osama__res sainsbury
TRANSCRIPT
OXFORD BROOKS UNIVERSITY
RESEARCH AND ANALYSIS REPORT
TOPIC: 8An analysis of the financial situation of
Tesco PLC
By: Muhammad Osama
ACCA Registration Number: 1229172
October 2008
RESEARCH & ANALYSIS PROJECT
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4,979 words
CONTENTS PAGE Page
1. Introduction 31.a Reasons for choosing the topic1.b Company Profile1.c Aims and Objectives of the Report1.d Executive Summary
2. Information Gathering 62.a Sources used and their reasons2.b Methods used
3. Research & Analysis 83.a Porter’s Generic Strategies3.b SWOT Analysis3.c Recovery Plan3.d Financial Performance
4. Conclusions 22
5. Bibliography 25
6. Appendices 27
1 INTRODUCTION
1.1 Reasons for choosing the topicAfter completing the ACCA fundamental level, I met the eligibility criteria of BSc Honours Programme, and had to select a topic from a list of more than twenty to embark upon. After short listing them one by one Topic 8 “An Analysis of the financial situation of your choice of organization” stood out.There were several reasons for choosing this particular topic. Apart from my personal interest, this the choice of this topic able to apply my academic learning into a real world scenario as well as further refine my analytical skills. This would also help me in my future as I have plans to invest into Plc’s through the stock exchange once I start my career.I wanted to perform the analysis on an organisation that was involved in a highly competitive environment so that I would be able to compare its results with a competitor to see the financial performance and its relation to the strategy. This would also help make the report more interesting for readers. Then while reading an article in the Independent with the heading ‘Sainsbury's outpacing Tesco with sales growth’ it occurred to me that Sainsbury’s is an ideal organization to analyze that operates in a highly competitive industry-Food Retail.
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It was then that I decided to analyse the financial performance of Sainsbury’s and to compare it with Tesco.
1.2 Company Profile“J Sainsbury plc is a public limited company listed on the London stock exchange. Sainsbury's was founded in 1869 by John James and Mary Ann Sainsbury. They opened their first small dairy shop at one of London's poorest areas and the Sainsbury’s shop quickly became popular for offering high-quality products at low prices. It was so successful that further branches were opened in other market streets.”(J Sainsbury’s Plc, Our History [online])
J Sainsbury plc is a leading UK food retailer with interests in financial services. It serves 16 million customers each week in over 780 stores across the country. The supermarket chain operates three main store formats; regular Sainsbury's stores, Sainsbury's Local (convenience stores) and Sainsbury's Central (smaller supermarkets in urban locations) stores. Sainsbury's also operates an internet shopping service branded as "Sainsbury's Online". This service is available to over 75% of the UK population.
The group also has interests in property and banking. It provides financial services through the Sainsbury's Bank. This is joint venture between J Sainsbury plc and Halifax Bank of Scotland (HBOS). The current product range includes savings and loan products, credit cards and a number of insurance products.
1.3 AIMS AND OBJECTIVES OF THE REPORTThe primary aim of this report is a thorough investigation of the financial performance of Sainsbury’s over the last few years (2004 -2007) emphasising on retail operations in UK. The main focus of this report can be summarised into:
To understand Sainsbury’s Business Strategy; and how it has facilitated Sainsbury’s to achieve success.
To analyze and present financial information in a form which will enable to assess the overall financial performance of the group from the year-ended 27/03/2004 to 24/03/2007.
Analyze major business decisions it has taken and new products it launched during the years mentioned above.
1.4 Executive SummarySainsbury’s aim is to provide its customers with ‘Great quality food at fair prices’. According to Porter’s Generic Strategies this would be more of a ‘stuck in the middle’ position, as it is competing with the market cost leaders as well as product differentiators. However, the Sainsbury’s success has shown that it has successfully operated in such a mid-market position.The overall business strategy has been successful. However, there was a decline in performance in 2004 and to get the company back on track a sales-led recovery plan named ‘Making Sainsbury’s Great Again’ was launched in October 2004. This has involved steps such as fixing the problems with Supply-chain and IT systems, improving existing product ranges, introducing new ranges and investing into price-cuts and promotions. This has worked extremely well and has led to an exceptional financial performance in 2007.
Turnover ↑ 6.8%
Gross Profit ↑ 9.8%
Profit before tax ↑ 58.7%
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Earnings per share ↑ 405%
Overall the figures look promising and have shown great improvements, however comparing them to Tesco’s shows that there is a need for further improvement. Tesco’s EPS in 2007 was 23.6p and Net profit Margin was 4.4% as compared to Sainsbury’s EPS of 19.2p and a Net profit margin of 1.9%. It has yet to improve its profit margins and reduce administration costs which are relatively high, which include further reducing its IT and supply-chain related costs.The company has set a target to increase Sales turnover by 3.5 billion in 3 year’s time to March 2010. Uncertain economic outlook and inflationary pressures may act as barriers to this target, but it is highly probable that it will be achieved.Sainsbury’s biggest weakness is in the non-food retail. It ranks third largest in UK retail, whereas excluding non-food it holds the second position. Non-Food sales contribute to less than 10% of its turnover, as compared to over 25% of Turnover for Tesco and Asda. If in the next few years the company is able to gain a good market-share in non-food retail, which it intends to, it is highly likely that it will narrow Tesco’s market lead and over take its rival ASDA as the second largest retailer in UK.
2 INFORMATION GATHERING
2.1 Sources used and their reasons2.1.1 Primary ResearchPrimary research involves getting original data directly about the product and market. It is data that did not exist before. Due to availability of adequate information from secondary sources, I felt that there was no need of primary information. Hence, most of my work is based on secondary sources.
2.1.2 Secondary researchI used two main sources for the secondary research.
1. LibraryI went through various books in the College library. I used BPP study text ‘Success in your research and analysis project’ which gave me an initial outline, approach, and structuring for the project. The study texts published for ACCA examinations provided me with an array of analytical tools to use in achieving the aims of this report.
2. Electronic researchI mainly relied on the Internet to formulate this report. The various databases and search engines to collect the information I needed for the report were:
Sainsbury’s website was the most important source of information. It provided me with the annual reports I needed for this report which includes the audited financial statements. The website also had an archive of company news which gave me a hindsight of the more immediate matters faced by the company.
Competitor websites (for the same reasons) Reuter’s website (http://stocks.us.reuters.com), this provided me with the
financial statements of Sainsbury’s and Tesco for the past five years along with ratios of both companies and the industry averages for the current period.
London Stock Exchange website, providing details of historic share performance and relevant industry and competitor news
Using internet search engines (Google, and MSN) to gather information related to Sainsbury’s and the UK retail industry.
Other business related databases used to obtain relevant industry and competitor news are:
Financial Times (www.ft.com)
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Accountancy age (www.accountancyage.com)
Business Week (www.businessweek.com)
2.2 Methods UsedInformation gathering is a critical phase and should be done in an organized way. Information access has become simpler with extensive details and volume available online and offline and one has to plan beforehand to be able to extract the relevant material to form a well-structured report.The main method I used to collect information was to use the GOOGLE search engine. Entering a few key words in the search bar provided me with the links of different websites where I could find the information I needed to formulate this report. Although there were a few irrelevant search results, I went through most of the search results gather relevant information.I wanted to have the relevant material to hand before starting the report writing process. I had bookmarked the web pages which had the relevant articles using the Internet Explorer so that I would not have any problems referencing the information if I had chosen to quote it in my report. I printed the Financial Statements of Sainsbury’s that I downloaded from its website and had also imported it into MS Excel to perform the ratio analysis on.
3 ANALYSIS
3.1 PORTER’S GENERIC STRATEGIESSainsbury’s aim is to provide customers with ‘Great quality food at fair prices’. Michael Porter identified three generic strategies (See Appendix A) through which organizations gain competitive advantage. Porter argued that to be successful an organization should select either cost-leadership or differentiation. According to Porter’s viewpoint Sainsbury’s would be a classic ‘stuck in the middle’ whereby it is trying to compete with the Industry Cost Leaders, Tesco and Asda as well as the Product Differentiators, Waitrose and Marks & Spencer.However, the overall success of Sainsbury’s has proved quite the opposite and there exists another viewpoint that a single generic strategy is not always best because within the same product customers often seek multi-dimensional satisfactions such as a combination of quality, style, convenience, and price. Sainsbury’s seeks to provide its customers with fair price products without compromising on their quality and has successfully operated in such a mid-market position.It has over the years been continuously building up its brand equity and is well positioned to anticipate and meet the increasing consumer focus on fresh, healthy, quality foods as well as fair price products.
“When interpreted narrowly as referring to the appeal of a product to its target buyers, the proposition that firms should not be ‘stuck in the middle’ should not be taken to imply that companies must be down-market or up-market, but nothing in-between. Such a view is belied by the evident success of companies such as Sainsbury's, which earn substantial economic rents in a mid-market position.”“PIMS (Profit impact of marketing strategy) data and other evidence shows, however, that intermediate positions are indeed profitable and are successfully
exploited by many firms.” (Michael Cronshaw, Evan Davis and John Kay (1994), pp. 19-33)
3.2 SWOT ANALYSIS ----- J Sainsbury’s Plc
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STRENGTHS Strong brand
Equity Wide Range of
Food-Products
WEAKNESSES Small store sizes High
administration costs
OPPORTUNITIES Expand into Non-
Food industry Marketing
Opportunity
THREATS Competitor price
war
StrengthsSTRONG BRAND EQUITYSainsbury’s has enormous brand equity and has built customer loyalty by providing them with ‘Great quality food at fair prices’. The core U.K business covers the grocery market and this means everything that is food related. It has over the years successfully delivered to its customers according to their needs regarding the quality, style, convenience, and price of different products and continues to provide them with the best offers.WIDE RANGE OF FOOD PRODUCTSSainsbury’s has aimed to provide its customers with a range of products to choose from. It has accordingly sub-branded own label products to fit the requirements of different customers segments. It is continuously working to introduce new ranges and improve existing ones in order to meet the demands of its customers.WEAKNESSESSMALL STORE SIZES Although Sainsbury’s have a large number of stores spread all over U.K, most of the current stores have relatively smaller sizes as compared to its competitors. Due to this there is less room for goods other than groceries and customers cannot be provided with a complete shopping experience‘Sainsbury's property portfolio was built up during the 1980s, when supermarkets averaged 20-30,000 square feet, compared with 40-50,000 square feet during the 1990s.’ (Jorn Madslien, 2006)
HIGH ADMINISTRATION COSTSSainsbury’s administration costs in recent years have been very high due to its supply-chain and IT costs. Although its previous supply-chain problems were resolved and IT costs have reduced in 2007, they are still higher than its competitors. Due to this it has lower operating and net profit margins although gross profit margin is much higher.
OPPORTUNITIESEXPAND INTO NON-FOOD RETAILNon Food products are very appealing to grocery supermarkets as they offer higher profit margins. The growth potential for non-food products is also much more as compared to the food-items. According to Verdict consulting (2006) the Sales of electricals will grow by 71.1% from 2006 to 2011, whereas Food and grocery will only grow by 16% in this period.Non-food accounts for less than 10% of Sainsbury's total sales turnover whereas Tesco’s non-food contributes to 25% of the total turnover. Sainsbury’s has therefore planned to increase its store sizes, where possible, and to open new larger stores in the near future to have more space available for non-food items
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and increase their market share in the non-food retail. However, it should also carryout additional market research to ensure the success of the Non-food items.HEATHY FOODS - MARKETING OPPORTUNITYA major advantage that Sainsbury’s has over the market cost-leaders is the superior product quality. This can be made use of and exploited by Sainsbury’s in its advertisements to increase consumer awareness and their focus on Fresh and Healthy foods. This may help stealing customers from the market cost-leaders and increase Sainsbury’s market share.THREATSCOMPETITOR PRICE WARThe retail industry is a highly competitive industry. Sainsbury’s has over the past few years invested heavily on price-cuts and promotions. However if cost-leaders retaliate this may have serious consequences as the business strategy of Sainsbury’s is different to the cost-leaders, and it may not be able to compete with them in this area. Also indulging in a price war would mean that the quality of its products may have to be compromised, which is a one of its key success factors.
3.3 RECOVERY PLANFor much of the 20th century Sainsbury's was the market leader in the UK supermarket sector, but in 2004 the group had suffered a decline in performance relative to its competitors, and in March 2005 this was shown on the balance sheet as a Loss (from continuing operations). Since then, the company launched a sales-led recovery plan that was named ‘Making Sainsbury’s great again’, under the leadership of Justin King, the CEO appointed in March 2004. The major changes the company has undergone as per the recovery plan are as follows:
3.3.1 Supply ChainThe main reason for the decline in performance in 2005 was attributed to the supply chain problems experienced by Sainsbury’s. The company had previously invested around 400m into four automated depots, which were later found to be flawed. Due to this there was a break-down in process between supply and retail leading to products being unavailable at point-of-sale.By 2005 the company had written down £120m in automated distribution and invested into manual depots. Within months the new depots brought improvements in stock availability and sales have been on the rise.“Our major focus on availability is beginning to show results with both colleagues and customers noticing improvements in store”(Justin King, Sainsbury's chief executive, 24 March 2005)
3.3.2 IT SystemsSainsbury’s outsourced part of its IT to consultancy firm Accenture in November 2000. The £1.8 billion seven-year contract was designed to back up the supply chain systems as efficiently and cost effectively as possible.However, the new systems implemented by Accenture failed to deliver. In October 2005, the IT services previously provided by Accenture were migrated back to the Group. Sainsbury’s has reported a better than expected reduction in IT costs less than a year after it terminated its outsourcing contract with Accenture.“Sainsbury's saves on IT after ditching Accenture” (IT week 2006)
3.3.3 New and Improved ProductsSainsbury's focuses on its strengths and are always working to introduce new ranges and improve established products. In the past few years it has done this in the following ways:Food Items:Basics: A wide range of everyday essentials that offering value for money. The range was re-launched in January 2005 and re-branded from Low Price to Basics. In January
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2007 a number of changes were made to the labeling of company's ‘basics’ range to enable customers to make healthier choices.Taste the Difference:This is the largest of Sainsbury’s sub-brands and the company it is integral to the business’s goal of delivering premium food “at fair prices”. In September 2006 Sainsbury’s re-launched its ‘Taste the difference’ range to very strict guidelines regarding its ingredients. Since this range was launched in November 2000, it has grown from 250 products to over 1400 in March 2007.Be Good to Yourself:This brand range consisting of premium products was completely re-launched in January 2006 with new product lines and completely new packaging designed to emphasize its healthy qualities. This now has over 350 product lines.Not Just For Vegetarians:Sainsbury’s launched a new range of ready meals in September 2006, to appeal to both meat lovers and vegetarians. In April 2007, twelve new were added to this range.Kids:In February 2006, Sainsbury’s launched its new children’s range, Sainsbury’s Kids. This nutritionally balanced range of over 80 products replaced the previous kid’s range, Blue Parrot Café and offered over 50 brand new products.Non-Food Items:In order to increase market share in the non-food retail sector, Sainsbury’s in recent years has taken the following steps:TU: Sainsbury’s introduced its own label clothing brand, 'TU', in September 2004.This features adult’s wear, children’s wear and accessories By August 2007 the buying, merchandising and technical teams responsible for TU adult and Children’s wear were brought in-house.
Different by Design: In March 2007 the company introduced a new premium homeware range under the ‘Different by design’ brand which mirrors the premium ‘Taste the difference’ food offer.3.3.4 Price-cuts and PromotionsIn order to make its price more competitive and encourage more sales Sainsbury’s is continuously working to provide customer with better offers. Another significant announcement in 2005 was the halving of the dividend to increase funds available for price cuts and quality.“The £400 million of investment in the customer offer was completed by December 2006 and additional funds were invested in early 2007, improving product quality and giving us our most competitive price position for many years”(J Sainsbury’s Plc. Annual report 2006-2007)
3.4 FINANCIAL PERFORMANCEThe activities of the company in recent years have resulted in an exceptional financial performance.
3.4.1 SALES REVENUE
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Sainsbury's Sales Turnover
14,000.00
14,500.00
15,000.00
15,500.00
16,000.00
16,500.00
17,000.00
17,500.00
2004 2005 2006 2007
Year ending march
Tu
rno
ver
in £
m
Sales Turnover
The sales revenue of the group in 2005 fell by 11.3% from £17,141 million in 2004 to £15,202m in 2005. Then in the two years to 24 March 2007 the sales have risen by 5.6% and 6.8% respectively.The decrease in 2005 was mainly due to the supply chain problems experienced by Sainsbury’s. Early sales increases were credited to solving problems with the company's distribution system whereas more recent sales improvements have been put down to price cuts and product launches and improvements.
3.4.2 PROFITABLITY RATIOS
Profitablity
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
2004 2005 2006 2007
Year Ending March
Pe
rce
nta
ge
Gross Profit margin
Net Profit margin
Gross Profit MarginThe gross profit margin has decreased in 2005 by 4.6%. This again was due to the supply chain problems mention above, which had adversely affected sales. The cost of sales also decreased, but by a smaller percentage, because of the nature of costs consisting of both variable and fixed elements.In 2006, the company had improved its Gross profit margin to 6.6%. This increase gives the initial indication of the successful running of the new supply depots. In 2007 this had further improved by 0.2% to 6.8%. However, as compared to the 2004 figure of 8.96% this may seem low. This is due to recent price cuts in Sainsbury’s stores in order to uplift sales turnover which has lowered the profit margin in products.“‘Supermarket chain Sainsbury's has seen a 2.8% rise in quarterly sales after it boosted advertising and cut prices.” (BBC 2005)Tesco’s G.P margin was 7.7% in 2006 and this increased to 8.1% in 2007. This shows a better GP margin than Sainsbury’s. This is due to the increased economies of scale because of its size. In addition, it is due to the non-food factor which contributes more to its total Turnover, offering better profit margins.
Net Profit Margin
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Net profit margin in 2005 was down by 3.6% to -1.23%. Along with the reasons mentioned above this was also due to Business Review and Transformation operating costs of £497m. This was in accordance with the recovery plan to sort out the supply chain problems and the problems with IT systems. In 2006 and 2007 the net profit margin was 0.36% and 1.89% respectively. This has shown an improvement in both years. In 2007 the net profit margin has increased more than the gross profit margin. This was primarily because of the IT cost savings resulting from migrating IT services back in-house.Tesco’s gross profit margin in 2007 increased from 5.7% in 2006 to 6.2% in 2007. Although the Tesco’s GP margin is 1.3% higher, its NP margin is 2.52% higher showing exceptional efficiency in overhead cost control. Admin expenses of Sainsbury’s and Tesco’s are 669m and 907m respectively, although Tesco’s turnover is nearly 2.5 times as much as Sainsbury’s.
Return on Capital EmployedThe return on capital employed (ROCE) assesses profits with the amount of funds (capital) employed to make the profits. This fell from 8.63% in 2004 to -2.29% in 2005. This was because of the loss made in 2005. Subsequently, in 2006 this improved by 5.18% to 2.89% on 2006 and further increased by 4.70% to 7.59% in 2007. This increase is evident of the improving financial situation of Sainsbury’s. On the other hand Tesco’s ROCE in 2007 increased by 0.75% to 11.29%. This difference shows that Tesco is managing its resources much better. Sainsbury’s should increase its profits using existing resources to improve its ROCE.
3.4.3 LIQUIDITY RATIOSCurrent Ratio:This is a measure of the adequacy of company’s current assets to meet short-term liabilities as they fall due. A ratio between 1 and 1.5 is considered to be norm for most businesses. Sainsbury’s current ration was 0.58, 0.79 and 0.70 in 2005, 2006 and 2007 respectively. Whilst varying from industry to industry for most business such a current ratio trend indicates an alarming liquidity position.Comparing the ratio to the industry average of 0.53 in 2007 shows that the situation is certainly not alarming, rather it’s due to the nature of the industry it operates in.
Quick Ratio:This differs from current ratio as it eliminates inventory from current assets providing a more useful position of the company to settle its immediate liabilities. Norms for quick ratios range from 0.7 to 1. Sainsbury’s quick ratio has been 0.47, 0.67, 0.49 for 2005 2006 and 2007 respectively. This may again seem very low, but the industry average of 0.30 in 2007 shows that this is not the case. This is again due to the nature of the business company operates in.Tesco’s current ratio was 0.52 in 2006 and 0.56 in 2007. Its quick ratio was 0.33 and 0.22 in 2006 and 2007 respectively. This shows that Sainsbury’s in a better liquidity position and it may not face any problem settling short-term debts, whereas there may be pressure on Tesco’s suppliers. It indicates that Tesco is making better use of its working capital, but on the other hand also leads to corporate social responsibility issues for which Tesco’s already has a bad reputation.
3.4.4 GEARING RATIOSCapital Gearing Ratio:This indicates the extent to which the business relies on debt financing. Sainsbury’s gearing ratio changed from 63.33% in 2006 to 57.39% in 2007, whereas Tesco’s gearing ratio was 54.25% and 57.44% in 2006 and 2007 respectively. This is a moderate level of gearing for both businesses.
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This decrease for Sainsbury’s illustrates that it has relied more on equity financing that debt financing during the course of the year whereas the Tesco gearing increase shows quite the opposite.Interest cover:The interest coverage ratio indicates the extent of which earnings are available to meet interest payments. An interest cover ratio of more than 3 times is considered safe as even if profits are reduced to half the company will still be able to meet its financing costs.Sainsbury’s interest cover increased from 1.48 times in 2006 to 4.86 times in 2007. The Company’s position in 2006 was relatively risky but now it is a more than satisfactory level of cover and indicates that a fall in profits is unlikely to prevent the company from meeting its financial obligations.3.5 INVESTOR OUTLOOKThe earnings per share (EPS) fell from 20.7p to -0.174p in 2005. However since the start of the recovery plan it has increased in the next years. In 2006 this increased to 3.8p and in 2007 to 19.2p showing an increase of 405%.The dividend per share was also approximately cut by half from 15.69p in 2004 to 7.80p in 2005. This was done in order to raise money for investment into price-cuts and promotions. In 2006 this was increased to 8.00p, and then further increased to 9.75p in 2007.
EPS V DPS
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
2004 2005 2006 2007
Year Ending March
Pen
ce p
er s
har
e
EPS
DPS
Although the dividends in 2005 and 2006 were low, they were yet higher then the EPS. This shows that the company had paid out more dividends then it had earned in these periods. This is because the dividends in 2005 had been halved already and a lower return would further reduce their confidence. In 2007 this has returned to normal where part of the earning was retained for future investments.Tesco’s EPS in 2006 was 20.2p in 2006 and increased to 23.6p in 2007. The dividends per share were 8.6p and 9.6p in 2006 and 2007 respectively. Although there was a major difference in EPS in 2006 of Sainsbury’s and Tesco, this has reduced significantly in 2007. Another point to be noted is that Tesco has retained more than half of the earnings for future investments. This is one of the reasons of its rapid expansion and Sainsbury’s may have to follow in its footsteps and retain a larger proportion of its earnings for future investments.
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(Source: London South East 2008)As of 31 March 2007 the shares of Sainsbury's were trading at 549.5p and Tesco’s share price was 444.25p. From the above graph it is quite visible that the share price of Sainsbury’s has fluctuated enormously in the last year. This was due to the takeover bids (see Appendix E) received by Sainsbury’s after months of speculation in the last quarter of year 2007. The main reason that makes Sainsbury’s an attractive for takeover bids is due to its huge property portfolio valued at around £7.5 billion in 2007.When the bids were rejected the share price started falling. For shareholders a better option would be to sell off their shares at the year end, as an EPS of 19.2p indicates that the company may not be able to deliver £5.50 in the current economic climate. However, the property portfolio can ensure that there will always be a demand for these shares and other such opportunities may arise.
4 CONCLUSION
Sainsbury’s financial performance in 2007 was exceptional. Improvement in sales, profit margins, dividends and a stable liquidity position should send positive messages to all stakeholders.The key corner stone of Sainsbury overall success is providing its customers with ‘Great quality food at fair prices’. It has stayed closely connected with the needs of the customers regarding the quality, style, convenience, and price of different products and have delivered accordingly by sub-branding own label products to fit the requirements of different customer segments. E.g.’ Basics’ for the down-market, ‘Be Good to Yourself’ for the up-market, and ‘Taste the difference’ for the ‘mid-market’.Since the launch of King's recovery programme, the turnaround has been phenomenal and the company has reported twelve consecutive quarters of sales growth, most recently in January 08. Despite distractions from potential takeover speculation in the last quarter of the year 2007, strong performance was delivered.‘Over the past year we delivered another strong performance and our recovery is ahead of plan. Since March 2005, we have grown sales by an additional £1.8 billion with over £1 billion delivered in the 2006/07 financial year. This means we are ahead of our target to grow sales by £2.5 billion by March 2008.’(J Sainsbury’s Plc. Annual report 2006-2007)“Sainsbury’s has been named Supermarket of the Year for the second year running at the Retail Industry Awards.”(J Sainsbury’s Plc, Awards 2007)
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However, comparing the results to Tesco shows that there is yet a need for further improvement. Sainsbury’s profit margins are lower than Tesco’s and it may have to increase production efficiency to improve profit margins. Although its gross profit margin is lower there is less difference as compared to the difference between both company’s net profit margin. This is due to the relatively high administration costs of Sainsbury as compared to Tesco.Tesco’s return on capital employed has also been higher than Sainsbury’s and this is evident of Tesco’s managing its resources efficiently. Due to this the EPS was also higher by 4.4p in 2007. Although the differences have decreased in the last year the results have yet to improve If Sainsbury’s is to be the best in the market.Sainsbury’s main weakness is in non-food items which make up less than 10% of its total sales. This is mainly because of its small store sizes which do not have enough room to accommodate many non-food products. Another reason is that the non-food products launched have not been very successful and the sales growth of any such products have saturated in a short period of time.However, Sainsbury’s has realized the growth potential of the non-food retail and plans to increase its presence in this sector.
(J Sainsbury’s Plc. Annual report 2006-2007)The existing plan was to get the company back on track and now that this has been accomplished, the company plans to invest around 2.5 billion by March 2010 into opening larger stores and increasing its existing stores sizes most importantly to increase its market-share in non-food retail. Along with store increased store sizes, Sainsbury’s should also carry out more market research before launching its non-food ranges to ensure they are popular with consumers and prove out to be successful.Market share statistics by TNS Global (2008) show that the company has 16.4% share of the grocery market with nearest rival Asda on 16.9 per cent and Tesco with a 30.9% market share.If in the next few years the company is able to gain a good market-share in non-food retail, it is very likely that it will over take its rival ASDA as the second largest retail in UK and reduce Tesco’s market lead.Overall Sainsbury’s growth will be affected by general market issues such as the impact of regulatory and planning regimes on store development and economic factors such as the level of household disposable income. However, Sainsbury’s is well positioned to anticipate and meet the increasing consumer focus on fresh, healthy, quality foods and fair prices.Based on the analysis undertaken in the report Sainsbury’s is likely to continue to further improve its financial performance and capture more market share over the coming years.
5 BIBLIOGRAPHY
Company Published SourcesSainsbury’s Publications
J Sainsbury’s Plc., 2007. Annual report 2006-2007. [Online]. Available at: <http://www.j-sainsbury.co.uk/index.asp?pageid=20>
J Sainsbury’s Plc., 2006. Annual report 2005-2006. [Online]. Available at: <http://www.j-sainsbury.co.uk/index.asp?pageid=20>
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J Sainsbury’s Plc., 2005. Annual report 2004-2005. [Online]. Available at: <http://www.j-sainsbury.co.uk/index.asp?pageid=20>
Tesco Publications Tesco Plc., 2007. Annual report 2006-2007. [Online].
Available at: < http://www.tescocorporate.com/page.aspx > Tesco Plc., 2007. Annual report 2005-2006. [Online].
Available at: < http://www.tescocorporate.com/page.aspx >News papers, Online news, and Specialist JournalsBBC (2005), Cut prices aid Sainsbury's sales, BBC [online], Available at:<http://news.bbc.co.uk/1/hi/business/4318042.stm>,[Accessed 7 March 2008]IT week (2006), Sainsbury's saves on IT after ditching Accenture, Accountancy age, [online], Available at: <http://www.accountancyage.com/accountancyage/news/2169234/sainsbury-cuts-costs-ditching>, [Accessed 27 February 2008]J Sainsbury’s Plc (2007), Awards, [online], Available at: <http://www.sainsburys.co.uk/aboutus/awards/retailer_of_the_year_2007.htm> [Accessed 29 February 2008].J Sainsbury’s Plc, Our History, [online], Available at: < http://www.j-sainsbury.com/index.asp?pageid=188>[Accessed 23 February 2008].Jorn Madslien (2006), ‘Sainsbury's chief cheers strong recovery’, BBC [online], <http://news.bbc.co.uk/1/hi/business/5251902.stm> [Accessed 3rd March 2008]Justin King (2005), Improved supply lifts Sainsbury's, BBC [online],Available at :<news.bbc.co.uk/1/hi/business/4378035.stm> [Accessed 3 March 2007]London South East (2008), Sainsbury Share Charts, LSE [online image], Available at: <http://www.lse.co.uk/ShareChart.asp?sharechart=SBRY> [Accessed 6 March 2008].Michael Cronshaw, Evan Davis and John Kay (1994) ‘Stuck in the Middle or Good Food Costs Less at Sainsbury's’, British Journal of Management, Volume 5,Issue 1, pp. 19-33TNS Global (2008), Market Share Data Release, IGD Retail Analysis [online],Available at: http://www.igd.com/analysis/news/news_detail.asp?articleid=4613[Accessed 18 March 2008]Verdict Consulting (2007), ‘UK Retail Futures 2011: Food and Grocery’, Verdict Consulting, Available at: <http://www.verdict.co.uk/Marketing/dmvt0375m.pdf>[Accessed 22 March 2008]Wikipedia (2008), Sainsbury's, <http://en.wikipedia.org/wiki/Tesco>,[Accessed 22/02/08, 01/03/08]
Wikipedia (2008), Tesco, <http://en.wikipedia.org/wiki/Tesco>[Accessed 22/02/08, 11/03/08]Textbooks and Accountancy PublicationsBPP (2003), Success in your Research & Analysis Project, London, BPPFTC Foulks Lynch (2006) ACCA paper 2.4 Financial Management & Control, Berkshire, Foulks Lynch Publishing.FTC Foulks Lynch (2006) ACCA paper 2.5 Financial Reporting, Berkshire, Foulks Lynch Publishing.Kaplan Financial (2007) ACCA paper P3 Business Analysis, Berkshire,Kaplan Publishing.Kaplan Financial (2007) ACCA paper P2 Corporate Reporting, Berkshire,Kaplan Publishing.Michael, E. Porter (1980) Competitive Strategy: Techniques for Analysing Industries and Competitors, New York, The Free PressSaunders, M. Lewis, P. Thornhill, A. (2003) Research Methods for Business Students. 3rd Edition, Harlow, Financial Times/Prentice HallOnline Financial Informationhttp://www.accountancyage.com http:// www.businessweek.com
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http:// www.ft.com http://retailtrafficmag.com/retailing/http://stocks.us.reuters.com
6 APPENDICESA. Porter’s Generic Strategies
Michael Porter in his 1980 classic ‘Competitive Strategy: Techniques for Analyzing Industries and Competitors’ identified three generic strategies through which an organization could achieve competitive advantage. These are:
1. Cost Leadership Strategy: This strategy emphasizes efficiency. By producing high volumes of standardized products, the firm hopes to take advantage of economies of scale and experience curve effects, ideally more than any competitor.
2. Differentiation Strategy: This involves creating a product that is perceived as unique. The unique features or benefits should provide superior value for the customer if this strategy is to be successful. This opens up the profit margin by raising selling prices.
3. Focus Strategy: This is where the organization is concentrated on a small segment of the market. Within the focus strategy(also known as niche strategy), the organization must choose whether or not to become a cost leader or a differentiator
Porter argued that to be successful over the long-term, a firm must either cost-leadership or differentiation. Otherwise, with more than one single generic strategy the firm will be "stuck in the middle" and will not achieve a competitive advantage.
B. J Sainsbury’s PLCConsolidated Income StatementIn Millions of GBP 2007 2006 2005 2004
(except for per share items) 24/03/2007 25/03/2006 26/03/2005 27/03/2004Total Revenue (continuing operations)
17,151.00 16,061.00 15,202.00 17,141.00
Cost of Revenue 15,979.00 14,994.00 14,544.00 15,606.00 Gross Profit 1,172.00 1,067.00 658.00 1,535.00 Administrative Expenses 669.00 839.00 830.00 800.00 Depreciation/Amortization -- -- -- 11.00 Unusual Expense -- -- -- 68.00 Other Income -17.00 -1.00 -21.00 --
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Operating Profit (PBIT) 520.00 229.00 -151.00 656.00 Finance Cost -107.00 -155.00 -132.00 -85.00 Finance Income 64.00 30.00 45.00 25.00 Gain (Loss) on Sale of Assets -- -- -- 14.00 Net Income Before Taxes 477.00 104.00 -238.00 610.00 Provision for Income Taxes 153.00 46.00 -51.00 206.00 Net Income After Taxes 324.00 58.00 -187.00 404.00
Summary Group Balance Sheet In Millions of GBP 2007 2006 2005 2004
(except for per share items) 24/03/2007 25/03/2006 26/03/2005 27/03/2004Total Inventory 590 576 559 753Other Current Assets 1325 3244 2342 3302Total Current Assets 1,915 3,820 2,901 4,055Total Non-Current Assets 7,661 8,927 8,717 8,452Total Assets 9,576 12,747 11,618 12,507
Short-term Borrowings 373 253 354 403Other Current Liabilities 2348 4557 4682 4503Total Current Liabilities 2,721 4,810 5,036 4,906Long Term Debt 2,123.00 2,208.00 1,846.00 1,904.00 Other Non-Current Liabilities 383.00 1,843.00 709.00 679.00 Total Non-Current Liabilities 2,506 4,051 2,555 2,583 Total Equity 4,349 3,886 4,027 5,018Total Liabilities & Shareholders’ Equity
9,576 12,747 11,618 12,507
C. Tesco PLCTescoSummary Group Income StatementYear ended February 2007 2006
£m £m
Total Revenue (Continuing operations) 42,641.00 39,454.00 Cost of Revenue -39,401.00 -36,426.00 Pensions adjustment – Finance Act 2006 258.00 –Impairment of the Gerrards Cross site -35.00 –Gross profit 3,463.00 3,028.00 Administrative expenses -907.00 -825.00 Profit arising on property-related items 92.00 77.00 Operating profit 2,648.00 2,280.00
Share of post-tax profits of joint ventures and associates (including £47 million of property-related items (2005/06 – £nil)) 106.00 82.00 Profit on sale of investments in associates 25.00 –Finance income 90.00 114.00 Finance costs -216.00 -241.00 Profit before tax 2,653.00 2,235.00 Taxation -772.00 -649.00
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Net Income After Taxes 1,881.00 1,586.00
Summary Group Balance sheet
In Millions of GBP 2007 2006
(except for per share items) 02/24/07 02/25/06 Total Inventory 1,931 1,464Other Current Assets 2645 2455Total Current Assets 4,576 3,919Total Non-Current Assets 20,231 18,644Total Assets 24,807 22,563
Short Term Debt 1,554 1,646Other Current Liabilities 6,598 5,872Total Current Liabilities 8,152 7,518Long Term Debt 4,146 3,742
Other Long-Term Liabilities 2,003 1,923Total Non-Current Liabilities 6,149 5,665Total Equity 10,506 9,380Total Liabilities & Shareholders’ Equity 24,807 22,563
D. Ratio AnalysisSainsbury's
2007 2006 2005 2004
Profitability and ReturnROCE % (PBIT/Capital Employed) 7.59% 2.89% -2.29% 8.63%Gross Profit margin % (Gross profit/ Turnover) 6.83% 6.64% 4.33% 8.96%Net Profit margin % (Net profit/ Turnover) 1.89% 0.36% -1.23% 2.36%
LiquidityCurrent Ratio (Current Assets/ Current Liabilities) 0.70 0.79 0.58 0.83Quick Ratio (Current Assets - Inventory/Current Liabilities) 0.49 0.67 0.47 0.67Admin expenses % (Administration expenses/ Turnover) 4.67% 5.46% 5.22% 3.90%
GearingCapital Gearing Ratio(Total Debt/ Total Equity) 57.4% 63.3% 54.6% 46.0%Interest cover (Operating Profit/ Finance cost) 4.86 1.48 -1.14 7.72
InvestmentEPS (pence) 19.2 3.8 -17.4 20.7 Dividend (pence) 9.75 8.00 7.80 15.69 Dividend cover 1.97 0.48 -2.23 1.32
Tesco
Profitability and ReturnROCE % (PBIT/Capital Employed) 11.29% 10.54%Gross Profit margin % (Gross profit/ Turnover) 8.12% 7.67%Net Profit margin % (Net profit/ Turnover) 4.41% 4.02%Admin expenses % (Administration expenses/ Turnover) 2.13% 2.09%
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LiquidityCurrent Ratio (Current Assets/ Current Liabilities) 0.56 0.52Quick Ratio (Current Assets - Inventory/Current Liabilities) 0.32 0.33
GearingCapital Gearing Ratio (Total Debt/ Total Equity) 0.57 0.54Interest cover (Operating Profit/ Finance cost) 12.26 9.46
InvestmentEPS (Basic) 23.6 20.2Dividend (pence) 9.64 8.63Dividend cover 2.45 2.34
E. Takeover BidsTakeover Bid 1:In February 2007, after months of speculation about a private equity bid, CVC Capital Partners, and Blackstone Group announced that they were considering a bid for Sainsbury's. The consortium grew to include Goldman Sachs and Texas Pacific Group.On 5 April the consortium submitted an "indicative offer" of 562p a share to the company's board, but the offer was rejected. On 9 April the indicative offer was raised to 582p a share, however this too was rejected. On 11 April the CVC-led consortium abandoned its offer, stating "it became clear the consortium would be unable to make a proposal that would result in a successful offer."
Takeover Bid 2:In April 2007 Delta Two, the investment fund backed by the Qatar Investment Authority, purchased 17.6% of Sainsbury's shares. In June 2007 this was increased to 25%. On 18 July BBC News reported that Delta Two had tabled a conditional bid proposal. On 5 November 2007 it was announced Delta Two had abandoned its takeover bid due to the "deterioration of credit markets". Following the withdrawal of the interest of the QIA, shares in Sainsbury's dropped around 20% on the day of this announcement.
(Source: Wikipedia <http://en.wikipedia.org/wiki/Sainsbury's>)
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