TESCO PLC ANALYSIS

Executive Summary
Tesco PLC is one of the largest retail businesses in the United Kingdom (UK) and was incorporated in the 1950 (Tesco plc, 2019 a). This multinational boasts of more than 34,000 stores in the UK employing over 300,000 staff in their stores globally. From the annual financial statements, the management is committed towards ensuring the growth of this firm and hence has employed various strategies to help in achieving this mission. These strategies have seen the firm make net profits worth 1,320 million pounds in 2019 compared to 1,210 million pounds in 2018. The adoption of the tax preference policy has also worked in favour of the multinational in ensuring its growth (Misra, Jain, and Sood, 2018). This paper will therefore focus on some of the challenges that this multinational has experienced, a focus on some of the strategies that have been employed to achieve a turnaround of the company, and finally some recommendations on what the firm can do going forward to maintain the growth rate.
Table of Content
Executive Summary……………………………………………………………………………. 2
Table of Content………………………………………………………………………………… 2
Discussion & Analysis………………………………………………………………………….. 2
Firm’s Strategy for raising funds………………………………………………………………. 3
Evaluation of Firm’s Strategy of Raising funds……………………………………………… 4
Evaluation of Firm’s Strategy on Distribution of Funds………………………………….…. 4
Conclusion and Recommendation…………………………………………………………….. 5
References ……………………………………………………………………………………… 7

Discussion & Analysis
Tesco PLC is a multinational food retailer with a huge online presence. Its key strategy over the years has been the operation of brick and mortar supermarkets, and a private- label brand of products. As a strategic segmentation plan, this company provides its services in Europe and a few Asian countries. It also boasts of over 3,400 physical locations under Tesco Express (small format stores), Metro (medium sized and targets the urban centres only), Superstore (Large supermarkets), and Extra (the hypermarket) (NB, 2002). The management of this company have been keen to note some opportunities of growth and capitalized on them to make a huge turnaround. For example, the firm has opened a series of new stores and done some huge renovations to improve the model of their express formats, reduction in capital and operating costs, while ensuring that the product mix is not compromised. Further, the expansion and adoption of the cash and carry model within countries such as Brazil has proven to be a great strategic move for this entity because it has helped scale down the account receivables subsequently strengthening its financial position (Kelly, Lewis, Atherton, Downes, Wyndham, and Giurco, 2016).
While the firm strongly encourages customer loyalty, the last three years have seen this entity introduce the first UK’s grocery loyalty subscription service, Clubcard Plus, offering its clients more value from their Tesco shops and a discount of at least 10% in two big shops each month (Tesco plc., 2020). This approach is a great move to help the corporation increase its market share in the UK and Asian markets. Further, the management has come up with very innovative techniques to make customer shopping experience a memorable one while minimizing the costs of operation. For instance, in February of 2020 the managers rolled out a new method that was customer centric at their fresh food counters in the UK. The adoption of technology by the management has seen administrative costs reduce since the introduction of the new scheduler tool which guarantees staff members flexibility and choices to book and amend their shifts, offer feedback, and is user friendly.
To increase the funds for investment into Tesco PLC, the management reinvested some of the investor dividends back into business. Also, the financial statements show that the financial year 2019/ 2020 there was a reduction in external long-term debts. Further, the firm is moving to encourage more customer debts and hence the increase in customer deposits from 2,972 Million Pounds in 2018 to 3,296M pounds in 2019.
4.1 Firm’s Strategy for raising funds
Some of the debt financing options adopted by the management of this entity are Trade and other payables, Borrowings (both short term and long-term borrowings), Lease liabilities in terms of unpaid lease costs, Derivative financial instruments, Customer deposits and deposits from banks, Post-employment benefit obligations, and Deferred tax liabilities.
While the firm had an option of getting external investors to invest in this firm, they chose not to float the idea to the public. Instead, the current shareholders were encouraged to plough back some of their dividends into the firm by purchasing some shares from the company. This approach made available some cash flow for the company to spend in renovations, adoption in high level technology among other operational sectors to better the shopping experience of their clients. Another technique used by the management of Tesco PLC is to have long term leases and agree with the landlords on a flexible payment plan. In so doing, the company left some funds available to help run the business without much struggle. The fact that the company encourages customer and bank deposits to be made to them also created another avenue for the come to have some revenue stream for its operations. The short term and long-term borrowings were also critical in financing the operations of the business. Borrowing in the short term however meant that the company could only invest in some short-term investments to ensure that they can cover up these debts when they fall due.
A deferred tax liability means that the company is supposed to pay its tax obligation but is yet to clear with the tax man (Nakamura, and Suzuki, 2015). This approach means that the company is buying time to clear this debt. It could also be that the investment returns from their various investment plans has not been cleared and that the company will clear once they have the cash at a future date (Wood, Wrigley, and Coe, 2017). The investors under Tesco PLC have embraced the tax preference dividend kind of policy. This policy champions for a low dividend payout hence encouraging the organization to grow steadily over a given time period.
4.2 Evaluation of Firm’s Strategy of Raising funds
There are various opportunities available for businesses such as Tesco PLC to raise sufficient capital for its operations and growth (Petersen, and Rajan, 1994). Tesco PLC within the last three accounting cycles has been keen to plough back some of the profits made from operations into its business. Additionally, the entity deliberately chose not to make much of external borrowing within the cycle of 2019/2020 which gave the company some less burden in terms of paying the bank interest and hence availing cash flow for other projects. The strategic decision by the management of Tesco PLC to clear most of their short-term debt was very thoughtful. This approach will give the company more time to run its business and recover some of their funds invested into long term. Also, the avoidance of external debts by not floating some external investors will encourage investor loyalty and allow growth (Chowdhury, 2016). It is important to note that this firm has customers and staff as the main beneficiaries hence loyalty and service to them as shareholders.
These strategies have enabled a comeback for the multinational after a detrimental performance in previous years. For instance, in the year 2015 Tesco PLC had lost such a huge market share and so it was crucial for the management to come up with stronger marketing and financing strategies to curtail this downward trend (Coe, and Lee, 2006). The above strategies seem to work very well for the company earning it a substantial growth rate and stability. The growth and stability can be associated with greater consumer confidence in the recent past. This trend is expected to propel this firm to new heights.
The reinvestments made by the company from its shareholder’s dividends were majorly spent in buying into new entities and such mergers were strategic. Through the merger the Tesco PLC customers can enjoy some quality shopping experiences at closer distances among other benefits.
4.3 Firm’s Strategy on Distribution of Funds
The financial years 2018- 2020 have been quite involving for Tesco PLC. The firm made an aggressive move to acquire stores, renovate, and even expand its business ventures (Tesco plc.,2020). As such, the financial year 2018 saw Tesco rebrand and adopt a strategy as Carrefour where in their Korea and Brazil they opted for cash-carry away technique. While the Korean market was not so receptive of this strategy, the Brazilian market was so successful. According to the Tesco management, the difference in response would be attributed to the diversity in consumer trends from the two countries.
4.4 Evaluation of Firm’s Strategy on Distribution of Funds
Gearing ratios:
The gearing ratio is used by firm investors to tell of the risks associated with investing their funds in a company (Adewuyi, 2016, p.45). A high gearing ratio translates to a high proportion of debt to equity and vice versa. This ratio is calculated by dividing debt by equity (Mitchell, 2006, p.15).
Gearing Ratio = Total Debt / Equity
Year
Total Debt
Equity
Gearing Ratio
2018
29,939
9,138
3.28
2019
30,888
13,432
2.30
2020
25,885
13,253
1.95

From the above calculations, the gearing ratio for Tesco PLC has substantially declined. This trend is a good sign for any investor looking at investing funds in the firm. The risks associated with their investments have declined from 3.28 in 2018 to 1.95. The decline can also confirm that indeed the strategies applied by the management of this firm are working favourably in ensuring the growth of the company.
The financial statement also shows a decline in the level of external borrowing for this firm which leaves the firm with some good amount of cash flow to run the business efficiently. The business is investing more in avenues that generate more income for the company and hence leaving with some near cash assets to ensure smooth operations (Gharib, and Benabbou, 2016). This strategy means that the company has less of borrowing to do even from the shareholders hence the decline in the equity figure from 13,432 in 2019 to 13,253 in 2020 (Tesco plc.,2020). Considering the dividend policies adopted by the shareholders of this corporation, the decline in share price from 13 in 2019 to 9 in 2020 should not be something to worry about. Besides, the management is keen to offer a good share price for the investors while allowing the company to recover from setbacks it had experienced in previous financial years. Also, to reduce on the amount of tax liability that the firm has to pay to the government, the company management opted to have some retained earnings in the firm. These earnings will be used in the management and operation of the company.
Conclusion and Recommendation
From the above discussion it is evident that there are some good strategies in place by the management of Tesco PLC to propel this firm to better growth. The business is a great going concern. Some of the key opportunities for this firm would be to make some substantial renovations on their current stores, increase some of the stores to areas where they can get bigger and loyal clients (Fujita, M., Wenpeng, Aizono, and Ara, 2015, p. 197-206). Additionally, the continued use of the cash- carry policy in most of their local stores especially zones bordering Brazil will work well. However, this has to be done in phases putting in place consideration the varying consumer preferences and needs. The various analysis carried out on the group’s financial statements (income statement and balance sheet) show that the company has substantially declined the external borrowing rates. The operation system seems to be sufficiently funded and investments done in the right places. What remains now is to have a close look at this company to see how it adapts to the dynamic consumer changes and most especially post covid.

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