Tesco PLC: Financial and Operational Performance Analysis Report

This report provides an in-depth analysis of Tesco PLC's operational and financial performance, comparing it with its main competitor, Sainsbury PLC. It begins with an overview of Tesco's business, its market structure, and operational activities, focusing on key aspects like customer service, product offerings, and channel management. The analysis includes a calculation and interpretation of various financial ratios, such as profitability, liquidity, leverage, and efficiency ratios, based on Tesco's financial statements for 2017 and 2018. These ratios are then used to evaluate Tesco's financial health and operational efficiency. Furthermore, the report compares Tesco's revenue generation, profit before tax, and return on assets with those of Sainsbury, highlighting the competitive landscape of the UK grocery market and the impact of new entrants like Aldi. The report concludes with recommendations for Tesco to improve its operational and financial performance and maintain a competitive advantage.

OPERATIONAL AND FINANCIAL PERFORMANCE ANALYSIS OF TESCO
Operational and Financial Analysis of TESCO
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2OPERATIONAL AND FINANCIAL PERFORMANCE ANALYSIS OF TESCO
Executive Summary:
This report analyzes and interprets the financial and operational performance of Tesco PLC.
Tesco PLC is having a large network of retail outlets dominating in groceries and food
products. For better understanding of their performance and competitive position in the
market, their operational and financial performance has been compared with the performance
of their competitor Sainsbury PLC. Different financial ratio helps in evaluating and
understanding financial performance of a company. For the users of financial information it
becomes easy to interpret the financial performance and financial position of a company
easily from certain financial ratios. Lastly, the paper concludes with some recommendations
to the management of the Tesco for improving their operational and financial performance
and gain more competitive advantage in the market.

3OPERATIONAL AND FINANCIAL PERFORMANCE ANALYSIS OF TESCO
Table of Contents
Introduction:...............................................................................................................................4
Brief overview of the Company:................................................................................................4
Overview of the Market Structure:............................................................................................5
Analysis of operational activities of Tesco PLC:.......................................................................5
Ratio Analysis of Tesco PLC:....................................................................................................6
Profitability Ratios:................................................................................................................7
Liquidity Ratios:.....................................................................................................................7
Leverage Ratios:.....................................................................................................................8
Efficiency Ratios:...................................................................................................................9
Comparative analysis of Financial and Operational Performance of Tesco PLC with
Sainsbury:...................................................................................................................................9
Revenue generation:.............................................................................................................10
Profit before tax:..................................................................................................................10
Return on Assets:.................................................................................................................10
Comparison of operational performance:.............................................................................11
Conclusion:..............................................................................................................................11
Recommendation:....................................................................................................................12
References:...............................................................................................................................13

4OPERATIONAL AND FINANCIAL PERFORMANCE ANALYSIS OF TESCO

5OPERATIONAL AND FINANCIAL PERFORMANCE ANALYSIS OF TESCO
Introduction:
Success of any company depends on how well they are serving their customer’s
demands and requirements. To achieve that success, operational efficiency is important.
Operational efficiency means the smooth and hassle free process of serving the demands and
requirements of the customers. On the other hand, financial performance depends on the
operational success of a company to a large extent. In this report, various operational
parameters of Tesco PLC have been analyzed to know their operational performance and
various ratios have been computed to interpret their financial performance in comparison
with their biggest competitor Sainsbury PLC. There are various business factors and macro-
economic factors that should be consideration while evaluating the financial performance of
the company as the same influences the financial performance of the company. Financial risk
and the business risk are some of the key risks found in the business of a company and there
should be optimal ways and strategies for dealing the same.
Brief overview of the Company:
Tesco is a UK based giant retailer of food products operating in UK, Europe and Asia
having more than 6,800 retail stores, Hypermarkets and Supermarkets. They are having more
than 440,000 employees to serve their customers efficiently. They also provide their services
online through one of their subsidiary Tesco.com. Tesco becomes the biggest food retailer in
UK capturing almost 27.8% of the market share by the year 2017 (Tesco.com 2019).
J. Sainsbury PLC becomes their biggest competitor with 15.8% of overall market
share in UK. Sainsbury is having many other joint venture businesses in banking and finance
sector. Sainsbury offers various food and non-food products through their numerous retail

6OPERATIONAL AND FINANCIAL PERFORMANCE ANALYSIS OF TESCO
outlets. They are also having a home delivery facility provided through online platform
(Sainsburys.co.uk 2019).
Overview of the Market Structure:
Tesco PLC’s operations are mainly based on the UK. They are the market leader in
UK food and groceries market. Initially they were offering their products through
supermarkets and hypermarkets limiting their market to some specific geographical regions.
With their entry into the online business, they are expanding their operations internationally
and capturing the global market. They are operating in a competitive market situation where
various competitors like Sainsbury, Asda, Aldi and Morrisons are operating with challenging
product offerings and marketing strategies. As the market of today is expanding globally
through online platform, it is becoming more and more competitive with various discount
offerings of their competitors in different countries. Though the Tesco is still the market
leader in UK their market share is falling marginally due to rise of many other competitors
like Aldi.
To survive is such a competitive situation, the company needs to be either cost
efficient or differentiate their products from the others with innovation in their products and
process. Tesco PLC offering best food products in their brand with innovation and cutting
edge manufacturing process thereby reducing their operating costs. Tesco PLC being an old
operator in the market enjoys certain amount of brand loyalty, which gives them a
competitive advantage in the market.
Analysis of operational activities of Tesco PLC:
Tesco is serving almost 80 million customers per week with continuous improvement
in their product offerings keeping in mind the stakeholders’ interest. Their business model is

7OPERATIONAL AND FINANCIAL PERFORMANCE ANALYSIS OF TESCO
based on three key aspects Customers, Products and Channels. They try their best to serve
their customers with quality products as per their tests and preferences. They work closely
with their customers to gather feedbacks from them. They appreciate their customers’
feedbacks and it is being considered in their product development strategies. They are
working closely with their suppliers and partners to serve the best possible products to their
customers. They are having a good collaboration and relationship with their partners and
suppliers for smoother availability of inputs. They are having a huge retail network and
partnerships to deliver their products timely. Their retail outlets are ranging from small shops
to large supermarkets and hypermarkets. Their online business platform gives them a new
channel to reach their customer through various delivery and warehousing partnerships.
Their key business strategy includes Brand Differentiation, Reducing operation costs,
Maximizing product mix and innovation. They have been trying to build trust and long term
relationship with their customers which will help them to create a well known brand in the
UK groceries market. Continuous research and development and improvement in their
operations helps them to reduce their operating costs. In their online business platform, they
are trying to increase the number choices through diverse product offerings to increase their
overall profit margin. One of their main strategies is to create new and innovative products
for their customers, which will keep them one-step ahead in the competition.
Ratio Analysis of Tesco PLC:
Different financial ratio helps in evaluating and understanding financial performance
of a company. For the users of financial information it becomes easy to interpret the financial
performance and financial position of a company easily from certain financial ratios. From
the financial statement of Tesco PLC, following ratios can be computed to analyze the

8OPERATIONAL AND FINANCIAL PERFORMANCE ANALYSIS OF TESCO
financial performance, financial position and liquidity of the company. Based on such
analysis certain observations can be pointed out as described in different heads below.
Profitability Ratios:
Ratios FY 2018 FY 2017
Gross Profit 3,350 2,902
Net Sales 57,491 55,917
Gross margin ratio = Gross profit/Net Sales 5.83% 5.19%
Operating Income 1,837 1,017
Net Sales 57,491 55,917
Operating margin ratio = Operating Income/Net Sales 3.20% 1.82%
Net Income 1,208 (54)
Total Assets 44,862 45,853
Return on assets ratio = Net income/Total assets 2.69% -0.12%
Net Income 1,208 (54)
Shareholders' Equity 10,458 6,414
Return on Equity = Net income/Shareholders' Equity 11.55% -0.84%
It can be observed from the above ratios that the company has successfully achieved
their goal of operating cost reduction. As a result, their operating margin ratio has been
increased to 3.20% in the year 2018 (Tesco Annual Report and Financial Statement 2018).
They were incurring a huge amount of loss in the year 2017 resulting in a negative ROA and
in the year 2018 with increase in their net income their ROA has been increased to 11.55%.
Liquidity Ratios:
Ratios FY 2018 FY 2017
Current Assets 13,726 15,417
Current Liabilities 19,238 19,405
Current Ratio = Current Assets/Current Liabilities 0.71 0.79
Current Assets 13,726 15,417
Inventories 2,263 2,201
Current Assets less Inventories 11,463 13,216

9OPERATIONAL AND FINANCIAL PERFORMANCE ANALYSIS OF TESCO
Current Liabilities 19,238 19,405
Acid-Test ratio = Current assets-Inventories/Current Liabilities 0.60 0.68
Cash and cash equivalen 4,059 3,821
Current Liabilities 19,238 19,405
Cash adequacy ratio = Cash and cash equivalent/Current
Liabilities 0.21 0.20
Operating Cash Flow 2,782 1,989
Current Liabilities 19,238 19,405
Operating Cash Flow ratio = Operating cash flow/Current
Liabilities 0.14 0.10
Liquidity ratio expresses the capacity of the company to meet their short-term
obligations. From the above ratios, it can be concluded that, the company is not having
enough cash resources or liquid assets to pay off their short term obligations. Their cash
adequacy and the operating cash flow is also poor though there is a slight increase in the year
2018 (Tesco Annual Report and Financial Statement 2018).
Leverage Ratios:
Ratios FY 2018 FY 2017
Total Liabilities 34,404 39,439
Total Assets 44,862 45,853
Debt ratio = Total Liabilities/Total Assets 0.77 0.86
Total Liabilities 34,404 39,439
Shareholders' Equity 10,458 6,414
Debt to Equity ratio = Total liabilities/Shareholders' Equity 3.29 6.15
Operating Income 1,837 1,017
Interest Expenses 539 872
Interest coverage ratio = Operating income/Interest Expense 3.41 1.17
Operating Income 1,837 1,017
Total Debt service 3,721 2,036
Debt Service Coverage ratio = Operating income/Total debt
service 0.49 0.50

10OPERATIONAL AND FINANCIAL PERFORMANCE ANALYSIS OF TESCO
The company is having a significant debt to equity ratio, which indicates that the
company is using huge amount of debt to finance their assets. The company is a highly
leveraged company with a high. If they are generating significant amount of profit greater
than their cost of debt, then the shareholders will be benefited.
Efficiency Ratios:
Ratios FY 2018 FY 2017
Net Sales 57,491 55,917
Total Assets 44,862 45,853
Assets turnover ratio = Net sales/Total assets 1.28 1.22
Cost of goods sold 54,141 53,015
Average Inventory 2,282 2,366
Inventory turnover ratio = Cost of goods sold/Average Inventory 23.73 22.41
Efficiency ratio indicates how well an organization is utilizing their current and
noncurrent assets to generate revenue and profit. From the above computed ratios, it can be
observed that the company is efficiently utilizing their resources to generate revenue; also, an
increasing trend in their efficiency can be observed.
Comparative analysis of Financial and Operational Performance of Tesco
PLC with Sainsbury:
Tesco PLC is the leader in the UK grocery market having their biggest competitor
Sainsbury with identical product offerings. Due to entry of numerous new players in the UK
grocery industry the total market share of both Tesco and Sainsbury has been decreasing for
last couple of years. As the market is having intense competition, companies need to be

11OPERATIONAL AND FINANCIAL PERFORMANCE ANALYSIS OF TESCO
efficient in their operations and offer innovative products to survive for a long run. One of the
new entrants, Aldi is capturing the market rapidly with a high growth rate in market share in
last few years. A valid comparison in terms of financial and operational performance of
Tesco and Sainsbury can be done as follows.
Revenue generation:
Tesco PLC is having the largest market share in the UK grocery market. Tesco’s total
sales for the year 2018 were 51bn pound in comparison the Sainsbury’s sales was 31,735m
pond in that year. Tesco have generated 57.5bn pound revenue in 2018 (Tesco Annual Report
and Financial Statement 2018), whereas the Sainsbury have generated 51bn pound in that
year. In terms of revenue generation, Sainsbury is not so far from the Tesco (J Sainsbury
Annual Report and Financial Statement 2018). A marginal growth of 2.8% in Tesco’s
revenue can be noticed in the year 2018.
Profit before tax:
Tesco was having a huge amount of loss in the year 2017, but they were able to
recover from that situation and were successful in making a statutory profit of 1,298m pound
in the year 2018. On the other hand, statutory profit of Sainsbury was 409m pound in the year
2018. Comparing the statutory profit keeping in mind their revenue, it can be concluded that,
the Tesco is more efficient in managing their expenses as a result; their statutory profit is
much higher than that of Sainsbury.
Return on Assets:
Return on assets indicates how efficient a company is in utilizing their assets to
generate profit. Tesco is having a 2.69% of return on assets in the year 2018. Sainsbury is
also performing well in terms of ROE but they are a little behind from the Tesco. Sainsbury is
having a 1.57 % of ROE in the year 2018 (J Sainsbury Annual Report and Financial

12OPERATIONAL AND FINANCIAL PERFORMANCE ANALYSIS OF TESCO
Statement 2018). It can be observed from the comparison of ROE of both the companies that
Tesco is more efficient in utilizing their assets to generate revenue.
Comparison of operational performance:
Operational performance means the efficiency and effectiveness of the operational
activities of any company. Tesco is having more than 440,000 employees who are
continuously working to serve their customers better every day. They are continuously
striving to improve their operational activities and create innovative products as per the
customer’s needs. They are having a retail chain of more than 6,800 stores and super markets
to deliver their products timely to their customers and they are serving almost 80 million
customers every week. They are having various partnerships to make their distribution
network and supply chain more strong and to reach their customers. In comparison, the
Sainsbury is having 608 Supermarkets and 102 stores for their food products. Both the
companies are working in the online platform and selling their products online (J Sainsbury
Annual Report and Financial Statement 2018). In the last year, there was a 5.1% growth in
the online selling of Tesco and on the other hand Sainsbury is having a 6.8% growth in their
online selling of their food products. That means, Sainsbury is capturing the online market
more rapidly than the Tesco. As a big challenge to both the companies ALDI is also
performing well in the industry, they are having over 200 percent growth in their sales in the
last year. They are remodeling and improving their stores to offer more premium shopping
experience to their customers. Their growth in last couple of years is remarkable (CNBC
2019).
Conclusion:
From the above analysis and comparison, it can be concluded that, the Tesco being
the largest company in the groceries market in UK have gone through some bad situations in