1

M004LON: Finance, Funding &

Legislative
Frameworks for Success

TESCO PLC
PRESENTED By
STUDENT

SUBMISSION DATE: 20/12/2010

2
Table of Contents
PAGE NO.

INTRODUCTION
1.1FORMATION AND
HISTORY………………………………………………………………………..
4

1.2OPERATIONS……………………………………………………………………………………
………… 4

1.3STRATEGY…………………………………………………………………………………………
………… 5

FINANCIALS
1.4BALANCE SHEET
…………………………………………………………………………………………
6

1.5GROUP INCOME
STATEMENT…………………………………………………………………….
8

1.6GROUP CASH FLOW

STATEMENT……………………………………………………………….
10

ANALYSIS
1.7BALANCE SHEET
………………………………………………………………………………………….
12

1.8PROFIT AND LOSS

………………………………………………………………………………………..
13

1.9RATIO………………………………………………………………………………………………
………….. 14

1.10 PESTEL
………………………………………………………………………………………………………
…. 17

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 1.11 SWOT
………………………………………………………………………………………………………
…… 18

1.12 PORTER’S FIVE

FORCES………………………………………………………………………………….
19

ECONOMIC VALUE ADDED…………………………………………....

19

BALANCED SCORECARD………………………………………………..
20

FUTURE EXPECTATIONS……………………………………………….
22

CONCLUSION…………………………………………………………………
23

BIBLIOGRAPHY……………………………………………………………..
24

1.1 FORMATION AND HISTORY

Tesco plc is a global grocery and general merchandising retailer headquartered in

Cheshunt, United Kingdom. Jack Cohen founded Tesco in 1919 by selling surplus
groceries from a stall at Well Street Market, Hackney, in the East End of London.
The brand first appeared in 1924. The name came about after Jack Cohen
bought a shipment of tea from T.E. Stockwell. He made new labels using first three
letters of supplier’s name (TES) and first two letters of his surname (CO), forming
TESCO. First store opened in 1929 in Burnt Oak, Edgware, Middlesex and was
floated on the London Stock Exchange in 1947 as Tesco Stores (Holdings) Limited.

1.2 OPERATIONS

Originally specialising in food and drink, it has diversified into areas such as
clothing, electronics, financial services, telecom, home, health, car, dental and pet
insurance, retailing and renting DVDs, CDs, music downloads, internet services and

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software. It’s the third-largest retailer in the world measured by revenues (after
Wal-Mart and Carrefour) and second-largest measured by profits (after Wal-Mart). It
has stores in 14 countries across Asia, Europe and North America and is the grocery
market leader in UK (having a market share of 30%) Malaysia and Thailand.

FIGURE 1: Share of Leading Players in UK Food Retail Market

Ref. (http://www.ivoryresearch.com/sample36.php)

1.3 STRATEGY

Tesco has a well-established and consistent strategy for growth. The rationale being
to broaden the scope of business to enable it to deliver strong sustainable long-term
growth by following customers into large expanding markets at home and new
markets abroad. The strategy to diversify the business was laid down in 1997 and
has been foundation of Tesco’s success in recent years.

The objectives of the strategy are:

• Be a successful international retailer

• Grow the core UK business

• Be as strong in non food sector as in the food sector

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 • Develop retailing services – such as Tesco Personal Finance, Telecoms and
Tesco.com

• Put community at the heart of what they do.

In 1997 Tesco’s international business generated 1.8% of the Group’s profits and at
the time Tesco had just entered the Retailing Services markets; today these parts of
their business represent 22% and 16% profits respectively. Importantly, the
strategy has given the business momentum to grow well through the economic
downturn. By continuing to invest through the recession- in the customer offer, in
infrastructure and in their own people- Tesco is now well placed to grow faster and
improve shareholder returns as the global economic environment improves.
Ref: (http://ar2010.tescoplc.com/business-review/~/media/Files/T/Tesco-Annual-Report-2009/Attachments/pdf/Full-
Review.pdf)

Figure 2: Strategy

Ref: (http://ar2010.tescoplc.com/a-business-for-a-new-decade/our-strategy.aspx)

2. FINANCIALS

2.1 BALANCE SHEET:

Balance sheet Layout |

28/02/2010
mil GBP
12 months
Cons.
Unqualified

6
 IFRS

Fixed Assets
Tangible Assets 24,203
Land & Buildings 20,685
Freehold Land
Leasehold Land
Fixtures & Fittings 0
Plant & Vehicles 0
Plant
Vehicles
Other Fixed Assets 3,518
Intangible Assets 4,177
Investments 5,878
Fixed Assets 34,258

Current Assets
Stock & W.I.P. 2,729
Stock
W.I.P.
Finished Goods 2,729
Trade Debtors
Bank & Deposits 2,819
Other Current Assets 4,306
Group Loans (asset) 2,727
Directors Loans (asset) 0
Other Debtors 1,236
Prepayments 337
Deferred Taxation 6
Investments 1,911
Current Assets 11,765

Current Liabilities
Trade Creditors -5,084
Short Term Loans & Overdrafts -1,571
Bank Overdrafts -575
Group Loans (short t.) -951
Director Loans (short t.) 0
Hire Purch. & Leas. (short t.) -45
Hire Purchase (short t.)
Leasing (short t.) -45
Other Short Term Loans 0

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 Total Other Current Liabilities -9,360
Corporation Tax -472
Dividends 0
Accruals & Def. Inc. (sh. t.) -1,815
Social Securities & V.A.T. -487
Other Current Liabilities -6,586
Current Liabilities -16,015

Net Current Assets (Liab.) -4,250

Net Tangible Assets (Liab.) 25,831
Working Capital -4,250
Total Assets 46,023
Total Assets less Cur. Liab. 30,008

Long Term Liabilities

Long Term Debt -11,744
Group Loans (long t.) 0
Director Loans (long t.) 0
Hire Purch. & Leas. (long t.) -164
Hire Purchase (long t.)
Leasing (long t.) -164
Other Long Term Loans -11,580
Total Other Long Term Liab. -776
Accruals & Def. Inc. (l. t.) 0
Other Long Term Liab. -776
Provisions for Other Liab. -967
Deferred Tax -795
Other Provisions -172
Pension Liabilities -1,840
Balance sheet Minorities -85
Long Term Liabilities -15,412

Total Assets less Liabilities 14,596

Shareholders’ Funds
Issued Capital 399
Ordinary Shares
Preference Shares
Other Shares
Total Reserves 14,197
Share Premium Account 4,801
Revaluation Reserves 0

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 Profit (Loss) Account 9,356
Other Reserves 40
Shareholders’ Funds 14,596

Ref: (https://fame2.bvdep.com/version-2010121/Report.ColumnsEdition.serv?
editedformat=nc&subjectrecord=nc&subjectrecordinternalid=64958&recordinternalid=6495
8&editedelements=nc&editedelementid=BALANCESHEET&returnservice=4&VolatileResoluti
on=1366x680&display=ContentOnly&context=2Y2O600O5JB78YE&_cid=491#BALANCESHE
ET)

2.2 GROUP INCOME STATEMENT:

PARTICULARS 52 WEEKS 53 WEEKS INCREASE

2010 2009 (%)

£m £m

Continuing operations

Revenue (sales excluding VAT) 56,910 53,898 5.6

Cost of sales (52,303) (49,713)

Gross profit 4,607 4,185 10.1

Administrative expenses (1,527) (1,252)

Profit arising on property-related 377 236

items

Operating profit 3,457 3,169 9.1

Share of post-tax profits of JV’s & 33 110

Associates
265 116
Finance income
(579) (478)
Finance costs

Profit before tax 3,176 2,917 8.9

Taxation (840) (779)

Profit for the year 2,336 2,138 9.3

Attributable to:

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Owners of the parent 2,327 2,133

Minority interests 9 5

Ref: (http://www.tescoplc.com/plc/ir/pres_results/results/r2010/2010-04-20/2010-04-20a.pdf)

Figure 3: Operating Profit

Ref: (http://ar2010.tescoplc.com/a-business-for-a-new-decade/a-growth-business.aspx)

2.3 GROUP CASH FLOW STATEMENT:

52 WEEKS 53 WEEKS
2010 2009

£m £m

Cash flows from operating activities

Cash generated from operations 5,947 4,978

Interest paid (690) (562)

Corporation tax paid (512) (456)

Net cash from operating activities 4,745 3,960

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Cash flows from investing activities

Acquisition of subsidiaries, net of cash acquired (65) (1,275)

Proceeds from sale of property, plant and equipment 1,820 994

Purchase of property, plant and equipment and (2,855) (4,487)

investment property
4 -
Proceeds from sale of intangible assets
(163) (220)
Purchase of intangible assets
(45) (242)
Increase in loans to joint ventures
(4) (30)
Investments in joint ventures and associates
(1,918) (1,233)
Investments in short-term and other investments
1,233 360
Proceeds from sale of short-term investments
35 69
Dividends received
81 90
Interest received

Net cash used in investing activities (1,877) (5,974)

Cash flows from financing activities

Proceeds from issue of ordinary share capital 167 130

Increase in borrowings 862 7,387

Repayment of borrowings (3,601) (2,733)

Repayments of obligations under finance leases (41) (18)

Dividends paid (968) (883)

Dividends paid to minority interests (2) (3)

Own shares purchased (24) (265)

Net cash from financing activities (3,607) 3,615

Net (decrease)/increase in cash and cash equivalents (739) 1,601

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Cash and cash equivalents at beginning of the year 3,509 1,788

Effect of foreign exchange rate changes 49 120

Cash and cash equivalents at the end of year 2,819 3,509

Ref: (http://www.tescoplc.com/plc/ir/pres_results/results/r2010/2010-04-20/2010-04-20a.pdf)

Figure 4: Cash Flows

Ref: (https://fame2.bvdep.com/version-2010126/CHART_EVOL.Edition.serv?
editedformat=nc&subjectrecord=nc&subjectrecordinternalid=64957&editedelements=nc&editedelementid=CHAR
T_EVOLINSECTION&returnservice=2&context=35YQ600O5Q0FP8C&_cid=610#CHART_EVOLINSECTION)

3.1 BALANCE SHEET ANALYSIS

1. Tesco purchased Land & Buildings worth 876 million GBP and made
investments worth 1049 million GBP in the last financial year, hence
increasing its Fixed Assets by around 7% during the period and a
whopping 70% from 28/02/2007. This rise shows that Tesco is willing to
make huge capital expenses and seeing it from a going concern concept it is
of immense importance that it continues to do so.

2. Current Assets dipped during the period by about 16%, still substantially
higher than what they were before last financial year.

3. Current Liabilities decreased during the period by over 2000 million

GBP which shows that Tesco is repaying its debts regularly. Tesco repaid
3601 million GBP borrowings in the current financial year.

4. Reserves increased by about 1654 million GBP.

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 Figure 5: Assets & Liabilities

Ref: (https://fame2.bvdep.com/version-2010126/EVOLINDICESCHART.Edition.serv?
editedformat=nc&subjectrecord=nc&subjectrecordinternalid=64957&editedelements=nc&editedelementid=EVOLI
NDICESCHARTINSECTION&returnservice=6&context=2TJQ600O5I78WN2&_cid=870#)

3.2 PROFIT AND LOSS ANALYSIS

1. Cost of Sales reduced during the current year relatively in comparison to the
last year which boosted the profits by about 188£m.

2. Gross profit increased by over 10% which is a very healthy sign for
Tesco.

3. The administration expenses during the period increased relatively when

comparing to the last year mainly due to inflation i.e., rise in the overall price
structure of the economy.

4. Finance income and Finance costs also increased in comparison to last year,
finance income became more than twice of what it was in the previous
year and finance costs increased by 21% approximately of last year’s
figure.

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 5. Profit before and after taxes increased by around 9% each showing
Tesco’s profit making ability.

6. Basic and Diluted Earnings Per Share increased from 27.14p to

29.33p and 26.96p to 29.19p respectively when almost every other firm
was struggling to make profits.

Figure 6: Profit Chart

Ref: (https://fame2.bvdep.com/version-2010126/EVOLINDICESCHART.Edition.serv?
editedformat=nc&subjectrecord=nc&subjectrecordinternalid=64957&editedelements=nc&editedelem
entid=EVOLINDICESCHARTINSECTION&returnservice=6&context=2TJQ600O5I78WN2&_cid=870#EVOL
INDICESCHARTINSECTION)

3.3 RATIO ANALYSIS

• Current Ratio: It is a liquidity ratio measuring company’s ability to pay

short-term obligations. At present Tesco has a Current Ratio of 0.73 (<1)
which is not a good sign for the company as it suggests that it would be
unable to pay off its obligations if they came due at that point. Current
Ratio = Current Assets / Current Liabilities.

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 Figure 7: Current ratio

Ref: (https://fame2.bvdep.com/version-2010126/Report.serv?
seqnr=0&context=2TJQ600O5I78WN2&_cid=57&focusedelement=nc&editedformat=nc&subjectrecordinte
rnalid=64957)

• Return on Capital Employed: A ratio that indicates the efficiency and

profitability of a company’s capital investments. Return on capital employed
has shown a downward trend in the last four years, mainly because of the
global recession. It has dropped down from 15.93% as on 28/02/2007 to
10.58% as on 28/02/2010.

ROCE = Earnings before interest and taxes / (Total Assets – Current

Liabilities)

Figure 8: ROCE

Ref: (https://fame2.bvdep.com/version-2010126/Report.serv?
seqnr=0&context=2TJQ600O5I78WN2&_cid=57&focusedelement=nc&editedformat=nc&subjectrecordinternalid=6
4957)

• Return on shareholder’s fund: It is a measure of profit for the period

which is available to the owner’s stake in a business. Return on shareholder’s
fund dropped down from 25.25% as on 28/02/2007 to 21.76% as on
28/02/2010, reason being the economic downturn during the period.

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 However, it is expected to grow in the near future as the global economic
conditions are on an upswing.

ROSF = [Net Profit after Tax and Preference Dividend / (Ordinary Share
capital + Reserves)]*100

Figure 9: ROSF

Ref: (https://fame2.bvdep.com/version-2010126/Report.serv?
seqnr=0&context=2TJQ600O5I78WN2&_cid=57&focusedelement=nc&editedformat=nc&subjectrecordinternalid=6
4957)

Figure 10: Graph showing ROSF

Ref: (http://ar2010.tescoplc.com/a-business-for-a-new-decade/a-growth-
business.aspx)

• Profit Margin: It is a profitability ratio which is calculated as net profits

divided by sales. Tesco has maintained a steady profit ratio over the last few

16
 years which is a healthy sign considering the economic conditions around the
globe. Tesco had a Profit Margin of 5.58% during the previous year.

Profit Margin = [Net Profit / Sales] * 100

Ref: (https://fame2.bvdep.com/version-2010126/Report.serv?
seqnr=0&context=PBRE600O5JB78SN&_cid=57)

Figure 11: Profit Margin

Ref: (https://fame2.bvdep.com/version-2010126/Report.serv?
seqnr=0&context=2TJQ600O5I78WN2&_cid=57&focusedelement=nc&editedformat=nc&subjectrecordinternalid=6
4957)

• Cash Flow Statement shows that Tesco invested heavily in short term and
other investments and made huge purchases of properties and plants, hence
the decrease in cash and cash equivalents during the year. During the
previous two financial year’s cash and cash equivalents had showed an
increasing trend though.

3.4 PESTEL ANALYSIS

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PESTEL ‘Thing’ which Frequenc Impact Impact by Importance Which area of
may change y in how Positive dynamics or Impact/ an
this will or (i.e., The Relevance – organizations
change Negative significan very high, finance is it
(1-5) (- or +) ce/ high, likely to
importan medium, affect (B/S,
ce of low, very P/L, C/F)
implicatio low
n)

Political Factors

 Involvement of 2 - High C/F, P/L, B/S

various
Governments

Economic Factors

 Stock Market 5 + Very High B/S

 Consumer 2 + High P/L

Behaviour
5 - Very High C/F, P/L, B/S
 Inflation

Social Factors

 Immigration 1 - Low P/L

 Change in 4 + High P/L

Fashion

Technological
Factors
4 + High P/L
A. Online
Shopping

Environmental
Factors
3 + Medium P/L
B. Environmentall
y friendly
products 3 - Medium P/L
C. Transport
network

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Legal Factors

D. Taxes 2 - High C/F, P/L

Ref: (http://www.321books.co.uk/catalog/tesco/pestle-analysis.htm)

3.5 SWOT ANALYSIS

STRENGTH WEAKNESS OPPORTUNITIES THREATS

A. Third largest A. Lack of A. Commercial A. Global

grocery Retail geographic network financial
Company in the diversification. portfolio. crisis in UK.
world.
B. High dependence B. Popularity of B. Fierce
B. Quality products on UK retail Tesco.com. competition
at low prices. sector. in UK grocery
C. Global market.
C. Customer C. Product recalls. expansion and
retention diversification. C. Decreasing
strategy. income of
D. Food retail people.
market
segment.

Ref: (http://www.ivoryresearch.com/sample36.php)

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 Figure 12: SWOT Analysis

Ref: (http://www.ivoryresearch.com/sample36.php)

3.6 PORTER’S FIVE FORCES ANANLYSIS

Threat of New Power of Buyers Competitive Power of Threat of

Entrants Rivalries Suppliers Substitutes

R R R R R

Threat of new Bargaining Competition + Bargaining + For food items-

competitors
- power fairly in grocery power fairly low.
+ in the food high. retail sector low.
industry is - very high.
relatively low.

+ Huge capital Switching cost Slow market + Negotiations at For non food
investments
- very low.
- growth low prices
- items- high.
required. threatening possible.
leadership
position.

Authorization
from
+ government,
considerable
amount of
time and
resources.

Ref: (http://www.ivoryresearch.com/sample36.php)

4. ECONOMIC VALUE ADDED

In corporate finance, EVA is an estimate of a firm’s economic profit- being value

created in excess of the required return of the company’s shareholders- where EVA
is profit earned by the firm less cost of financing the firm’s capital.

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EVA = Net Operating Profit after tax – (Weighted Average Cost of Capital * Capital
Employed)

During the financial year 2008-09 EVA by Tesco was approximately 1045 million
GBP which proves that Tesco is a value driven company as it is providing its
shareholders more than their expectations. Ref:
(http://www.sooperarticles.com/finance-articles/accounting-articles/cost-capital-uk-companies-
183857.html)

5. BALANCED SCORECARD

A strategic planning and management system used widely in businesses to align

business activities to the vision and strategy of the organization and monitor
organization performance against strategic goals. It was originated by Drs. Robert
Kaplan and David Norton as a performance measurement framework.

Ref:
(http://www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx)

Tesco operates a Balanced Scorecard Approach to manage its business which is

known internally within the group as “Steering Wheel”.

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 Figure 13: Steering Wheel

It provides a perfect base to the company for designing future strategies. It

communicates strategy-aligned goals, manages strategic performance, monitors
progress and measures success. Tesco’s values and priorities are embedded in this
wheel through appropriate KPI’s. The picture above clearly shows that the main
areas of focus are:

• Operations

• People

• Finance

• Customer

• Community

Benefits of using the Balanced Scorecard are:

• Reflects core aims and values

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 • Converts strategy into an effective governance mechanism

• Ensures alignment of employees to company’s strategic vision

• Increased transparency and better communication

• Simplifies strategic aim by creating a visual summary

Challenges that Tesco faces when using them are:

• Co-ordination across multiple functions

• Some indicators are not measurable e.g. innovative quotient of the

organization.

Ref: (http://www.mbaknol.com/management-case-studies/tesco%E2%80%99s-
%E2%80%98steering-wheel%E2%80%99-a-tool-for-strategic-value-creation-and-business-
transformation/)

6. FUTURE EXPECTATIONS

Tesco is planning to nearly double its selling space in Central and Eastern parts of
Europe in the next 5 years. It is also planning to quadruple its sales in China to 4
billion GBP a year in the next 5 years. Meanwhile, Charles Stanley analyst Sam Hart
said he expects trading conditions in the UK food retail industry to remain
"relatively benign" but that consumer demand should be "resilient in the face of
austerity measures". He expects Tesco's international and retailing services
divisions to be growth drivers, with the core UK business "acting as the 'cash cow'
to fund growth in these areas".

Ref: (http://www.just-food.com/news/tesco-plans-to-double-selling-space_id113326.aspx)

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(http://www.just-food.com/news/tesco-aims-to-quadruple-china-sales_id113305.aspx)

(http://www.just-food.com/news/analysts-focus-on-tescos-international-potential_id113497.aspx)

Figures 14 & 15

Ref: (http://ar2010.tescoplc.com/a-business-for-a-new-decade/a-growth-business.aspx)

Ref: (http://ar2010.tescoplc.com/a-business-for-a-new-decade/for-a-new-decade.aspx)

Tesco improved its liquidity significantly during the year through strong cash
generation, tight control of capex and working capital improvements due
to better inventory management. Tesco plans to invest 3.5 billion GBP in
capital expenditure this year which would make Tesco bigger than what it is at
present.

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 7. CONCLUSION

We can say that over the past decade Tesco has transformed itself into a
diverse international business and by following the consistent strategy laid down
by the management it is well positioned for long term growth. Through
diversification into new geographies, new product areas and new services,
Tesco has developed a business for the future. Tesco is amongst the top five
retailers in the world today both in terms of profit and in terms of revenue and is
all set to become the leader in the retail market segment in the near future. Tesco
needs to improve its Current Ratio. Ideally the Current Ratio should be 2 whereas
Tesco presently has a Current Ratio of less than 1 which means that it cannot pay off
its obligations if called upon to do the same at present. It is paying debts
continuously and needs to continue doing the same to save the huge interest
cost it expends. By making heavy capital expenditures it is showing to the world
that Tesco is an ever expanding company and has set its goals higher than one
anticipates.

Risk is an accepted part of doing business and the real challenge for any entity is
to identify the principal risks it faces and to develop and monitor appropriate
controls to counter the same. Tesco, being as huge as it is also faces such risks and
is doing pretty well at present by identifying the risk management process in
detail in the Corporate Governance section. To conclude it can be said that
Tesco is an ever growing, ever expanding company and it should continue to serve
the community and its people economically and in an environment friendly
way in the future i.e., THE TESCO WAY.

8. BIBLIOGRAPHY

25
Ref: (http://www.bme.eu.com/news/tesco-recovery/)

List of References:

(http://www.bme.eu.com/news/tesco-recovery/)

(http://www.mbaknol.com/management-case-studies/tesco%E2%80%99s-
%E2%80%98steering-wheel%E2%80%99-a-tool-for-strategic-value-creation-and-
business-transformation/)

(http://ar2010.tescoplc.com/a-business-for-a-new-decade/a-growth-
business.aspx)

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(https://fame2.bvdep.com/version-2010126/Report.serv?
seqnr=0&context=2TJQ600O5I78WN2&_cid=57&focusedelement=nc&editedformat
=nc&subjectrecordinternalid=64957)

http://en.wikipedia.org/wiki/Tesco

Information on Return on Capital Employed available at:

http://www.investopedia.com/terms/r/roce.asp and

(https://fame2.bvdep.com/version-2010126/Report.serv?
seqnr=0&context=2TJQ600O5I78WN2&_cid=57&focusedelement=nc&editedformat
=nc&subjectrecordinternalid=64957)

Information on Return on Shareholders Fund available at:

http://www.thefinanceowl.com/financial-ratios/rosf-ratio/ and

(https://fame2.bvdep.com/version-2010126/Report.serv?
seqnr=0&context=2TJQ600O5I78WN2&_cid=57&focusedelement=nc&editedformat
=nc&subjectrecordinternalid=64957)

Information on Current Ratio available at:

http://www.investopedia.com/terms/c/currentratio.asp and

(https://fame2.bvdep.com/version-2010126/Report.serv?
seqnr=0&context=2TJQ600O5I78WN2&_cid=57&focusedelement=nc&editedformat
=nc&subjectrecordinternalid=64957)

Information on Profit Margin available at:

http://www.investopedia.com/terms/p/profitmargin.asp and

(https://fame2.bvdep.com/version-2010126/Report.serv?
seqnr=0&context=PBRE600O5JB78SN&_cid=57)

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