= 24.6Billion pounds *as at 31 march 2005
