Financial Performance of Tesco - Case Study Example

Financial Performance of Tesco and Section # of Introduction In the context of this paper, a successful organization is the one that ‘cares’ about its stakeholders. Stakeholders include entities varying from employees to shareholders and from general public to local government and from suppliers to the customers (Haberberg & Rieple 2008, pp. 551-580). As all five fingers cannot be kept at the same line, an organization cannot keep all stakeholders happy and satisfied at the same time. However, there is an optimality level, which varies from organization to organization as they weigh and balance the costs and benefits of keeping the stakeholders satisfied with the performance or beyond (Thompson & A.J 2006, pp. 189-200). The society and economy is also a stakeholder as it is also being affected by the operations of the company. This paper discusses about the Tesco Company and how excellent is Tesco financially and at what cost. The paper then discusses what constitutes a successful organization- how happy is its shareholders, how damaging and favorable is Tesco financially and how it is contributing to the society and what are the criticisms in relation to Tesco’ effect on the economy. The conclusion is presented at the end. About Tesco With a control of around 30% on the grocery markets of the UK and declared profits of £2.8 billion in 2008, Tesco is one of the fastest growing stores in the world even in the days of economic crisis. The British based international grocery and general merchandise range; it is the biggest retailer in the UK on grounds of both domestic and international sales figures. Tesco has a diversified product range, from food and beverages, where it started off with, to CDs, DVDs, consumer electronics, financial services, insurance, and a lot more…all under one roof. Tesco has certain unique points of differentiation which have contributed to Tesco in becoming the market leader (Reynolds, Cuthbertson & Bell 2004, pp. 148-152). Tesco has multi-store formats in UK and also it focuses on sales of non-food items. Tesco offers its customer multiple ways and means to shop in order to fulfill their needs; these include Tesco.com, Tesco telecoms and Tesco personal finance. Financial Performance of Tesco – A Brief Over view The five years investment trend (Tesco 2008) gives a clear indication of betterment in terms of performance. The group sales figures have increased from £46,611 million to £51,773 million from 2007 to 2008. Interestingly the increase in operating profits has been very lesser in terms of percentage compared to the amount of increase in sales in proportion. A dividend per share of £10.9 per share and ROCE (Return on Capital Employed) of 12.9% is another story of success within itself (Tesco 2008). There is overall growth witnessed not just in the sales figures but also in the number of stores and other variables in the balance sheet that clearly denoted that Tesco is a growing group. The shareholder return (Tesco 2008) shows that the return that the shareholders of Tesco receive is greater as compared to the other competitors of Tesco (Tesco 2008). Comparison of Tesco with Competitors Tesco’s major competitors in the UK industry include 1. 2nd largest: ASDA –the American group owned by the Wal-Mart 2. 3rd largest: J Sainsbury –UK’s grocery retailer which runs the Sainsburys Supermarkets chain 3. 4th largest: Morrison Supermarkets Tesco’s sales and growth figures have shown an increasing trend as compared to its competitors. Yearly growth this year for Tesco was 12.1%, for Sainsbury was 5.7%, ASDA is going up with a growth of 8.8% while Morrison also went up with a growth rate for the year of 8.2% (Creevy 2009). Although, Tesco’s competitors are showing an increasing trend but Tesco still enjoys the largest market share of 30.4% in the UK retail industry; J Sainsbury’s share has gone down to 16.1% while ASDA rise to 17.5%. Morrison lags behind with 11.8% market share in the UK industry. The ASDA group which is owned by Wal-Mart has although been showing a threat to Tesco as ASDA has seen continuous growth like Tesco is continuing to grow (Hamilton 2009). Tesco is a successful organization not just because its financial performance is good but there are qualitative factors also attached to it that make Tesco the market leader (Davies et al. 2003, pp. 42, 71). Has Tesco kept its stakeholders happy? Tesco has done well, with donating over 1% of its 2006 profits to local charitable organizations. With over 70% of the shares belonging to individuals other than employees or corporate institutions, an appropriate divided is an acknowledgeable factor and has positive influence on the stakeholders of the firm (Tesco 2008). Following are some important facts as quoted: 1. Basic EPS £26.95 2. Diluted EPS £26.61 3. Dividend per Share £10.90 These three figures are of most importance to a shareholder. Each of these is significant because their difference defines the company policy towards the growth or pay out. The overall happiness of the shareholders is in major dependent on the return on their investment they get (Moore 2001, pp. 299-315). The shareholders of Tesco have received mostly unexpectedly high returns on their equity which has resulted in Tesco keeping its shareholders happy by increasing shareholders’ return on equity (Esty & Winston 2009, p. 85). Effect of Tesco’s Excellent Financial Performance on the Economy Tesco has made corporate social responsibility, an integral part of its corporate strategy. It aims to provide its customers with healthy options; the company’s high financial performance is shared with the community by contributing a percentage of their income to supporting the local communities and contributing to the environment. The company aims to conduct its business responsibly and ethically (Tesco PLC 2008). Another contribution of Tesco to the economy is its recent announcement to create 200 finance jobs in Edinburgh and 250 jobs in Coleraine (BBC News 2009). This news has brought another positive essence of the company as the company has announced the creation of such a large number jobs when most of the other large organizations are announcing lay-offs employees, introducing pay-cuts and reducing the workforce. The creation of 200 jobs in this economic downturn is a great contribution to the economy and the community. Tesco also contributes to the environment by encouraging and increasing recycling by the common men. Tesco has installed recycling machines throughout the country which enable the customers to earn points if they put in plastic bottles and aluminum cans into the machine. The machine was in turn misused by the people and they started putting plastic items that are cut into pieces to gain more points. Due to this issue, it now recycles aluminum cans only (BBC News 2009). But this reveals its continuous contribution to the environment. Effect of Tesco Monopolistic System on the Economy Tesco is financially an excellent company but the critics say that Tesco has achieved this high financial performance at the cost of the small competitors. But the general perception is that the management of the company has strived to achieve the success that the company has today (Wall & Griffiths 2008, p 520). Although the company, Tesco aims to portray a positive image of it cultural practices and activities but the company is being continuously criticized. The advertisers claim that Tesco is involved in activities like child labor abuse and poor working conditions, its effect on price manipulations, being a threat for small retail businesses and development of their own suppliers and thus it is responsible for unpleasant ecological effects. There are also more criticisms associated with not only Tesco but its major competitors as well. These include: 1. The opening of stores in residential areas will result in noise pollution and blockage of parking spaces in the areas. 2. The green space is also at risk due to the opening of more and more stores 3. The local traders will suffer due to the monopolistic effect of Tesco in many countries 4. Tesco is moving towards having its monopoly in various countries due to which a lot of other businesses will suffer. Conclusion Tesco, being the market leader in the UK retail industry, has increasing financial performance and is contributing to the society as well. But there are also criticisms arising against Tesco’s monopolistic effect on the economy. Its income growth, EPS, market growth and the number of stores have seen an increasing trend over the years. Since Tesco has also increased the dividend payout with the increase in its net profits, the organization aims to keep its shareholders happy. Thus, the good financial performance of the company does not merely judge that the organization is a successful organization; rather, the success of the organization depends also on how it is contributing to the society and the economy. Tesco is being criticized by advertisers and other people due to its increasing number of stores and its monopolistic effect that is beginning to be created in most of the countries it operates in. therefore, Tesco needs to devise proper strategies to minimize these negative effects and bring Word Count: 1500 words References 1. BBC News 2009, Tesco Cuts Points for Recycling, BBC News, viewed 7 April 2009, . 2. BBC News 2009, Tesco to Create 200 Finance Jobs, BBC News, viewed 7 April 2009, . 3. BBC News 2009, Tesco to Create 250 Jobs in Town, BBC News, viewed 7 April 2009, . 4. Creevy, Jennifer 2009, ASDA Records Highest Growth Rate of the Big Four, Retail Week, viewed 7 April 2009, . 5. Davies, Gary, Chun, Rosa, Da Silva, Rui Vinhas & Roper, Stuart 2003, Corporate Reputation and Competitiveness, Routledge, pp. 42, 71. 6. Esty, Daniel & Winston, Andrew 2009, Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, John Wiley and Sons, p 85. 7. Haberberg, Adrian & Rieple, Alison 2008, Strategic Management: Theory and Application‎, Oxford University Press, pp. 551-580. 8. Hamilton, Douglas 2009, ASDA Tops Grocery Market Growth League, The Herald, viewed 7 April 2009, . 9. Moore, Geoff 2001 Corporate Social and Financial Performance: An Investigation in the U.K Supermarket Industry, Journal of Business Ethics, vol. 34, no. 3-4, pp. 299-315 10. Reynolds, Jonathan, Cuthbertson, Christine & Bell, Richard 2004, Retail Strategy: The View from the Bridge, Butterworth-Heinemann, pp. 148-152. 11. Tesco 2008, Investor Information: Summary Five Year Record - Tesco Annual Review 2008, Tesco, viewed 7 April 2009, . 12. Tesco 2008, Summary Financial Statement: Total Shareholder Return, Tesco, viewed 7 April 2009, . 13. Tesco PLC 2008, Our strategy - Community, Tesco PLc, viewed 7 April 2009, . 14. Thompson, Arthur A. & A.J., Strickland 2006, Strategic Management: Concepts and Cases, Academic Internet Publishers, pp. 189-200. 15. Wall, Stuart & Griffiths, Alan 2008, Economics for Business and Management, Pearson Education Limited, p 520. Read More