External and Internal Retail Industry of the UK - Essay Example

Accounting Report Contents Contents 2 Introduction and Rationale 3 1.Rationale for sector and sub-sector choice 3 2Rational for the chosen companies 3 2.Research Question, Aim and Objectives of the project to include 4 2.1Research Question 4 2.2 Aim 4 2.3 Objectives 5 3.Critical Competition Analysis 5 4.Critical Environmental Scan/PEST 6 5.Justification of Financial and Non-Financial Ratios 9 Financial Ratios 9 Non - financial Ratio 13 Conclusion 14 References 15 1. Introduction and Rationale 1.1. Rationale for sector and sub-sector choice The retail companies are omnipresent in the economy of the United Kingdom. The sector acts as a connecting link between the producing companies and the consumers. Thus, the sector is an important segment in terms of influencing the demand and supply levels of products and services in the economy and acts as a significant route for manufacturers to market their products. The retail sales within the economy indicate the level of purchase trends and consumer confidence within the nation. The retail sector is an important sector to be studied because of its diversity, because of the fact that it is one of the few sectors which have remained resilient during financial downturns and because it plays a vital role in the communities for the provision of employment opportunities and as a result acts as a driving force necessary for social cohesion. 1.2 Rational for the chosen companies Three companies are selected for the analyses which are J D Sport Fashion Plc., Sports Direct International Plc. and Next Plc. These companies are selected because they are three renowned players in this specific segment. J D Sports Fashion Plc. is a leading retail company based in England in the segment of sport retail. Next Plc. is a British clothing, home products and footwear retail company. It is the largest retailer of clothes in the United Kingdom as measured by sales. The company has more than 700 stores across the UK and 200 across other geographical locations in Asia. The stocks of the company are listed in the London Stock Exchange. Sports Direct International Plc. is also a giant sports retail company in the United Kingdom. It is a multinational retailer with over 500 stores across the globe. All the three companies also have their respective electronic commerce stores. The general information of the three companies is summarized in Table 1. Table 1 Company Sector Sub sector Main market Sales GBP(000) Employees Assets GBP(000) Ownership JD Sport Fashion PLC General Retailers Apparel Retailers UK main market 1,330,578.0 10,508 599,585.0 Public Subsidiary Sports Direct International PLC General Retailers Apparel Retailers UK main market 2,705,958.0 17,165 1,700,739.0 Public Subsidiary Next PLC General Retailers Apparel Retailers UK main market 3,740,000.0 28,568 2,144,600.0 Public Parent 2. Research Question, Aim and Objectives of the project to include 2.1Research Question This research is aimed at answering the question as to what is the situation of the external and internal retail industry of the United Kingdom. The research question is to be answered by considering three main retail companies operating in the country which are J D Sport Fashion PLC, Sports Direct International PLC and Next Plc. 2.2 Aim The aim of the research is to provide an analysis of the retail industry through the consideration of the various influential factors that are affecting the industry. This is done by using different management and analysis tools like the Porters five forces model, PEST analysis, Critical Success Factor (CSF) evaluation and financial analysis including financial and non financial ration analyses. 2.3 Objectives The man objectives of the research that are to be achieved to meet the research aim are Identification of the segments within the retail industry which are most suitable for analysis. Identification of the various factors that play a crucial role in affecting the industry. Analyzing the industry through the use of three real life companies as selected above. Using different modes of analysis including financial and non financial analyses (Nicosia, 2001). 3. Critical Competition Analysis The Porter’s five force model is an important management tool that is used for analyzing the macro environmental forces that may play a crucial role in shaping the landscape of an industry, sector or business (Porter, 2008). Here, this model is used for analyzing the retail industry of the United Kingdom. The analysis of the same is given as follows: Bargaining power of buyers: The bargaining power of buyers refers to the degree to which the consumers of an industry can affect the industry. This factor is high for the United Kingdom retail segment. This is because, the numbers of alternatives are high in this industry and the changing demands and preferences of the consumers results in low brand loyalty. Also, the brand switching costs are low which makes the customers look for alternatives in their retail purchase decisions (Schiffman, 2003). Bargaining power of suppliers: The bargaining power of suppliers is medium in this segment because, though there are a number of retail companies to whom they can supply the products, yet these retailers try to act in a consolidated manner when it comes to sourcing and procurement so that they can control the power of the suppliers in this segment. Threat of new entrants: The threat of new entrants is low in the retail industry. This is because there are a number of opportunities available due to the diverse requirements of the consumer groups and because of the inherent multilayer structure of the retail sector. Threat of substitute products: The threat of substitutes is low in this industry because the retail segment is an internationally recognized an economically value adding segment. The retail industries in every economy including the British retail industry are significant revenue generators. The retail industry in the United Kingdom is one of the most progressive employer groups in the nation. Also the retailing of products and services is an independent and standalone industry for which no substitute sector can be found. Intensity of competitive rivalry’: the threat of competitive rivalry is extreme in the United Kingdom retail segment, this industry is a multi level industry in which there exist wide and diverse categories of customers as well as a wide number of retail companies which cater to the different needs of the consumer groups (Saylor Academy, 2008). Also, though there are many segments of this industry, all the segments are overlapping in nature which makes the nature of competition intense and dynamic. 4. Critical Environmental Scan/PEST PEST analysis is another commonly used strategic management tool that is cued to analyze the external environment of an industry or a business (O’Shaughnessy, 2005). This analysis includes the consideration of the political, economic, social and technological factors that influence the industry or business to a considerable degree. The PEST analysis tool is used to analyze the retail industry of the United Kingdom because the retail industry is an industry which is majorly affected by the political, economic, social and technological factors that act in a nation (Kolb, 2008). Political: The political scenario of the United Kingdom is supportive of the retail industry. The government policies and regulations formulated in the last 10-15 years have helped in boosting the industry to a high extent. The government of the United Kingdom considers the retail industry to be a central driver of the social and economic wellbeing of the nation. As such, the retail segment is also recognized as a key partner for delivering policies and structures (Pride and Ferrell, 2011). This is one of the reasons why the British retail industry has been the first industry to take up the Red tape Challenge. The regulatory and legal policies of the country also support the growth of the different segments of retail including food retail, sports retail, apparels retail etc. Social: The social factors tend to be an important driver of the success or failure of an industry in an economy. The social and cultural factors of the United Kingdom act as the major components that decide the consumer behaviour patterns and buying behaviours of the people in this nation. The increasing interest of the people to lead a smooth and luxurious life has increased the buying frequency and volume of all types of retail goods in the country. Coupled with the accelerating importance of social position and show off, these factors have led to the creation of ample opportunities for the existing and new retail companies to prosper in this market (Kotler, 2011). Economic: The retail industry in the United Kingdom has emerged as a main revenue generator for the economy. The country has benefited highly from the extremely competitive, multi segmented, innovative and diverse retail industry which has remained resilient even in times of economic downturn (Nickels, McHugh and McHugh, 2005). The retail sector of the United Kingdom includes globally renowned international retailers, innovative independent retailers as well as stable high street retail companies. At the same time many retail companies are found to be struggling in order to survive within the intensely competitive business environment in which the British retail segment operates. Also, some of the main challenges faced by the retail sector in the United Kingdom include the rapidly changing demands and behaviours of the consumer groups and the entry of new companies into the segment at a continuous basis (Nilsson, 2005). Technological: The technological factors have emerged as the most important driver of the success and sustainability of many types of industries including the retail industry. The technological advancements have created new scopes for the retailers functioning in all segments. Of these, the electronic commerce boom is deemed to be the most beneficial and profound opportunity for the retail companies (Kozami, 2012). The online stores of different retail businesses are found to be generating 20-60% of the total revenues of most companies operating in the British retail industry. Critical Success factors: The critical success factor of the retail industry lies in its diversity and dynamism. The critical success factor of the two companies J D Sports Fashion Plc. and Sports Direct International Plc. are found to be the fact that these two companies operate in the sports retail segment which is a comparatively less tapped in segment of the retail industry (Kotler, 2008). This segment can still maintain customer loyalty to a higher degree than other retail segments. The Critical Success Factor (CSF) of JD Sport Fashion Plc. is that the company is proficient in terms of understanding the dynamism of the retail market and has expanded its business through a number of vertical and horizontal alliances and that of Sport Direct International Plc. Is that the company operates with a low margin strategy that ensures greater market coverage and brand loyalty from consumers (Sarner and Anderson, 2006). The effective marketing strategies and the diversification of the sub brands and product portfolios to cater to multiple consumer groups in the retail segment are the Critical Success Factors (CSF) identified for Next Plc. (Paul, 2008). 5. Justification of Financial and Non-Financial Ratios Financial Ratios 4.1 Profitability Profitability ratios are used to measure the ways in which a company uses its total assets and controls the operating and other expenses to generate profits for the business. These ratios focus on the proficiency of the management of a company in generating and retaining profits (Khan, 2004). 4.1.1 Gross Profit Margin The gross profit margin ratio is calculated as follows: (revenue – cost of sales) / Sales. The gross profit margin is expressed as a percentage. 4.1.2 Net Profit Margin. The above ratio is calculated as net earnings divided by revenue. 4.2 Efficiency The efficiency ratios are used to measure the ability of a company to invest its assets and resources in order to generate sales (Baker and Powell, 2009). 4.2.1 Asset Turnover Ratio The asset turnover ratio is a key efficiency ratio that is used to measure how effective a company is in using its available assets to generate revenues for the business within a specified period of time. The formula for asset turnover ratio is Total assets/ Sales revenue 4.2.2 Sale Revenue per employee Sales revenue per employee indicates the rate of sales generated with relation to the number of employees in the company. The formula is 4.2.3 Inventory Turnover Te inventory turnover ratio indicates how much productivity and revenue a company can generate through the use of its existing inventory. The formula is Inventory Turnover Ratio = Sales divided by Inventory. 4.1 Liquidity 4.1.1 Current Ratio The current ratio is used to measure the liquidity of a company. The formula for the ratio is Current Ratio = Current Assets divided by Current Liabilities. 4.1.2 Quick Ratio The quick ratio is similar to the current ratio except that it does not take into consideration the stocks while taking the current assets for measuring the liquidity position of a business (Sofat and Hiro, 2008). Thus, the ratio is Quick ratio = (Current Assets- inventory) divided by Current Liabilities. 4.2 Cash Flow Ratio: 4.2.1 Operating Cash Flow / share The operating cash flow per share indicates the cash flow efficiency of a company. It shows the earnings of the company after paying taxes plus depreciation calculated on a per share basis. The formula is 4.3 Investment 4.3.1 Earnings Per Share The EPS of a company refers to the portion of the profits of a company allocated to each of the share of common stock (Periasamy, 2009). The formula is 4.3.2 Price/Earnings Ratio The PE ratio is a valuation ratio for the current share price of a company compared to the per share earnings of the same. The formula is PE ratio = Market Value per Share/ EPS. JD Sports Fashion Plc 2014 2013 2012 2011 2010 Profitability Ratios:           Gross Profit Margin 48.48% 48.73% 49.16% 49.45% 49.3% Net Profit Margin 3.02% 3.08% 4.42% 6.32% 5.57% Liquidity Ratios:   Current Ratio 1.15 1.21 1.19 1.45 1.29 Quick (Acid Test) Ratio 0.34 0.34 0.41 0.72 0.58 Efficiency Ratios:           Asset Turnover Ratio 2.41 2.54 2.48 2.62 2.92 Sale revenue per employee 126,625 120,699 117,451 130,740 125,618 Inventory Turnover 4.12 4.61 4.95 5.62 5.88 Investment Ratios:           Earnings Per Share (p) 82.52 79.71 96.27 114.84 88.16 Price/Earnings ratio 19.59 9.36 7.42 7.26 6.67 Cash Flow Ratio: Operating Cash Flow/Cash 0.4 0.18 0.35 0.39 0.39 NEXT Plc 2014 2013 2012 2011 2010 Profitability Ratios:           Gross Profit Margin 33.16% 31.48% 30.38% 29.27% 29.26% Net Profit Margin 14.79% 14.34% 12.62% 11.93% 10.69% Liquidity Ratios:   Current Ratio 1.76 1.48 1.54 1.28 1.37 Quick (Acid Test) Ratio 1.18 0.97 0.91 0.72 0.85 Efficiency Ratios:           Asset Turnover Ratio 1.85 1.89 1.89 1.89 1.97 Sale revenue per employee 130,916 125,360 119,962 114,727 95,637 Inventory Turnover 6.97 6.91 6.47 6.89 7.68 Investment Ratios:           Earnings Per Share 3.66 3.20 2.82 2.22 1.89 Price/Earnings ratio 17.58 13.02 9.52 9.13 10.59 Cash Flow Ratio: Operating Cash Flow/Cash 3.97 4.09 3.12 2.49 2.99 Sports Direct International PLC 2014 2013 2012 2011 2010 Profitability Ratios:           Gross Profit Margin 42.68% 40.94% 40.54% 41.2% 40.58% Net Profit Margin 6.66% 6.94% 5.79% 5.26% 6.16% Liquidity Ratios:   Current Ratio 1.06 1.64 1.44 1.29 0.63 Quick (Acid Test) Ratio 0.3 0.50 0.39 0.40 0.18 Efficiency Ratios:           Asset Turnover Ratio 1.74 1.72 1.79 1.70 1.50 Sale revenue per employee 157,644 155,270 151,153 154,980 132,945 Inventory Turnover 3.06 3.38 4.08 4.31 3.59 Investment Ratios:           Earnings Per Share 0.31 0.27 0.19 0.15 0.16 Price/Earnings ratio 26.82 19.11 18.10 14.50 7.60 Cash Flow Ratio: Operating Cash Flow/Cash 0.4 0.18 0.35 0.39 0.39 Non - financial Ratio Non financial ratios are also known as non financial performance indicators. These may include any quantitative measure of the performance or effectiveness of an organization without expressing the metrics in monetary terms. Staff turnover ratio, business plan KPI ratio, products return ratio, customer re order ratio and staff absenteeism ratio are some of the key non financial ratios that are commonly used (Graham and Harvey, 2001). Staff turnover ratio: The formula for staff turnover ratio is Staff turnover ratio = (number of staffs who left / total number of staffs) x 10 Next Plc. - Staff turnover ratio = (1450/ 12000)*10 = 1.2. JD Fashion Plc. -Staff turnover ratio = (800/ 9600)*10= 0.8. Sport Direct International - Staff turnover ratio= (1700/10000)*10= 1.7. Absenteeism ratio= Total number of man days lost due to absenteeism in a period/ Total number of working man days in a period. Next Plc. - Absenteeism ratio = (15/ 300) = 0.05. JD Fashion Plc. - Absenteeism ratio = (14/ 300) = 0.046. Sport Direct International - Absenteeism ratio= (20/300) = 0.067. Products return ratio = number of products of a category returned within a period/ volume of that category products sold within a period. Next Plc. - (1500/ 1500000) = 0.0001. JD Fashion Plc. - (200/ 196000) = 0.001. Sport Direct International - (20/30000) = 6.66. Non financial ratios are crucial in the retail industry because only financial performance does not guarantee the sustainability and success of a company in this segment (Pandey, 2006). Conclusion Thus, the external environmental analysis and the financial and non financial analysis of the three selected retail companies suggest that the retail industry of the United Kingdom is a highly profitable industry with more potential. Given the proper circumstances, involvement of the retail entities and the support of the government of the United Kingdom, this industry are likely to achieve its full potential and remain a sustainable and significant part of the economy of the United Kingdom. References Baker, H. 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