tesco performance analysis

1 | P a g e T e s c o P L C : C o m p a n y A n a l y s i s

SWOT, PESTEL and Porter’s 5 Forces analyses of Tesco

(2013, 3800 words)

This paper analyzes the internal and external performance of Tesco, which is one of the leading

global retailers and an extremely successful global brand. Tesco’s performance analysis is

carried out by assessing the company’s current standing using the PESTLE, SWOT, as well as

the Porter’s Five Forces Model. Furthermore, the paper also includes comprehensive financial

analysis and shareholder performance for the years 2010-2012.

Tesco, SWOT; PESTEL; Porter’s Five Forces


1. Introduction

Tesco (henceforth: the company or Tesco) is ranked amongst the most popular grocery

and food retailers worldwide. It operates in 14 countries and is has a strong financial and

economic presence in Asia, North America and Europe. The company comprises of

approximately 492, 714 employees and has its headquarters in Hertfordshire, UK (Datamonitor

PLC, 2011).

The company experienced an increase in revenues by 7.1% in the fiscal year that ended in

2011. The total revenues of the company amounted to £60,931 million (approximately $94,193.2

million). Considering the operating profit, the company attained an increase of 10.2% in FY2011

as compared to FY2010. Thus, the total operating profit of the company amounted to £3,811

million (approximately $5,891.4 million). The net profit experienced a gain of 14.1% in FY2011

when compared with the statistics of FY2010. The net profit of the company turned out to be

£2,655 million (approximately $4,104.4 million) (Datamonitor PLC, 2011).

This paper analyzes the internal and external performance of Tesco by analyzing the

company’s standing using the Pestle Structure, SWOT, as well as the Porter’s Five Forces

Model. The paper also includes comprehensive financial analysis and shareholder performance

for the years 2010-2012.

2. Comprehensive PESTLE analysis

Political

For TESCO, it is very important to monitor changing environment. Recent changes can

significantly affect the day to day activities and long term plans too. For instance, credit crunch

may have economic as well as political significance. Unemployment rises during credit crunch;

hence, if TESCO is the fastest growing retailer, it can generate more employment opportunities.


Similarly, if they would have anticipated such crisis, TESCO would have definitely made a plan

(Ghafoor, 2011).

Economics

Current financial crisis affected the entire world. However, TESCO was fortunate that

recession did not pose serious concerns in terms of lowering the company’s profits. TESCO has

created a brand that markets the product to everyone; hence, customers come and shop from a

wide variety of their products and portfolio. Furthermore, customers are also satisfied with the

appropriate pricing offered by TESCO at its outlets which makes it an even more suitable and

reliable brand (Ghafoor, 2011).

Social

Sociological factors account for demographic changes, such as more Eastern Europeans

immigrating, young generation entering into workforce, etc. TESCO can make the most of these

changing social trends. For instance, current demographics show increase in career minded

professionals who are mostly single. They mostly opt for fast food, quick meals, or

microwaveable cooking products to make their life easier which is where Tesco’s portfolio is its

strongest (Ghafoor, 2011).

Technological

In recent years, internet has influenced the way people do their business. Same is the case

with TESCO. TESCO has also benefited from internet by initiating online shopping services at

their homepage (www.tesco.com <http://www.tesco.com>) (Ghafoor, 2011).

Legal

TESCO has tremendous physical presence. On one hand, it is beneficial, but on the other

hand, it has a negative side too. Laws and regulation are enforced that prevent monopoly and


creates competitive environment. PESTLE analysis renders results that either a company is

working as a monopoly or not. In case of a company being found as a monopoly, it can face

lawsuits. Contrary to this, competitive environment is always encouraged. It has been ascertained

that TESCO do hold dominance in the EU market, however its dominance is not exploitative. In

addition to this, planning permission also comes under legal aspects. TESCO can expand but it

has to ensure that all the regulations of planning permission are carefully followed (Ghafoor,

2011).

Environment

TESCO believes in green and user friendly environment. It has also created Sustainable

Technology fund worth £100 million in order to support carbon reduction. TESCO knows very

well that a company’s image is greatly affected by the corporate social responsibility practises it

conducts (Ghafoor, 2011).

Therefore, it can be said that TESCO should frequently conduct its PESTLE analysis

since the results can help in deciding future strategies. If an organisation is unaware of the

prevalent external environment, decisions and strategies will not work. This will cause business

to cease in long run (Ghafoor, 2011).

3. Comprehensive Porter’s 5 force analysis

Industry Competitors

Porter’s 5 force analysis revolves around factors like pricing, behaviour, capacity, fixed

or variable costs, concentration, differentiation, and market and company growth. The industry,

in which Tesco is involved comprises of numerous rivals, which need to be identified by the

company. The competitors which top the list of rivals of Tesco are Carrefour S.A., ASDA Group

Limited BP PLC, Royal Dutch/Shell Group, J Sainsbury PLC, Somerfield, Marks & Spencer


Group PLC, The Boots Group PLC, ExxonMobil Corporation, John Lewis Partnership PLC,

The Big Food Group PLC, Wm Morrison Supermarkets PLC, and The Car phone Warehouse

Group PLC. As the number of competitors increase and expand in their size and capacity, they

tend to approach equal position which ultimately intensifies rivalry. This suggests the fact that

since Tesco belongs to the retailing industry, the degree of rivalry here is immensely stiff

(Typepad, 2008).

Potential Entrants

As they possess a valuable experience spanning over 51 years in this kind of business,

they are fairly placed with the incumbent retail giants present today in the market, which

eventually puts up a strong barrier for the entry of any new comer. It was quite easy in the early

days to enter the industry and make way through it, as giants of today were just medium-sized

firms before. However, today the retailing industry has a contemporary landscape which tends to

be a big hurdle for the new entrants. The conglomerate incumbents actually impose both explicit

and implicit barriers upon the potential entrants in this industry. New entrants also need to

overcome hurdles pertaining to access towards the distribution channels. The common

distribution channels are already being occupied by the incumbents. The new entrants thus

encounter the challenge of finding out new channels for dispensing their retail products and also

competing with the already established chains in the domain of distribution channels (Typepad,

2008).

Buyers

The customers of the retailing industry are present in a large quantity who do not

purchase products in bulk quantity. This factor actually weakens the bargaining power of the

consumers. The buying power of the buyers increases when the supplying industry comprises of


small sellers in a large quantity in such a way that the product being purchased is standardized

sufficiently among the sellers. The buying power intensifies when customers are unable to find

alternative sellers and switch between various suppliers at zero cost virtually. Tesco is being

fortunate in the sense that its competitors are not large enough in comparison to its own

organisation size. This has resulted in a more disciplined market, where the competitors follow a

disciplined approach in setting their prices. The government regulations are also partly

responsible for this disciplined market approach (Typepad, 2008).

Suppliers

The suppliers in Tesco’s kind of industry would be left alone with no one for selling their

products to, if the retailing giants aren’t willing to lower the price to that which is posed by

Tesco. Thus, Tesco is advantageous in the sense that it can dictate the price according to its own

will to the supplier. On the other hand, supplier power increases in cases where the buyers find it

difficult for switching from one supplier to another as the suppliers have differentiated products

and the suppliers aren’t bothered much about those buying firms. The case of retailing industry

differs from this scenario where the suppliers do not possess much power as they are expected to.

Tesco finds it quite easy to switch from one supplier to another as it doesn’t cost much to the

company’s overall structure. If the company decides upon switching suppliers, it can easily

demand from the firm to choose them as the supplier in this case (Typepad, 2008).

Substitutes

The prices of the products produced by the producers highly depend on the availability

and price of acceptable substitutes for that product. Producers encounter challenges of low

growth rate in sales and profits due to the inroads taken by substitutes. They could only combat

such situations if the product sellers upgrade their product’s quality, differentiate their product


from the substitutes and lower the price through cost reduction. As mentioned earlier, the

retailing industry comprises of numerous rivals and competitors which are responsible for

reducing the prices of all the companies in the industry. The ease with which buyers are able to

opt for another substitute affects the competition among the substitutes present in the market. A

core consideration in this switching process is the cost incurred by the buyer in switching from

the use of a product towards its substitute. Thus, this one-time switch over cost must be low. The

force of a substitute tends to be much higher in the industry as switching over various chains

results in a fuss for the consumer and also leads to low costs. Thus, it is essential for Tesco to

keep its products differentiated from the competitors, improve upon its quality and keep the costs

low as well (Typepad, 2008).

3. Comprehensive SWOT Analysis

Strength

Sustaining a business by adopting value oriented and diversified approach in retailing

Tesco is a great example of a sustainable business model. Tesco has achieved highest

rank among retailers from all over the world by delivering service of high value. Besides, it has

been focusing upon discovering new boundaries through continuous diversification. The value

oriented agenda of Tesco is tremendously supporting its business in acquiring new prospects,

even during the unfavourable environmental conditions (Datamonitor PLC, 2011).

Expanding non-food categories

Keeping in mind the already saturated UK market, Tesco has opted for expansion through

introduction of non-food categories. Electrical items are one recent example. Tesco has gone for

category expansion due to already limited buyer base. Attracting entirely new prospects is


certainly more difficult than retaining the existing ones. Thus, Tesco was propelled to take this

step in order to increase its profitability ratios (Datamonitor PLC, 2011).

Support by other retail services

Tesco has ventured into business of retail services. These include banking,

telecommunication, ecommerce, and market research. The core retail business of Tesco is very

well supported by these complementary services (Datamonitor PLC, 2011).

Weaknesses

Competitors grabbing Tesco’s customers

All around the world, customers are affected positively by the most discounts offered.

The competitors of Tesco are able to grasp majority of its customers by introducing new pricing

strategies. Tesco has failed to keep an eye on the trend prevalent in the market. During FY2011,

it was found that UK accounts for 66.8% of Tesco’s revenues. If the same practice continues,

Tesco might not only lose its market share in UK but also may incur loss in sales (Datamonitor

PLC, 2011).

Opportunities

Thailand, India and China seems to be promising markets for sustainable growth

Venturing into these new markets not only diversifies the company’ reach but also turn

out to be new promising markets since the UK market is already saturated. The entry in these

countries also nullifies the risk of being stuck with matured UK markets and also allows

enjoying growth (Datamonitor PLC, 2011).

Continue succeeding with the e-business

Tesco is already enjoying successful e-business activities with its online service for

different modes of its business. It introduced online grocery shopping 11 years back. Since then


that category has shown positive growth. During 2011, the clothing business ventured into

European Union nations with an aim to cater more international markets. This e-business has

enabled Tesco to meet the needs and demands of its customers more efficiently and conveniently

(Datamonitor PLC, 2011).

Company can differentiate on the basis of its private label portfolio

European Union has been experiencing economic decline. This situation has compelled

customers to move towards private labels. This new trend suggests that Tesco can enjoy its

increasing consumer base because it already has strong private label offers in its portfolio. This

characteristic differentiates Tesco from others and allows it to make profits during worse

economic conditions (Datamonitor PLC, 2011).

Threats

Difficulty in retaining customers due to severe competition

During tough economic periods, Tesco seems to lose its customers. The two things that

have so far differentiated Tesco are strong marketing tactics, sales promotion and EDLP (Every

Day Low Pricing) (Datamonitor PLC, 2011).

A very strong threat to Tesco is Amazon that has already proved it to be a pioneer of

online retailing business. It offers excellent supply chain service with flexibility to its distributors

to make customized orders. Besides, it allows interaction among 160 million customers from

different parts of the world (Datamonitor PLC, 2011).

Currently, Hypermarkets are not in demand because of continuous change in customer

preferences and demographic factors:

Hypermarkets usually focus on other items than food which is now not a very significant

step in the growing trading conditions. People mostly prefer their neighbourhood general stores


or malls for their day to day shopping rather than these hypermarkets which are far away from

their towns. By looking over such demographic changes and customers’ demands and

preferences, some serious measures were taken by Tesco in the fiscal year of 2011. The company

remodelled and converted some of its hypermarkets of Eastern and Central Europe. They

enhanced their markets by selling around more than five thousand products under a roof.

Although no results have yet been observed but it is clear that the changes in customers’

shopping preferences directly influence the company revenues (Datamonitor PLC, 2011).

The factors limiting the expansion process are mainly the restricting regulations and loss

of consumer interest:

Nowadays such large hypermarkets are not constructed frequently, like Tesco, because of

certain restrictions applied on their planning procedures. However, in the year 2008 European

Competition Commission (CC) compiled a test to judge competition among such chains in order

to prevent their outlet’s extensions and construction of new stores in the same area. That is why

Tesco became restricted in opening stand-alone outlets for its non-food items, which directly

influenced their customer’s convenience and also confined their demands (Datamonitor PLC,

2011).

Tesco is now facing lot of problems in expanding their business because the local

communities are not very much interested in such markets and also because of certain rules and

regulations. One of the main hurdles is the availability of land for further construction as it

usually constructs the outlets on local citizens’ lands (Datamonitor PLC, 2011).

4. Comprehensive Analysis of Financial Ratios

Profitability


It is a very challenging time for consumers to manage their budgets due to the increasing

inflation, fuel prices and other expenditures. However, Tesco was still successful in making

profit at Group Level (Tesco PLC Annual Report, 2012).

In UK trading market, the profit reduction has been compensated by the increasing

international business opportunities, which increased by 18%. Here we are giving a brief strategy

survey followed by Tesco in different countries in order to prevent its declining conditions. In

US, Tesco followed a policy to reduce its losses by looking forward to break-even before making

any further investments. After a competitive journey of eight years, Tesco quit Japan’s market.

In order to maintain its position in China, Tesco refused the idea of launching freehold shopping

malls and continued their hypermarkets development and at the Bank, Tesco slowed down its

migration policies without making the procedure noticeable. However, in its home market (UK)

it took a bold step of reducing prices. “The Big Price Drop” in the month of January was a

decisive step towards its progress. These strategies brought back Tesco in the competitive market

and also took it towards the positive financial track (Tesco PLC Annual Report, 2012).

Hence, here we are giving a brief financial record of the Tesco Company. An increase in

group sales was about 7.4% which was approximately £72 billion, whereas, last year profit of

Group Trading was about 1.3% and the underlying profit was £3.9 billion before the rise in tax.

There was also an increment recorded in capital expenditure which was 1.6% (£3.8 billion).

ROSE (Return on the Capital Employed) was increased to 13.3%, which was 12.9% in previous

year. In the end, the Board announced a dividend of 10.13p per share which ended at 14.76p for

the year, hence showing an increase of 2.1 percent (see also Hopkins, 2013).

The expectations were not met in the mid of the year, which was probably because of the

Christmas season, or the working capital inflow which was relatively low while the stock levels


maintained at a higher ratio. Irrespective of the expectation, the net debt for the year stayed

stable. As the expenditure was tightly controlled, that was why only £3.8 billion were used for

making capital expenditure, this led to a decline in the operating cash flows, being generated

from the retail operations. Tesco’s strategy proved to be really successful, which we come to

know by looking at the huge profit of £376 million originating from a disposal of £1 billion.

Their first property was launched in Thailand, and this successfully raised £379 million from 17

stores and malls. The trade which took place over and above the list price gave clear indication

of the company’s value, in not only Thailand but in all over Asia. Tesco’s global property

currently has a market value which is somewhere above £37 billion (Tesco PLC Annual Report,

2012).

In 2011, the Return from Shareholder fund (ROCF) was 21.27%, but this dropped

drastically to 16.61% in 2012. A rise of 1.39% and 10.47% was seen in share premium and

retain earning, respectively. This thus led to an overall increase in the total equity by 7.09%. This

increase in equity leads to a drop in ROCF. Furthermore, the increase in sales by 5.09% has also

led to a decline in ROCF (Tesco PLC Annual Report, 2012).

Liquidity & Solvency

Liquidity shows the potential of any asset (inventory, debtors) to turn in to cash as early

as possible.

The ability of a company to settle its current liabilities by means of its current assets is

known as current ratio (Tesco PLC Annual Report, 2012).

In 2011, the current ratio of the company was 67.9%, but this dropped slightly to 66.8%

in 2012. Current ratio is declining because of the increasing liability towards the bank, from

where funds were raised for the development of branches. If we talk about future perspective


then the growing branches seem too beneficial in the long run, as this would amplify business

activities. An increase from 14% to 21.62% was seen in short term investments and receivables

(Davey, 2013).

In 2010, the increase in current assets was 2.33% but in 2012, although the inventory at

hand was of much higher value (£3162mm in 2011 vs. £3598mm in 2012) but still the current

assets increased by 6.48%. The operating performance was so well that the inventories were

held, which led to greater revenue and lower costs. The interest payments were lower because of

lesser debtor collection days, new borrowings and the minimal base rates (Davey, 2013).

If we add the paid dividend with the reinvested amount and with the percentage change in

share price over previous five years, then we will obtain the Total Shareholder Return. This can

also be defined as the annual return from a share (Davey, 2013).

In 2011/2012, the five year’s share return is actually the annualized growth of share

price, dividends paid and short term reinvestments in Tesco shares (from 06/07), as a percentage

of share price. The investment decisions and the ups and downs of share price greatly affect the

customers’ decision in UK (Barr, 2012).

Year 2008/09 2009/10 2010/11 2011/12

TSR 8% 9.5% 6.7% (3.0%)

*TSR: Total Shareholder’s Return

Gearing

Gearing basically gives the proportion of assets which are financed via borrowing rather

than from equity. Gearing is obtained by dividing net debt by total equity. As the table below

shows, the gearing of the company is decreasing from past three years. This decreasing trend

signifies a sound debt position of the company, irrespective of the increased amount of


investment in the assets (Barr, 2012). The targeted growth is largely because of the investments

made in Japan. Although, by the end of the period the SHE showed no change in the upper case

but the non-current assets of the company rose by 6.84%.

Year 2008/09 2009/10 2010/11 2011/12

Gearing

Ratio

74.4% 54.0% 40.8% 38.4%

Efficiency

Tesco has set up four measures for the convenience of the investors, so that they can

easily determine the overall performance of the entity ranging from their debts to the returns. An

improvement from 12.9% to 13.3% was seen in Return on Capital Employed (ROCE) from 2011

to 2012. Currently, Tesco is maintaining two metrics of debt; net indebtedness and fix charge

cover, largely flat in this year. UK investment plan would directly hit both these measures. The

company aims to keep the fix charge between 4 and 4.5 times, while net indebtedness as 2.5

times. The fourth metric is that of capital expenditure, which is targeted to be between 5 and

5.5%. From management’s point of view, all these predefined measures seem to be successful

(Barr, 2012).

Last year’s shareholders return was 11.5% but the proactive strategies of the company

has led to an increase in the shareholders return which has reached to 12.03% in 2012. Not only

shareholders return but payables and receivables also increased by 62.66% and 14.82%,

respectively. In order to meet the competitive trading environment Tesco has changed its strategy

and have decided in making low capital investments, for the aim of achieving higher returns

(Barr, 2012).

2. Comprehensive Analysis of Share performance


Unusual trends are observed in previous years in share performance of Tesco. In the

beginning of 2012, drastic slums were seen and this continued throughout the year. On year-on-

year basis, the P/E ratio slowed down, but still the market was not able to soak Tesco’s price. In

2010 the P/E ratio was 13.2%, this dropped to 11.10% in 2011, while currently it has reached

8.5%. Analysts still have great hope for Tesco, on the basis of the previous year’s dynamic

performance of the company (Tesco PLC Annual Report, 2012).


References

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Davey, James. (2013). UPDATE 3-Tesco says back on form with Christmas sales rise.

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