CONTENT

1.0. Introduction ....................................................................................................................... 2

1.1. TESCO ............................................................................................................................ 2
1.2. SAINSBURY’S .............................................................................................................. 3
2.0. External Environment Analysis ...................................................................................... 4
2.1. Porter’s 5 force analysis .................................................................................................. 5
2.1.1. Conclusion ........................................................................................................... 9
2.2. PESTLE analysis .......................................................................................................... 10
2.2.2. Conclusion ......................................................................................................... 12
3.0. Firm Level Analysis ........................................................................................................ 13
3.1. Key resources ................................................................................................................ 13
2.1.3. Key resources of Tesco: ..................................................................................... 13
2.1.4. Key resources of Sainsbury’s: ........................................................................... 15
3.2. Capabilities ................................................................................................................... 18
3.2.1. Tesco Capability .................................................................................................... 19
3.2.2. Sainsbury’s Capability ........................................................................................... 21
3.3. Competencies ................................................................................................................ 24
3.3.1. Tesco-Competencies .............................................................................................. 24
3.3.2. Sainsbury’s Competencies ..................................................................................... 25
3.4. Tesco- Business model/strategy.................................................................................... 27
3.5. Sainsbury business model/strategy ............................................................................... 30
3.6. Analysis of Strength and Weaknesses .......................................................................... 32
3.6.1. Tesco Strength and Weaknesses ............................................................................ 32
3.6.2. Sainsbury Strength and Weakness ......................................................................... 34
4.0. Strategic Choice .............................................................................................................. 37
4.1. Tesco’s strategic choice ................................................................................................ 38
4.2. Sainsbury’s strategic choice .......................................................................................... 40
5.0. Financial Analysis ........................................................................................................... 42
5.1. Transformation of finance function from strategy formulation to decision making
process.................................................................................................................................. 42
5.2. Tesco merging with Booker & the impact on the business .......................................... 43
5.2.1 Advantages of the merger ....................................................................................... 44
5.2.2. Disadvantages of the merger .................................................................................. 45
5.2.3. Success factors of the merger ................................................................................ 45
5.2.5. Risk factors of the merger ...................................................................................... 47
5.2.6. Conclusion ............................................................................................................. 48
6.0. Appendix .......................................................................................................................... 49
7.0. REFERENCES ................................................................ Error! Bookmark not defined.
1.0. Introduction

1.1. TESCO

Tesco Public Limited Company is a U.K based international grocery and general
merchandising retail chain. It was founded in the year 1919 by Jack Cohen. The name “Tesco”
derives from the initials of TE stockwell, who was a partner in the firm of tea suppliers, and
CO from Jack's surname. The first Tesco store was opened at Burnt Oak, London, selling dry
goods with their first ever branded product, Tesco Tea.

Today the company is well known all over the world. It is known to be one of the global leaders
in the retail business. And has multiple ways of reaching its consumers. Tesco has their own
in-house Tesco brands such as Tesco loves baby, Tesco, Eat fresh, Tesco everyday value, F&F
clothing, Tesco finest and Inspirasi. The company also has various ways of reaching its
consumers. Such as;
1. Tesco Extra. A hypermarket mainly located out-of-town in suburbs stocking almost all
of Tesco’s products.
2. Tesco Superstore. Superstore that holds standard groceries and a small range of non-
food goods.
3. Tesco Metro. Supermarket, found mostly in city centers and near train stations.
4. Tesco Express. A convenience store found in busy city center districts.
5. One Stop. Convenience store normally found in smaller communities.
6. Tesco.com. Online store

As of 2018, it is reported that Tesco operates in 11 countries including India, Malaysia, China,
Japan and Pakistan. However, their operations in the UK are the largest within the group, with
over 3,400 stores and more than 300,000 colleagues working together to serve customers a
little better every day. In the UK, Tesco serves 66 shoppers every second. It is their goal to
ensure every one of those customers experiences just a little better service on each visit.

(Tesco Plc, 2018)

1.2. SAINSBURY’S

Sainsbury is founded by John James and Mary Ann Sainsbury in London’s Drury Lane, during
1869. Sainsbury started off as a retailer of fresh foods and later expanded into packaged
groceries such as tea and sugar. Despite losing a third of its workforce during World War One
1914 and World War Two 1936, by its 125th anniversary in 1992, Sainsbury owned 355 stores
in a trading area stretching from Truro to Edinburgh.

Today, Sainsbury is considered as the second largest retailer in the U.K and is known widely
all over the world. According to May 2018, Sainsbury’s shop portfolio indicated:
1- Supermarkets. Sainsbury supermarkets with a convenience kiosk, produce, meat, fish,
groceries and frozen food, and manned and self-service checkouts. In addition, an in-
shop bakery, butcher, fishmonger, delicatessen and pizza counters, a cafe, TU clothing,
general merchandise, petrol station and online picking department.
2- Sainsbury’s Fuel. Fuel forecourts located at its supermarkets selling diesel and petrol
3- Sainsbury’s Cafe’. Sainsbury's Cafe’ are situated in many of its supermarkets and are
open for as long as the shops are open.
4- Sainsbury’s Online. Sainsbury's operates an internet shopping service branded as
"Sainsbury's Online", where customers choose their groceries online, or by phone.
5- Sainsbury Distribution. Sainsbury's supply chain operates from 13 regional distribution
centers, with two national distribution centers for slower moving goods, and two frozen
food facilities.

Sainsbury also stocks around 30,000 lines of which around 20% are "own-label" goods. These
own-brand lines include, Basics, by Sainsbury’s, Taste the difference, Be good to yourself,
Deliciously FreeFrom, SO organic, Sainsbury’s home, Home collection and on the go.
(Sainsbury's Plc, 2018)
2.0. External Environment Analysis
The year 2017, was reported to be a tough year for the companies in retail industry. Every
macro indicator indicated a fall in the overall growth of retail industries in UK. This included
rising inflation, fall in real income, increase in interest rates and fall in the buying power of
consumers. At the end of year 2017, during October and November, the retail sales indicated a
growth compared to the beginning of year. (Perks, 2018)

Looking into 2018, the retail sector of UK is estimated to perform better compared to 2017.
The government aims at boosting consumer confidence, because without consumer confidence
Britain will not increase their borrowings and this will badly affect the household goods
sectors. Food retailers are also expected to perform better than 2017. The highest expectations
are for the online retailing industries. (Deloitte, 2018)

Competition is also on the rise. A number of consumer brands are penetrating into the market
by expanding their subsidiaries in the best locations and through intense advertisements and
loyalty programs. With factors such as poor macroeconomic indicators and high competition,
for a firm to properly secure their position in the market, various analysis should be taken. This
is equally important for the firms that are already well established such as Tesco. Because
volatile external environment can break the pillars of an already established business.

There is multiple external environmental analysis that can be carried out. Tesco carries out the
following external environmental analysis;
1- Porter’s 5 force analysis
2- PESTLE analysis
2.1. Porter’s 5 force analysis

Figure 1: Diagram of porter’s 5 force classification

Tesco uses Porter’s 5 force analysis to understand what threats they are going to face in the
industry and how they are going to tackle them. (Fern Fort University, 2015)
Firstly, threat of new entrants. The threat of new entry or competitors in the food industry retail
is low in UK. It is hard for new entrant to enter into the retail industry because the market is
already dominated by few retail leaders. The firms that have already secured the food market
retail are Tesco, Asda, Sainsbury's and Morrison and that there represents approximately 70%
of all the buys in the United Kingdom.

Figure 2: Market share of grocery industry in UK, as of January 2018

Hence, the new entrants have to produce something at an exceptionally low price or of high
quality to establish his value of market. And this is impossible because they do not have enough
money, experience to produce something remarkable. Moreover, to obtain authorization of the
planning of the local government takes a considerable quantity of time and resources to
establish new firm and this is therefore considered as an obstacle for the new entrants.

To tackle the issues of new entrants, Tesco uses economies of scale as their tool. Tesco has
lower production cost, so Tesco can reduce the price as much as they want, and the new entrants
can never be able to compete against the lower prices because they should be able to cover their
costs with their prices. Tesco also uses promotional techniques such as customer services to
add value to their business or Tesco loyalty cards. These are techniques that are hard for new
entrants to employ because of their rising production costs.

Secondly, industry rivalry. The industry rivalry food and groceries retail are very high in UK.
Tesco faces huge competition from competitors, such as Sainsbury, Asda, Morrision, The Co-
op, Waitrose etc. These companies are the leaders in the market with the highest market shares
after Tesco’s. They have the similar products, store formats and convenience stores as Tesco’s.
However, they employ “narrow focus”, by concentrating on the middle up to the upper middle-
class segment. They also employ differentiation strategy to a certain level by providing own
branded goods to customers.

It is also important to highlight the effects of Brexit on the industry rivalry factor. The
immediate effects of the British European Union referendum of June 23rd, 2016, resulted in a
rise in the price level of goods and services followed by the sharp fall in value of the British
pound sterling. Tesco, being a UK established company, their performance dropped compared
to their rival’s, because of consumer’ buying behavior. (Buttonwood, 2016) The buying
behavior of consumers in economics are said to be inelastic when it comes to necessity goods,
such as the ones provided in Tesco. However, the consumer behavior towards grocery was
based on “the best price” behavior. And Tesco was badly affected

Tesco ensures that they have sustainable differentiation. Through this Tesco is able to maintain
their market position. Tesco differentiates their products by their own branded products and
their customer services.
Figure 3: Tesco’s in-house brands

Thirdly, bargaining power of buyers. The power of negotiation of the buyers is high. As Tesco
is in the retail industry the nature of bargaining power of buyer in the industry is always high.
At Tesco, each individual brand has obtained large customer loyalty. Infact Tesco has proven
to be the most popular supermarket in the UK. Tesco keeps their price relatively low so that
customers will not switch from one product to another. Tesco also has a lot of stores operating
within UK. Bargaining power of buyer can only be strong if the product is available
everywhere. If Tesco has more branches compared to its competitors such as Sainsbury’s, the
switching cost of Tesco buyers will be lower. Because they would not want to travel far to get
a product which is closely available near to their home.

As mentioned before Tesco’s operations in the UK are the largest within the group, with over
3,400 stores and more than 300,000 colleagues working together to serve customers a little
better every day. In the UK, Tesco serves 66 shoppers every second. However, on a more local
level, for instance express stores Tesco may only have to compete with a corner shop, such
presents a distinct advantage to the organization as they for essential groceries can exercise a
cost leadership strategy.

Fourthly, bargaining power of suppliers. Supplier power refers to the amount of power the
provider of goods is able to exert over the purchaser of those goods, in this case it will be
Tesco’s suppliers’. Power is in terms of changing the price, quality or amount of the product is
quite low. This is due to various reasons.

To begin with, Tesco has been operating in the market for quite a long time. Tesco has the
highest market share and the highest brand loyalty. If any supplier is working together with
Tesco they are going to enjoy the profit as much as Tesco does. If they are to increase their
prices, Tesco is going to turn to another supplier. If they are to reduce the prices, both firms
will enjoy the profit. So, suppliers are more than willing to work with Tesco at any price
suitable for both the parties. When it comes to bargaining the price, suppliers are aware that
Tesco also has their in-house brands. Tesco is capable of producing their own product and
reducing the prices. Moreover, UK supermarkets are saturated. There are various suppliers who
are willing to work together with Tesco.

Tesco made payments on time, committed to meet customers' requirements, are professional
and treat them with respect. As duly payments were made by Tesco, most of the suppliers are
willing to supply goods and products priority to Tesco so that Tesco won't encounter shortages
in products in order to serve customer better. However, Tesco should implement a proper
Supply chain management. It is a management concept that integrates the management of
supply chain processes in term of supplier management, inventory management, distribution
management, channel management, payment management, financial management, as well as
sales force management.

Finally, threat of substitutes. Threat of substitutes for Tesco is high. Because Tesco operates in
a retail industry with similar products the threat of substitutes for Tesco is high. Meaning
consumers can easily switch from one product to another incase what they are searching is not
available in Tesco. Tesco’s competitors, such as Sainsbury, Asda, Morrision, The Co-op,
Waitrose etc., produce similar products so threat of substitutes is high for Tesco.

Tesco prevents the switching of consumers to another product by providing differentiation. For
example, Tesco has their club card. The club card works only in UK, where Tesco offers
discounts for only their registered customers. This way, consumers will choose to buy products
from Tesco itself. Because the more products they buy from Tesco the more points they get on
their loyalty card and also, they are entitled to a discount. In addition, Tesco also differentiates
their products by producing an in house brand as showed in figure 3. These products are
produced within Tesco and not available in any other store. The products are designed to suit
the needs of consumers and ensures high quality as Tesco can monitor the production process.
2.1.1. Conclusion
It is easier for Tesco to measure the level of threats they face in terms of rivals, competitors,
buyers, suppliers and substitute goods when they draw up the porter’s 5 force. The strategies
used against each of the threats to overcome the threats are different. Hence knowing whether
the threats are higher, lower or moderate is important so that Tesco can implement either
differentiation, supply chain management, quality control etc. in their business process.
2.2. PESTLE analysis

Tesco’s performance is greatly affected by the global political factors. Politics play a high role
in regulating businesses through laws and legislation sanctioned by bodies such as UK
government. For instance, the fiscal policy, import and excise duty, loans and subsidiaries of
UK has affected the performance of Tesco multiple times. Apart from the taxation policies and
inflation, the biggest effect was the “Brexit”, UK’s decision to leave the EU in June 2016.

Brexit had the largest impact on the retail sector due to the depreciation of the pound which
resulted in higher costs for suppliers, which eventually led to increases in inflation. The
political uncertainty caused by the referendum was predicted to hit consumer confidence in the
long run as well. This negatively affected Tesco because consumer confidence is an important
driver of retail performance such as Tesco. However, retail sales continued to grow throughout
2016, but slowed down in 2017 as higher prices began to change people’s spending behavior.
(Chris Rhodes & Philip Brien, 2018)

UK governments apprenticeship programs also affect the performance of Tesco. Through

providing good quality education and a variety of different schemes such as apprenticeships,
the UK government is responsible for creating a highly skilled and flexible workforce. This is
vital to increasing productivity and competition for leading companies such as Tesco.
Moreover, UK being in WTO; World Trade Organization, encourages countries to remove
trade barriers and deals with trade disputes has also benefited Tesco as it reduces the import
tariffs and quotas placed on their products making it cheaper. (Wood, 2017)

Economical factors refer to economic growth. Economic growth is determined from the level
of income within the population of the country, employment rate, purchasing power etc. When
a country’s economy is performing well, it is considered always desirable for any company.

For Tesco, being headquartered in UK was always beneficial. In 2017 however, Britain’s
economy had worsened. As growth in other countries picked up, growth in the UK had slowed.
A major factor that contributed to the slump in economy was Brexit. Forecasters predicts that
rising inflation, driven by the depreciation of sterling, will continue to squeeze household
incomes and reduce consumer spending, which has been the main driver of economic growth
in recent years. With the fall in consumer confidence and fall in economic growth, retailers like
Tesco are severely affected in terms or revenue and profit generation. (The Heritage
Foundation, 2018)
UK’s social factors are in favor of Tesco. Social factors refer to the lifestyle of a country such
as their religion their culture or the way they do things. The type of goods and services
demanded by consumers is mostly influenced by their beliefs and attitudes which, in turn, are
influenced by social conditioning. (Tesco Plc, 2018) UK has moved towards bulk shopping
and one stop shopping. The type of goods and services demanded by the UK citizens are more
towards healthy, nutritious and environmentally friendly decomposed goods. Tesco is adapting
to these changes by accommodating the demand for organic, nutritious and environmentally
friendly products. For example, Tesco’s eat fresh products.

As a third of the UK population now identifies themselves as “flexitarian”, the number of those
cutting back on animal products and following a plant-based diet is set to increase by 10 %
within 2018. It was reported in the year 2017 that lifestyle choices with demand for chilled
vegetarian ready meals and meat substitutes soared by 25%. To respond to the changes in the
demand. Tesco launched “Wicked Kitchen”, a new range of irresistible meals that celebrates
everything tasty about plants. The exclusive range includes 11 ready meals and 9 food-to-go
options, perfect for lunch or dinner. (Tesco Plc, 2018)

Technological innovations make the productivity faster and cost of production lower. Hence
technological factors are important to every firm. For a firm such as Tesco, with high customer
loyalty and market share, they need to ensure their production is supported with the most up to
date technology. For instance, the more technology start-up firms, the more chances Tesco has
for merger and acquisition to improve their production process. This is because startup firms
usually cannot compete with well-established firms, and hence a merger or acquisition means
quick money for them rather than going liquid.

London’s technology sector continues to fuel the growth of the UK’s economy, with the
capital’s tech firms raising a record £2.45 billion and accounting for around 80% of all UK
venture capital tech funding in 2017. The UK technology sector saw a favorable amount of
investment in 2017, despite their uncertainty over the Brexit could have on the nation's
technology industry. London now possess a successful support infrastructure, including
venture capitalists, accelerators, incubators and workspaces. Outside London, a number of
areas are also successfully attracting tech start-ups. (Bell, 2018)

Customers of today are more aware about the environmental issues and makes sure whatever
the products they buy are environmentally friendly. UK also has the same issue. UK citizens
are more aware about the environment than they were ever before. Hence Tesco has to ensure
their actions do not cause them any consequences such as them losing their customer loyalty.
In an attempt to improve the environmental sustainability Tesco has taken various actions.

Tesco has developed a “UK Zero Deforestation Soy Transition Plan”. This Plan supports the
commitment of Tesco, towards leading the industry in addressing sustainability challenges in
their supply chains. Tesco’s ambition is that all soy used as animal feed in UK supply chain is
sourced from areas which are verified as zero deforestation. In addition, Tesco also has their
waste management policy. Tesco has lifted the color quality specifications for lemons in a
move that will also help offset food waste in the home by adding up to an extra two days’ shelf
life to the fruit as it turns yellow. Tesco has committed to making sure no good food goes to
waste and works with farmers and suppliers to adjust crop specifications. (Tesco Plc, 2018)

Legal issues are also equally important. Legal issues ruin the firms image. It takes days and a
lot of strategic plans and market planning to gather customer loyalty. But one legal issue has
the power to break the customer loyalty. This results in poor market share and market
positioning which eventually results in lower profitability and revenue.

On November 2013, Tesco agreed to pay $12 million to settle a legal action by US
shareholders. The law suit claimed that Tesco's accounting irregularities deliberately inflated
the supermarket's share price. Auditors found that the inflated profit figure was the result of
Tesco booking payments from suppliers before the company had been due the money. The
claim came a month after the Serious Fraud Office (SFO) charged three former Tesco
executives with fraud and false accounting as part of a continuing criminal investigation. The
announcement sent Tesco's New York listed shares down by 15% the following day. (Hope,
2016)

2.1.2. Conclusion
PESTLE Analysis is important for Tesco for one main reason. It helps the firm to understand
macro factors and prepare themselves. Especially due to the fact that since the 1960s, the UK
economy has been on a bit of a roller-coaster ride. The sudden rise and fall in inflation,
unemployment, interest rates and demand have a huge impact on the firm’s performance.
PESTLE helps Tesco to prepare for the uncertainties.
3.0. Firm Level Analysis
To carry out a firm level analysis, we will analyze the firm’s key competencies, resources and
capabilities. We’ll also be looking into the firm’s models and strategy to identify what are their
strength and what are their weaknesses. This will help us to obtain a picture regarding the
market position of the two companies; Tesco and Sainsbury’s in UK.

3.1. Key resources

Figure 4: Tesco and Sainsbury’s resources classification

2.1.3. Key resources of Tesco:

Tesco resources are classified into three; Tangible, Intangible and Human. Tangible resources
are classified into Products, Stores, Financial and Technological, etc. Intangible resources are
classified into Services

Products are the goods that are being sold at Tesco. Tesco is famous for grocery and retail.
However, the most famous and remarkable products are Tesco’s in-house brands; Tesco loves
baby, Tesco, Eat fresh, Tesco everyday value, F&F clothing, Tesco finest and Inspirasi. The
products range from vegetable, fruits, fast foods, cloth lines, beauty, baby necessities, kitchen
utensils, furniture lines etc. (Tesco Plc, 2018)

Tesco has wide ranges of stores designed to suit the needs of different people. Hence, Tesco
also considers stores as their resources. As mentioned before Tesco’s stores include, Tesco
Extra, Tesco Superstore, Tesco Metro, Tesco Express, One Stop, and Convenience store.
(Tesco Plc, 2018) These are hypermarkets, Superstores, Supermarket and convenience stores
found in busy city center districts or train stations or even out-of-town in suburbs.
Tesco’s financial resources refer to the borrowings made by Tesco to fund their long term and
short-term plans. The Tesco group finances their operations through a combination of retained
profits, disposals of assets, debt capital market issues, commercial paper, bank borrowings and
leases. (Tesco Plc, 2018) A thorough picture of Tesco’s financial resources is shown in the
Appendix 1.

Technological resources such as Stock Counter, BYOD integration and mobile payment
applications have kept Tesco ahead of its competitor. For instance, technological advancement
such as BYOD integration helps staff to act quickly when responding to customer’s request.
BYOD or commonly known as, Bring Your Own Device is an application designed for store
manager which helps to keep a real-time record of stock level and stock availability.
(Ecommerce Workroom, 2016)

Apart from the products, Tesco also provides services such as Tesco Club card, Tesco Bank,
Tesco Mobile, Delivery saver, Brand guarantee and Tesco online website. Firstly, Tesco Club
card was introduced in 1995. It is a loyalty card for the Britain Tesco customers, that helps
customers to earn points every time they shop. Secondly, the delivery saver allows customers
to pay a monthly subscription starting at £3.49 a month. It allows customers to choose the most
suitable delivery slot that, regardless of price. Thirdly, the Tesco Bank provides customers with
current accounts, credit card, saving accounts, loans, mortgages and travel money. It also
provides insurance for cars, pets and home.

Human resources as mentioned before referring to human capital. Tesco employs more than
300,000 workers, working together to serve customers a little better every day. Human resource
management at Tesco involves various activities, including recruitment talent analysis,
provision of a good working environment, programs aimed at retaining employees who have
good performance, and ensuring that all are treated equally. (Tesco Plc, 2018)
2.1.4. Key resources of Sainsbury’s:
Sainsbury’s resources are classified into three; Physical, Financial and Human. Physical
resources are divided into property portfolio, product portfolio and technology. Financial
resources are classified into retained earnings and long-term/short-term debt. Human resources
are classified into employees and shareholders.

Firstly, property portfolio. Sainsbury has diversified portfolio located in London, Manchester,
Reading, Sheffield, Cardiff, Southampton, Nottingham, Bristol and Edinburgh. The group has
over 2,200 Sainsbury’s supermarkets, convenience stores and Argos stores across UK and
Ireland and an established online capability. The popular Groceries Online app now accounts
for around 20% of food orders. With this strong multi-channel, customers can shop whenever
and wherever they want. (Sainsbury Plc, 2018)

Secondly, product portfolio. Sainsbury offers delivery of fresh food, groceries, general
merchandise and clothing from suppliers around the world, through 33 distribution centers, to
their store and online customers, meeting their requirements for flexible, convenient shopping.
The products are sourced from over 70 countries, without neglecting the ability of suppliers to
meet the group’s quality, safety and ethical standards. (Sainsbury Plc, 2018) The group
provides meat, fish, groceries and frozen food, in-shop bakery, butcher, fishmonger,
delicatessen and pizza counters, a cafe, TU clothing, general merchandise, petrol station and
online picking department etc.

Figure 4: Sainsbury In-house brands

Thirdly, technology. Sainsbury has made multiple investment of multimillion pounds in its
supply chain technology which has helped the group to reduce the amount of food stock held
within the group by approximately 15% during hard times, such as recession, low seasonal
demand etc. The supply chain technology was created by Sainsbury with an aim to help the
group to reduce wastage of food which would then help in the reduction on emission of harmful
gases such as CO2 to about 1,400 tonnes. In addition, Sainsbury’s online shopping has evolved
over the years and with a change in customer’s mind set and lifestyle and is mostly dominated
by the major food retailers. (Internet Retailing, 2016) It is undeniable that technology is one of
the driving factor for Sainsbury to be recognized as the second largest food online retailer in
UK’s retail industry as of today.

Fourth, retained earnings. Retained earnings as of March 2018 is £3,789 million. Increase in
retained earnings is a result of increased in sales, other income and operating profit. The
retained earnings are important and the higher the better for the group. (Sainsbury Plc, 2018)
Most often, retained earnings are used to fund the strategic goals of a business. In the case of
Sainsbury’s, the excess is used to fund their goals;
a) Further enhance the group’s differentiated food proposition
b) Diversify and grow Sainsbury’s Bank
c) Continue to deliver cost savings and maintain balance sheet strength
d) Grow General Merchandise and Clothing and deliver synergies

Fifth, long term and short-term loans. The long term and short-term loans are taken by the
firm so that it can be used to fund the acquisitions, joint ventures and mergers. It is also
important to fund the expansion of property and product portfolio. The firm ensures that despite
the increase in debts, they maintain a low gearing ratio

Total borrowings (current and non-current) of the group amounted to £2,240 million as of 2018.
As shown in Appendix 5, the group’s borrowings have increased compared to 2017. The Bank
overdrafts are repayable on demand and bear interest at a spread above Bank of England base
rate. In November 2014, the Group issued £450 million of unsecured convertible bonds due
November 2019. The bonds pay a coupon of 1.25 per cent payable semi-annually. Each bond
is convertible into ordinary shares of J Sainsbury plc at any time up to 21 November 2019 at a
conversion price of 309.26 pence. (Sainsbury Plc, 2018)

Lastly, employees and shareholders. Employees and shareholders are a key resource to the
group because they drive productivity and their investment for the firm helps the firm to reach
their goals. As of March 2018, number of shareholders are 12,464. Dividend per share is 10.2
pence as of 2018. 2017 and 2016, dividend per share was 10.2 pence and 12.1 pence
respectively. As of March 2018, it was reported that total employees at Sainsbury is 121,200,
with a total employee cost of £3,134. The employee cost involves wages and salaries, social
security costs, pension costs and share based payment expenses.
For instance, the bonus arrangements for senior managers and supermarket store managers
include corporate and personal performance targets. 60% of the bonus is paid in cash and 40%
awarded in shares. In addition, the Deferred Share Award targets a diverse range of financial
and strategic scorecard measures. These are intended to reward the top managers in the
company, for driving the short-term objectives that will directly lead to building the
sustainable, long term growth of the company. At least 50% of the awards are based on the
delivery of financial performance and returns to shareholders. Last but not least, the group also
operates a Savings Related Share Option Scheme, open to all UK employees working within
the group for more than three months. The scheme allows participants remaining in the group’s
employment at the end of three year saving period, to use their savings to purchase shares in
the company at a stated exercise price. (Sainsbury Plc, 2018)
3.2. Capabilities

Resources Capabilities
Products Tesco’s own product range; Tesco loves baby, Tesco, Eat fresh, Tesco
everyday value, F&F clothing, Tesco finest and Inspirasi.
Stores Diversify market through stores such as Tesco Extra, Tesco Superstore,
Tesco Metro, Tesco Express, One Stop, and Convenience stores.
Financial Obtain financial instruments such as lease, joint ventures, bonds, shares
and Medium-Term Notes, through which plans are funded.
Technology Technological advancement through Stock Counter, BYOD integration
and mobile payment applications.
Services Provide services such as Tesco Club card, Tesco Bank, Tesco Mobile,
Delivery saver, Brand guarantee and Tesco online website.
Human resources Conduct recruitment talent analysis, good working environment,
programs aimed at retaining employees who have good performance.

Resources Capabilities
Property portfolio Increase sales and purchases through diversified stores.
Product portfolio Increase sales and purchases through diversified product portfolio and
in-house brands.
Technology Reduce cost of production through supply chain management.
Retained earnings Ability to maintain or increase retained earnings to fund long term
goals and objectives of the group.
Long term/ Ability to gain loans to fund investment, acquisitions and take over and
Short term debt at the same time maintain lower leverage and gearing ratio.
Employees Increase productivity through employee remuneration.
Shareholders Increase investment by attaining shareholder trust.

Table 1: Tesco’s and Sainsbury’s analysis of capability

3.2.1. Tesco Capability
Firstly, in terms of products, Tesco’s main capability is their successful range of private
branded products. According to Tesco’s annual report as at February 2018, their private brand
range have achieved an increase in sales growth by 4.2%. The group’s new, exclusive Hearty
Food Co. range of ready meals has proved particularly popular, contributing to an increase in
overall own brand participation of nearly 1%. Tesco’s newest launch; Wicked Kitchen dishes,
have been gaining strong rate of repeated purchases. The group also reported that they have
delivered 2.7% sales growth in their home category, following the launch a new private brand;
Go Cook and Fox & Ivy ranges. These new brands have driven a 14% and 20% increase in
customers to cook and homecare ranges sales, respectively. Clothing has also performed well
throughout the year with sales growth of 2.6%, reflecting the strength of the F&F brand. (Tesco
Plc, 2018)

Secondly, in terms of stores, Tesco’s main capability is their ability to differentiate their store
formats from their competitors. It has been reported that all store formats and channels have
achieved growth, with the largest Tesco store business growing at 1.9% and online grocery
sales growing at 5.1%. The group also reported that they have delivered 2.7% growth in
Express convenience stores, with a positive customer response to the changes made to tailor
ranges and improve product availability. (Tesco Plc, 2018)

Thirdly, in terms of financial resources, Tesco’s main capability is their Financial Risk
Management Team who are able to maintain their indebted ratio at pace while at the same time
using financial resources to support their projects, mergers, acquisitions and research and
development. The firm’s net debt was reported to be £2,625 million, as shown in Appendix 2.
The firm’s total indebtedness ratio is £3.3 million in 2018 and £5 million in 2017, as shown in
Appendix 3. (Tesco Plc, 2018) The firm was able to carry out all their operations and plans
while financial risk management team reduced both the net debt and indebtedness ratio figures
by 29.6% compared to prior years.

The group’s policy towards interest risk management is to target fixing a minimum of 50% to
70% of interest costs for senior unsecured debt of the Group. For credit risk management the
Group holds positions with an approved list of investment grade rated counterparties and
monitors the exposure, credit rating, outlook and credit default swap levels of these
counterparties on a regular basis. Liquidity risk is maintaining short term and long-term cash
flow forecasts.
Fourthly, in terms of technology, Tesco’s main capability is how they enhance innovation
through technology. Tesco uses technology for product innovation, packaging innovation and
reducing their everyday prices. For packaging, Tesco used their technology to come up with a
"skin packaging" on beef and lamb products. The packaging provides the buyer maximum 5
days of freshness. Customers also often struggle with fresh avocados at home as they go off
very quickly which result in food waste. Tesco introduced, frozen, peeled and halved avocados
which are ready to use in salads, guacamole and even smoothies.

Tesco also worked with Food-Cloud and Fare-Share to build a nationwide program named,
“Community Food Connection”. It enables Tesco to donate surplus food to charities and
community groups. The software platform tracks the donation data, allowing support team to
monitor donations and help the charities whenever needed. It also matched charities to stores
and most are conducted at local level. Till today, 886 Tesco stores run Community Food
Connection and 3,000 charities have been conducted, donating meals worth $1.4 million.
(Tesco plc, 2016)

Fifthly, in terms of services, Tesco’s main capability is their banking service. Throughout the
year 2017, the bank service has been persistent in strengthening its product and service offered
to customers and delivering growth of 4.1% in active customer account numbers across its
primary products. As of today, it serves more than 3.7 million customers. As for the income
statement of bank service at Tesco, compared to February 2017, operating profit before
exceptional items have increased by 10% to £173 million. Lending growth for 2018 has been
strong, driven by secured mortgage lending which comprises 26% of the lending portfolio,
compared 22% last year. In addition, Money Services products have performed well overall as
the Group continues to enhance the product range and expand the customer base. (Tesco Plc,
2018)

Finally, in terms of human resources, Tesco’s main capability is their human resource policy
that empowers their employees. The employment policies are regularly reviewed by the board
of directors to ensure they are simple, helpful, trust worthy and transparent. The policy aims at
removing hierarchy complexity and creating fairness among the employees. Such as improving
communications to colleagues to ensure that they are also engaged in the decision making and
that their feedbacks are taken and responded to. (Tesco Plc, 2018)

The human resource policy also represents Tesco’s commitments towards providing equal
opportunities to all colleagues, irrespective of age, disability, gender, marriage and civil
partnership, pregnancy or maternity, race, religion or belief, sex, or sexual orientation. In fact,
Tesco is a Disability Confident Employer as part of the UK Government’s Disability Confident
scheme, a Global Diversity champion with Stonewall and a gold member of the UK
Government’s Armed Forces Covenant. The group offers a range of employee networks,
including: ‘Out at Tesco’; ‘Women at Tesco’; ‘Black Asian Minority Ethnic Network’; ‘Armed
Forces Network’; and ‘Disability Network’.

3.2.2. Sainsbury’s Capability

Firstly, product and property portfolio. Having a diversified portfolio help to maintain the
market position and also makes it harder for new comers to penetrate into the market. Sainsbury
is located in London, Manchester, Reading, Sheffield, Cardiff, Southampton, Nottingham,
Bristol and Edinburgh. The group has over 2,200 Sainsbury’s supermarkets, convenience
stores and Argos stores across UK. The group has their own brand products of more than
15,000. (Sainsburys, 2018) The total products offered at Sainsbury are more than 90,000. Of
all the products the most demanded are the in-house brands and Sainsbury’s Bank. (Sainsburys
plc, 2018) The range of financial products includes credit cards, savings and loans, as well as
travel money, mortgages, and car, home, pet, travel and life insurance. Sainsbury considers
loyalty very important hence they offer shoppers great deals and rewards for choosing to shop
and bank with them.

Thirdly, technology. Technology is a key component for Sainsbury that helps the group to gain
customer loyalty and brand loyalty. The group has implemented various technological
strategies into their business throughout the years. For instance, the group teamed up with
Williams Advanced Engineering to give its store fridges a turbo boost through aero-foils. It the
same technology that helps the improvement in the performance of F1 cars on the road. (
Williams Grand Prix Engineering Limited, 2017) Moreover, the group also ensures that their
technological team is proficient. According to Sainsbury’s Jon Rudoe, Digital and Technology
Director, the firms vision is to have a world-class digital and technology function that great
services for customers whenever and wherever they want. Sainsbury’s Digital and Technology
Team run, improve and create digital platforms, such as websites and apps, for customers and
colleagues.

Fourth, Retained earnings. The retained earnings for March 2018, is recorded as £3,789.
Retained earnings are source of income for the firm to fund their projects. The higher the
retained earnings the more investments the firm can proceed with. It is an internal source of
finance to which the firm does not have to pay any interest or deposits or even assign any
security. (Sainsbury Plc, 2018) At Sainsbury, the firm cut costs through mergers and
acquisitions by performing horizontal or vertical integration hence, higher retained earnings
are important. As they act as a contingent plan. For example, through the recent horizontal
integration with Argos and Habitat, Sainsbury can now offer a wider selection of trusted
products across home, electrical, technology, toys, clothing and leisure.

Fifth, long term/ short term debts. Sainsbury runs their business operation through short term
and long term borrowing but at the same time, ensures that the risk is managed. Risk arising
from supplier management, revenue recognition, mergers or acquisitions and even financial
instruments are monitored day in, day out. (Sainsbury Plc, 2017)
Risk Risk management
 The group uses forward contracts to hedge foreign exchange,
commodity exposures, cross currency swap contracts. Interest
rate swap contracts are used to hedge interest rate exposures.
 The Group’s currency risk policy seeks to limit the impact of
Foreign exchange risk
fluctuating exchange rates on the Group’s income statement by
requiring highly probable foreign currency cash flows to be
hedged.

 The Group’s liquidity policy sets a minimum funding of £400

million in excess of forecast net debt over a rolling 12-month time
horizon.
Liquidity risk  The Group manages its liquidity risk by maintaining a core of
long-dated borrowings, pre-funding future cash flow
commitments and holding contingent committed credit facilities.
  The Group uses a combination of purchasing agreements and
financial derivatives to hedge commodity risk such as fuel
Commodity risk
exposures on a layered basis using contracts for difference.

 The Group’s interest rate policy seeks to limit the impact of

fluctuating interest and inflation rates by maintaining a
Interest rate risk diversified mix of fixed rate, floating rate and variable capped
rate liabilities.

 Counterparty limits and credit assessment process are in place

to control exposure levels.
Wholesale credit risk  Key ratios are monitored and reported on a daily basis with
triggers in place for escalation.

 Daily monitoring and reporting of capital position, with

triggers in place for escalation.
Capital adequacy Risk  Capital adequacy built in to our strategic planning and capital
plans.

Table 2: Sainsbury’s risk analysis

Finally, employees and shareholders. Sainsbury employees 185,000 colleagues who are
considered as the foundation of the business. The human resource department is committed to
providing equal opportunities for all colleagues and applicants, during recruitment, selection,
training, development and promotion. (Sainsbury Plc, 2018) They make a real difference in the
communities as they continue to serve customers great services every day, be it stores, online
or through telecommunication. In fact, Sainsbury is proud of their diverse workforce because
every colleague’s unique perspective has helped the group to innovate, understand and embrace
different needs of customers.
3.3. Competencies

Figure 5: Linkage between Tesco’s key resources, capabilities and competencies

Figure 6: Linkage between Sainsbury’s key resources, capabilities and competencies

3.3.1. Tesco-Competencies
Tesco’s key competencies are in house or private brands, financial risk management and Tesco
banking service. These capabilities add value to Tesco and differentiates them from its
competitors. (Tesco Plc, 2018)

The constant increase in demand for the private brands has boosted the group’s profitability.
The group also reported that they have delivered 2.7% sales growth in their home category,
following the launch a new private brand; Go Cook and Fox & Ivy ranges. These new brands
have driven a 14% and 20% increase in customers to cook and homecare ranges sales,
respectively. Clothing has also performed well throughout the year with sales growth of 2.6%,
reflecting the strength of the F&F brand.
As for the Tesco banking service, for the past 13 years, Tesco’s bank service has opened over
300 Travel Money Bureau, selling over £1 billion worth of currency yearly. As of today, it
serves more than 3.7 million customers. As for the income statement of bank service at Tesco,
compared to February 2017, operating profit before exceptional items have increased by 10%
to £173 million.

And finally, the risk management, if the team does not do their work properly they will not be
able to fund the research and development for product innovations. Proper management of risks
such as credit risk and liquid risk management has allowed the firm to carry out all their
operations and plans while financial risk management team reduced both the net debt and
indebtedness ratio figures by 29.6% compared to prior years.

The end result is the ability for Tesco to maintain their market position, market share, customer
loyalty and profitability. If we look into the annual report of Tesco it is evident to from the
operating profit/loss for the year that the firm has maintained and is trying to increase their
profit. February 2018, the firms operating profit are recorded at £1,837 million and February
2017, the firms operating profits are recorded at £1,017 million. Most of all the biggest
competitive advantage is how the capabilities have kept Tesco ahead from its competitors.

3.3.2. Sainsbury’s Competencies

Sainsbury’s key competencies are Sainsbury bank, variety of stores and Financial risk
management. These capabilities add value to Sainsbury and differentiates them from its
competitors. (Sainsbury Plc, 2018)

Firstly, Sainsbury’s banking service. Sainsbury’s Bank profits increased by 11 per cent to £69
million, primarily due to the full-year consolidation impact of Argos Financial Services. Over
81 per cent of insurance customers and 75 per cent of banking customers have, or are linked
to, a Nectar card. Credit Cards performed strongly, with 40 per cent growth in new Sainsbury’s
Bank card sales. Since introducing our insurance broker panel model in February 2017, new
policy sales in Car Insurance increased by 42 per cent and Home Insurance grew by 39 per
cent. Travel Money grew 26 per cent in a competitive market. We have received over 3,000
mortgage applications and lending is in excess of £275 million.
Secondly, the variety of stores. The habit of shopping continues to grow as the UK consumer
expects far greater choice and flexibility in how, when and where they shop for food, general
merchandise and clothing, accessing a variety of channels. Consumers continue to shop more
frequently across different channels and store formats, with convenience stores and online both
showing strong growth. Discount and bargain retailers continue to open significant numbers of
new 7% stores and gain market share.

Figure 7: Sainsbury’s grocery market channel share

Figure 8: Sainsbury’s grocery, convenience and online stores year on year sale

Thirdly, financial risk management. The risk management team ensures that liability of the
firms is managed and paid for when due at the same time ensuring that the firm has enough
funds to cater for the investment choices while maintaining sufficient profitability. This helps
the firm to maintain their market position and business reputation.

Figure 9: Sainsbury’s maintenance of balance sheet strength

Figure 10: Sainsbury’s group measures

3.4. Tesco- Business model/strategy

For Tesco to maintain their position in the market they have to ensure that the resources are
being utilized to maximum. The group needs ensure proper control has been implemented so
that the firm is align in achieving their goals. Usually it is the business strategy that ensures
the firm is in line with its objectives and goals. At Tesco, the business strategy they
implemented is known as McKenzie’s 7 Analysis.

Figure 7: McKenzie 7s Analysis

McKenzie’s 7s analysis focuses on Shared Value, Strategy, Structure, System, Staff, Style and
Skill. The analysis is helpful for identifying areas that require improvement in the
management’s performance and also to examine the effects of future changes that may affect
the company in the long run. (Quarterly, 2018)

Firstly, ensuring shared value is practiced within the organization. Shared value refers to
company’s objectives and beliefs. Tesco believes in providing what the customers demand
through cost reduction techniques and sustainability. The three key objectives are practiced
within the firm. For instance, Tesco responds to customer requirements by lowering their
prices. Tesco has even set their moto as “everyday low prices”. When obtaining resources from
suppliers, Tesco is only in contract with those suppliers who offer them the quality raw
materials at reasonable prices. Lastly, sustainability is practices through Tesco’s corporate
social responsibilities where the firm has carried various actions to minimize their waste.
(Tesco PLC, 2018)

Figure 9: Tesco’s shared value

Secondly, ensuring strategy is aligned. Strategy refers to a plan developed by a firm in

achieving their long-term goals. It helps the firm achieve their competitive advantage through
their vision, mission and values. Tesco applied various strategies usually using Balance
Scorecard (BSC) method. Tesco’s Balance Scorecard evolves around Financials, Customers,
Processes and People. (Dudovskiy, 2016)
Pillars Objectives
Financials  Improve international sales by more than 25%.
 Improve group sales by more than 10%.
 Improve return on capital employee to 15%.
 Improve international sales by more than 25%.

Customers  Making FF a global fashion.

 Improve range of clothing.
 Increase product range of Tesco bank.
 Improve range and quality of general merchandise.

Processes  Improve health and safety processes.

 Improve capabilities of people.
 Improve control for fraud and compliance.
 Improve processes for product safety.
 Peoples  Improve employee retention by 95%.
 Improve diversity and inclusivity.
 Develop leaders with great intensity.
 Improve effectiveness of whistle blowing policy.

Table 3: Strategic objectives for Tesco as denoted in the BSC chart

Thirdly, ensuring the system is effective. System is based on how to priorities on resources
that are more likely to drive the organization towards their goal. Tesco’s system is mainly
towards focusing on the products, financial and services because there are the resources that
keeps the firm competent. (Dudovskiy, 2016)

Fourthly, staff. Staff states about the number of staff in the organization and how the firm
managed them to achieve maximum productivity. Tesco employs more than 300,000 workers.
Human resource management at Tesco involves various activities, including recruitment talent
analysis, provision of a good working environment, programs aimed at retaining employees
who have good performance, and ensuring that all are treated equally. (Dudovskiy, 2016)

Fifthly, style. It is the style of the organization in which it works to achieve its objectives. The
style of Tesco is a cost leadership. The group aims at reducing the prices by reducing the
operating costs so that they are able to live up to the moto of, “everyday low prices”.

In addition, skill. It describes the capabilities of the organization or the employees to a

particular task. The human resource policy at Tesco aims at removing hierarchy complexity
and creating fairness among the employees. It focuses on improving communications to
colleagues to ensure that they are also engaged in the decision making and that their feedbacks
are taken and responded to.

Finally, Structure. It depends on the company’s hierarchy, the structure at which decisions are
made are made; top down, bottom up, centralized or decentralized. Tesco has a wide hierarchy
and decisions are made from top down, where the top management is in charge of making
decisions. (Hierarchy Structure, 2017)
Figure 10: Tesco Organizational Structure at Board level and Store level

3.5. Sainsbury business model/strategy

For Sainsbury to maintain their position in the market they have to ensure that the resources
are being utilized to maximum. The group needs ensure proper control has been implemented
so that the firm is align in achieving their goals. Sainsbury’s business strategy to ensure firm
is in line with its objectives and goals is called the “5 pillars strategy”. The strategy is made up
of having efficient colleagues, being there for customers, values, fair prices of products and
services and knowing customers better than anyone.
Figure 11: Sainsbury’s 5 pillar strategy

Firstly, knowing the customers better than anyone else. This is based on the saying that “it
is not the quantity but the quality that matters”. At Sainsbury no matter how, many products
they produce or how many services they provide, if it is not according to customer’s
requirement the firm will never be able to maintain their position. Hence, Sainsbury takes every
opportunity to talk to them face-to-face, through telephone or online. This approach helps
increase loyalty and improve firm’s vision. During the year, around 35 million mailings are
sent to Nectar card holders. It gives valuable information and increases knowledge of how
customers are shopping and interacting. (Sainsbury's, 2018)

Secondly, efficient colleagues. Sainsbury empowers employees to make real changes to the
business and invest in training and development, encouraging them to diversify their skills.
Sainsbury is known for having great customer service and that’s all due to the commitment and
collaboration of employees. Sainsbury believe that they are the business. They make the firm
who they are today and are the reason why so many customers come back time and time again.
Hence the firm encourage expansion of employee skills through initiative programs and
mentoring schemes. (Sainsbury's, 2018)

Thirdly, great products and services at fair prices. Sainsbury’s focus is on quality,
provenance and sustainability which sets us apart from other supermarkets. Hence, their
strategy of regular lower prices reassures customers that they’ve come to the right place. The
acquisition of Argos and Habitat has accelerated this strategy. The group has created a multi-
product, multi-channel business with fast delivery networks, offering customers
complementary products and services from brands they trust. (Sainsbury's, 2018)

Fourthly, being there for customers. Being there for customers means that, adapting to the
changes that occur for customers. For instance, customers of today are more open towards
online shopping then attending the stores itself. As part of the ambition towards being a multi-
product, multi-channel retailer Sainsbury has already opened 60 Argos Digital stores in
supermarkets and plans to open 200 more. (Sainsbury's, 2018)

Finally, values. Sainsbury’s values are the heart of everything they do and has always be
central to the business since day one. it involves, living healthier lives, sourcing with integrity,
respect for our environment, making a positive difference to our community and a great place
to work. Values strengthen relationships with customers, suppliers, colleagues and makes
commercial sense. Values make sure that the group does right to suppliers and the planet. They
ensure the group takes responsibility for the communities and encourages the group to look
towards the future and find innovative ways to make customer’s lives easier. (Sainsbury's,
2018)

3.6. Analysis of Strength and Weaknesses

Figure 12: Sainsbury & Tesco Strength and weakness analysis

3.6.1. Tesco Strength and Weaknesses

Firstly, brand image and market leadership. The group continue to maximize the value and
impact of their brand with the advice of specialist external agencies and in-house marketing
expertise. Tesco is the largest retail group in the UK, which has about 27.7% of the UK grocery
market as of January 2018. As of 2018, it is reported that Tesco operates in 11 countries
including India, Malaysia, China, Japan and Pakistan. However, their operations in the UK are
the largest within the group, with over 3,400 stores, serving 66 shoppers every second. The
company built up a good reputation enables the group to launch new products and services and
makes easier entering in new markets. (Bhasin, 2018) Tesco continues to develop
communication and engagement programs to listen to customers and stakeholders and include
their needs in the plans. Maintaining a differentiated brand is one of their strategic priorities.
This is supported by their group processes, policies and the business code of conducts.

Secondly, financial position. According to long term viability statement of the group it has
been reported that the after assessing the group’s competitive pressure, data security and
regulatory breach, Brexit impact, reduction in cost savings and cash generation on the financial
position, Directors have a reasonable expectation that the Company will continue to operate
and meet its liabilities as they fall due over the three-year period considered. Moreover, if we
look into Apendix 2, 3 and 4 we can see that Tesco’s financial position has been improving
with lower indebtedness ratio, better and stronger cashflows reconciliation and higher
profitability compared to 2017. (Bhasin, 2018)

Thirdly, customer retention. Customer retention is one of the biggest strength because Tesco
seek to understand and respond to colleagues’ needs by listening to their feedback from open
conversations, social media and customer surveys. Moreover, Tesco monitors the effectiveness
of their processes by regular tracking their business against competitors, against measures that
customers indicates are important to their shopping experience. (Bhasin, 2018) Tesco has also
established product development and quality management processes, which keep the needs of
customers central to their decision making. Lastly, Group-wide customer insight management
is undertaken to understand customer behavior, expectations and experience, and leverage
more consistently across the different parts of the business.

On the other hand, High competition. This refers to failure in delivering an effective, coherent
and consistent strategy to respond to competitors and changes in macroeconomic conditions in
the operating environment, resulting in a loss of market share and failure to improve
profitability. Tesco continues to face ongoing challenges of a changing competitive landscape
and price pressure across most of their markets. The firm aims to minimize this risk. Tesco’s
board actively develops and regularly challenges the strategic direction of the business and
actively seeks to be competitive on pricing, differentiating range and service, as well as
developing their online and multiple formats to allow Tesco to compete in different markets.

Secondly, Brexit. Brexit has been listed as new risk as per Tesco’s annual report. It is
considered as a weakness because failing to prepare for the UK’s departure from the EU caused
disruption and created uncertainty around the business. (Buttonwood, 2016) It created
uncertainty in Tesco’s ability to recruit and impacted their relationships with existing and
potential customers, suppliers and colleagues. These disruptions and uncertainties had and will
continue to have an adverse effect on Tesco’s business, financial results and operations.

And finally, responsibility sourcing and supply chain. This is a new principal risk according
to Tesco’s annual report. It refers to failure of meeting product safety standards resulting in
death, injury or illness to customers, failure to ensure that products are sourced responsibly and
sustainably across the supply chain leading to breaches of regulations, illness, injury or death
to workers and communities. (Tesco Plc, 2018) In order to tackle the risk, Tesco aims at
running colleague training programs on food and product safety, responsible sourcing, hygiene
controls and provide support for store, ensuring that products are safe, legal and of the required
quality, and that the human rights of workers are respected, and environmental impacts are
managed responsibly.

3.6.2. Sainsbury Strength and Weakness

Firstly, diversified portfolio. Sainsbury’s portfolio is very diversified. This helps them to
recover any loss made by one product with the profit of the other. It is a way of risk
management. Diversified portfolios are hence categorized as a strength especially if the
products are performing well. Sainsbury has their own brand products of more than 15,000.
The total products offered at Sainsbury are more than 90,000. This involves products such as
meat, fish, groceries and frozen food shop bakery, butcher, fishmonger, delicatessen and TU
clothing. Of all the products the most demanded are the in-house brands and Sainsbury’s Bank.
The range of financial products includes credit cards, savings and loans, as well as travel
money, mortgages, and car, home, pet, travel and life insurance. The company has achieved
growth in general merchandise and non-food product business like, garment, kitchenware and
homecare. (Sainsbury Plc, 2017) Expansion of product lines would enable the organization to
fulfil varied demands of the customers.

Secondly, human resource management. As mentioned before Sainsbury is known for

having great customer service and that’s all due to the commitment and collaboration of
employees. Sainsbury believe that they are the business. The group ensures their employees
are treated equally, fairly and that they earn the remuneration they deserve. This includes
annual bonus, deferred share award and 2015 future builder. It was reported on the annual
report that during the year the Committee reviewed the Group’s Gender Pay Report on behalf
of the Board. The group pays colleagues according to their role, not their gender, and the Board
is committed to improving the representation of women at senior levels. (Sainsbury's, 2018)

Thirdly, capital investment. Having a diversified capital investment portfolio helps to

maintain the market position and also makes it harder for new comers to penetrate into the
market. Sainsbury is located in London, Manchester, Reading, Sheffield, Cardiff,
Southampton, Nottingham, Bristol and Edinburgh and has over 2,200 supermarkets,
convenience stores and Argos stores across UK. Sainsbury has created a retail business with
over 2,800 stores. In a challenging retail market, Group sales were £31,735 million, up 9% on
last year. Group like-for-like sales were up 1.3%. Our Convenience and Groceries Online
channels were also strong drivers of growth, with sales increases of nearly 8% and nearly 7%
respectively. (Sainsbury Plc, 2018)

Finally, financial risk management. The risk management process is designed to manage
rather than eliminate the risk of failure to achieve the Company’s business objectives. The
Group Treasury function is responsible for managing the Group’s liquid resources, funding
requirements, interest rate and currency exposures. The Group Treasury function has clear
policies and operating procedures which are regularly reviewed and audited. Through proper
risk management the group is able to increase their profitability and revenue and maintain their
market share. (Sainsbury Plc, 2018)

On the other hand, high competition seems to be a weakness for Sainsbury. Sainsbury being
in the retail industry faces a lot of competition from competitors such as Tesco, Walmart,
Carrefour and Kroger. These companies have similar products and similar pricing strategies as
Sainsbury. Hence, Sainsbury has to carry out extreme product differentiation strategies just
like their competitors. However, Tesco and Walmart are known for their strong brand
recognition all over the world. Not just in UK. Sainsbury maybe famous in UK and may have
strong brand recognition among the employees in UK but it may not be able to compete with
the competitors internationally.

Lastly, Operational weakness. Sainsbury despite being one of the oldest supermarkets, having
started its operations way ahead of its competitors such as Tesco and ASDA did not fully
exploit the opportunity to grow and maintain lead in market share. It took long before making
changes to new and promising strategies. The company had issues with inventory management
and supply chain management that affected its products up until 2004. The organization is one
of the four leading supermarket chains in the UK with a legacy of over a decade. Despite the
long experience, it has recently closed 16 stores which eventually affected their sales and
reputation. The reason could be attributed to the lack of advertising. This would restrict the
organization from strengthening its financial position. The group has also had various technical
problems with their online website. The website was shut down for 2 continuous working day.
(Bhasin, 2018) With most customers relying on their delivery services, online transactions, it
was reported that the shut down in online websites disrupted approximately 10,000 online
shoppers.
4.0. Strategic Choice

Figure 13: Porter’s Generic Strategy Model

Porter’s Generic Strategy is used to identify the strategy company uses to gain competitive
advantage. It is made up 4 strategies: -
 Broad based cost leadership strategy
 Broad based differentiation strategy
 Focus strategy
(a) Narrow based cost focus strategy
(b) Narrow based differentiation strategy

Broad based cost leadership strategy is when the business aims at a mass market to produce
quantities in bulk so that cost per unit will fall. By doing so the firm is able to charge lower
prices compared to other business in the industry. This increases barriers to entry as new
comers are unable to compete with the fall in prices.

Broad based differentiation strategy is when the business targets a mass market but does not
have similar products. The products are differentiated by the features, or by providing and
additional service, promotional techniques etc. By doing so, the product is as exclusive as
possible, making it more attractive than comparable products offered by the competitors.

Focus strategy is when the firm focuses on a narrow market. The business focuses on one single
market or number of target market segments. Focus strategy is classified into Narrow based
cost focus strategy and Narrow based differentiation strategy.

Narrow based cost focus strategy is used by those business who aims at a certain segment but
keeps their cost as low as possible so that the prices are relatively low for those products. The
product will be basic or a similar product to the higher priced and featured market leader, but
acceptable to sufficient consumers.

Narrow based differentiation focus strategy is when the firm targets a niche market which
makes the market narrow. The product is also distinguished from the competitors for instance,
giving it a unique feature or design. This strategy often involves strong brand loyalty among
consumers.

4.1. Tesco’s strategic choice

Tesco’s strategic choice is broad based cost leadership strategy. Tesco being in a retail
industry their generic strategy is cost leadership strategy where the target market is wide, and
the prices are relatively low. Tesco has always wide market in the U.K. The wide market
maybe in terms of profit, product or even property.

In terms of revenue or profit, Tesco is known to be the most popular and largest retail store in
the U.K. It has been reported that with the acquisition of Brooker, Tesco continues to perform
well compared to year 2017. Despite a slight fall in market share of 0.1%, Tesco experienced
particularly strong growth from its Extra superstores. For the 12 weeks ended March 25, 2018,
Tesco's sales grew 2.4% to £7.32 billion, while its market share was unchanged and remained
at 27.6%.

Figure 14: Great Britain Grocery market share.

In terms of products, Tesco provides a wide range of products that include food, clothing,
electronics, financial services etc. Within each category, Tesco provides additional wide
variety of choices ranging from brand, regional produce, type, international cuisine in food and
other choices that don’t leave the customer lacking when it comes to choose.

Moreover, as per Tesco PLC’s strategic report, Tesco is aiming to increase their market
position through property portfolio. As mentioned before as of 2018, their operations in the
UK are the largest within the group, with over 3,400 stores. Tesco serves 66 shoppers every
second. As of today, it is headquartered in Chestnut, Hertfordshire, England. Its stores are
spread far and wide in the world. It employs two main channels of distribution for its products
and services online and offline. Its offline forum has stores of six various kinds; Tesco Express,
Tesco Extra, Tesco Metro, Tesco Compact, Tesco Homeplus and Tesco Superstore.
Furthermore, Tesco is exploring number of opportunities to work with a third-party to
redevelop their stores in high value locations. London is one of the example of high value
locations, where Tesco has sold high volume of products, to wide range of customers, and were
able to maintain lower costs and profits. (Tesco Plc, 2018)

Being said that, lower costs are managed by Tesco and is one of their targets for year 2019.
Reduction in operating cost is their 2nd biggest aim under their strategic report. According to
their strategic report Tesco aims at reducing their cost by £1.5 billion for the year 2019.
According to Tesco’s strategic report 2018, the company identifies opportunities for savings
while particularly focusing on their store operating model, where Tesco has delivered £541
million of savings. This was achieved through logistics and distribution, with £104 million of
savings, and goods not for resale, where they made savings of £174 million. It is reported that
Tesco continues to encourage a cost-conscious culture, finding savings so that it can be
reinvested for the benefit of customers. The group has also made strong progress in reducing
the costs of procuring goods and services not for resale and finding synergies across the Group.
4.2. Sainsbury’s strategic choice

Sainsbury strategic choice is broad based cost leadership strategy. Sainsbury also being in a
retail industry their generic strategy is cost leadership strategy where the target market is wide,
and the prices are relatively low. Sainsbury has been the second biggest marker share holder in
the UK retail industry. This is attained through reduces in prices by cost reduction, and
increased market scope through enhanced product portfolio and property portfolio.

Firstly, the market scope for Sainsbury is wide. Sainsbury has diversified property portfolio
located in London, Manchester, Reading, Sheffield, Cardiff, Southampton, Nottingham,
Bristol and Edinburgh. The group has over 2,200 Sainsbury’s supermarkets, convenience
stores and Argos stores across UK and Ireland and an established online capability. This will
be further strengthened once Sainsbury combines with Asda. According to Sainsbury Chief
Executive Officer, “This is a transformational opportunity to create a new player in UK retail,
which will be more competitive and give customers more of what they want now and in the
future. It will create a business that is more dynamic, more adaptable, more resilient and an
even bigger contributor to the UK economy.” It is predicted that Combining Sainsbury’s
strength in London, the Midlands, the South of England and Northern Ireland with Asda’s
strength in the North of England, Scotland and Wales.

Figure 15: Sainsbury’s and Asda’s geographic coverage.

In terms of products, Sainsbury has their own brand products of more than 15,000. The total
products offered at Sainsbury are more than 90,000. This involves products such as meat, fish,
groceries and frozen food shop bakery, butcher, fishmonger, delicatessen and TU clothing.
Sainsbury competes with Tesco by being the market leader in clothing and toys category.
Sainsbury is one of the largest general merchandise and clothing retailers in the UK, offering
a wide range of products across Argos, Sainsbury’s Home and Habitat brands, in stores and
online. Sainsbury is also a market leader in toys, electrical and technology and Tu clothing
offers high street style at supermarket prices. When it comes to banking products Sainsbury’s
Bank offers accessible products such as credit cards, insurance, travel money and personal
loans that reward loyalty. (Sainsbury Plc, 2018)

Finally, in terms of overall cost savings, Sainsbury aims to deliver cost saving £500 million by
2020/21. The firm’s strategic reports say that; the group has exceeded their original 3-year
£500 million cost saving target by £40 million. The group aims to deliver further savings of a
minimum of £500 million over the next 3 years to 2020/21. Sainsbury reduced net debt by over
£113 million to £1,364 million and are targeting to reduce net debt by a further £100 million
in 2018/19. (Sainsbury Plc, 2018)
5.0. Financial Analysis

5.1. Transformation of finance function from strategy formulation to decision making

process.

Finance function today are completely different from the finance functions years ago. There
is a huge difference between traditional and modern finance function. The traditional financial
function was about preparing the financial statements and ensuring it is all in accordance with
the GAAP and other accounting frameworks. It is about preparing the budgets, cash inflows
and outflows, Tax filings, recommending the source of financial strategy.

However, today the finance function is moving more towards decision making. Accountants
are not just involved in the preparations and the maintenance of the account but are also
involved in the decision making to communicate or vote for decisions that they may find do-
able. For example, if the decisions have to be made based on which investment to choose from
various option, the accountant not just prepare budgets and variation for the investments but
also looks into contingent plans, evaluate macro and micro economic factors that may
influence the business.

In the case of Tesco’s merger with Booker for instance, the role of finance function was not
limited to obtaining source of finance to fund the merger, but it looked way beyond that. The
accountant was responsible to evaluate a proper risk analysis on possible strengths and
weaknesses of the merger. And identifying the advantages and disadvantages of the merger.
Financial managers/accountants were in charge of weighing cost-benefit analysis and
analyzing how the company is going to outperform their risks with the strengths, to maximize
the profit so that they are able to maintain their market share and increase profitability. This
is important because Tesco needs to be able to cover up their investment fast enough, so they
can accomplish their next strategic milestone.
5.2. Tesco merging with Booker & the impact on the business

Founded in the year 1835, by George and Richard Booker, Booker makes most of its money
supplying branded and private label goods to independent convenience stores, grocers and
leisure outlets. Initially the business started with Booker Line which focused on shipping
goods. Later on, it diversified into distribution of goods and gradually gave up the shipping of
fleets and changed their focus towards wholesale food distribution. (Tesco Plc, 2018)

As of today, it supplies thousands of product lines that ranges from frozen food to tobacco. The
business has over 400,000 customers however, the end of year 2016 it was claimed that Booker
has over 1.3 million customers. The company also supplies catering services for pubs,
restaurants and other clients. Customers include the prison service in England and Wales,
restaurant chains such as Byron and Prezzo, and most of the cinema chains in the UK.

Booker has various divisions specializing in different areas in United Kingdom. This includes:
a) Booker Wholesale- A delivery business that focuses on independent retailers, grocers,
pubs and restaurants.
b) Makro Self Service Wholesalers- It focuses on caterers and small professional
businesses.
c) Book Direct- Serves large businesses such as leading United Kingdom cinemas and the
Prison Service.
d) Classic Drinks- A wholesale delivery of drinks for pubs and bars.
e) Ritter Courivaud- A wholesale business specializing in fine food delivery service,
serving top United Kingdom restaurants.
f) Premier Stores- Independent convenient stores.
(BOOKER GROUP PLC, 2016)

Booker has been in existence for a very long period of time. In January 2017, Tesco announced
that it had reached an agreement to buy Booker Group for £3.7 billion. It was confirmed on the
5th March 2018, that Tesco had completed its takeover of Booker. This decision was made by
the financial analysts by evaluating the advantages, disadvantages, success factors and risk
factors of the merger. (Wood A. M., 2017)

5.2.1 Advantages of the merger

Firstly, strong market position compared to rivals. Analysts noted that with a market
capitalization of just under £20 billion, Tesco is now bigger than the whole of rivals
Sainsbury’s, Morrison, Marks & Spencer and Ocado put together. Booker shares have now
been de-listed from the London Stock Exchange. For each Booker share, Tesco offered 0.861
new Tesco shares and 42.6 pence in cash. (Tesco Plc, 2018) The firm is still looking for more
mergers or takeover that may further boost or strengthen their current position.

Secondly, the benefit of stronger financial positions. The Tesco Board believes that the
merger will bring together the capacity and capability of Tesco to accelerate revenue growth,
from opportunities which such as by accelerating growth in the food service sector by using
Bookers skills and networks. (Devlin, 2017) Moreover, it will bring in new source of
consumers and customer towards the business which will then drive new innovative offerings.
Tesco can also use Bookers catering services and enhance their value by using Tesco’s range
of fresh food and their own brand ranges. The firm will also benefit from the combine asset
base if they are utilized to the maximum. For instance, digital offering for all customer so that
the accessibility is provided at full range.

Thirdly, the benefit of cost synergy. A cost synergy refers to the opportunity of a combined
corporate entity to reduce or eliminate expenses related to running a business. Tesco Directors
expect pre-tax cost synergies of the merger to reach a recurring run-rate of at least £175 million
per annum by the end of the third year following completion of the Merger. The firms aim to
gain cost synergy through procurement, central functions and distribution and fulfillment.

As for procurement, approximately 55% of cost synergies identified in this area are projected
to generate from improved purchasing cost efficiencies and sharing best practice through each
of the 3 main types of suppliers; fresh, own label and branded. These opportunities include cost
reduction of final product, lower waste, new opportunities for product/service innovation.

At the central function less than 10% of the identified cost synergies are projected to generate
from the reduction of duplicate costs and improved purchases of goods not for resale.
Finally, distribution and fulfillment. It is estimated that approximately 35% of the identified
cost synergies are projected to generate from opportunities in arears such as logistics, delivery,
improved efficiency and service standards. Enhancing a joint national distribution system of
Tesco and Booker, it is expected that it will lead to material benefits, including sharing parts
of the delivery fleet. (Tesco Plc, 2018)

5.2.2. Disadvantages of the merger

The main disadvantage for Tesco of merging with Booker is that the Shareholders are
unhappy with the decision. Shareholders believe that Tesco has a strong competition from
leading retail industries such as Sainsbury and Kroger and Walmart and the best way to
compete with the retailers are through pricing or promotional techniques. Or even by product
enhancement. Shareholders believe that merging with a wholesaler is going to reduce the
retained earnings and leave Tesco with a greater opportunity cost. In recent years Tesco has
been hit by growing competitors from discount chains and also the accounting scandal that
have affected Tesco negatively. Shareholders are also unhappy about the fact that Tesco is
paying a higher price for Booker making it very hard to create value for Tesco shareholders
Tesco shares closed up by 6% at 187.9 pence, while Booker also added more than 6% to 211.3
pence as the update removed some of the uncertainty clouding the deal. (Tesco Plc, 2018)

Secondly, Lower profits in the short run. With the increase in level of competition and the
scandal mentioned above, it is predicted that Tesco’s profitability is going to reduce in the short
run. This is bad for the company. The company is already suffering bad reputation due to its
accounting scandal by chief executive Phillip Clarke who overstated the financial statement
profit by £263 million by incorrectly booking payments from suppliers. It later revised the
overstatement up by £63 million. Merging with Brooker may further lower down the profit and
harm the business reputation as Tesco now has more branches, more stores and more employs
to monitor. Failure to execute the plan properly and weak integration, poor authorization can
always lead to fall in business efficiency overall. (Tesco Plc, 2018) Not to mention, the wider
and longer hierarchy makes it harder for the management to properly engage internal control
within the entire organization.

5.2.3. Success factors of the merger

Firstly, increased market shares and added value. Booker is the UK’s leading food
wholesalers. It has 198 branches and has a delivery capability with national coverage. Through
its branches, Booker has the ability to serve independent retailers, small business customers,
and also serves national chains of retailers, cinemas and other organizations. Throughout the
years, Booker Group has grown with its customers. They have improved their choices, prices
and service to its customers. The group has also grown its sales from approximately £3 billion
in the 52nd weeks ended 30th March 2007 to approximately £5.3 billion in the 52nd weeks ended
24th March 2017, which is evidence that the group has been competent in serving customers
well. Moreover, the group has also driven its operating profit from approximately £46.1 million
in the 52nd weeks ended 28th March 2008 to approximately £176 million in the 52nd weeks
ended 24th March 2017. This eventually increased shareholder value by approximately £4.7
billion since 2005. (Tesco Plc, 2018) Booker was also voted as UK’s best wholesaler by The
Grocer in 2017. This is the 7th time Booker achieved the title in the past 8 years.

Secondly, increase in potential consumers. It is assumed that the merger with Booker Group
and Tesco are going to increase value for consumers. There are going to be improved choices
in the range of fresh food available at more, convenient outlets, widest range of food and
ingredients in professional catering outlets, quality fresh foods at attractive prices at more retail
and eating out establishments and an expanded network of up to 8,000 convenient
neighborhood locations to pick up click and collect orders. Moreover, the combined group will
be able to improve choice, prices and service for the retail, catering and small business
customers that Booker is proud to serve. (Tesco Plc, 2017) It is expected that, as a result of the
Merger, Booker’s customers will benefit from the Combined Group’s ability to: -

 Offer significant enhancement to ranges of food available for independent retailers,

caterers and small businesses, including fresh food and the availability of new/own brand
ranges.
 Improve the value equation through better sourcing, allowing access to competitive prices
from larger brands.
 Enhance the delivery service by utilizing the Combined Group’s range and fleet.
 Provide access to Tesco banking, mobile and Tesco Pay+ services to support the
management of businesses, and the core consumer offering.
 Transfer knowledge, skills and innovation ideas across the retail and wholesale markets
more readily to develop an enhanced proposition for businesses and consumers.
 Make a positive contribution to local communities through supporting small businesses.
Thirdly, multi-channel supply chain. The multi-channel supply chain will cover the whole
range of food, grocery and catering supplies, which is expected to provide new opportunities
for Tesco. This includes the opportunity to create own label brands as well as supplying
existing products to a wider footprint creating the opportunity for fresh suppliers to use and
sell their full crop. By opening up a broader range of routes to markets Tesco will benefit from
fuller crop procurement and utilization which will help to reduce food waste, cost of production
and increase efficiencies. Tesco can also expect greater opportunities for innovation in food
production and help reduce carbon emissions through improved production measures and the
utilization of the most efficient storage and transportation network. (Tesco Plc, 2017)

Fourthly, better human resource training. The merger will open up opportunities for
colleagues of Booker and Tesco by broadening the range of experiences, skills and roles
offered for the employees during the training period. It is expected that, as a result of the
merger, Tesco will be able to provide growth opportunities for employees by becoming part of
a larger business and will be able to provide better experiences and skills in a new multi-
channel environment. (Devlin, 2017) The group is also expected to enhance the security of
roles by delivering growth and open up further opportunities for colleagues to be involved in
contributing to local community projects.

5.2.5. Risk factors of the merger

Firstly, changes in regulation. Booker operates in environment governed by strict regulations
that ensures safety and protection of customers, shareholders, employees and other
stakeholders and the operation of an open and competitive market are sustained. These
regulations include food hygiene, health and safety, tobacco, data protection. In all cases, once
the merger is done, Tesco has to ensure they are aware of the regulation is various state and
countries because Booker operates in countries where Tesco does not operate. (Wood A. M.,
2017)The Board takes this responsibility seriously and recognizes that any breach of regulation
could cause reputational and financial damage to the group.

Secondly, failure to respond to competition. The industry is extremely competitive with the
market being served by numerous competitors, ranging from national multiple retailers to
regional independent wholesalers. Because of the merger the management has to ensure what
are their key focus areas. The scope is greater now with a wider hierarchy and more function
to monitor. The delivery wholesale services, product innovation, private branding and
diversified property portfolio makes it difficult to ensure proper controls are placed. Hence, the
business may not be able to respond to strong competition unless supervisors or experts are not
consulted. (Wood A. M., 2017) Tesco ensure that they will compete by closely monitoring the
activities of competitors and ensures they will continue to improve the choices, prices and
services to customers.

Thirdly, failure to ensure product quality and safety are met. This could have an
unfavorable impact on the Tesco’s reputation, sales, operating profits and cashflows. The
quality and safety of the products should always be the main focus
and any failure in this
area will affect the willingness of customers to purchase Tesco’s product. A larger workforce
usually results in the company not being unable to monitor product quality. Tesco is aware that
if the company fails to respond to customer satisfaction the expected standards of quality and
safety in products, their loyalty may be impacted. This will adversely impact on the market
share and the financial results.

Because Tesco anticipates these risks, the group works with their suppliers to ensure the
integrity of the products supplied are met according to their standards. Food hygiene practices
are taken seriously and are monitored through internal audit procedures and external bodies,
such as environmental health departments, within local authorities. Tesco has well prepared
procedures for crisis management in order to act quickly when required. (Tesco Plc, 2018)

5.2.6. Conclusion
After the thorough evaluation of the impact of the merger on Tesco it was decided to proceed
with the merger as the advantages outweigh the costs.
6.0. Appendix

1- Tesco financial resources as per 24TH February 2018

2- Reconciliation of net cash flow to movement in Net debt as per 24TH February 2018

3- Total Indebtedness ratio as per 24TH February 2018

4- Profit/loss for the year as at February 2018 and February 2017

5- Sainsbury’s borrowings as at March 2018