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Financial Analysis: Role of Retail (Grocery) in ones Portfolio

Student Name:
Student ID:
Supervisor:

Ankur Asati
51338535
Mark Whittington

Submission Date: 29th August 2014

Role Of Retail Sector (Grocery) In Ones Portfolio


Masters Dissertation in Msc (Econ) in Finance & Investment Management

Table of Contents
Executive Summary.................................................................. 3
Introduction

....................................................................... 4

Objective of the study


4
Background of the Retail Industry
..4
What are Convenience
Store ?..............................................................

...........4

Company's History
..6
Literature Review

.9

Transformation of Retail Industry


9
Corporate Governance
.11
Financial Ratios
.13
Methodology
Data Analysis

...15
..18

Commercial and Financial Information


.18
Porter's Five Forces
19
Corporate Governance
...21
Investors Information and Share ownership
22
Financial Ratio
.23
Conclusion and Recommendation

..35

References..38
Appendix 1(Income Statement ASDA).......................................42
Appendix 2(Balance Sheet ASDA).............................................43
Appendix 3(Income Statement Morrison's)................................44
Appendix 4(Balance Sheet Morrison's)..
..45
Appendix 5(Income Statement Sainsbury)..
..46
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Role Of Retail Sector (Grocery) In Ones Portfolio


Masters Dissertation in Msc (Econ) in Finance & Investment Management

Appendix 6(Balance Sheet Sainsbury)....


.47
Appendix 7(Income Statement Tesco)
.48
Appendix 8(Balance Sheet Tesco)
.49

Executive summary:
In the past few years there has been a rapid growth in retail industries within the
U.K. due to various reasons like technological advancements and change in
shopping trend from weekly to daily. Despite of the harsh economic times in
Europe retail sector proved to be a supple for U.K. As it continued supporting the
economy and have brought great benefits due to its highly innovative and
competitive nature.
Annual retail sales (excluding automotive fuel) were 302.7 billion in 2011 which
reached 320.7 billion in 2013, there is a growth of 10 billion within a year as it
was 310.8 billion in 2012. These stats show the growth achieved by the retail
sector in past three years. However this growth is tremendous if viewed for last
10 years as in 2003 it use to be 241.7 billion which turned out to be 320.7
billion in 2013, growth of 32.8%, which is 20% of total U.K. GDP. On the other
hand, the major players of the retail market remained same for all those years
they are TESCO, SAINSBURY, ASDA and MORRISONS, there has been changes in
market shares of the mentioned companies but overall the market has always
been in their hands.
Retail industry plays a vital role in U.Ks community and economy as it gives
employment to a population of 3 million which is the largest private sector
employment provided. Out of which 60% of the total employees are women,
while 55% are part-time workers. It also helps to contribute to the GDP of UK,
paid tax of 19.5 billion.
Hence the retail business may be worth investing into TESCO, SAINSBURY, ASDA
and MORRISONS. The main objective of the study is to advice potential investors
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Role Of Retail Sector (Grocery) In Ones Portfolio


Masters Dissertation in Msc (Econ) in Finance & Investment Management

particularly shareholders to know which company will be most profitable based


on the information provided in their annual reports of past three years (20112013).
According to the study conducted Morrisons was the first choice for investors
followed by Tesco, Sainsbury but I would not recommend investing in ASDA.

INTRODUCTION:
a). Objective of the study:
The main objective of this study is to provide an in depth understanding of the
U.Ks top four retail (grocery) companies namely TESCO, SAINSBURY, ASDA, and
MORRISON as to how these big four managed to dominate the U.K market for all
these years. By analysing the facts, figures and strategies involved with the four
major players.
This study aims to analyze the top four U.K retail (grocery) companies in order to
advice the shareholders which company is beneficial for investment and which
of these companies have brought maximum benefits in past three years (20112013) to the shareholders. The study is based on level of disclosed information of
these companies and financial statements provided in the annual reports (20112013).
b). Background of Retail Industry:
UKs urban, retail and leisure has changed vividly in the past three decades, it
has been characterised by considerable changes in the location of the outlets,
magnitude and leisure. This has been amplified by the trend of shopping towards
which the nation is moving these days and changes that has happened during
this time period in the nations leisure habits. It has also been shaped up due the

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Role Of Retail Sector (Grocery) In Ones Portfolio


Masters Dissertation in Msc (Econ) in Finance & Investment Management

sophisticated interaction among political, economic, consumer behaviour, market


demand and investments.
There are three basic reason behind the shaping up of the grocery market Convenience Stores; Discounters; Online Sales.
c). What are Convenience stores?
Convenience stores are stores that have area under 3,000 sq ft (280 sq m) and
to be considered a convenience store it must

stock

at least seven of the

mentioned core categories- Alcohol, Bakery, Canned and Packaged Groceries,


Chilled Food, Confectionary, Frozen Food, Fruit and Vegetables, Health and
Beauty,

Hot

food-to-go,

Household,

National

Lottery,

Milk,

Newspapers/Magazines , Non Food items, Sandwiches, Savoury Snacks, Soft


Drinks, Tobacco and according to Sunday Trading Act 1994 (IGD, 2014)1
convenience store shouldnt have restricted opening hours on sunday.
The UK consumers prefer to shop during the week in small independent grocery
and convenience store these days unlike major weekly shoppings which they
use to do before. The inevitable outcome was a massive expansion in
convenience store openings and online sales as witnessed in 2013. This
behaviour reduces wastage incurred and thus saves money of the consumers.
The other reason for development of this behaviour is UKs economic conditions,
continuous inflation and stagnating salaries; while rising fuel price pushed them
towards small convenience stores rather than shopping in hypermarkets and
supermarkets located in the outskirts of the town. Tesco were the first to embark
upon this strategy, they were the first to open a local store in the year 1994 by
the name Tesco Express, soon to follow their suit was Sainsburys who open the
Sainsbury locals in the year 1998. The last to enter the local store competition
was Morrisons in the year 2011 under the name M locals. Amongst the four
giants, ASDA seems to be undeterred by the competition of small scale local
markets (Ruddick, 2014)2. Currently there are 1601 Tesco Express, 523
Sainsburys Local and 85 M Locals to date and Tesco was the first to open Local

IGD, 2014. The Institute of Grocery Distribution and IGD Service Limited. [Online] Available at: http://www.igd.com/ourexpertise/Retail/Convenience/3369/Convenience-Retailing-Market-Overview/ [Accessed 05 August 2014].
2

Ruddick,
G.,
2014.
Telegraph
Media
Group
Limited
2014.
[Online]
Available
http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/10566775/Sainsburys-Local-stores-to-overtakesupermarkets.html [Accessed 02 August 2014].

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Masters Dissertation in Msc (Econ) in Finance & Investment Management

stores named Tesco Express in 1994 which was followed by Sainsburys in 1998
and Morrisons in 2011. (Barford, 2014)3
According to BRC (British Retail Consortium) there was a record amount of online
sales in 2013, there was a growth of 19.2% in 2013 compared to 2012. There
was a 2.1% hike in December online sales in 2013 compared to 2012 i.e. it
reached 18.6% from 16.5%. The main forces driving this hike are the improved
delivery system, sophisticated websites of the sellers and significant investment
has been made to improve these aspects of business. The growing popularity of
Smartphones and Tablets that allows the consumer to choose and order
products on the go has also played a pivotal role in promoting the online
business.
UK grocery can be divided into following sectors made up of: Hypermarkets and
Superstores

(42.23%),

Supermarkets

(20.34%),

Discounters

(6.18%),

Convenience stores (21.4%), online shopping (4.4%), others retailers (5.38%) of


the total sale in 2014 (IGD, 2014)4.
d). Companys History
TESCO PLC: TESCO PLC was founded by Jack Cohen in East end of London in the
year 1919 where it started with a grocery stall. First Tesco store was opened in
1929 Burnt Oak, North London; whereas Tesco brand first appeared in 1924 five
years after the opening of their first store. Tesco was named after the initials of
Mr. T.E Stockwell, who provided the shipment of tea to Mr Cohen and Mr Cohen.
Tesco continued its rise and went private in the year 1932. Tesco stock floated
with 25p as initial price on stock exchange in the 1947. In 1961 Tesco Leicester
had its name on Guinness book of world record for being the largest store in
Europe. The first superstore was opened in 1968 in Crawley, West Sussex. After
ruling the grocery market, Tesco opened its first petrol pump in 1974.In 1995
when the Tesco launched its club card followed by the slogan Every Little
Counts (1992). It took over its greatest rival Sainsburys, largest food Retail
Company in U.K. at that time. (Clark, 2008)5

Barford, V., 2014. BBC 2014. [Online] Available at: http://www.bbc.co.uk/news/magazine-25762466 [Accessed 02 August
2014].
4

IGD, 2014. The Institute of Grocery Distribution and IGD Services Limited. [Online] Available at: http://www.igd.com/ourexpertise/Retail/retail-outlook/3371/UK-Grocery-Retailing/ [Accessed 02 August 2014].
5

Clark, T. (2008, April 15). Telegraph Media Group Limited 2014. Retrieved July 30, 2014, from The Telegraph:
http://www.telegraph.co.uk/finance/markets/2788089/A-history-of-Tesco-The-rise-of-Britains-biggest-supermarket.html

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They opened their online shopping website www.tesco.com in the year 2000 and
continued their expansion they now includes clothing, personal finance and
electrical products as well. They launched themselves in U.S with another name
Fresh and Easy. The Tesco now operates in 12 different countries and have
working force around 530,000 people.
SAINSBURY: SAINSBURY was founded by John James Sainsbury and his wife Ann
Sainsbury who initially wanted to be the best butter seller in U.K and opened a
dairy however in 1869 the first Sainsbury store was opened at Drury Lane,
London. Later in 1882, they started selling their own brand products. Heading
towards the end of 19th century they also started selling meat and poultry
products which were supplied by their longest establish supplier Lloyd Maunder.
Sainsbury first started training schools in 1916 at Blackfriars to make sure that
their colleagues were best trained. In 1945, they halved labels on the products to
support world war by saving the use of papers. They were one of the U.Ks first
supermarkets to open self serviced store which was introduced in 1950 and this
idea of self service counters allowed supermarkets to expand themselves to a
greater extent (Ruddick, 2013)6. In 1969 their own brand products accounted for
half of the total turnover made by Sainsbury. In 1974, for the first time Sainsbury
offered the shares of the company to colleagues through the saving related
share option scheme. They were the first to introduce bags made out of recycled
material in 1989. They are the worlds biggest retailer of fair trade products
which was initiated by them in 1996. They launched their banking service in
1997. At the beginning of 21 st century in the year 2000 they introduced more
than 175 products by the name Be good to yourself which followed strict
nutrition standards (Sainsbury, 2014)7.
ASDA: ASDA has its origin dating back to 1920, when a group of farmers in
Yorkshire joined their resources keeping milk and meat as customer base, to start
a venture that has now grown to be one of the biggest retailers in the U.K. The
dairy formed was named Hindells Dairies after a great success they expanded
and diversified themselves and formed Associate Dairies and Farm Stores LTD
in the year 1949 (ASDA, ASDA, 2013)8. ASDA Stores LTD was being formed by the
6

Ruddick, G. (2014, August 30). Telegraph Media Group Limited. Retrieved July 30, 2014, from Telegraph:
http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/10277326/Sainsburys-returns-to-site-of-first-self-servicesupermarket.html
7

Sainsbury. (2014). J Sainsbury plc. Retrieved July 30, 2014, from Sainsbury History: http://www.j-sainsbury.co.uk/aboutus/sainsburys-story/19th-century/#tabbed_section
8

ASDA. (2013, October 16). ASDA. Retrieved July 31, 2014, from Asda Media Centre: http://asdamediacentre.co.uk/aboutasda/asda-history

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two groups Asquith and Dairies, where Dairies is taken from Hindells Dairies and
Asquith was taken from the chain of self service supermarket named Queens
supermarket, which was initially started as a store in Pontefract, West Yorkshire,
England by two brothers Peter and Fred Asquith. They renamed the company as
ASDA Queens after acquiring the GEMs Group in 1965. Finally in 1968 when the
Asquith was bought by Associate dairies they named it ASDA. 1980s was hard
time for them where they just introduced George clothings in some of its stores
in 1989 compared to 1970s when they were acquiring some big names like Allied
store, gateway and expanding their business. Later towards the end of 20 th
century in 1999 Wal-Mart biggest retailer purchased ASDA (ASDA, 2014 Asda
Stores Limited, 2014)9, which helped ASDA to explore more areas in business as
they launched shopping website www.asda.com for purchase online and collect
for free they also launched a service called ASDA direct where non-food items
can be purchased and are deliver to door step of the customer. (ASDA, 2014)10
Morrisons: Morrisons today had its roots in a stall run by William Morrison, an
egg and butter merchant of Bradford market in 1899.First store with self serviced
counters and product with price labels on them was introduced in 1958, it was
the only store with such facilities in Bradford market at that time. They continued
to expand and diversify themselves and first supermarket was launched just after
2 year in 1961 with groceries, meat and other provisions including the facility of
free parking. Further expansion of the company led it to be a public company
and they launched their shares in 1967, due the huge demand of shares it was
over-subscribed. They expanded themselves and reached Lancashire by taking
over Whelan discount store in 1978. They joined FTSE 100 in the year 2001 and
became U.Ks fourth largest supermarket after acquiring Safeway in the year
2004; they continued this wave of acquiring and took over Rathbone bakery and
abattoir in May and June 2005 respectively. They became the first retailer to have
all the three top retail industry awards in one year- Supermarket of the year,
Grocer of the year, Retailer of the year in 2008. It also became U.Ks Greenest
Supermarket in the same year. They also have awards like-Employer of the year
and U.Ks most apprenticeship provider in 2010&11. (Morrison's, 2014)11 They
were the last among all the top four players to start online shopping
9

ASDA. (2014). 2014 Asda Stores Limited. Retrieved July 31, 2014, from History of Asda: http://your.asda.com/about-asda/thehistory-of-asda
10

ASDA. (2014). ASDA 2014. Retrieved July 31, 2014, from ASDA: http://www.asda.com/

11

Morrison's, 2014. Wm Morrison Supermarkets plc 2014. [Online] Available at: http://www.morrisons-corporate.com/Aboutus/Company-history/ [Accessed 10 August 2014].

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www.morrisons.com , they started delivery facility but are still lacking behind as
they only cover a little part of U.K. (BBC, 2013)12

LITERATURE REVIEW

12

BBC, 2013. BBC 2014. [Online] Available at: http://www.bbc.co.uk/news/business-21782381 [Accessed 10 August 2014].

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The purpose of this chapter is to look upon the literatures written in the past and
have a better understanding of the retail industry. The studies conducted on
different factors like changes in retail industry over time, technological
advancements, policies followed and the competitive environment will be
discussed under the section of Transformation of Retail Industry. The studies
conducted on the impact of proper and improper governance over the financial
performance, agency theory and information asymmetry will be discussed under
the section of Corporate Governance. While as the studies on the role of
financial statements or accounting information, impact of financial ratios, other
areas which can be analysed and which will be of benefits to the users of
information will be discussed under the section Financial Ratios.
This chapter will provide extensive review of the studies conducted in the past
under following headings:
a). TRANSFORMATION OF RETAIL INDUSTRY:
In

the

nineties

the

retail

industry

particularly

grocery

witnessed

the

concentration of power in the hands of few. It was this era where development of
new physical supply system, own brand products and use of more advance
information system took place. This all supported the powerful drivers to expand
their business more rigorously and gain more control over the supplier. However
the studies conducted suggest that there is a potential for further growth in the
industry (Emmanuel Ogbonna, 1998)13. National context in which trading take
place is said to be responsible for the changes in retail industry, it is said that
British Retail system is controlled by some key traders having control over the
funding system. Such a huge concentration of power in a few hands leads to the
development of predictable format and acts as a driving mechanism for all
leading chains in a pre-determined manner (Hallsworth, 1995) 14.
Late 80s and Early 90s was reffered as the golden age of the retail industry as
there was a tremendous growth and increase in profitability and during that
period Sainsbury witnessed continuous increase in Pre-tax profit and the
shareholders dividend reached upto 20% per annum. Soon after the mid of 90s
there was a substantial shift in UK food market, according to the researches
conducted previously the main drivers of the shift were the rise and fast growth
13

Emmanuel Ogbonna, B. W., 1998. Power relations in the UK grocery supply chain - Developments in 1990s. Journal of
Retailing and Consumer Services, 5(2), pp. 77-86.
14

Hallsworth, A., 1995. British retailing: the institutional context. Journal of Retailing and Consumer Services, 2(4), pp. 251-258.

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of deep discounters, alteration of sunk cost, property valuation and people were
unwilling to accept the growing dominance of key players. This all lead to a new
era in food industry with is often reffered as Store Wars (Wrigley, 1994) 15.
Studies conducted in the past states that competiton amongst retailers in UK is
not upto the same level as in some similar leading economies. Convinence store
have been threatened to loose their market share to the supermarket chains
which are starving to grab more and more market share (Ronan De Kervenoaela,
2006)16.Innovation is considered to be an important organ of organisation for
many industries and similar is the case for the retailing. If one want to survive in
such a competitve global platform they need to innovate. Developing business
model, pursuing development of technology and growth prospects in the global
market are some part of innovation retailers are trying to achieve. In order to
achieve these goals retailers need to know which innovation are paying them off,
which technology advancement could let them expand further, how to meet the
changes in market and so on (Venkatesh Shankar, 2011) 17. The answer to these
question leads to innovation such as online shopping or introduction of internet
in retailing.
There are three major factors which led to the internet introduction-market
development

opportunity,

internet

communications

and

development

capabilities. The pottential for sales in internet segment has led retailers to build
an active website with online sale facility. All the companies considered in this
study have active participation in online market

and target internet segment

(Neil Doherty, 2003)18. In recent years there has been a great development in
online sales and as a result market share covered by online sales is booming
year by year at a high rate. Tesco have their website with online sales and
delivery facility with the name www.tesco.com , ASDA with click and collect,
online purchase and delivery facility at www.asda.com , Sainsbury with online
sales and delivery facility at www.sainsbury.co.uk and Morrisons with sales and
delivery facility at www.morrisons.com . However Morrisons covers the least
area for delivery among all the companies.

15

Wrigley, N., 1994. After the store wars (Towards a new era of competition in UK food retailing?). Journal of Retailing and
Consumer Service, 1(1), pp. 5-20.
16

Ronan De Kervenoaela, A. H. I. C., 2006. Macro-level change and micro level effects: A twenty-year perspective on changing
grocery shopping behaviour in Britain. Journal of Retailing and Consumer Services, 13(6), pp. 281-392.
17

Venkatesh Shankar, M. S. Y., 2011. Innovations in Retailing. Journal of Retailing, 87S(1), pp. S1-S2.

18

Neil Doherty, F. E.-C. C. H., 2003. An analysis of the factors affecting the adoption of the Internet in the UK retail sector.
Journal of Bussines Research, 56, pp. 887-897.

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Despite of all efforts there is always a threat of a new competitor to enter the
market, like the worlds biggest retailer walmart (Ruddick, 2014) 19 entered the
UKs retail market in 1999 with the acquisition of ASDA which led to the
restructuring of the market with

customers demanding value for money and

stores cutting prices to remain in such a competitive market. Despite of its


presence over 14 years in UKs grocery market it failed to have market share
leadership here, Tesco continues to dominate with highest market share in UK as
well as in Europe (John Fernie, 2006) 20. However the level of competition in UKs
grocery market has reached upto a new heights after the entry of german
grocery giants ALDI and LIDL aiming to capture more and more market share
every year.
b). Corporate Governance:
It is designed in such a way that helps the company to control over all its
operations with the help of predetermined set of system, processes and
principles that ultimately assist the company to achieve its goals and objectives.
In addition to that it adds value to the company and is beneficial to all
stakeholders in long term (Thomson, 2009)21.It has also been described as
process of supervising and controlling the firm in such a ways that its
management and shareholders interest remains the same (Solomon, 2007)22.
There has been a positive relationship between quality of the corporate
governance and benefits to the stakeholders
The firm with good corporate governance definitely brings benefits to the stake
holders and so far there has been a good positive relationship between quality of
corporate governance and benefits to the partners or the shareholders. It has
been found in the previous studies that the firm having good quality of corporate
governance greatly values the interests of the shareholders and is managed in
the way that firm has a potential of growth as well as the stakeholders are
financially benefited by the operation been carried out by the firm (Chen,
2014)23. Morrisons has been consistent in maintaining shareholders return up to
a decent level for the past three years and has corporate governance head
19

Ruddick,
G.,
2014.
Telegraph
Media
Group
Limited
2014.
[Online]
Available at: http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11034069/Asda-winning-supermarket-pricewar-as-sales-rise.html [Accessed 19 August 2014].
20

John Fernie, B. H. U. G. E. P. S. J. A., 2006. The Impact of Wal-Marts Entry into the German and UK Grocery Markets.
Agribusiness, 22(2), pp. 247-266.
21

Thomson, L. M., 2009. 2014 Bennett, Coleman & Co. Ltd. All rights reserved. [Online] Available at:
http://articles.economictimes.indiatimes.com/2009-01-18/news/28462497_1_corporate-governance-satyam-books-fraud-bysatyam-founder [Accessed 15 08 2014].
22

Solomon, J., 2007. Corporate Governance and Accountibility. 2nd ed. West Sussex: John Wiley & sons.

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members common for different departments which may prevents deviation of


objectives and goals of different departments and maintains better coordination
between them (Chen, 2014).
Agency theory talks about the conflicts that arises between managers and
stakeholders interests that is manager starts keeping his interest ahead of
stakeholders interest which in turn brings less benefit to stakeholders than they
may have achieved if this conflict wouldnt have raised. The studies done in past
suggests that if company poses good corporate governance it provides a better
and transparent view of financial and operational situation of the company which
helps the traders to reduce the chances of adverse selection. This grants more
liquidity to the stocks of the company with good corporate governance. There are
also evidences that if the governance quality increases a little, liquidity increases
significantly (Panu Prommin, 2014)24. Corporate governance contibutes an
important part in financing the company, it has an impact on the cost incurred in
equity or debt financing. The studies carried in past shows that if the company is
having good corporate governance that is when the company have transparency
in financial and operational activities they have lower cost of equity. However if
there is a block ownership within the company, meaning if there are a few major
shareholders in the company who can influence at the time of vote, the cost of
equity increases. These owners can be other companies, employees, manager or
the family business members

and so on.In contrary to it the cost of debt

decreses with the company having block owners, where the block owner may be
a bank or other corporations. (Tran, 2014)25
Agency problem arises due to a simple cause asymmetry of information
between manager and the shareholders. It is obvious that the manager knows
more about the firm than the shareholders as the shareholders are not the one
who are involved in the firms operation. To keep an eye on the manager that is
agency problem and reducing the asymmetry of information is to have a good
corporate governance. The studies conducted in the past indicates that there is a
positive relationship between the peformance of the firm and its effective
governance. The findings states that there is a positive relation between the
23

Chen, J.-h. l. a. L.-Y., 2014. The Valuation Effect of Corporate Governance on Stakeholder's Wealth. Internation Review of
Economic & Finance, 32, pp. 117-131.
24

Panu Prommin, S. J. P. J., 2014. The Effect of Corporate Governance on Stock Liquidity : The Case of Thailand. International
Review of Economic and Finance, 32, pp. 132-142.
25

Tran, D. H., 2014. Multiple corporate governance attributes and the cost of capital- Evidence from Germany. The British
Accounting Review, 46, pp. 179-197.

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board structure, stock ownership and the performance of the firm. (Brian
Conheady, 2014)26.
There are effective ways opted by almost all the companies used to shrink
agency problem and make the board more effective by comprising the board of
independent members (Aparna Bajpaia, 2014) 27. As in the case of Tesco PLC
(2013) the proportion of independent members in the board is more, they have 8
non-executive directors and two executive directors. Sainsbury (2013) also have
more non-executive members in board, they have 5 non-executive member in
comparison to 4 executive members. Where as (2012-2013) Morrisons board
comprises of 14 out of which there were only 4 non-executive members. There is
no information regarding board members of the ASDA in the public domain.

c). FINANCIAL RATIOS


Accounting reports are the major source of information to many users like
investors, shareholders, analysts and others and the tool used to extract and
interpret this information is called financial ratios. The best way to understand
financial statements (Balance sheet and Income statements) is to analyse
financial ratios, the financial ratios is defined as the relationship between
accounting information (Palmer, 1983)28. They provide information about
profitability, liquidity & solvency, risk and return of the analysed firm which
allows the user to know more about the company and develop a better
understanding of whether to invest in it or not. These ratios can be used to make
different comparisons like they can be used to know the financial status of
different firms in an industry, can also asses the performance of the firm over the
time.
Previous studies suggests that they can be used as a predictor of the companys
future financial status and can determine whether the business is going to
26

Brian Conheady, P. M. K. K. O. I. P., 2014. Board effectiveness and firm performance of Canadian listed. The British
Accounting Review, xxx, pp. 1-14.
27

Aparna Bajpaia, D. M. M., 2014. Empirical Study of Board and Corporate Governance Practices in Indian Corporate
Sector:Analysis of CG Practices of ITC and ONGC. Procedia Economics and Finance, 11, pp. 42-48.
28

Palmer, J. E., 1983. Financial Ratio Analysis. 3rd ed. Bloomington: American Institute of Certified Public Accountants.

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survive or is going to fail, this can be done several years prior to the failure. In
other words it is a good tool to differentiate between a failed and non-failed
company before they are actually going to fail (Moscalu Maricicaa, 2012)29.
Financial analysis can mainly be of two types; based on actual results rather than
forecast and based on forecast rather than actual results. Former type is used to
determine the financial performance of the ongoing projects while the later type
is used mainly for early warning of any failure, predict the financial health and so
on (Katarina Kocisova, 2014)30. Financial ratios are of various types but there are
five particular independent financial factors; liquidity, capital structure and
profitability, profit margin and growth, efficiency and asset structure that can
sense the changes in economical conditions of any country.
The output of ratio analysis can help the government to consider the changes
and take suitable step in order to keep the economic conditons stable. This result
can also be used by other industry rivals in order to know their financial state
within the industry (M. Emin O cala, 2005) 31. Financial Ratios plays important role
in the prediction of financial crisis, as found in previous study the leverage ratio
can give strong evidence of the banks in trouble and can help concerned
authorities to take action prior to collapse of the whole financial system.
However, market leverage ratio was found to be more suitable and effective than
book leverage ratio (Chen, 2013) 32. Financial forecast has remained centre of
attraction and a challenge at a global stage. Researches has been done in order
to develop a model using financial ratio which can predict the situation of
business crisis, models like SVM developed in China gives a accuracy of about
85% which is a strong evidence of the fact that financial ratio use in a model
gives a true picture of future of the industry (Fengyi Lina, 2011) 33. UK adopted
IFRS(International Financial Reporting Standards) in the year 2005 but wasnt
fully implied untill 2007. This transiton of UK GAAP to IFRS led to some changes
in key financial ratios like profitability and liquidity ratios increased by a great
margin where as P/E(price/earning) ratio decreased by a lower margin. There is
also an increase in operating income, net income, current liability and invested
29

Moscalu Maricicaa, V. G., 2012. Business Failure Risk Analysis using Financial Ratios. Procedia - Social and Behavioral
Sciences, 62, pp. 728-732.
30

Katarina Kocisova, M. M., 2014. Discriminant analysis as a tool for forecasting companys financial health. Procedia - Social
and Behavioral Sciences, 110, pp. 1148-1157.
31

M. Emin O cala, E. L. O. E. E. G. V., 2005. Industry financial ratiosapplication of factor analysis in Turkish construction
industry. Building and Environment, 42, pp. 385-392.
32

Chen, S., 2013. How do leverage ratios affect bank share performance during financial crises: The Japanese experience of
the late 1990s. Journal of The Japanese and International Economies, 30, pp. 1-18.
33

Fengyi Lina, D. L. E. C., 2011. Financial ratio selection for business crisis prediction. Expert Systems with Applications,
38(12), pp. 15094-15102.

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capital while decline in shareholders equity has been observed. This is very
important to the financial statement users (investors, shareholders , analyst) to
be informed that this transition results in increase which can be misleading if not
considered properly (Rainer Lueg, 2014)34.

METHODOLOGY
The purpose of annual reports published by the companies is to provide true and
fair view of valuable information in order to help the investors in their decision
making process. Following information can be found in an annual report:
Chairmans Review, Chief executive Review, Business Formation, Corporate
Governance, Financial Review, Financial Statements and Notes on Financial
Statements. These are all historical information which helps an investor to
calculate the returns they can achieve, whether to buy or sell the stocks, risk
related to the investment, key competitors and market risk. In this chapter the
Tesco, Sainsbury, ASDA and Morrisons annual reports will be compared on

34

Rainer Lueg, P. P. M. B., 2014. Does transition to IFRS substantially affect key financial ratios in shareholder-oriented common
law regimes? Evidence from the UK. Advances in Accounting, incorporating Advances in International Accounting, 30, pp. 241250.

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particular grounds and allow us to figure out the company with maximum
disclosure.
The data analysis section includes the revelation of all the four companies on the
basis of various sections. The first section of the study is related to the
commercial and financial information of the company that includes information
about their operations in different countries and continents. What is the business
area of the company? And what things are been provided by them in their annual
statements. Second section is of corporate governance which gives an overview
of the number of committee member and the details about the members and
function performed by them. Third section is investors information, share
ownership and market performance which give an impression about the stock
ownership and their performance.
Tesco, ASDA, Sainsbury and Morrisons have been opted for the study due to fact
that they are the top four companies in terms of market shares (BBC, 2014)35.
There are many other companies in the market like Waitrose, ALDI, LIDL which
are growing their market share in U.K every year but are far away from the top
four hence doesnt makes them suitable to be considered for the study and the
time limitation confined the study to be limited to these four companies.
The study has been done using the annual reports of Tesco, ASDA, Sainsbury and
Morrisons respectively and other sources of public informations such as news
articles, books and journals. In order to do competitive analysis Porters five
forces is used which is based on five sections namely bargaining power of buyer,
bargaining power of supplier, threat of new entrants, rivalry among firms and
threat of substitute. It is low complex model. Many other models like BCG matrix,
SWOT analysis, PEST analysis, Core competence analysis, Monte Carlo, Scenario
planning and other analysis would have done which may have given more
accurate results but due to the time limitation only Porters five forces has been
used for analysis. In addition to this ratio analysis has been conducted which
gives an overview about the companys financial condition and they have been
compared with the industry norms in order to have a clear picture of what is
going on in the firm. For obtaining industry norms a software name Thomson
Reuters Eikon is used and the software consists of information regarding the
firms market overview, performance, key ratios, share price, news, changes in
35

BBC, 2014. BBC 2014. [Online] Available at: http://www.bbc.co.uk/news/business-26936146 [Accessed 09 August 2014].

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high end positions, various charts and historical data. There are other
information available in the software which is more of the use to an analyst.
LIMITATIONS
Although methods of obtaining information are profound, there still might be
some adverse effect as discussed in the sections below:
1. Information Quality: As the information used in ratio analysis is
extracted from the companys financial statements. These statements are
taken from their annual reports which are a public source of information,
thus these reports are seen by all of the users (investors, creditors,
suppliers and analysts). So the company wont be willing to show if they
are having high debts or the actual problem which can ruin their image
and goodwill in the market. Thus the actual figures of profits, assets, debts
and liabilities, stock and so on may not be represented and may have
been manipulated by the company in order to give annual report a
lucrative gesture.
2. Based on Historical Data: The basic purpose served by the financial
ratios is they provide the financial information on the companys past
performances. They dont give any information about the present situation
of the company and in particular information from the past is not enough
to understand the present situation of the firm. There are many factors
which may have influenced the statements which are not at all available in
the statements or the annual reports.
Regardless of all the above limitation Ratio Analysis of the companies will
add some value to the decision making process of the investors
3. Disclosure: The information used in the disclosure and analysis of
corporate governance of the companys is limited as the data used has
been collected from public sources like annual reports and news articles.
Thus the information was limited.
4. Limitation of the Study: Due to the limitation of the time, in the study
secondary study has been done that is research done in the past has been
reviewed. However this study could have been conducted using primary
method which could have given more accurate result. Limited Data
availability, public source of information has been used thus no inside
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information or interaction with the employees or managers has been


made. Last but not the least limitation of knowledge of the author is the
major limitation in this study.
5. Limitation of financial statements: The sample companies of the retail
sector in the U.K. publish their financial statement on varying dates which
made the comparison difficult. ASDA publishes its financial statements on
31st December, Morrison on 3rd February, Tesco on 23rd February and
Sainsbury on 19th March
6.
This study will be conducted in order to advice the potential investors regarding
their investment in the companies. Analysis of the company will be done on
various factors and recommendation will be made which company is most
favourable one to be invested in.

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DATA ANALYSIS
In this chapter data was gathered about all the companies on the basis of four
main grounds Commercial and financial information about the companies,
Porters five forces (competitive analysis), Corporate governance and investors
and shareholders information. The data collected was then processed in order to
answer the question posted on the objective section.
a). Commercial and Financial Information:
Tesco Plc:
Tesco use to operate in three continents (Europe, Asia, and America) which
comprised of 14 countries before its withdrawal of business from Japan and
America. Tesco closed 199 shops run by Tesco under the name Fresh and Easy
were closed reported that these shops failed to make profit although there was
an investment of 1.2bn. (Peston, 2013)36
Tesco now operates in 12 countries (United Kingdom, India, South Korea,
Malaysia, Thailand, Czech Republic, Hungary, Ireland, Poland, Slovakia, China
and Turkey) (Tesco, 2014)37. Tesco business consists of groceries, clothing,
electrical, financial services and home product. They provide detailed disclosure
about their group as well as individual continent sales, investments, services,
definition and performance of each sector of business including customer loyalty
and supplier view point in their annual report.
J Sainsbury:
Sainsbury used to operate a chain in U.S. and Egypt as well but due to the hard
times faced by its core domestic businesses they pulled their hands out of it
36

Peston, R., 2013. BBC 2014. [Online] Available at: http://www.bbc.co.uk/news/business-22179255 [Accessed 6 August
2014].
37

Tesco, 2014. Tesco 2014. [Online] Available at: http://www.tescoplc.com/index.asp?pageid=372 [Accessed 06 August
2014].

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(Hall, 2010)38. Their business comprises of Grocery, Merchandise and clothing,


Farmer Development, Pharmacy, eBooks, Gas and Energy. They provide detailed
disclosure of sales, about their expansions, new ideas been considered, details
about all their products which includes foods, investments made in farmers
development, clothing and merchandise, channels and services in their annual
report.

Morrisons:
Morrisons operated throughout the U.K. and has factories based in Hong Kong,
china and many others East Asian countries whose core purpose is to supply
range of goods (Morrison, 2014)39. Their business consists of groceries, fresh
food, own brand food products, Kidd care, Morrisons cellar-selling wine from all
around the world and clothings. They provide detailed disclosure of sales,
investments,

their

achievements,

customer

understanding,

Performance,

strengthening of their own Brands, financial information in their Annual Report.


ASDA:
Due to non-availability of information the companys commercial and financial
information cannot be analysed.
b). PORTERS FIVE FORCES:
Porters Five Forces was designed in 1979 with the motive to analyse outside
factors in order to provide information about the competitiveness within the
industry and inside factors to analyse the approach of the company to
compete( to serve and earn profit).
These can be analysed by the composition of the following factors (Bargaining
Power of Supplier, Bargaining Power of Buyer, Threat of New Entrants, Threat of
Substitute and Rivalry among Firms).
BARGAINING POWER OF THE BUYERS:
38

Hall,
J.,
2010.
Telegraph
Media
Group
Limited
2014
.
[Online]
Available
http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/8124540/Sainsburys-eyes-expansion-in-foreignmarkets.html [Accessed 07 August 2014].
39

at:

Morrison, 2014. Wm Morrison Supermarkets plc 2014. [Online] Available at: http://www.morrisons-corporate.com/Aboutus/HK/ [Accessed 07 August 2014].

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Customers are the base of grocery industry; they can influence the price up to a
great extent say if the price of any products with fairly same quality is more in
Tesco they will move to another retailer with lower price. Especially after the
financial crisis the customers have been more prices conscious and the online
shopping option has much more impact on pricing as it gives the option of
selecting and comparing various brand products simultaneously, so the buyer
can switch to a different brand with no cost.
BARGAINING POWER OF SUPPLIERS:
Suppliers do have enough power to regulate the market as they are the heart of
supply chain. They use their power by making retailers pay a certain amount for
the goods as they are the one to supply but they are being dictated by the
supermarkets and hypermarkets like Tesco as they can negotiate better prices
than individual chains. If the supplier wont agree with such firms they are left
with no retailers to buy their products.
THREAT OF NEW ENTRANTS:
U.Ks grocery market has always been a spot for competition, global rivalry,
innovations, alterations in strategy and price wars. Its difficult for a new firm to
enter the market as it is been dominated by the main players like Tesco, ASDA,
Sainsbury and Morrisons. These firms hold their position strong and make
survival of the new firms difficult other factors affecting entries are a high fixed
charge which comes with the industry and sophisticated supply chains of the
existing firms. Above all its a market of investors and as long as the firms have
good financial support they can establish themselves as seen by the newly
emerged firms like German ALDI, LIDL and Britain based Waitrose snatching
market shares from the top players. (BBC, 2014)

40

THREAT OF SUBSTITUTES:
They are not the products which actually replaces the existing ones but they are
emerged with help of new technology which helps to reduce the cost of the
product thus can be sold at a lower price than their competitors which forces
companies to keep the profit down . As there is no charge for customers for
switching to another product within this industry its easy to change mind for
customers. Grocery market offers vast range of products thus switching of
40

BBC, 2014. BBC. [Online] Available at: http://www.bbc.co.uk/news/business-26936146 [Accessed 9 August 2014].

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customers from one product to another couldnt be stopped but customers can
be retained by a consistent high quality and enhanced services.
RIVALRY AMONG FIRMS:
Intensity of the competition in the grocery market is really high due to aim of the
companies to capture more market and customer shares. This highly competitive
environment of the grocery market has forced Top market dominators namely
Tesco, ASDA, Sainsbury and Morrisons to amplify their level of development,
innovation and services. In response to these situation, competing the retailers in
the U.K. has moved towards building diverse marketing strategies with the focus
on competitive pricing , enhanced services like online shopping, home deliveries.
Competition to dominate the industry had been really strong and is still
continues to be.

c). CORPORATE GOVERNANCE


Tesco PLC:
We make what matters better; together as the core purpose of Tesco and they
engage employee, community to be served and keeps aim of We treat
everyone as we like to be treated. Corporate governance consists of Chairman,
Tesco PLC Board (11 members), Executive Committee (17 members). The board
comprises

of

Nomination

committee,

Audit

Committee,

Remuneration

Committee, Corporate Responsibility Committee. Whereas the

Executive

committee comprises of Commercial committee, compliance committee, Digital


Retailing Committee, People Matters Group, Property Strategy Committee, Social
Responsibility Committee, Technology Committee.
They gives details about number of meeting held in every committee with
attendance of the members and details of number of members and names of the
members

of

each

committee.

Internal

and

external

auditor

of

Pwc

(PricewaterhouseCoopers) company and gives the independent report on their


statement. They give details about salaries, bonuses, benefits short term, gains
on share options and and shares options held and not exercised by the director
and long term performance of share plan, Executive incentive Plan. (Tesco, Tesco
Annual Report, 2013)41
41

Tesco, 2013. Tesco Annual Report, London: Tesco.

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J Sainsbury:
Its corporate governance consists of 9 board of directors, head of different
committees and 11 members in operating board. They provide detail of board
tenure period of non-executive staff, percentage of male and female in board,
operating board, senior executive position and company also includes details like
when was last board evaluated. They provide details of each committee head
members and the number of meetings held and attended by the directors. In
addition to this they also provide information on external and internal auditors,
risk management of different divisions, other disclosure like ordinary shares,
dividends paid, major interest in shares, contracts and policies, directors
remuneration, long term incentive plans as well.
Morrisons:
Its corporate governance comprises of 7 boards of directors who are members of
different committee like Nominations, Remuneration, Audit and Corporate
compliance and responsibility, most of the directors are member of more than
one committee; and Management board having 9 members. They also provide
information about the meetings held throughout the year including the
attendance of the members, shareholder relation, pay structure of the executive
directors, pay performance of the company, Unaudited and Audited information,
Awarded shares, Annual bonus, changes of directors, contract of directors and
other disclosures which says company is under no arrangement which will result
in termination or change of control including that employee have no share
scheme related to rights of control of the company.
ASDA:
No information regarding corporate governance was found.
d). INVESTORS INFORMATION AND SHARE OWNERSHIP:
Tesco Plc:
It gives share incentives not only to the executive class but management team
by participating in Performance Share Plan; they get Tesco shares as a part of
their bonus with a differed period of 2-3 years. As stated in Tesco values all the
colleagues not just executive or management hold shares with the help of all-

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employee scheme and Save as You Earn scheme over 200,000 colleagues hold
shares.
Sainsbury:
The major share holders are Qatar holding LLC owing 29.99% shares. Lord
Sainsbury of holds 4.99% so we can see major shareholders of the company are
institutional and large shareholders (Sainsbury, 2014)42. Ordinary shares of
Sainsbury is listed in London Stock Exchange and in form of ADR (American
Depository Receipts) and one ADR equals Four shares, they are not listed on
stock exchange but are exchanged over the counter. (Sainsbury, 2014)43
Morrisons:
Majority of shares falls under private shareholders as they account for 85.94% of
the total shares. Nominee Company stands on the second position with 12.56%
shareholdings. Other shareholders are Limited companies, Deceased Accounts,
Bank and Bank nominees, investment trusts, Pension funds, family interests,
Insurance Company and other Institutions with 0.43, 0.65, 0.16, 0.05, 0.05, .01, .
01 and 0.14 respectively. (Morrison's, 2013)44
ASDA:
No information about the Shareholders although its a Wal-Mart own subsidy.
e). FINANCIAL RATIOS:
The easiest way to examine the financial health of any firm is by looking at its
ratios. They can be expressed in various forms like percentage, fraction,
proportion, comparison and many more. These ratios are used by various users
like shareholders, lenders, government, customer, supplier, employees and
competitors as well. Ratios are not only about calculations; numbers alone cant
illustrate the financial situation of the company so they require a proper
interpretation and explanation to describe about the figures obtained in a
manner which can be understood by the end users.

42

Sainsbury, 2014. J Sainsbury plc 2014. [Online] Available at: http://www.j-sainsbury.co.uk/investor-centre/shareholder-centre/


[Accessed 12 August 2014].
43

Sainsbury, 2014. J Sainsbury plc. [Online] Available at: http://www.j-sainsbury.co.uk/investor-centre/share-price/majorshareholders/ [Accessed 11 August 2014].
44

Morrison's, 2013. Annual Report, London: Morrison's.

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They should be compared with some pre set benchmarks in order to have a
meaningful ratio as they dont have any relevance if they are not compared with
some set benchmark. They can be compared within the firm over different time
periods which can be used to see the performance of the company over that
particular time period. The ratio analysis can also be used as a guideline to know
the performance of different firms in the same industry while keeping various
factors in mind like economic conditions, political condition, if international
comparison is made currency need to be considered and so on. Last but not the
least they may also be used to check predetermined goals by the management.
Ratios can be categorised in many ways but for this study they have been
divided into four groups-Performance, Working Capital, Financial Status and
Investment Ratios.
PERFORMANCE RATIOS:
It represents the performance of the company that is how well the company is
performing and it is found by the ratios like-ROCE, Sales or Operating Margin,
Asset Turnover and Employee ratios.
1) ROCE (Return on capital employed) - it is also called Return on Net
Assets (RONA) and Key Ratio, it gives information regarding the
percentage of return on long term capital employed in business.
(Whittington, 2014)45.
For instance if the ratio comes out to be 0.4; it means that firm is generating 40
pence of profit on per pounds invested, it is a long-term profitability ratio. This
helps the users to know about how the management is performing with the long
term funds engaged within the firm. The higher ratio is desirable as it shows
higher profit per pound; however there is no individual benchmark as it varies
from industry to industry. This study used Thomson Reuters for the industry
norms and there is no information about this particular ratio.
ROCE
Tesco
ASDA
Sainsbur
y
45

2011
13.12%
9.22%

2012
12.82%
7.92%

2013
7.11%

10.06%

9.50%

9.26%

Whittington M.(2014). Financial Analysis and Markets, BU5574-75, Lecture Slides, University of Aberdeen,(2014).

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Morrison
s

12.45%

12.88%

11.58%

There is a downward trend in Return on capital employed in all the above


mentioned companies however maximum fall of the ROCE is seen in Tesco that is
about 6% from 2011 to 2013, this may be due to increase in cost of sales by a
greater amount than sales growth. Highest ROCE is of Morrisons and is having
one of the most consistent ROCE among these companies as it had a downfall of
only 1% from 2011 to 2013. Sainsbury also has consistent ROCE with a downfall
of about 1 % from 2011 to 2013. Due to insufficient data ASDAs ROCE of 2013
has not been found but there was a descending trend in 2012 of 1.42%.

2) SALES OR OPERATING MARGIN- it measure how many pence in each


pound sales is profit. It allows users to overview the management capacity
to maintain expenses and to generate profit. Higher ratio indicates the
companys ability to earn more profit margins for each pound of sales.
There are different benchmarks of sales margin for different industries.
sales
margin

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2011
6.25%
2.14%

2012
6.17%
1.90%

2013
3.38%

y
Morrison

4.03%

3.92%

3.81%

's

5.49%

5.51%

5.24%

Tesco
ASDA
Sainsbur

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Masters Dissertation in Msc (Econ) in Finance & Investment Management

Similar to ROCE, all the companies shows a downtrend once again, Sales
margin of Tesco has declined dramatically from 2012 to 2013 by 3% which
can be justified due the increase cost of sales, may be the company has
cut down product prices due to which its gross profit has also decreased
when compared to 2012.While ASDA remained at the bottom in the list for
the year 2012 (No data available for 2013). Sainsbury has the consistent
Sales margin ratio with a change of only .2% from 2011 to 2013.
Morrisons with 5.24% have the highest sales margin for the year 2013.

3) ASSETS TURNOVER- it measures how many pounds of sales is generated


for each pound invested in the business in the year. It is expressed in
multiples and shows efficiency of the firm to generate revenue using its
assets. It depends on industry how high the multiple would be? Capital
concentrated industries usually have lower multiple when compared to the
industry using high debts to support the business. Retail sector generally
have high multiples.

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Even after a decline from the year 2011 ASDA is at top of the list for the year
2012 far ahead of any other among the above mentioned companies. (No data
for 2013). Tesco and Morrisons shows upward trend from 2011 to 2013 however
Morrisons has better sales generated for all the mentioned years. Sainsbury has
a downward trend however it has not declined by a considerable amount and
stands second in the list.

Asset turnover

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2011
2.0978

2012
2.0758

2013
2.1050

Tesco

86
36.417

1
30.113

82

ASDA

28
5.3983

38
5.2419

5.0647

Sainsbury

12
3.1051

47
3.3509

69
3.5619

Morrison's

44

77

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WORKING CAPITAL
This is one of the most prominent areas of ratio analysis which reflects the
management performance and plays a vital role in companys financial health.
Many firms go bankrupt due to poor working capital management.
1) INVENTORY RATIO- It measure the average number of days the
inventory is been held. They can be expresed in various time
periods like in days, weeks and so on for days we multiply the ratio
by 365 while for weeks we take 52 as a multiple. This tells us about
the inventory turnover in the year or we can say it tell us for what
time does the stock stays with company. It includes raw material
and work in progress as well. It gives the information of the
inventory management within the business and differs from
industry to industry, for retail its 34 days.
Inventory
Ratio
Tesco
ASDA
Sainsbury
Morrison's

2011
21
17
15
15

2012
22
18
16
17

2013
22
16
17

All the companies above shows an upward trend for inventory ratios Tesco is at
the top with 22 days which means that Tesco holds its inventory longest while
Morisons and Sainsbury hold the inventories for about 17 and 16 days
respectively. However ASDA in 2012 holds its inventory for 18 days (no data for
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2013). There in not much difference in the time these companies convert
inventory into sales despite all this we can say that Sainsbury and Morrisons are
capable of better converting their inventory into sales than Tesco.

2) Debtor Ratio- This ratio provides the information about the time
taken by debtors to settle their bills. It is important for the firm to
have lower debtor ratios than creditor ratio to have a well managed
financial condition. If the debtor ratio is greater than the creditor
ratio company can be in serious financial trouble or specifically
trouble in cash flow as it is a crucial part of cash flow. This is
important for creditors, banks and other investors as it concerns
cash flow of the firm.

Debtor
Ratio
2011
8
45

2012
10
23

2013
4

y
Morrison

's

Tesco
ASDA
Sainsbur
Tesco is at the
dramatic change

top here with a


to

just

days

from 10 days from 2012 to 2013 which is a good sign as it gets it money back
sooner. However Sainsbury and Morrisons are nearly the same with 5 and 6 days
respectively. Even after dropping its debtor days from 49 to 23 ASDA is nowhere
around the other three. We can portrait a better picture after analysing Creditors
Ratio.
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3) CREDITOR RATIO- It gives information on the time taken by the


company to pay its supplier/creditors. This must be greater than the
debtors ratio so that company could easily pay off creditors from
the money they receive from debtors and maintain their cash flow.

creditor
ratio
2011

2012

2013

Tesco

68

69

67

ASDA
Sainsbur

69

47

y
Morrison

48

47

45

's

46

45

46

Tesco is most successful in maintaining longer creditor period its far better than
all others. They have almost 60 days of difference between debtor and creditor
days which is a very good sign as in a sense its a free source of finance for the
company. But at the same time if the time period is too long as it can harm the
goodwill of the company with suppliers. Sainsbury and Morrisons have
32 | P a g e

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Masters Dissertation in Msc (Econ) in Finance & Investment Management

maintained their consistency in creditors ratio for all the three years. However
ASDA has decreased it creditor ratio by 12 days but as we have seen they also
have reduced their debtors days as well but is still far away from all other
competitors.

FINANCIAL STATUS (LIQUIDITY AND SOLVENCY):


1) Current Ratio- its a liquidity ratio. It is the ratio which gives us
information about companys ability to pay its current liabilities using its
current assets. It is better to have a good current ratio but it depends on
industry like a food retailer will have average current ratio of 0.3 and for
retail its .82

Current
ratio

33 | P a g e

2011
0.65467

2012
0.64405

2013
0.66647

Tesco

3
0.92654

6
1.01692

ASDA

5
0.58055

4
0.64795

0.61027

Sainsbury

7
0.64141

9
0.57403

3
0.57497

Morrison's

Role Of Retail Sector (Grocery) In Ones Portfolio


Masters Dissertation in Msc (Econ) in Finance & Investment Management

ASDA was at the top in the year 2012 having a ratio of 1 which means it has
sufficient current assets to cover its current liability however more concern is
about how fast are these assets convertible to cash. Morrisons it at the bottom
of the list with a ratio of 0.57. However in 2013 Tesco is at top with .66 followed
by Sainsbury with a ratio of 0.61.

2) ACID/QUICK RATIO- It is also a liquidity ratio which indicates the


companys ability to repay immediate commitments using cash and near
cash. It excludes inventory in order to show the immediate solvency of the
company (Elliot, 2012)46

Acid Ratio
2011

2012

2013

Tesco

0.476341

0.456465

0.466289

ASDA

0.681288

0.632645

Sainsbury

0.304555

0.348852

0.293419

Morrisons

0.33557

0.244464

0.24036

All the companies except Tesco has a great part of inventory in their current
asset, which is considered to be most illiquid asset. Tesco still is at top in the
chart (2013) with a ratio of .466 which has been constantly maintained for all the
46

Elliot, B. E. a. J., 2012. Financial Accounting and Reporting. 15th ed. London: Pearson Education.

34 | P a g e

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Masters Dissertation in Msc (Econ) in Finance & Investment Management

three year where as Sainsbury and ASDA shows a downward trend. Morrisons is
at the bottom although it has not changed much from 2012. Industry norms are .
53

Solvency ratio comprises of interest cover ratio and Gearing ratio however the
former one is not applicable in this scenario due to lack of information.

3) GEARING- it is a solvency ratio which is expressed in multiple. Higher


gearing ratio means that firm has high debts on it which is in most cases
undesirable. If a company has got low gearing ratio it can borrow money
easily as lower ratio indicates assets in access of debts. Above all it
depends on industry to examine level of gearing for retail it is 0.58.
Gearing

Tesco

2011
0.9548

2012
0.9349

2013
0.9904

24
0.9731

83
0.8217

92

ASDA
83
Sainsbur 0.6172

57

y
Morrison

93
0.3854

0.6506
0.6368

51
0.9772

's

89

36

73

0.6046

Best among these are Sainsbury while the worst is Tesco however as the ratio is
still below 1 it means that company is having more assets than debts. So its not
a worrying situation but they cant borrow money easily as they have achieved
35 | P a g e

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Masters Dissertation in Msc (Econ) in Finance & Investment Management

high gearing. As analysed Morrisons is gearing at a much faster rate than any
other company in the list which may be due to its expansions in recent year
however its a worrying situation as a further increase can lead to serious
Solvency problems for the company.

SHAREHOLDERS RATIO:

This is amongst most important ratio for potential

investors particularly Shareholders looking for return on their investment.


Shareholders can be subdivided in two groups one who looks for dividends,
share price and risk associated with the investment while the second class look
on stocks with income growth and other capital growing stocks which can be
determined by the ratios like Return on equity and Earning Per shares.
1) RETURN ON EQUITY (ROE) - it is also known as Return on shareholders
fund (ROSF). It gives information about return which investors gets on the
money they have invested in the company. the return of shareholders
funds ratio compares the amount of profit for the period available to the
owners with the owners average stake in the business during the same
period. (Peter Atrill, 2011)47
ROE
2011
6.0429

2012
4.3493

2013
0.1102

86
0.1001

04
0.0912

94

ASDA
99
Sainsbur 0.4481

11
0.3777

0.3329

y
Morrison

79
0.2217

64
0.2421

72
0.2270

's

54

05

18

Tesco

47

Peter Atrill, E. M., 2011. Accounting and Finance for Non-specialist. 7th ed. London: Financial Times Prentice Hall.

36 | P a g e

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Masters Dissertation in Msc (Econ) in Finance & Investment Management

Sainsbury with 0.33 is at the top of the chart but is showing a downward trend.
However all the companies follow the same trend worst is Tesco as it has
dropped from 6.04 in 2011 to 0.11 in 2013. Although Morrisons is below
Sainsbury but is consitent in all the three year which makes it best among all.
While ASDA is far behind in this ratio from all of its competitors.

2) EARNING PER SHARE-

it tells us about the profit earned by each share

in pence, it a mandatory to be mentioned in a published account.


Indicates the amount of profit after tax, interest and preferred dividends
which has been earned for each shareholder (Elliot, 2012)48
EPS
Tesco
ASDA
Sainsbur
y
Morrison

2011
34.43

2012
39.35

2013
19.07

34.4

32

32.6

's
23.93
26.68
26.65
Due to Limitation of information there is no data for ASDA. Sainsbury once again
tops the list with 32.6 in 2013 however it shows a decline from 34.4 in 2011 to
48

Elliot, B. E. a. J., 2012. Financial Accounting and Reporting. 15th ed. London: Pearson Education.

37 | P a g e

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Masters Dissertation in Msc (Econ) in Finance & Investment Management

32.6 in 2013.Once again Tesco has worst ratio dropped a lot from 34.43 in 2011
to 19.07 in 2013. Morrisons shows upward trend from 23.93 in 2011 to 26.65 in
2013 and has remained constant over these two years.

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Masters Dissertation in Msc (Econ) in Finance & Investment Management

CONCLUSION AND RECOMMENDATION


Considering the top four retail companies in the UK based on market share
ownership, my objective was to recommend potential investors to invest in the
companies having best prospects for them. This study was based on eminence of
disclosure in their annual report, competitive analysis using Porters five forces
and Ratio analysis.
The disclosure level of each company was based on various factors legal system,
firm size, culture, corporate financing, economic system, political system, history
and profession. However, according to numerous studies conducted ASDA was
the worst amongst all in disclosure of the information as it doesnt even publish
its annual report in UK. Rest all the companies revealed the information almost
equally.
The study remained focused on some particular section which seems to be
relevant to the potential investors to make decision regarding their investment.
Those were commercial and financial information of the company, corporate
governance, performance and share ownership. In those areas the worst was
ASDA as it doesnt provides any information about its operations, governance or
share ownership however Wal-Mart is running ASDA in UK. Tesco stands first in all
those sections with the details about all its operations worldwide as well as it
provides segmented information about the operation on basis of each continent
and each country as well. While disclosures in Sainsbury and Morrisons were
almost equal, this makes me bias if I opt for one over other. While if we look deep
into the governance committee the least number of non-executive members
were in Morrisons 4 out of 14 while in the case of Tesco and Sainsbury the
number of non-executive members were more than the executive members 8 out
of 10 and 5 out of 9 respectively. However there was no information about the
governance committee of ASDA.
In ratio analysis on Performance, Working Capital, Financial Status and
Investment Ratios, Morrisons and Tesco were at the top followed by Sainsbury
and ASDA. Interest expenses and investors ratio like price/Earnings and Dividend

39 | P a g e

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Masters Dissertation in Msc (Econ) in Finance & Investment Management

yield has not been calculated since the information required for the calculations
was not available of all the companies.
From the above analysis done on the basis of mentioned fact I recommend the
potential investor to invest in Morrisons as they are the one rewarding their
investor with consistent returns. As observed in the Performance ratios; ROCE
Morrisons stands at the top of the list ensuring the performance of management
with the employed funds. Sales margin and Asset turnover Morrisons is the best
among all it has got highest sales margin of 5% indicating more profit thus more
benefits. It is at the top of the list in 2013 in asset turnover as well, which makes
it first choice on the basis of performance ratio. As we move to the next category
of ratios which is Working capital it has got enough days in hand to pay its
creditors as it has got debtor days less than the creditor day, which makes it
suitable to be the first choice. However Tesco have the most days to use that
free finance due the long gap between the money in and the money out but
since Morrisons has witnessed better performance so the first recommendation
will be Morrisons. It can be seen in shareholders ratios they are the one which
dont show a downward trend while Tesco is the one with most declining trend
but is still giving a better return when three years time period is considered.
There is high gearing ratio for Morrisons but it is due the expansion plans
initiated in the year 2011 which shouldnt be the reason of concern for investors.
Third choice will be Sainsbury but as the retail industry is expanding on daily
basis and future is unseen so the investor should not take risk of investing in a
particular firm or industry. Investors should try to diversify their investment in
order to reduce risk, so they should include share of various company from
different industry in their portfolio.
From this study it is clear that level of disclosure is not the key to good
performance. In fact there are companies who are more transparent to hide their
inabilities to perform well. However companys like ASDA should be instructed to
publish their Annual report as it is among the top four retailers in UK. There is a
great difficulty in obtaining Harmonisation as there are various factors that
manipulate level of disclosure and exist permanently, if various organisation of
different country form a single organisation which could look upon the various
firms and provide a uniform set of information. The forming committee may
include departments like Accounting, Securities and analysts, Legal and
regulatory. Although the study has been done about the four companies,
40 | P a g e

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Masters Dissertation in Msc (Econ) in Finance & Investment Management

research can be done on various other emerging companies like Waitrose, ALDI,
LIDL and various other looking upon their level of disclosure and ratio analysis ,
other analysis too as time may not be constraint for them. Above all an investor
should analyse the companys internal and external factors as well as its
operations in all the countries before investing in any company.

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Peston, R., 2013. BBC 2014. [Online]


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APPENDIX 1

Income statements (31 December)


2011(m)
2012(m)
2013(m)
Turnover(sales)
216610
228139 ###
Operating cost(cost
of sales)
46 | P a g e

211977

223800 ###

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Masters Dissertation in Msc (Econ) in Finance & Investment Management

operating profit
Interest receivables

4633

4339 ###

and similar income


interest payable and

1611

1754 ###

similar charges
other financial

1204

1359 ###

29

10.1 ###

income
Profit on ordinary
activity before tax
Tax

5069
1388

4835 ##
1040 ##

3681

3795 ##

Profit for financial


year

APPENDIX 2

2011(m)
Fixed Assets
intangible assets
tangible fixed assets
Investments
Total Fixed assets
current assets
Stocks
Debtors
cash at bank on hand
Total current assets
creditors(within 1 year)
47 | P a g e

Balance sheet (31 December.)


2012(m)
2013(m)

222
45446
7522
53190

206
46387
7697
54290

9813
26629
630
37072

11058
14551
3654
29263

Role Of Retail Sector (Grocery) In Ones Portfolio


Masters Dissertation in Msc (Econ) in Finance & Investment Management

trade and other creditors


Borrowings

40010
1

28775
1

-2939

487

50251

54777

45

42

net assets

46240

51110

capital and reservers


share capital
share premium account
revalutation reserve
profit and loss reserve

5948
9503
1105
29684

7576
9503
1201
32830

total shareholders fund

46240

51110

net current assets/


(liabilities)
total assets less current
liabilities
creditors(more than 1
year)

Turnover(sales)
Operating cost(cost of
sales)

Income statements (31 dec)


2012(m)
2013(m)
228139

2011(m)
216610
211977

223800

4633

4339

1611

1754

1204
29

1359
10.1

Profit on ordinary activity


before tax
Tax

5069
1388

4835
1040

Profit for financial year

3681

3795

operating profit
Interest receivables and
similar income
interest payable and similar
charges
other financial income

APPENDIX- 3

2011(

2012(

2013(

m)

m)

m)

Turnov
er
cost of sales
gross profit
operating
48 | P a g e

16479
15331
1148
904

17663
16446
1217
973

18116
16910
1206
949

Role Of Retail Sector (Grocery) In Ones Portfolio


Masters Dissertation in Msc (Econ) in Finance & Investment Management

profit(PBIT)
profit before tax
Tax
profit after tax
Earnings per
share
Basic
Diluted

874
242
632

947
257
690

879
232
647

23.93
23.43

26.68
26.03

26.65
26.57

APPENDIX 4
Balance sheet (3feb)
2011(m)

2012(m)

2013(m)

Assets
Noncurrent Assets
goodwill and intangible assets
PP&E
investment property
investment
other financial assets
Total Noncurrent Assets

184

303

415

7557

7943

8616

229

259

123

38

31

31

8011

8537

#
9185

638

759

781

current Assets
Stock
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Masters Dissertation in Msc (Econ) in Finance & Investment Management

Debtors

268

other financial assets


cash and cash equivalents
Total current Assets

320

291

228

241

265

1338

1322

1342

1914

2025

2130

115

55

Liabilities
current liabilities
Creditors
other financial liabilities
current tax liabilities
Total current liabilities

172

163

149

2086

2303

2334

1052

1600

2396

499

464

471

11

20

Noncurrent liabilities
other financial liabilities
deferred tax liabilities
net pension liabilities

##

Provisions

92

84

76

Total Assets

1643

2159

2963

Net assets

5420

5397

5230

called up shares

266

253

235

share premium

107

107

107

19

37

merger reserve

2578

2578

2578

retained earnings and hedging earning

2463

2440

2273

Total Equity

5420

5397

5230

Shareholder's Equity

capital redemption reserve

APPENDIX -5
Income
statement(19march)
2011(
Revenue
cost of sales
gross profit
administrative expense
other income
operating profit
finance income
finance cost
share of post tax profits from
joint ventures
profit before tax
profit for financial period
Earning per share
Basic
50 | P a g e

2012(

2013(

m)
m)
m)
21102
22294
23303
19942
21083
22026
1160
1211
1277
417
419
457
108
82
67
851
874
887
32
35
19
116
138
142
60
827
640

28
799
598

24
788
614

34.4

32

32.6

Role Of Retail Sector (Grocery) In Ones Portfolio


Masters Dissertation in Msc (Econ) in Finance & Investment Management

Diluted

Appendix 6

51 | P a g e

33.8

31.5

32.1

Role Of Retail Sector (Grocery) In Ones Portfolio


Masters Dissertation in Msc (Econ) in Finance & Investment Management

Balance sheet(19 march)


2011(m)

2012(m)

2013(m)

Noncurrent assets
PP&E
intangible assets
Investment in subsidiaries

8784

9329

9804

151

160

171

##

##

##

Investment in joint venture

502

566

532

Available for sale financial assets

176

178

189

36

38

38

other receivables
derivative financial instruments
deferred income tax

29
##

Total noncurrent assets

37
##

47
##

9678

10308

10781

Inventories

812

938

987

Trade and other receivables

343

286

306

Current Asset

derivative financial instruments

52

69

91

501

739

517

1708

2032

1901

11399

12340

12695

2597

2740

2726

Borrowings

74

150

165

derivative financial instruments

59

88

65

201

149

148

11

11

Total current liabilities

2942

3136

3115

Net current Liabilities

1221

1104

1201

120

137

173

2339

2617

2617

172

286

247

62

63

39

cash and cash equivalents


Total current Assets
Total Assets
Current Liabilities
trade and other payables

tax payables
Provisions

Noncurrent Liabilities
other payables
Borrowings
derivative financial instruments
deferred income tax liabilities
Provisions
retirement benefits obligations

340

471

766

Total noncurrent liabilities

3033

3575

3846

Net Assets

5424

5629

5734

535

538

541

1048

1061

1075

680

680

680

Equity
called up share capital
share premium account
capital redemption reserves
other reserves

213

365

623

retained earnings

3374

3715

4060

Total Equity

5424

5629

5734

52 | P a g e

Role Of Retail Sector (Grocery) In Ones Portfolio


Masters Dissertation in Msc (Econ) in Finance & Investment Management

APPENDIX 7
Income statement Tesco Plc (February)
2011(m)

2012(

2013(

m)

m)

Revenue(sales
excluding VAT)
cost of sales
Gross Profit
Operating Profit
Profit before Tax
Taxation
Profit for the year

60931
55871
5060
3811
3535
864
2671

64539
59278
5261
3985
3835
879
2814

64826
60737
4089
2188
1960
574
120

APPENDIX 8
2011(m)
Noncurrent Assets

53 | P a g e

2012(m)

2013(m)

Role Of Retail Sector (Grocery) In Ones Portfolio


Masters Dissertation in Msc (Econ) in Finance & Investment Management

goodwill and other intangible assets


PP&E
investment property

4338

4618

4362

24398

25710

24870

1863

1991

2001

investment in joint venture and associates

316

423

494

other investments

938

1526

818

Loan and advances to customers

2127

1901

2465

derivatives financial instruments

1139

1726

1965

48

23

58

35167

37918

37033

Inventories

3162

3598

3744

Trade and other receivables

2314

2657

2525

loan and advances to customers

2514

2502

deferred tax assets


Total noncurrent Assets
Current Assets

404

derivatives financial instruments

148

41

10

1022

1243

522

Current tax Assets


short-term investments
Cash and cash equivalents

###

3094

loans and advances to bank and other financial assets

###
58

1870

2305

2512

11608

12353

12465

10484

11234

11094

1386

1838

766

255

128

121

5110

5465

6015

432

416

519

64

99

188

17731

19180

18703

5862

6386

5889

9689

9911

10068

600

688

759

post employment benefit obligations

1356

1872

2378

deferred tax liabilities

1094

1160

1006

113

100

272

Total noncurrent liabilities

16623

17801

14483

net assets

16623

17801

16661

402

402

403

40

245

685

4896

4964

5020

retained earning

11197

12164

10535

Total equity

16623

17801

16661

Total current Assets


Current liabilities
trade and other payables
Financial Liabilities
Borrowing
derivative financial instruments and other liabilities
customer deposit and deposits by bank
current tax liabilities
Provisions
Total current liabilities
Net current liabilities
Noncurrent Liabilities
Financial Liabilities
Borrowing
derivative financial instruments and other liabilities

Provisions

Equity
share capital
other reserves
share premium account

54 | P a g e