Financial situation and investigations

The finding of the analysis is that Tesco is a sustainable company with comfortable level of liquidity, huge fixed assets base and is generating excellent profits from its consistently increasing revenue. The company holds sufficient resources and access to market funds to fund its on going expansion programmes. The present competition condition is in favour of the company, positively contributed by some of the most important factors “its size”, great bargaining power, huge market share and Sainsbury’s weaker position which was one of its major competitors.

The company’s shares has started out performing in the stock market due to its fundamentally strong position based on excellent financial results and positive news about its plans ahead. Reason for choice of topic Being a professional accountancy student and an active investor in stock market back home in Pakistan, it was my usual practice to perform tests on the financial data of the different companies in order to analyse their financial health for the investment purposes , although I have left my country for the studies , but still my inside investor is still keen to look at and analyse things as an investor’s point and the professional accountant inside me gives me the opportunity to make use of my knowledge, which I have gained during my studies, in this analysis process. Therefore I preferred this topic over others.

The purpose of the research is review and synthesis existing knowledge and investigate existing situation s and problems , (Collis and Hussey 2003) This project will be focusing on analysis of the financial situation, and investigations of the irresistible driving force behind Tesco’s growth . 1.2 Objectives The supermarket industry in UK is a fiercely competitive market, dominated by three large supermarket groups, Tesco, Sainsbury and ASDA. The chasing pack of second Rank super markets (Wait rose , Morrison’s ,marks and Spencer’s) could only challenge the big three if they joined forces and get some foreign investment backing. However the competition commission does not encourage such practices in UK.

Tesco has been a success story for the past decade. The company which was founded in 1919 as a small grocery stall has now grown up to the largest UK food retail chain. The company now runs more than 2,460 supermarkets, hypermarkets and convenience stores in The UK, Ireland, central Europe and Asia. Its operations include different format stores consisting of Tesco express (petrol stations), Tesco metro (small Urban), Tesco extra (hypermarket), Tesco direct (catalogue) and Tesco.com Tesco also owns 35 % stake in Us grocery Chain Safeway Grocer works. (Extracts from Eastlondonhistory.com/Tesco)

1.2.2 Competition The main competitors of Tesco (30.5% ) include ASDA( 16.7%), Safeway/Morrison’s and Sainsbury(15.7%). Source TNS. Out of these three Sainsbury ranks as the biggest competitor of the company in respect of the turnover and lines of businesses, ASDA is American owned and not listed while Morrison’s have a relative small market share.
When analysing the retail industry sales on year on year basis, there is a need to focus on the growth rate of sales from the existing stores rather than looking at the new store acquisitions, this way of comparison gives us the more accurate picture of the revenue. So actually this is the way of comparing identical sales with the identical sales, But the Tesco does not publish the identical sales figure, and it only publishes the Like for Like sales figures, which normally include many stores which have undergone an expansion .

Total Revenues have grown from FY 02/03 (26,004 million) to FY 003/04 (30814 Million) by 18.49% and by a further 10.2% in the following year (FY 04/05 – 33,974Million), in absolute terms. All the revenue figures are net of value added tax and excluding share of Joint ventures. ( See Appendix A) Increase in turn over reflects, growth from UK operations mostly, as in 2004 a new sales area of about 1,778,000 sq ft was opened and out of the total 18.49% increase 7.5% came from the new stores, so leaving behind about 11% sales growth on Like for Like basis.

While in 2005 new area of 1,519,000 sq ft was opened only contributing 2.9% to the sales not as much as new area did in 2004 on per Sq ft basis, But the Like for Like sales showed a growth of about 10.52%. We should also consider 53rd week trading factor in FY 04/05 as compared to previous year which contributed about 2.2 % in the UK sales.