Highlights in Business, Economics and Management FMIBM 2023

Volume 10 (2023)

Financial Analysis and Development Study of Tesco PLC

Wenxuan Gan 1,*,†, Chuyue Yan 2,†
1
Business School, University of Huddersfield, Huddersfield, United Kingdom
2.
Business School, Durham University, Durham, United Kingdom *
Corresponding Author Email: [email protected]
†
These authors contributed equally

Abstract. Since the development of the modern retail industry, there have been many different
business models, such as traditional retail and new online retail. The emergence of these new
models has provided people with new ways of shopping. Taking Tesco, a representative British
retail company, as an example, we can better analyze the future of the modern retail industry. In
this paper, our research object is Tesco, a British retail company, and our research goal is the
financial analysis and development research of Tesco. Our research result is that from the
perspective of financial analysis, Tesco has recovered its overall profit from the impact of the
epidemic, but its current liabilities are a little high and its cash flow is low. From the perspective of
development research, Tesco's online sales increased a lot after the epidemic, and online
shopping mode is a sustainable development strategy. In general, the financial performance of
Tesco is that its operating efficiency and profitability have improved. In terms of future
development, Tesco is worth being the investment choice of investors, and Tesco will provide
stable returns for investors.
Keywords: Tesco; Financial analysis; Retail industry.

1. Introduction
1.1. Background
Because humans have the basic need to eat, there are different forms and different kinds of
stores. With the new development of urban infrastructures, such as the mode of transportation, a
new business model of proxy retail has gradually emerged. From the emergence of the modern retail
industry to today, this business model has replaced most of the old retail business models in the
world. The sudden outbreak of the global epidemic in 2020 has brought a considerable impact on
the traditional retail industry. The development of the new retail industry is accelerated under the
condition that people go out less. Tesco is currently the largest retail company in Britain. Tesco has
actively developed new retail methods to face the special challenges of the epidemic. Taking Tesco,
a representative British retail company, as an example, we can better analyze the future of the
modern retail industry.
1.2. Related research
Stanton provides an in-depth analysis and study of the development of the food retail sector. The
author considers that the direction of retailing is clear, but that the nature of these retail outlets is
different from the corner shops of the past. At the same time, street markets and wet markets are still
the main types of food retailing for underdeveloped or partly developing countries, and there is
much room for modern food retailing [1]. Laura provides a horizontal and vertical study of the
changes in retailing, including a study from the past to the present to the future, as well as research
on sales channels and technology. The author argues that developments in the Internet and other
technologies have had many effects on people's shopping behavior. This has led retailers to
constantly adapt their sales strategies to face the challenges posed by the changing market
environment [2]. Pantano has conducted an in-depth study of the drivers of innovation in the retail

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sector, including innovation management methods, the impact of technology, and demand.
According to the author, the success of innovation in the retail sector is largely a function of
customer acceptance. At the same time, anticipating trends is an ability that retailers need to have in
order to face the changes and turbulence of the current market environment [3]. In the EU, the retail
industry is an essential source of employment, which has made a great contribution to GDP growth.
In many EU member states, the growth of major companies has been inspected. Second, there are
remarkable differences in the development of retail structures in distinct countries. The third retail
industry has had a big socioeconomic influence on the economy [4]. The UK is generally
recognized by the world as the country with the highest workload of groceries supply chain in a
certain period. In the early 1980s, the British retail industry experienced a "logistics
transformation". After 20 years of confrontation, it has been updated to a more cooperative supply
chain management approach. At the same time, Fernie pointed out that the key challenge of the
logistics supply chain in the future is related to political, environmental, and technological changes
[5].
Tesco is a British shopping center, that makes money by investing in and selling high-quality
products. It is also a leading retail company, providing online and offline store services. The
financial analysis of Tesco and Benedict shows that Benedict is short of competitiveness and has big
financial and commercial risks, which cannot produce profits for investors [6]. Compared with
Sainsbury and Morrisons which are the competitors in the same period, we can find that the
development of Tesco is slow by analyzing the financial analysis of Tesco from 2010 to 2014.
Although the online shopping business has strong potential and increase, gross profit, return on
employment capital, dividend payment and share price are falling year by year. The performance is
unsatisfactory, and the profit of shareholders is also decreasing [7]. In 1995, Tesco launched its
membership card Clubcard. Tesco's loyalty program aims to set up a relationship or brand network
by interchange customer data and information with moderate rewards. Since the development of
Tesco's Clubcard, it has created a brand website and an electronic version, which is developing
towards transforming consumers' illusory loyalty into sustainable loyalty [8]. Haddock-Millar
provides an analysis of Tesco's financial situation, including the financial situation from 2010-2014,
Tesco's market position and business strategy, an analysis of the decline in Tesco's performance and
recommendations. The authors argue that during this period, changes in consumer shopping habits
caused larger retailers to lose market share. The market became unstable under the influence of the
external market environment. At the same time, the company's internal decisions have caused sales
and profits to fall [9]. Rosnizam uses PEST analysis and qualitative methods to analyze the
opportunities and challenges faced by Tesco in the market. According to the author, Tesco needs to
consider new strategies such as globalizing its business, improving the training and reward system
for its employees, or changing the marketing strategy of the business in order to cater to the changes
in the market [10].
1.3. Objective
This paper will study the financial analysis and development of Tesco company. The second
chapter uses the swot model to analyze Tesco's internal and external competitive environment. The
third chapter uses various ratio models to analyze Tesco's finance. The fourth chapter discusses the
financial analysis of Tesco and Tesco under epidemic situation. The fifth chapter is the summary of
this paper.

2. SWOT Analysis
The Swot model is used to analyze Tesco's strengths, weaknesses, opportunities, and threats.
Tesco's biggest advantage is that it has the largest supermarket chain in the UK and a leading retail
brand in the UK. Tesco dominates the UK grocery retail market with a market share of 27.9%.

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Tesco has 4673 stores worldwide and is expanding. Tesco has opened different forms of stores to
achieve diversified stores. Tesco also has diversified markets and products across many areas from
food to financial services. The development of Tesco Technology Department has gone from
automatic barcodes to online shopping to unmanned stores. Tesco's biggest weakness is that it must
withdraw from the global stage. although Tesco operates in several countries in the United States
and Asia, its performance in some of these countries is not as expected. These failures (several
years) clearly show that Tesco has failed to adapt to and operate in markets outside Europe. In
addition, the food expired in 2015-2017, the audit fraud scandal in 2017 and the negative publicity
of the senior management reduced the reputation of Tesco. The controversy over the arbitrary
adjustment of Clubcard and the scandal of exploiting migrant workers also brought Tesco's
reputation to the bottom. Secondly, the operating profit of Tesco has been declining slightly from
2021-2022. Tesco's biggest opportunity is online grocery sales. Because of the epidemic, many
customers prefer to shop online. Tesco has launched an hour-long door-to-door delivery service to
more than 100 stores. It plans to expand its stores to at least 600 by the end of 2023. This method
can provide door-to-door service to attract more customers. In competition with competitors, Tesco
recently launched a new form of store discount stores to seize the market of cheap food
supermarkets, and Tesco also promoted price matching to regain the market share that was taken
away by competitors. Tesco has gained the qualification and ability to enter emerging markets,
expanding its stores to more developing countries such as South Korea and Turkey. Tesco also
proposed to form alliances with other brands and establish some joint ventures to attract more
customers in different regions. Tesco is currently facing the greatest threat of economic recession,
which is caused by the epidemic. It will continue to threaten global market share and profitability
and reduce the number and scale of consumer purchases. The second threat is the rapid expansion of
local supermarket ASDA after it has a new owner, threatening Tesco's leading position in the
market and seizing many Tesco markets. At the same time, with the UK's separation from the EU,
Tesco was forced to adopt new trade agreements such as tariffs and customs inspection, which
harmed Tesco. Tesco has some food safety problems. if they cannot be solved in time, regular food
safety and hygiene inspections from the government will always threaten Tesco's reputation and
self-development. Recently, problems have also occurred in Tesco's supply chain. Tesco's operation
and profitability are threatened by shortages due to supply chain problems.

3. Financial Analysis
3.1. Ratio
This paper will compare data from the company's financial statements to perform a ratio analysis
and reveal the profitability, liquidity, and operational efficiency of the company. The following are
the formulae for the relevant ratios.
3.1.1 Profitability Ratio
𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡
𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = × 100% (1)
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = × 100% (2)
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦 = × 100% (3)

𝐸𝑞𝑢𝑖𝑡𝑦 𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡

𝑎𝑛𝑑 𝑡𝑎𝑥

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𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 =× 100% (4)

𝑒𝑞𝑢𝑖𝑡𝑦+𝑙𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

3.1.2 Liquidity ratio

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜 = × 100% (5)
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡−𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝑄𝑢𝑖𝑐𝑘 𝑟𝑎𝑡𝑖𝑜 =× 100% (6)
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦

3.1.3 Efficiency ratio

𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 ℎ𝑜𝑙𝑑𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑 = × 365 (7)
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑐𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑝𝑒𝑟𝑖𝑜𝑑 = × 365 (8)
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑝𝑎𝑦𝑎𝑏𝑙𝑒
𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑝𝑒𝑟𝑖𝑜𝑑 =× 365 (9)
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠

3.2. Results
Table 1. depicts Tesco's profitability ratios, including gross profit margin, net profit margin,
return on equity and return on capital employed. in 2020, these figures are 7.07%, 1.27%, 5.55%
and 2.99% respectively. Compared to 2020, all figures have decreased in 2021. In particular, the
return on equity decreases significantly by 1.14%. However, between 2021 and 2022, these figures
have increased significantly and are higher than the previous levels. Return on equity and return on
capital employed reach 9.74% and 6.12% respectively.
Table 1. Profitability ratios
Feb. 29, 2020 Feb. 27, 2021 Feb. 26, 2022
Gross profit margin 7.07% 6.52% 7.55%
Net profit margin 1.27% 0.92% 2.48%
Return on equity 5.55% 4.41% 9.74%
Return on capital employed 2.99% 2.15% 6.12%

Table 2 depicts the liquidity ratio. According to the chart, Tesco's current ratio is around 70%
between 2020 and 2022, fluctuating up or down by 5%. The average figure for the UK retail sector
is around 1.2, which is below the average for the UK retail sector. On the other hand, Tesco's quick
ratio figures for 2020 to 2022 are 61.43%, 55.58% and 61.09% respectively. Despite the
fluctuations, this indicates that the company's quick ratio is remaining healthy, indicating that the
company can easily meet its short-term obligations in the future.
Table 2. Liquidity ratios
Feb. 29, 2020 Feb. 27, 2021 Feb. 26, 2022
Current ratio 74.47% 67.56% 75.53%
Quick ratio 61.43% 55.58% 61.09%

Table 3 depicts the efficiency ratio of Tesco. In it, the Inventory holding period and the
Receivables collection period are decreasing. This indicates that Tesco can sell goods and collect

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payments more quickly. Conversely, the payables period is decreasing from 62 days in 2020 to 59
days in 2022. This means that the company will need to pay its bills more frequently. Table 3.
Efficiency ratios
Feb. 29, 2020 Feb. 27, 2021 Feb. 26, 2022
Inventory holding period 17 15 14
Receivables collection period 10 9 8
Payables payment period 62 58 59
4. Discussion
4.1. Financial Analysis
For profitability, Tesco was affected by the outbreak and the cost of goods and other expenses
have increased. As a result, this figure for Tesco was down somewhat for all of the 2021 settlement
dates. Benefiting from a change in strategy, Tesco is gradually recovering from the impact of the
outbreak and is above its previous levels. Secondly, the current ratio, which was around 70% for
Tesco over the three years, did not fluctuate much. The average for the UK retail sector is 1.2,
which is therefore negative news for Tesco's managers and investors. This is because the current
liabilities may be a bit high. In terms of efficiency ratios, the figures for stock retention periods and
receivables recovery periods are both shrinking. This is a good sign that Tesco can sell its goods
faster as well as collect its accounts to ensure adequate cash flow. However, the decrease in the
accounts payable payment period is a bad sign, which will lead to a decrease in cash flow.
4.2. Impact of Covid-19
The global economy has been deeply troubled by Covid-19 in recent years. Also, the retail sector
has been significantly impacted by policy decisions that have been taken to contain the spread of the
virus. According to the survey, total retail sales in the UK fell by 1.9% at the end of the 2020
yearend settlement compared to 2019. This is the largest annual decline on record. Tesco has also
been impacted by this environment, which has seen a significant drop in the UK inflation rate.
Tesco's annual profit before tax for the period to the 2021 settlement was £825 million, down 19.7%
in 2020. This includes higher costs associated with the coronavirus pandemic, such as hiring more
staff. During the height of the crisis, Tesco adapted to its new strategy by recruiting almost 50,000
new temporary staff to support those already working on the shop floor, in distribution centers and
as delivery drivers. Secondly, Tesco is spending more to secure its shops than before. In this case,
consumers' spending habits and patterns have also changed. Benefiting from the closure of
restaurants and bars has meant that consumers have had to eat and drink more of the products they
buy in shops. Consumers now prefer to shop closer to home, buy more food, or shop online. Tesco
has also adapted positively to this change. In the company's 2021 results report, the company said
sales (excluding fuel) to £53.4 billion, up 7% compared to the previous. Online sales in the UK
grew to £6.3 billion, up 77 % compared to the previous year. This was due to the company's
increased distribution capacity to accommodate the gradually rising demand from household
consumers.

5. Conclusion
This paper provides investors with financial information about Tesco in recent years. The paper
applies a SWOT analysis and ratio analysis to discuss the growth of Tesco and the impact of the
epidemic. Overall, the data shows that Tesco's operational efficiency and profitability have
improved and are better than in previous years. According to forecasts, this trend will be
maintained. This is due to Tesco's aggressive strategic alignment and its membership card policy,
where Tesco can utilize resources more efficiently. This has helped Tesco to capture market share

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and maintain a leading position. Conversely, Tesco had some shortcomings, such as a poor liquidity
ratio. Despite this, Tesco can still be an investment option for investors as the company can provide
stable returns.

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