Last Updated 10 Aug 2020

Accounting and Finance for Non-Specialists (TESCO PLC)

Category Finance
Essay type Research
Words 5720 (22 pages)
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Chapter I

Tesco PLC is a recognized leader of the UK and European retailing industry with dynamics of growth exceeding any possible expectations. Being founded in 1924, Tesco is now becoming a global retailer with operations and aggressive expansion not only in Europe but also in Japan, Malaysia, South Korea, Taiwan, Thailand, Turkey and China, growing their international network by the end of 2005 to 554  stores (Tesco, Investor’s FAQ, 2005). From 1970s till the present moment Tesco has been opening superstores building a national network, to which they are adding every year (Tesco, Inside Tesco, 2005).

 In the United Kingdom alone, Tesco has 1,780 stores with 24.2 million square feet of sales area (Rohwedder, C1), employing staff of 353,000 individuals. Taking into consideration the company’s size, its dynamics of development and global ambitions, proclaimed company’s mission seems to be logical: “to create value for customers to earn their lifetime loyalty” (Tesco, Inside Tesco, 2005).

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The company employs its slogan “Every Little Helps” to obtain customer loyalty and sustain its competitive position in the UK retail market. Tesco describes its core purpose and main commitment in one statement: “The way we work is how we deliver Every Little Helps to make Tesco a better place to shop and work in. We use simple processes so that shopping is Better for customers, Simpler for staff and Cheaper for Tesco” (Tesco, Inside Tesco, 2005).

The key to understanding Tesco’s success is in company’s effectiveness to match their objectives with available resources. For instance, in its business Tesco PLC relies on four pillars, namely strong UK core business, non-Food business, various retailing services, and international expansion. In implementing its strategy to UK core business, Tesco utilizes its unique retailing operating strategy. Tesco has a variety of different store layouts: the Tesco Extra hypermarket style stores provide a wide range of food and none-food products; they are generally large out of town supermarkets, some of which are open twenty-four hours.

The Tesco Express stores combine a petrol filling station with a local convenience store. The Tesco Metro chain is on a national scale and is a series of small high street stores. Tesco Direct, a culmination of Tesco’s online shopping approach is now the largest grocery home shopping business in the world, and has a 65% share of the United Kingdom’s Internet grocery market. It operates nationwide and has been very helpful in drawing in new customers to their customer base, as 40% of shoppers prior to using Tesco Direct, were not customers of Tesco. Tesco has been able to broaden its customer base, and make its stores more attractive to a wider range of customers by diversifying the products offered to its customers.

Tesco’s strategic logistics is another company’s key resource which enables it to occupy the leading position, which is about 30% of UK retail market share (Rohwedder, C1). From the practical viewpoint and in contrast to other competitors in the UK retail market, Tesco management brought its supply chain and logistic system on entirely distinctive level. Tesco is using smaller temperature-controlled trucks to fit down narrow city streets, computer-assisted, traffic-tracking systems to negotiate horrendous traffic, and sometimes railroads to bypass the traffic altogether.

Unlike other retailing companies in the UK, Tesco has become more open about releasing information to suppliers through Tesco Internet Exchange, a service which publishes real-time scanner data for suppliers from store level. The similar system has been implemented by Dell, Inc. in the United States and too aimed to improve company’s supply chain. In Tesco case, advanced suppliers are able to see real-time sales information on each store and use that to optimize deliveries in the Tesco system. Tesco operates with about six days of total stock in its entire system and yet maintains about 98% in-stock availability (Turcsik, 34).

The last key resource of Tesco is considered to be its people. Every year over 40,000 individuals coming from different occupations and cultural backgrounds are recruited by Tesco. From this perspective, a major challenge of Tesco is to create conditions where all employees are aware of the role they play in company’s daily business as well as see how their attitudes and actions impact the “big picture” of Tesco’s performance. According to Judith Nelson, head of stores HR at Tesco, “[Tesco] has invested a lot of time and money in understanding and responding to [its] customers, what motivates them to shop with [Tesco] and what the customer expects from Tesco.

It is important that staff is also aware of customer expectations and that they maintain a positive, consistent attitude” (Whitelock, 802). It is evident that requirements articulated by Nelson are directed not only towards line personnel, interacting with customers on a daily basis inside the stores, but also to managerial personnel, including that one involved in financial reporting.

It is necessary to emphasize that traditionally the accounting and the quality of financial reporting is pivotal to successful retailing business. The performance of Tesco depends heavily on the accuracy of financial department and qualifications of its personnel. It is evident that Tesco’s financial reporting resources comprise another company’s key resource. Badenoch & Clark, a recruitment company involved in supplying financial personnel to Tesco, points out that “the finance function at Tesco is integral to this growth and to realising their ambitious plans for the future” (Badenoch & Clark, 2005).

Like in the most large retailing companies, Tesco’s financial department named Department of Finance and Accounts, is responsible for keeping a detailed record of all money paid in and out, prepare the financial balance sheets, income statements, sources and use of funds, profit and loss accounts and other financial records at regular basis. Again traditionally for the industry, Tesco’s financial department consists of two subdivisions – one involved exercising of financial accounting function, another in management accounting function. Subdivision performing financial accounting functions records all events occurring in Tesco business activity and provides financial entries for each event.

This subdivision is also involved in producing periodic records, namely interim and annual reports for the board. Management accounting subdivision is involved in providing managers with figures as well as data analysis for decision-making. The subdivision is operated under the system called the Management Accounting Information system, employed for forecasting, planning, control, budgeting and monitoring of financial progress. At the same time, Tesco’s Department of Finance and Accounts exercises important sub-functions as cashier’s department taking care of transactions to banks and wages departments, in this manner supervising payroll.

Tesco operates in the complex environment of the changing and merging accounting standards, and from the critical perspective it adds certain complexities in financial reporting. The UK embraces the need for international accounting standards in the context of global business environment. Moreover, in the Regulation on International Accounting Standards the European Commission required consolidated financial statements of all publicly listed companies within the European Union (EU), hence Tesco, to be prepare their in compliance with IFRS, which consequently triggered specific steps undertaken by the IASB, namely convergence of accounting standards, practical application of IFRS (International Financial Reporting Standards) , and improvement of basic accounting and financial standards.

According to opinion expressed by many experts and practitioners, a uniform set of worldwide standards is crucial for making accounts transparent to global investors and for making them relevant to all enterprises (Piper, 52). If one takes a look at Tesco’s latest interim report, particularly the section of key profit measures, one notices that the figures are divided in two sections, IFRS and UK GAAP – the difference is both minor but surely noticeable (Tesco, Interim Report 2005, 3). Read also about s ources of accounting standards

Similarly to many global companies, Tesco is trying to universalize accounting reporting and control among all its units. In its global business partnership, like acquisition of Chinese retail chain Ting Hsin, Tesco relies on those ones using the similar accounting standards. Accurate accounting in all units requires an implementation of universal accounting and IT systems. In order to accomplish this task, Tesco utilizes both Oracle Financials and Oracle Retail Warehouse Management System, which are “key enabler[s] both financially and functionally for developments in Tesco international business” (Oracle Press Release, 2006).

Usually global retailing companies have a choice between using SAP applications or Oracle Financials, and in Tesco’s case, the choice has been made on the latter, including Oracle Financials, Retail Warehouse Management System, and Peoplesoft’s (owned by Oracle) Human Resource Management Platform.

Chapter II

The overall picture of the company displays a healthy condition of operations and financial transactions. The business looks promising and able to fulfill its obligations in front of the current and potential investors. A steady and progressive growth of the company is predetermined y implementing new technologies into practice in order in minimize any expenditures, including resources consumption, time management, etc in order to yield the highest efficiency of the operations and provide the highest return possible, extensively busting the profits.

Constant benchmarking of the companies operational departments and outsourcing in favor of greater efficiency allows Tesco to be in the state of continuous improvement. A quick glance at the company’s performance shows an over 10% increase in sales over the year resulting in a 19% increase in profits compared to those generated last year. Globalization strategies of the company provide a great opportunity of expansion and growth of enterprise.

As an expending enterprise Tesco shows tendencies to support its operations and growth with sufficient investment. Aggressive marketing strategies in order to outrun the competitors by efficiently using its resources shows successful results as Tesco moves up in the rating of the top three UK retailers.

In addition, its international influence and capital centralization steadily increases. A great advantage allowing Tesco to outrun such enormous competitors as Sainsbury is implementing a new warehousing and distribution scheme allowing to operate Just-In-Time as well as successfully arrange the best combination of resources at every checkpoint of operations.

The sources for financing operations of the company are mostly capital reinvested from retained earnings, as well as money received from issuing public and commercial obligations (bonds, commercial paper) with long or medium terms of liquidity. Additional investments are provided from bank borrowings and leases. Meanwhile, the company maintains a positive credit rating.

Financial information indicates that the company is attempting to keep most of the debts out of the short-term listing in order to maintain high liquidity ratings. Avoiding big indicators in short-term borrowings, especially at the end of the fiscal period is primarily performed through refinancing the debt, thus converting the liability into long-term.

The current ratio of the company is greater than one for the last two years, which means positive net working capital and high liquidity. In other words, the company covers its liabilities 1.31 times for the year 2004, and 1.32 for the year 2005. A stable rate of liquidity is maintained by concentrating debt in the long term section.

Total Debt ratio represents that the company has ?.53 debt for each dollar of assets for the year 2004. Furthermore, this ratio insignificantly decreases to ?.52 in 2005, which consequently means that more of the asset value belongs to Owner’s Equity.

Return on assets ratio analysis shows the rate of efficiency at which the company uses its assets to generate profits. 22% result shows a sustainable involvement of assets and decent return of profit, although the number is somewhat small. The most probable reason for not an excellent result might be acquisition of intangible assets. Balance sheets indicate a pattern of increasing fixed assets at a higher rate compared to the insignificant increase on current assets, which are more involved into operational flow of resources.

Return on equity analysis suggests a positive result, showing the ability of the company to secure the shareholders investment, and yield additional profit of 15% on every invested ?1. Profitability analysis shows that a company is capable of meeting shareholders’ needs and fulfilling its obligations. The returns are not phenomenal; however the company outstands with its confident market leadership, stability of the capital flow, and therefore less risk on the investment.

The organization holds a confident position of the leader on the domestic retail market leaving behind such giants of retailing as Sainsbury, outrunning it y 2.7% in annual sales volumes and turnover. Tesco’s international program provides great results contributing to the overall prosperity of the organization. Stats shows that Tesco is the biggest UK retailer internationally, successfully operating at high returns in many countries. It is ranked 6th among world’s retailers’ turnovers, coming after Wal-Mart (USA), Carrefour (France), Ahold (Netherlands), Metro Group (Germany), and Kroger (USA). Its annual turnover internationally is $53,791. The next UK retailer in this list is Sainsbury, taking up only 22nd position among competitors. Furthermore, Tesco is ranked 3rd among top 10 global grocery retailers, from the “IGD Global Retail Index”, dated February 2005.

The financial reports publicized by Tesco are primarily targeted to inform potential and current shareholders about the financial operations and their outcomes on the organization’s wellbeing. The targeted market segment is covering the interests of common stock purchasers as well as selected groups of investors occupying proffered stock in the company’s capital.

The organization’s financial statements are audited by PricewaerhouseCoopers LLP, which informs that all financial information has been prepared properly.

Chapter III

Tesco possesses a structured management accounting system. The inside separate branch is also investigating any current trends as for risk management. It works not as a profit generating department, but as a research group foreseeing any potential risks to the organization and balancing it with probable returns and rates of change of risk and return respectfully to each other.

Budgeting of the organizational resources is prepared on the regular basis with continuous improvement of the projected indicators. Budgeting system works certain assumptions developed through practice of projecting potential operations. Allocation of resources is completed successfully based on the budgeting plans, allowing the company to practice just in time services which improves the channeling of resources through primary and secondary intermediaries, less stoppage time and more correspondence of the resources supply to the actual demand.

The companies operations are greatly dependant on budgets prepared to forecast goods and services demand and availability of supply as well as the costs of acquiring, reallocating, transforming, and distributing the resources in respect to the market interest rates. Among the prepared budgets are sales budget, purchases budget, and cash budget, which represent the core information for implementing business decisions for future financial periods. Budget variances are taken into account in order to successfully analyze collected financial data and determine the most probable cause of forecasting failures and inconsistencies.

Capital budgeting is performed using available financial information of potential projects and classical techniques of calculating net inflows and outflows of resources – NPV and IRR. Discounting is completed in accordance to time frame of the project at the market rates of currency. Although cost of capital is taken as the initial indicator of discounting rate on the project, market fluctuations on the price of resources and currency is taken into account to calculate more accurate data.

The budgeting team philosophy is that measuring the potential benefit of an investment by internal rate of return method gives an approximate measure which sets the limits of the discount rate possible to be used. As discounting rate usually represents cost of capital, any project which yields lower internal rate of return than cost of capital will result in the negative net present value, and therefore non-profitability of the project. Internal rate of return provides somewhat more flexible results compared to those under net present value, as it represents a set of rates that can be used for the project’s future cash inflow to discount, which NPV mainly concentrates on the present value of an investment under a certain fixed discount rate.

Dismissing the project after calculating NPV may fail to recognize some potential profit provided if a different discount rate would be used. However, the difference would be diminutive and is a subject to change due to possible market fluctuations and environment change. Both of these measures provide a fairly questionable result and may fail to disclose enough important information as for possible outcomes of an investment. The periods used to measure future cash inflows may not be precise, and therefore it fails to recognize the absolute size of the investment. Furthermore, internal rate of return may provide misleading results, because it is calculated under the assumption that all cash received will be reinvested at the same discount rate.

NPV analysis is more preferable as its calculation uses less approximates and is based on a more fixed time periods and discount rates. Also, it is easier to include in calculations possible market changes. Internal rate of return is purely a hypothetical approximate; however in reality it fails to realize all factors affecting the investment and consequently leads to really unfair results.

Capital is financed primarily through retaining profits into capital as well as common and preferred stock issuance. Resources are also acquired through issuing commercial paper and long term obligations with the stated rate lower than IRR of the potential project, for which costs are gathered. Bank loaning and leasing are also sources for incoming working capital.

Costing structure of the organization is composed of fixed and variable sacrifices incurred into production as well as overhead costs. Cost behavior is directly reactive to changes in the level of business activity of the organization. Variable costs are dependant on the output of the company, while fixed costs remain unchanged when activity changes. Successful operations of Tesco yield higher turnover without changing fixed costs. Recent tendency of the organization to outsource and apply the findings of latest technology on software and hardware markets in order to improve efficiency of company’s operations lead to significant reallocation of most of the variable expenses such as labor to fixed.

Automation, which involves laying-off human labor and replacing it with machine labor, greatly reduced variable expenses and increased fixed expenses for acquisition prices of the machinery and its continuous depreciation. Such a risky enterprise would turn to a disaster provided less demand for the organizations goods and services. However, successful marketing campaigns support the current demand and intend to increase it in future.

Established chain of communication between organization’s departments allows efficient usage of information and instant reaction to market changes.

New software utilized to improve logistics of the company became one of the main advantages, which allowed Tesco to outrun its competitors. New warehousing and distribution system allows better communication, better understanding of demand and consumer preferences, and instant feedback in reallocating the required resources to perform the business operation with least resources incurred and maximum profit received.

Tesco’s recent stress on improving the supply chain, which gave amazing positive result for the enterprise’s prosperity, indicates the overall company’s strategy of continuous improvement, benchmarking and outsourcing, implementing new technologies and trends, closely examining consumer preferences and reactions, avoiding of adolescence of current strategies and systems, and high rates of reinvesting for expansion, which drives the organization to leadership in the particular market segment.

Chapter IV

To maintain its 1,780 stores, Tesco runs 24 consolidation centers itself. Each distribution depot operates around the clock, seven days a week, typically providing about 2,500 deliveries daily. A distribution center has capacity of serving anywhere from 50 and 80 stores, depending on the region. Moreover, Tesco maintains its own private fleet for store deliveries; in fact, that fleet, which includes 4,116 trailers, is the largest in the United Kingdom. In addition to delivering products from the distribution centers to the stores, the fleet vehicles also take inbound goods from suppliers (Cooke, 77).

Tesco uses 1396 specialized temperature controlled delivery trucks, which have three separate compartments for different temperature zones. Practically, operating temperature controlled vehicles lets Tesco haul a wider variety of products in a single shipment. From the strategic logistics perspective, Tesco management pursued the opportunities of centralized distribution network, by constructing the National Distribution Centre in Milton Keynes, which serves all stores. From the perspective of transportation costs, it allows Tesco to save because it can eliminate trips between distribution centers and make more direct store deliveries.

Under previous distribution system called “twining,” a delivery truck had to retrieve products from two warehouses before it could deliver a full range of frozen foods to one store (Cooke, 78). Therefore, the National Distribution Centre allows Tesco to consolidate outbound trips and simultaneously save on the inbound haul because delivery trucks have to move products from suppliers to a single destination point, not to two or three warehouses.

From the practical viewpoint and in contrast to other competitors in the UK retail market, Tesco management brought its supply chain and logistic system on entirely distinctive level. Tesco is using smaller temperature-controlled trucks to fit down narrow city streets, computer-assisted, traffic-tracking systems to negotiate horrendous traffic, and sometimes railroads to bypass the traffic altogether. Unlike its competitors, Tesco has been experimenting with smaller trucks for its Metro urban-format stores. This obviously strategic step has been made because the load for Metro urban-format stores is smaller and often the company cannot get a 20-ton truck down the narrow streets (Turcsik, 2000, 36).

From this perspective, multi-temperature vehicles become extremely efficient, allowing shipment of a single order across three temperature zones. Thus, products are not only getting to store shelves faster, but also being ordered more efficiently. If assessed critically, this approach may lead to more frequent deliveries to stores, but Tesco is improving its trucking and delivery systems to eliminate traffic bottlenecks and reduce costs, and the construction of the National Distribution Centre is a self-evident important step in overall company’s logistics strategy.

Importantly, in an additional effort to improve the supply chain channel, Tesco has become more open about releasing information to suppliers through Tesco Internet Exchange, a service which publishes real-time scanner data for suppliers from store level. The similar system has been implemented by Dell, Inc. in the United States and too aimed to improve company’s supply chain. In Tesco case, advanced suppliers are able to see real-time sales information on each store and use that to optimize deliveries in the Tesco system. Tesco operates with about six days of total stock in its entire system and yet maintains about 98% in-stock availability (Turcsik, 2000, 34).

Tesco’s supply chain is now considered as one supply chain, not a number of fragmented and independent supply chains as in case with other rivals (Safeway and Asda), in which all parties cooperate in order to deliver the combination of product-quality that the consumers are asking for. The team of Tesco buyers headed by Tesco Category Manager meets formally with all the suppliers on an annual basis, and less formally on a quarterly basis, to discuss the suppliers’ performance.

On an almost daily basis, Tesco discusses with an individual supplier issues that include business performance, new product development, market understanding, and technical improvements to reduce cost and wastage. From practical standpoint, this system means that the relationships between Tesco and the suppliers transform into long-term supply relationships, and that the supply chain must allow for transparency, communication, and trust (Lindgreen & Hingley, 338).

Modern information technology and various communicational systems provide essential strategic solutions for large retailers like Tesco. Practically, Tesco is widely known for its extensive application of numerous IT solutions – from G-Log’s Global Command and Control Center and radio frequency identification (RFID) to online store. Prior to the end of 2002, each product was shipped to Tesco by thousands of suppliers in more than one million shipping movements per year. Logically, in case one of the suppliers arrived at the stores incomplete or late, Tesco managers did not find out about this failure until after the fact (Aichlmayr, 47).

Therefore, Tesco implemented G-Log’s Global Command and Control Center (GC3) (also used only by Wal-Mart) in order to conduct a control of their inbound freight. Moreover, GC3, which is similar to well-known i2 Technologies used by Dell. Inc., combines traditional transportation planning and execution and incorporates that functionality into a Web-based architecture (Aichlmayr, 47). GC3 allows Tesco to gain control of any inbound supply chain, particularly, to monitor problematic supply chain, optimize shipments and create an audit trail.

In 2004 Tesco implemented in-store RFID applications provided by MeadWestvaco Intelligent Systems (Berthiaume, 24A). RFID also known as “smart tags” are tags that contain identity information about a product, which enable businesses to identify and track assets wirelessly. In practice, the application of RFID at Tesco looks as follows: the delivery truck is tracked in route with global positioning system (GPS) technology, providing live updates of location and delivery status to Tesco. Upon arrival at the Tesco distribution centre, the order is automatically verified, and a receipt is sent to the manufacturer.

Software then routes individual cases on the pallets to storage shelves and to trucks heading to individual stores. Each store’s shipment is verified and recorded as it enters the truck, and again upon arrival at the store. The product is then routed to the stockroom and store shelves. At two Tesco locations, RFID-enabled smart shelves are tracking the movement of the in-store complete inventory of DVDs and software games, all of which are labeled with RFID tags (Berthiaume, 2004: 24A). Tesco management considers RFID particularly important for retail business, and as one of company’s managers points out it is most applicable in retail verticals that offer high-cost, small-package goods such as music/entertainment, pharmacy, cosmetics, health/beauty care and consumer electronics (Berthiaume, 24A).

However, the apogee of IT technologies employed by Tesco is the company’s online store, the biggest in the UK, offering products from Tesco’s all categories as well as various product delivery types, namely home delivery, store pick up, and delivery to work. According to New Media Age, Tesco is trouncing its supermarket competitors in its use of email marketing, sending out more campaigns in the six months to September than the next nine brands in the grocery sector (New Media Age, 5). According to data from Interactive Prospect Targeting’s Email Tracker service, Tesco sent 265 campaigns between April and September 2005 (New Media Age, 5).

 Unlike its many competitors, Tesco is marketing online groceries as a convenience, not as a low price option - charging customers a delivery charge in addition to the retail cost of groceries. Online orders are filled by Tesco employees at the nearest Tesco store, then picked up or delivered via a truck. Moreover, Tesco has also increased the number of non-food items stocked online.

Practically, Tesco effectively combined its highly developed delivery network with modern benefits of e-tailing. Through its online store, Tesco claims it can deliver to 96% of the population (Dickinson, 10). The method demonstrated by Tesco in e-tailing Tesco reveals that one key to success in the online grocery business is the proper alignment between marketing and supply chain and logistics strategies.

Chapter V

While evaluating the situation with Tesco it is important to point out the strength, weaknesses, opportunities, and threats of the company’s techniques used at the time, as well as possible solutions for their potential problems. It is obvious that despite all aggressive, in some cases even over-ambitious strategies performed by Tesco’s rivals to improve their positions on the market and to regain the leadership in the industry, these attempts were not successful. Tesco on the contrary occupies the position of market leader almost seven years in a row, and company’s business performance as well as overall financial situation makes Tesco’s future promising.

Strengths

(1) The largest supermarket chain in the UK consisting of 1,780 stores with 24.2             million square feet of sales area, which being a leader, every year is still constantly          increasing its market share;

(2) The most effective and cost-effective supply chain and distribution infrastructure,     which includes multiple store formats competing in different sectors, different types        of delivery trucks, major distribution center and new technologies effectively      incorporated within this supply chain;

(3) Customer-oriented philosophy and marketing - cheap product attracts a wide range   of customers, including poor and wealthy, because along with the cheap price Tesco      provides guarantee of a quality product. Tesco demonstrates an ability to climb up in            rating among customers as well as increase its profits due to the successful marketing campaigns. Most of the time, the company tries to attract more customers by creating     a stand-out slogan.

In general, public relations campaigns often become handy for             Sainsbury and generate a big portion of profit increase. Marketing side of the business    is partially involved in strengthening the business, although it fails sometimes to            recognize the need for such changes as providing more diversity of a product, or re-   engineering a product, which will generate potential growth.

(4) Strong leadership of top management – CEO Sir Terry Leahy receives significant      recognition for his leadership talents running Tesco PLC. Recently he won another    CSC Business Leader of the Year Award.

(5) Tesco Online Store – the biggest grocery online store in the world

 (6) Tesco’s Brand Value and awareness of its slogan “Every Little Helps” in the UK

Weaknesses

  • Heavy dependency on UK market – Tesco positions itself as global retailer like Wal-Mart, however, only 1/3 of its stores located outside the United Kingdom, and although management declared Tesco’s global expansion, UK local crisis or drop in consumer spending may trigger negative consequences for the retailer
  • According to industry experts, the slow international growth of Tesco weakens its positions in stock markets.
  • While expanding in other countries Tesco has to conduct several acquisitions, which can be traditionally a risky venture.
  • Tesco possesses the large portfolio of ageing stores that needs modernization and will heavily deduct from company’s profits in the nearest future.

Opportunities

  • Aggressive expansion on the international scope, particularly in China and India, where demand for retailing services is expected to become enormous. Saturation in the home country is an impetus for foreign direct investment by retailers. Ample expansion space must be available, if the firm needs size to exploit economies of scale. Tesco international expansion is evidently motivated by a saturated home market. The UK retail market is primarily represented by Tesco PLC which accounts for 30% of the grocery market, and its rivals Wal-Mart's Asda unit and J Sainsbury PLC (Rohwedder, 2005:C1).
  • Tesco’s sales in its fiscal first half, ended August 13, rose 14% from a year earlier to GBP 18.8 billion, while net profit increased 17% to GBP 643 million (Rohwedder, 2005:C1). Most importantly, Tesco’s boosters say concerns about possible limits to the company’s growth are overblown and that shareholders do not fully appreciate Tesco’s ability to expand, especially internationally (Rohwedder, 2005:C1).
  • Therefore, although company plans further domestic expansion and growth, developing its non-food sectors, the retail market is likely to become saturated soon.
  • Development in Non-Food sector – the strategic point for Tesco due to UK market saturation and available niche coupled with extensive supply chain and distribution capacity Tesco has at this moment.
  • Development of Tesco Online Store – Internet offers virtually unlimited opportunities for e-commerce including for retail industry, therefore even considering the fact that Tesco Direct is the largest online grocery store in the world, further directions in e-commerce should be explored, e.g. merchant account processing services.
  • Tesco Finance – the field, which now includes credit cards, loan services, home insurance, etc requires further development in sectors like investment.

Threats

  • Rivalry – Asda (Wal-Mart branch) performance is solid and corresponds exactly to Tesco’s growth pace. Sainsburys, Tesco’s traditionally most important partner, aims to return its marketing positions as a leader of UK retail industry. Recent actions of the company display some future prospects. Sainsburys is not loosing hope, and the present CEO thinks that she will be the one to make a difference. Most of the attempts in the past to reorganize supply chain, approaches to improve distribution and warehousing have failed completely or partially.
  • However, compared to the old supply chain, the new system was greatly improved and more reliable. The company is showing a gradual and steady improvement in its marketing campaigns over the past decade and a significant change in its distribution techniques, which provided an essential increase in profits and great cost minimizations.
  • If the company will practice the same steady growth in the future accompanied by diversification and innovations of the product, there is a great possibility not only to firmly hold the current position of the market, but also to extend its services to other market segments and possibly regain the leading position in retail industry.
  • Failure to succeed internationally - A first-mover advantage may be lost if competitors enter a foreign market. Competitors may secure prime retail locations and block out other firms. Within any major city, there are only so many prime retail sites.
  • The larger the retailer considering international expansion the more crucial it is to be an early mover. Smaller retail spaces are generally not a problem. Nevertheless, from the strategic perspective, the early moves of a large retailer set the stage for a long-term competitive advantage. Therefore, Tesco should not only be the first to enter (in most developing countries it is neither the first nor the last) but also be able to protect their investments in the threat of other rivals.

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Cecilie Rohwedder. Attention Shoppers: Tesco May Be a Bargain; Despite Signs of       Booming Sales, Shares Trade Near 52-Week Low As U.K. Retailer Expands         Reach. Wall Street Journal. New York, N.Y.: Nov 25, 2005

Richard Turcsik. Novel ideas. Progressive Grocer. New York: Aug, 79(8), p.32-36, 2000

Arthur Piper. A Matter of Principles. The Internal Auditor. Altamonte Springs: Oct. 62(5):62-   68, 2005

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            <http://www.tescocorporate.com/page.aspx?pointerid=36580BC015614848886455B            CB202E691&faqelementid=E28335B23AD64E13B3C5A8960C0AE637> Accessed    Jan 21, 2005

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            <http://www.tescocorporate.com/images/Report_05_0.pdf> Accessed      Jan 21, 2005

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<http://www.tescocorporate.com/page.aspx?pointerid=40B6E68B255B44ECADF894ACA012D4FF> Jan 26, 2006

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Mary Aichlmayr. The three tech essentials for the next big fix. Transportation & Distribution. Cleveland: Dec.43 (12), pp.45-49, 2002

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