Accounting and Finance
This report is developed to provide information on Tesco Plc including the products and services they offer their customers and different channels from where customers purchase their product and take service. Also, provides information about key resources and the present financial position of Tesco. Tesco faced different challenges to achieve their objectives which are also analysed in this report. The non-financial and financial performance of Tesco are analysed and problems and opportunities associated with this matric are also discussed. Additionally, make a comparison of financial and non-financial metrics with competitors to determine the best performance. An opinion is developed on the basis performance of the two competitors operating in the same industry.
Tesco Plc prepared its group financial statement in accordance with IFRS and GAAP therefore it is easier to understand its profit margin, revenue by segment and capital structure. Tesco, in fiscal year 2022 generated revenue of £61344 million which increased by 5.97% from the fiscal year 2021. Operating expenses in the current fiscal year 2022 are £2073 million which is £156 million decrease from £2229 million from fiscal year 2021 (annualreports.com, 2022). The capital structure includes long-term borrowing and equity which are the main source of finance for business operation and growth. The long-term borrowing of Tesco was £6188 million in 2021 increased to £6674 million in 2022. The current stock price is 279.60 GBX decreasing by 2.17% for the last trading days (annualreports.com, 2021).
Employees and retail stores are the main key resources of Tesco. At present, globally a total of 354744 people are working at Tesco and the company offer its products worldwide through 4859 physical retail stores. Sales revenue generated from retailing activity by £56639 million and £4167 million in UK & ROI and Central Europe. Additionally, £922 million in sales revenue is generated from banking services (Tesco PLC, 2023). But the company failed to generate enough liquidity resources in fiscal year 2022 for these reasons, the company fell due to meeting its financial obligations.
Tesco is one the largest British organizations that always focused on developing its business standards. Tesco's objective is to serve the community and customers a little better than ever. This is one of the most significant motivations of Tesco to deliver the best quality of products and services to the customers. In this context, the organization has been evaluated to encounter some major challenges that have been restricted to meeting their business objectives. It has been explored that Tesco has alleged in the recent past due to poor product quality and at the same its service has also been criticized majorly (Rosnizam et al., 2020). Tesco has been serious about keeping customers at the top of the business but such faulty services and worse product standards have hampered the organization. Besides this, Tesco always aimed to boost their competitive advantage and sustainability by performing their business ethically and maintaining integrity yet the horsemeat scandal has put black marks on the brand image of the organization which has also restricted them from meeting their business objectives. Apart from this, the organization has also failed to indulge cultural differences in their workplace and has collapsed in understanding market trends due to poor technological edge. All these factors have led Tesco down and have restricted it from meeting its business objectives.
The financial performance of Tesco Plc is evaluated through differnt types of accounting ratios including efficiency, profitability and liquidity. The gross profit margin under the profitability ratio increased to 7.55% in 2022 from 6.52% in the fiscal year 2021 and 7.07% in the fiscal year 2020. This is because sales revenue in all segment operations increased by 5.97% as compared to fiscal year 2021 (Ichsan et al., 2021). However, sales revenue in fiscal year 2020 was 5.2% higher as compared to fiscal year 2022. Due to inefficient management and increased resource prices during the pandemic, the company was unable to reduce expenses. The net profit margin of Tesco was 8% higher in 2021 compared to 2022 because of the discontinuation of operations it earned a profit of £5426 million (Husain and Sunardi, 2020). However, the net profit margin was 0.92% lower in 2020 as compared to 2022 due to increased expenses. The return on capital employed by Tesco in the fiscal years 2022, 2021 and 2020 is 7.55%, 5.19% and 6.55% respectively. therefore, in the fiscal year 2022 Tesco efficiently utilised their capital to generate operating profits. The company was able to produce a higher profit from the basic shares in the fiscal year 2021 because of the discontinuation of operations for these reasons earnings per share of Tesco is 0.62 in 2021 as compared to 0.19 and 0.10 in the financial years 2022 and 2020 (annualreports.com, 2022).
Diagram 1: Net Profit Ratio
(Source: By Author)
Tesco sold its inventory 25 times in 2022 as compared to 23 times in 2021. therefore, Tesco showed higher efficiency in 2022 in selling its inventory rather than buying. But in the financial year 2022 and 2020, the inventory turnover ratio was the same. Thus, in the financial year 2021 incurred expenses of holding costs were higher as compared to 2022 and 2020 (Husain and Sunardi, 2020). The liquidity of a company is measured through the average settlement period of accounts receivable. in the given case, the company collected cash from their client every 7 days in three financial years. It helps the company to mitigate business expenses from business profit without bearing additional risk of debt.
The current ratio of Tesco for the financial year 2022, 2021 and 2020 are 0.76, 0.69 and 0.74. Therefore, the company is unable to maintain liquid cash to mitigate its financial obligation in three financial years. The acid test ratio is also used to accurately measure the liquidity position of the company (Ningsih and Sari, 2019). In three financial years, the acid test ratio was below the industry standard which resulted in failure to repay its short-term obligation in this period.
The interest coverage ratio of Tesco was higher in 2022 as compared to 2021 and 2022. It represents the capability of Tesco to pay its debt interest in 2022 3 times and 2.63 times as compared to 2021 and 2020 (annualreports.com, 2022; 2021).
The non-financial key performance indicators of Tesco include climate, health and sustainable diet, diversity and inclusion and west and packaging. The company take initiatives to be carbon neutral across their group operations by 2035 additionally, in the financial year 2050 the company wants to achieve net zero carbon reduction across the value chain. In the financial year 2022 greenhouse emissions slightly increased as compared to the previous financial year because of operation changes and data collection methodology improvement (Kyere and Ausloos, 2021). Customers are more concerned about their health as a result of the pandemic, but more individuals are cooking at home. From 2020, there has been a 105 increase in the number of meals consumed at home, or half a million additional meals. Thus, the partnership with Jamie Oliver helps to provide easy, healthy and affordable food to families through a new campaign (Awaysheh et al., 2020). The top priorities of the company are the health, safety and well-being of the 345000 colleagues. For self-isolated colleagues, the company improved their sick pay structure. Additionally, the company made a partnership with USDAW to protect workers from threats, abuse, and violence and invested in equipment to keep their colleagues safe (annualreports.com, 2022). The company focus on retaining, attracting and developing diverse talent through its aspirations and commitment to equality of representation.
Tesco has been exploring to move its business successfully yet there are some major challenges faced by the organization that have pressured its financial performance over the year. Firstly, Inflation is a major factor that has been problematic for Tesco in regards to financial performance. It is seen that the operational and internal business cost of Tesco has been enhancing year after year, lowering profit margins. Hence, Tesco is failing to make money as expected. Besides this, in the post-Brexit period, the supply chain cost of the organization has also increased due to a shortage of suppliers. Besides this, Tesco can build an empowered case by partnering with prominent suppliers in the UK market. Besides this, technological indulgence can be a major turnaround factor for Tesco (Weyer et al., 2020). Service Robots must be added to its operations, which can boost service quality and attract consumers. Besides this, indulging AI and IoT in the supply chain can also help advance traceability and product safety.
The current ratio of Sainsbury and Tesco for the financial year 2022 and 2021 is 0.76 and 0.69; 0.68 and 0.61 respectively. Thus, both companies fall due to paying their short-term obligation in the two fiscal years. Both competitors need to improve their liquidity position by generating more sales revenue (annualreports.com, 2022). Although the liquidity position of Tesco is slightly higher as compared to Sainsbury in both financial years. The current assets of Tesco in 2022 are £12189 million whereas Sainsbury has only £675 million. The quick ratio represents that Tesco has £0.61 and £0.56 of liquid assets for every £1 of financial obligation in the fiscal year 2022 and 2021. on the other hand, Sainsbury has £0.61 and £0.50 liquid cash for every £1 of obligation. Thus, the liquidity performance of Tesco is slightly higher as compared to Sainsbury's (Husain and Sunardi, 2020).
The gross profit margin represents that Tesco is able to retain a profit of £7.55 from every £100 of sales revenue whereas Sainsbury retains a profit of £7.91 from every £100 of sales revenue in the fiscal year 2022. Also, the net profit margin of Tesco in 2022 is slightly higher as compared to Sainsbury's. It is because Sainsbury was unable to cut off expenses in both fiscal years 2022 and 2021 as a result the company incurred a loss in 2021. The return on capital employed represents that Tesco better-utilised capital to generate revenue in the fiscal year 2022 as compared to Sainsbury (annualreports.com, 2022). For these reasons, Tesco was able to generate a profit of £7.70 from £100 of capital investment whereas Sainsbury generated £6.55 from every £100 of capital in fiscal year 2022. In the financial year 2022, Sainsbury provided better returns to their shareholders because earnings per share of shareholders was £0.30 whereas Tesco had £0.19 but in the fiscal year, Sainsbury was unable to provide a return to their shareholders because they incurred loss. Thus, the overall profitability performance of Tesco for the two fiscal years is slightly higher as compared to Sainsbury.
Diagram 2: Return on Capital Employed (ROCE)
(Source: By Author)
Tesco sold its inventory 25 times in 2022 as compared to Sainsbury's 16 times. therefore, Tesco shows higher efficiency in 2022 to sell its inventory rather than buy as compared to Sainsbury. The average collection period of Sainsbury is higher as compared to Tesco in fiscal years 2022 and 2021 as a result of lower generation of liquid assets (Husain and Sunardi, 2020).
Sainsbury changed its family leave policy including a paid leave increase of 26 weeks for adoption, maternity, surrogacy and paternity from two to four weeks. Therefore, both companies changed their policy regarding employee well-being. Also, both the company focus on diversity and inclusion. Both the companies take initiative to create a better world through the reduction of greenhouse gases (annualreports.com, 2022). In 2022 Tesco achieved a 52% reduction in their operation as compared to the 2015 baseline on the other hand Sainsbury achieved a 7% reduction as compared to the 2018 baseline.
Sainsbury Plc. is also one of the predominant supermarket chains in the UK. The organization has grown to be a massive competitor for Tesco. It has been found that Inflation has also been affecting the financial performance of Sainsbury Plc. Like Tesco, the business expenses of Sainsbury Plc. have also increased resulting in lowering profit margins. Besides this, Brexit has also affected Sainsbury Plc. yet the successful management operations have helped in rebuilding a strong supplier base. Technology and innovation are also one of the dominating factors affecting the business operations of Sainsbury Plc. The organization has created its own Smartshop application through which buyers can scan and pay their shopping bills making consumer experience much more comprehensive.
The financial performance of Tesco for the last three fiscal years represents the performance increase in different segments of accounting ratios except the liquidity ratio. The company needs to improve the liquidity ratio in the future period to reduce the risk of invested capital of the lender. Additionally, the profitability ratios have to improve in future periods which will help to provide better returns to their shareholders. Also, the financial performance of Tesco is slightly higher compared to Sainsbury in fiscal years 2022 and 2021. Tesco can make a joint venture with a listed company that will help to cut costs in future periods. Additionally, the company achieved their target reduction of greenhouse gases through a joint venture with Sainsbury.
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