Tesco PLC: Financial Analysis and Performance

This assignment requires a thorough analysis of Tesco PLC's financial performance. Students will utilize the provided financial statements to calculate key ratios, identify trends, and assess the company's overall financial health. The analysis should delve into profitability, liquidity, solvency, and efficiency, drawing insights from these metrics to evaluate Tesco's strategic positioning and future prospects.

Running head: ACCOUNTING PROJECT
Accounting Project
Name of the Student:
Name of the University:
Author’s Note:

1
ACCOUNTING PROJECT
Table of Contents
Interim Project..........................................................................................................................3
Introduction and Rationale.......................................................................................................3
Introduction and Rationale of Retail Sector..........................................................................3
Justification for selecting the retail sector for this paper.......................................................3
Research Questions, Objectives and Aims..........................................................................5
Research Questions.........................................................................................................5
Research Aims..................................................................................................................5
Research Objectives.........................................................................................................6
Pattern of the Retail Sector in UK.........................................................................................7
Essential Drivers of the Retail sector and the performance of the companies.....................7
Opportunities and challenges that are faced by the retail industry.......................................7
Transition in the pattern of telecommunication industry in the current years.......................7
Essential themes rising from the research analysis and about the industry and company. .8
Critical Internal and External Environment Analysis.............................................................8
Industry Analysis and Overview........................................................................................8
Industry Lifecycle..............................................................................................................8
Industry demand and the drivers of profitability................................................................8
External analysis of Tesco, Sainsbury and Morrison............................................................9
PEST Analysis..................................................................................................................9
Porter’s Five Forces........................................................................................................12
Swot Analysis..................................................................................................................14
Financial ratios.......................................................................................................................16
Activity ratios......................................................................................................................16

2
ACCOUNTING PROJECT
Liquidity ratios.....................................................................................................................17
Solvency ratios...................................................................................................................17
Profitability ratios................................................................................................................18
Non-financial ratio..................................................................................................................18
Retention turnover ratio......................................................................................................18
Customer and clients..........................................................................................................19
Operations..........................................................................................................................19
Environment and citizenship...............................................................................................19
Timetable to complete the project......................................................................................19
Conclusion..........................................................................................................................20
Reference List....................................................................................................................21

3
ACCOUNTING PROJECT
Interim Project
Introduction and Rationale
Introduction and Rationale of Retail Sector
The retail industry in UK have been gaining their presence as they have been gaining
knowledge about the demands that are pertinent in the market as well as regulatory
transformations during the time of explaining the transparency with the help of which they
have been incorporating new and improved services in the market as well as enhancing the
level of customer satisfaction (Vries 2014). The characteristic of retail sector in UK has the
capability to provide various kinds of retail products and services to their consumers and
development of supermarket chains has even enhanced this service as the consumers are
able to attain various kinds of products under one roof thereby easing their life and reducing
their consumption of time.
Justification for selecting the retail sector for this paper
In this paper, retail sector has been chosen as the consumers have been facing
rapid transition in their tastes and preferences with the advent of time. There have been
various new products and services that have evolved and therefore the taste and
preferences of the consumers have been changing (Cette, Fernald and Mojon 2016).
Therefore, it has been significant to select this sector in order to understand the kind of
products that are demand and what is the business model that has been implemented by the
various retail chains in order to retain their customer base and enhance their competitive
edge (Yu, Ramanathan and Nath 2014). The retail firms in UK have been facing tough
competition among each other and therefore have been going through tough challenges with
respect to maintaining their customer base along with innovation in services and pressure
with respect to pricing of the products in order to improve their return with respect to their
investment.

4
ACCOUNTING PROJECT
Tesco Plc
Tesco Plc trading as Tesco is a British multinational general and grocery
merchandise retailer which has their headquarters situated in Welwyn Garden City,
Hertfordshire in United Kingdom. Tesco is the third largest retailer with respect to their profits
and is the ninth largest retail firm with respect to their revenue globally. It has their shops in
over 12 countries in Europe and Asia and has been found to be the leader of the grocery
market in UK.
Wm Morrison Supermarket Plc
Wm Morrison Supermarkets Plc trades as Morrisons is seen to be the fourth largest
supermarket chain and is right behind Tesco, Sainsbury’s and Asda within UK. The company
has their headquarters in Bradford, West Yorkshire in UK. The organization was established
in the year 1899 and till now has been functioning effectively and has their stores mostly in
UK, Scotland and Wales.
J Sainsbury Plc
J Sainsbury Plc trading as Sainsbury’s is the second largest supermarket chain in
UK. It has a market share of 16.9% in the sector of supermarket in UK. The firm was
established in the year 1869 and is currently headquartered in London UK.
Explanation of the economic importance
The retail industry in UK had an extensive level of curiosity for the financial process
and hence the government of Britain mainly looks to manage the market scenarios for the
delivery of innovative information and retail expertise.

5
ACCOUNTING PROJECT
Research Questions, Objectives and Aims
Research Questions
Q1. How is the retail sector structured in UK?
Q2. What are the main retail sector drivers and the degree of performance of the retail sector
in UK?
Q3. What are the challenges and the opportunities that are faced by the retail industry?
Q4. How has the retail industry transformed in the past few years?
Q5. What are the current news that are disclosed in the news with respect to the three
companies that is under consideration?
Research Aims
By making use of both the economic and financial frameworks, the current study tries
to bring out the worst or the best company with respect to their performance so that there is
a transparent understanding of what actions must be taken by the ineffective organizations
in order to transform themselves into an effective one in order to retain their competitive
edge in the long run. The financial component is segmented into four classifications that are
inclusive of solvency, profitability, liquidity and efficiency. Each of these sectors has various
worst and best performing organizations and thereby the conclusion section will define the
overall financial status of the selected organizations.
The first objective of the paper is to highlight the external environmental factors
associated with the retail industry in UL by exploiting frameworks like PESTLE as it aids in
bringing out the information from the four aspects i.e political factors, social factors,
economic factors and the technological factors.

6
ACCOUNTING PROJECT
The second objective of the paper is to answer the internal environmental factors
associated with the retail sector in UK by employing the SWOT analysis model as is assists
in discovering the information from the components.
The third objective of the paper is to construct the financial ratio of the selected three
organizations for two years. With the help of this, it will be easy to collect the information with
respect to which the firm that is performing effectively and ineffectively (Jamasb and Pollitt
2015). The financial ratios have been segmented into four aspects that would make the
paper simpler to assess. The vast category of the ratios comprise of the Liquidity, Solvency
Ratio, Efficiency ratio and Profitability Ratio.
The fourth and the last objective of the paper has been to construct the non-financial
ratio of the three organizations individually. With the help of this, it will be simpler to collect
the facts with respect to understanding the company that has been performing effectively
and the one which is unable to do so. The non-financial ratio has been segmented into three
aspects namely Customer Retention Ratio, Staff Turnover Ratio and Absenteeism Ratio
which would be easier to assess.
Research Objectives
The objectives of the research are as follows:
 To ascertain how the retail sector in UK is structured
 To focus the significant drivers of the retail industry and the performance of the
companies
 To explain the challenges and the opportunities that retail sector has been facing
currently
 To determine on how the retail industry has transformed in the current years
 To explain the current news that had been reported about the retail sector and the
organizations that have been taken into consideration

7
ACCOUNTING PROJECT
Pattern of the Retail Sector in UK
The retail sector in UK was de-regularised and was followed by the privatisation as it
opened up the market to the rival firms with the help of incorporation of new technologies,
entry barriers in this sector was constructed with respect to that (Cox et al. 2016). The
market share of the retail industry is controlled by the three key firms namely Tesco,
Sainsbury and Morrison.
Essential Drivers of the Retail sector and the performance of the companies
The industry performance has been explained in a poor manner and they are unable
to gain the value from the assets. It is significant for the retail sector to gain knowledge about
the wants, needs and choices of the consumers in order to achieve success in the future
(Triantafyllou, Cherrett and Browne 2014).
Opportunities and challenges that are faced by the retail industry
There are several challenges and opportunities that are faced by the retail sector in
UK. The challenges have been unable to understand the new role in the current ecosystem
of the industry (Cheshire, Hilber and Kaplanis 2014). There exists an absence of regulatory
indecision especially in the new market frameworks (Maican and Orth 2015). The
opportunities of this segment has been retail industry has been evolving rapidly and
therefore has been able to strive for growth and effectives in the coming years (Lloyd and
Payne 2014).
Transition in the pattern of telecommunication industry in the current years
The retail sector has gone through a vital transition and this sector has the ability to
reduce the level of risk that has been recognised and function effectively in the current
competitive environment (Wood and McCarthy 2014).

8
ACCOUNTING PROJECT
Essential themes rising from the research analysis and about the industry and
company
The essential themes from the current research assessments are with respect to the
three firms that function in UK and have been listed in the London Stock Exchange. The
research paper clearly explains about the organizations as to which the most effective firm
and which has been the most ineffective organization with respect to the financial and the
non-financial components.
Critical Internal and External Environment Analysis
Industry Analysis and Overview
The retail industry in UK has been one of the largest retail markets globally with
respect to their customers and the variety of products that have been offered for purchase
(Cullen et al. 2013). By looking at the three selected organizations that functions in the retail
sector and these firms have been listed in the London Stock Exchange. The companies that
have been chosen are Sainsbury, Tesco and Morrison.
Industry Lifecycle
The retail sector had a hard time to compete with the other services and therefore
there has been decline in the demand (Goodridge, Haskel and Wallis 2013). The report of
the market research aids in providing the latest industrial statistics and even the industrial
patterns that permits in recognising the customers and the products as it is helpful for the
rise in the revenue development along with profitability (Aguzzoni et al. 2016). On the other
hand, the industry report defines the leading firms and even offers strategic industrial
assessment of the significant factors that have an influence in the marketplace.
Industry demand and the drivers of profitability
The standards of living as well as the economic development in the developed
countries have been connected with the usage and availability of the retail services.
Furthermore, the efficient decisions in relation to the policies requires to be the effective

9
ACCOUNTING PROJECT
projections of the drivers in getting entry to these services (Shin and Eksioglu 2015). The
financial aspect can be effectively judged by making use of the financial records of the three
retail companies and their financial statements are inclusive of the balance sheet, income
statement and the analysis of the cash flow. The financial data would be helpful in assessing
the financial position of the chosen companies and thereby selecting the best out of them.
External analysis of Tesco, Sainsbury and Morrison
PEST Analysis
Tesco
Political Factors
 The recent adoption of the tax measure by the government of UK has affected
Tesco.
 The increase in VAT has lowered the spending of the customers
Economic Factors
 Development in the economy is a positive sign as it leads to the development of the
supermarket industry, which has been the main aim of Tesco
 Economic recession has a negative impact on Tesco as unemployment increases
and the spending of the customers reduce
Social Factors
 The rise in the life-expectancy of the individuals and decline in the birth rate has
changed the tastes and preferences of the consumers and in that manner having an
impact on Tesco
Technology Factors

10
ACCOUNTING PROJECT
 The implementation of new and improved technologies has led to the development
of an effective supply chain management of the firm and in that manner has
improved the operational activity of the firm
 The incorporation of the e-marketing has increased the level of sales for the firm
Environmental Factors
 Global warming is having an impact on the environment and in that manner Tesco
has taken significant measures with the help of which they can make the consumers
aware of the situation.
Legal Factors
 There are various laws with respect to the products and services that have an
impact on the operations of the firm
Sainsbury
Political Factors
 The rise in the level of consumer rights within Europe and the decisions made by
various regulatory bodies especially in the retail sector is having an impact on them.
 Rise in the government intervention as they have implemented legislations in the
retail sector
Economic Factors
 Growth rate of the GDP
 Inflation rate
 Global Financial issues
Social Factors
 Transitions in the working trends

11
ACCOUNTING PROJECT
 Depending on the technologies that can uplift the retail industry
 The transition in the age of the individuals can have an impact on the social factors
Technological Factors
 Characteristics of the technological industry
 The firm spends a certain amount of money on the research and development
operations with the help of incorporating the innovative products
Morrison
Political Factors
 Vast level of government intervention where the government has put limitations on
various products and tariffs
 The innovative technologies requires to stick to the rules stated by the government
Economic Factors
 Interest rates
 Recession globally
 Economic development
 Inflation
Social Factors
 Safety
 Career of the employees
Technological Factors
 Development of new technologies with the help of which the products can be
ordered online and can be delivered effectively

12
ACCOUNTING PROJECT
Porter’s Five Forces
Tesco
Threat of new entrants
 Government does not intervene in competition
 Relatively demanding sector
 Huge industry size
Bargaining Power of the suppliers
 Increased competition
 Lower of cost of switching
Bargaining Power of the customers
 Large customer level
 Products are needed by the customers
Threat of substitutes
 High level of substitutes
Rivalry
 Maximum level of market share
 Strong brand name
Sainsbury
Threat of new entrants
 High threat of new entry
 High establishment cost
Bargaining power of the suppliers

13
ACCOUNTING PROJECT
 The bargaining power of the suppliers are high with the presence of many retail
companies
Bargaining power of the customers
 Presence of many retail firms have increased the bargaining power of the suppliers
 The company looks to make sustainable amount of profit
Threat of substitutes
 Threat of various products and services
Rivalry
 Stiff completion is faced by the firm due to the low prices of the products
Morrison
Threat of new entrants
 Huge industrial size
 High level of demand of the retail products in the market
Bargaining power of the suppliers
 The company has an effective supply chain with the help of which they maintain
multiple suppliers
Threat of substitutes
 The firm functions in a retail sector that is competitive in nature
Rivalry
 Constructing sustainable differentiation

14
ACCOUNTING PROJECT
Swot Analysis
Tesco
Strength
 Strong position in the domestic market
 Extensive range of products and services
 Huge base for employees
Weakness
 Dependent on the market of UK for the main profit level
 Behavioural targeting
 Restricted liquidity
Opportunity
 Development in the retail sector
 Essential contracts
 Development in other regions
Threat
 Pressure from competition
 License and regulations
 Presence of factors that are uncontrollable

15
ACCOUNTING PROJECT
Sainsbury
Strength
 One of the popular brand name in UK and Europe
 Opportunities of diverse options for payments
 Development of effective websites
 Extensive level of brand visibility
Weakness
 Constant vigilance from national states and the government
 Has to fight for the market share with the rivals due to price wars
Opportunities
 Development of low cost technologies
Threats
 Low price offering having an impact on the level of profit for the firm
 Gaining access to new customers in UK
Morrison
Strength
 Effective sales team
 Availability of independent distributors as well
Weakness
 Dependent on the market revenue of UK
 Restricted liquidity

16
ACCOUNTING PROJECT
Opportunities
 Rise in purchase due to the advent of online purchasing options
 Rise in the income level of the consumers
Threats
 Increased level of competition
 Issues related to credibility
Financial ratios
Activity ratios
Ratios 2016 2017
Account receivable ratio 21.57 56.74
Inventory turnover ratio 19.15 22.41
Total asset turnover 1.24 1.24
The activity ratios of the company measure the sales of the company as against any
other asset account. It measures the efficiency of the entity with respect to utilising its
resources. As most of the entities invest in the inventories or accounts receivable, these
accounts are taken into consideration for measuring the activity ratios.
The accounts receivable is the amount that is due from the debtors with regard to
the credit sales of the company’s services or products. It reveals the efficiency of the
company in collecting its debt (Adewuyi 2016). It can be identified that the accounts
receivable ratio of Tesco PLC for the year 2016 was only 21.57. However, the company was
able to improve its receivable turnover ratio significantly and the ratio achieved by the
company during 2017 was reached to 56.74.
Inventory turnover ratio shows the efficiency of a company to manage its inventory
as compared to cost of the goods sold with the average inventory for the period under
consideration. To be profitable, a company shall be able to manage the inventory as it is the

17
ACCOUNTING PROJECT
money invested that is not able to earn the return until the sale of the product. It can be
identified from the above table that the inventory turnover ratio of the company has been
improved and reached to 22.41 in 2017 from 19.15 in 2016.
Total asset turnover ratio measures the the ability of the company to generate the
sales from the asset with comparing to the net sales with the average total assets. To be
more specific, this ratio reveals the company’s efficiency to generate sales through usages
of the assets (O'Hare 2016). It can be identified from the above table that the total asset
turnover ratio of the company over 2016 and 2017 are same at 1.24. It reveals that the
efficiency of the company over both the years remains same.
Liquidity ratios
Ratio 2016 2017
Current ratio 0.75 0.79
Quick ratio 0.59 0.66
Liquidity ratios evaluate the company’s ability to pay off its current liabilities on
becoming due as well as the non-current liabilities on becoming current obligations. To be
more specific, these ratios reveal the company’s cash levels and the ability of turning the
other assets into the cash. Looking into the liquidity ratios of the company it can be identified
that though both the current ratio as well as the quick ratios of the company has been
improved in 2017 as compared to 2016, the ratios are lower as compared to the industry
average (Ismail 2017). Generally, the ratio of 1 is considered good for any company under
retail sector. Therefore, the company shall take appropriate measures to increase its current
assets so that it can improve its paying ability for the current obligations.
Solvency ratios
Ratio 2016 2017
Financial leverage 5.09 7.12
Debt equity ratio 1.24 1.47

18
ACCOUNTING PROJECT
Solvency ratios are used to measure the company’s ability for meeting the long-term
debts. It quantifies the after tax income size of the company while not considering the non-
cash expenses for depreciation as against the company’s total debt obligation (Laffy and
Walters 2016). Looking into the solvency ratios of the company, it can be identified that both
the financial leverage ratio as a whole and the debt equity ratio of the company has been
increased in 2017 as compared to the year 2016. A higher leverage represents that the
company is less stable and will be taken as more risky from the investors and creditor’s
aspect.
Profitability ratios
Ratio 2016 2017
Return on assets 0.31 0.09
Return on equity 1.76 -0.53
Net profit margin 0.25 -0.07
Profitability ratios are financial metrics used to measure the ability of the business
with regard to generate of earnings as compared to the expenses and other costs spend
during the specific time period. Return on assets measures the profitability of the company
as compared to the total assets. It can be identified from the above table that the return of
assts of the company is reduced to 0.09 in 2017 from 0.31 in 2016 (Müller 2015). Further,
the returns on equity as well as the net profit margin both for the company in 2017 are in
negative as the company was not able to earn any positive income during 2017. The main
reason behind this was the large amount of interest expense during 2017. Therefore, Tesco
PLC shall try to pay-off its borrowings to reduce the interest expenses.
Non-financial ratio
Retention turnover ratio
Retention rate is calculated by dividing total employees number by average of
employees at the opening of the period and at closing of the period. Three years ago the

19
ACCOUNTING PROJECT
employee turnover rate for Tesco PLC was 29.9% and as per Glickman, the turnover rate of
the company is lower as compared to the industry average of 35%.
Customer and clients
As per the latest data of Customer Satisfaction Index of UK (UKCSI), the Institute of
Customer Service, Tesco recorded the highest point at 1.2 with regard to customer
satisfaction based on the index of 100 point. Further, the customers scored 7.7 point out of
10 with regard to trusting the retailer. Moreover, with regard to handling the compliant of the
customers, the company scored 85% in getting it right 1st time (Wood, Wrigley and Coe
2016).
Operations
The company has set 3 year target for reducing the accidents in workplace by more
than 10% and last year already recorded 22% reduction in customer’s accidents and 13%
reduction in retail staff’s accidents. Further, the company has taken proper measures to
reduce the load factors due to emissions of various gases like nitrogen oxides, carbon-
dioxide and sulphur-dioxide.
Environment and citizenship
The company is doing continuous improvements in reducing the carbon intensity of
the the distribution centres and stores per square foot and emission of that per case of the
goods. Further, it reduced the emissions from refrigerant by 14% from 2015/16.
Timetable to complete the project
Main Activities 12 th November
2017
16th November 2017
Interim Report
Rationale of
business activities

20
ACCOUNTING PROJECT
Aim, objectives
and research
questions
PEST
(Environmental
Scan)
Porter’s Five
Forces Model
Financial ratios
Non-financial
ratios
Conclusion
The interim report is completed by explaining that retail sector in UK is a developing
sector and further employment and development are required in order to satisfy the demand
in the economy. There is a huge level of completion in this sector as the organizations
provide opportunities to their customers. The assessment effectively explains the internal
and environmental assessment along with the financial and the non-financial ratios of the
retail sector industries in UK. The assessment of the same would be effective in
understanding the most effective and the most ineffective company out of the chosen three
retail firms.

21
ACCOUNTING PROJECT
Reference List
Adewuyi, A.W., 2016. Ratio Analysis of Tesco Plc Financial Performance between 2010 and
2014 in Comparison to Both Sainsbury and Morrisons. Open Journal of Accounting, 5(03),
p.45.
Aguzzoni, L., Argentesi, E., Ciari, L., Duso, T. and Tognoni, M., 2016. Ex post merger
evaluation in the UK retail market for books. The Journal of Industrial Economics, 64(1),
pp.170-200.
Cette, G., Fernald, J. and Mojon, B., 2016. The pre-Great Recession slowdown in
productivity. European Economic Review, 88, pp.3-20.
Cheshire, P.C., Hilber, C.A. and Kaplanis, I., 2014. Land use regulation and productivity—
land matters: evidence from a UK supermarket chain. Journal of Economic
Geography, 15(1), pp.43-73.
Cox, A., Hay, G., Econometrics, C., Hogarth, T., Brown, G., Writing, G.B. and Limmer, H.,
2016. Productivity in the retail sector: Challenges and opportunities. Recuperado de
http://www. employment-studies. co. uk/system/files/resources/files/ukces0816d. pdf.
Cullen, J., Tsamenyi, M., Bernon, M. and Gorst, J., 2013. Reverse logistics in the UK retail
sector: A case study of the role of management accounting in driving organisational
change. Management Accounting Research, 24(3), pp.212-227.
Goodridge, P., Haskel, J. and Wallis, G., 2013. Can intangible investment explain the UK
productivity puzzle?. National Institute Economic Review, 224(1), pp.R48-R58.
Ismail, I.N., 2017. The Roles of Corporate Governance and its Influances on Risk and
Performance: Tesco Plc.
Jamasb, T. and Pollitt, M.G., 2015. Why and how to subsidise energy R+ D: Lessons from
the collapse and recovery of electricity innovation in the UK. Energy Policy, 83, pp.197-205.

22
ACCOUNTING PROJECT
Laffy, D. and Walters, D., 2016. Managing Retail Productivity and Profitability. Springer.
Lloyd, C. and Payne, J., 2014. ‘It’s all hands-on, even for management’: Managerial work in
the UK cafe sector. human relations, 67(4), pp.465-488.
Maican, F. and Orth, M., 2015. A dynamic analysis of entry regulations and productivity in
retail trade. International Journal of Industrial Organization, 40, pp.67-80.
Müller, M., 2015. Critical Analysis Of The Financing Policies of Tesco plc.
O'Hare, J., 2016. Analysing Financial Statements for Non-specialists. Taylor & Francis.
Shin, S. and Eksioglu, B., 2015. An empirical study of RFID productivity in the US retail
supply chain. International Journal of Production Economics, 163, pp.89-96.
Triantafyllou, M., Cherrett, T. and Browne, M., 2014. Urban Freight Consolidation Centers:
Case Study in the UK Retail Sector. Transportation Research Record: Journal of the
Transportation Research Board, (2411), pp.34-44.
Vries, G.J., 2014. Productivity in a distorted market: the case of Brazil's retail sector. Review
of Income and Wealth, 60(3), pp.499-524.
Wood, S. and McCarthy, D., 2014. The UK food retail ‘race for space’and market saturation:
A contemporary review. The international review of retail, distribution and consumer
research, 24(2), pp.121-144.
Wood, S., Wrigley, N. and Coe, N.M., 2016. Capital discipline and financial market relations
in retail globalization: insights from the case of Tesco plc. Journal of Economic
Geography, 17(1), pp.31-57.
Yu, W., Ramanathan, R. and Nath, P., 2014. The impacts of marketing and operations
capabilities on financial performance in the UK retail sector: A resource-based
perspective. Industrial Marketing Management, 43(1), pp.25-31.