Tesco V Walmart

BA. Honours Business Management BUSINESS MATTERS Business Issues: Tesco v Walmart TABLE OF CONTENTS Page 1. Introduction 3 2. Business Issues in the Retail Sector 3 3. Financial Health 5 3. 1 Tesco 5 3. 2 Walmart 7 4. Cultural Style & Leadership 9 4. 1 Tesco 9 4. 2 Walmart 10 4. 3 Ethical & Environmental Issues 12 5. Conclusions 12 6. References 13 7. Bibliography 14 1. Introduction In 2009 the grocery market in the United Kingdom was worth 146. 3 billion pounds, an increase of 4. 8% on the previous year [see Figure 1].Groceries account for fifty-two pence of every pound in retail spending [Newbold, 2010, online]. Figure 1: UK Grocery Market Performance 1998 – 2009 Source: IGD Research 2009 This report looks at contemporary business issues in the grocery sector and then compares the financial health, leadership, cultural style, ethical initiatives and environmental values of two of the biggest business names in the industry – Tesco and Walmart. 2. Business Issue sin the Retail Sector At the expense of small, specialist shops, supermarkets increasingly manage the supply chain from farm to shelf.Technological improvements in stock control and checkout scanning, for example, have lowered costs and attracted customers. Loyalty card schemes provide these superstores with an insight into consumer preferences, enabling them to better match products with customers. To increase efficiency and maintain competitiveness, supermarket chains have consolidated, resulting in a fewer number of giant companies. Consequently, manufacturers have become increasingly dependent on a small number of market outlets, giving these retailers tremendous leverage to negotiate lower prices.There is also severe competition with discounters such as Lidl. To better manage household budgets during the present credit crunch more British shoppers are shopping at these discount stores. Competition from these discounters has led the big chains to develop new strategies. For exam ple, Tesco has recently launched its new Discount range, in an effort to combat the rise of these popular, super-cheap supermarkets. Shoppers are not just attracted by low prices. The super centre or hypermarket approach means that one-stop shopping has become a reality for shoppers.Shopping at one of these large stores, possibly two to three times a week, has become a recreational event not a chore. With most shopping now done in malls or online, the traditional high street, with its parking charges, and traffic problems has suffered. There is no much talk about the dead heart of the city. To counter this trend, convenience stores [under 3000 sq feet and â€Å"opened all hours†] are increasing dramatically on the high street [see Figure 2]. With an increasing range of products and improved layouts, convenience multiples such as Spar represent the fastest growing part of the grocery market, with sales increasing by 12. %. They currently comprise 20. 5% of the total United Kin gdom food and grocery market [Tesco, 2009, online]. Figure 2: UK Convenience Stores, 2009 Source: IGD Research 2009 The large multiples have responded strongly in this market sector (e. g. Tesco Express) and have taken over some existing chains and petrol station forecourts. 3. Financial Health of Tesco & Walmart 3. 1 Tesco Tesco is the United Kingdom’s premier supermarket chain. It employs 440000 staff and operates in thirteen countries [Tesco, 2009, online]. Presently, it has a commanding, and increasing, 30. % share of the non-convenience UK grocery market [Figure 3].Figure 3: UK Supermarket Share In the financial year 2008-9, despite the economic downturn, Tesco had record profits of more than ? 3 billion, 10% more than the previous year. Total revenue rose to ? 59. 4bn, taking sales to more than ? 1billion a week for the first time. Consequently, shares in Tesco rose by 5. 5% [I. S. , 2010, online]. Figure 4: Tesco’s Profit & Loss Account 2005-2009| Year E nded 28 February| 2009| 2008| 2007| 2006| 2005| ? millions| Turnover| 59377. 0| 47298. 0| 42641. 0| 39454. | 33866. 0| Operating Profit| 3206. 0| 2791. 0| 2673. 0| 2280. 0| 1952. 0| Net Interest| -362. 0| -63. 0| -126. 0| -127. 0| -132. 0| Profit Before Tax| 2954. 0| 2803. 0| 2653. 0| 2235. 0| 1894. 0| Profit After Tax| 2166. 0| 2130. 0| 1881. 0| 1586. 0| 1353. 0| * * Source: www. redmayne. co. uk Figure 5: Tesco’s Balance Sheet 2005-2009| Year Ended 28 February| 2009| 2008| 2007| 2006| 2005| ? millions| Intangible Assets| 4027. 0| 2336. 0| 2045. 0| 1525. 0| 1408. 0| Tangible Assets| 23152. 0| 19787. 0| 16976. 0| 15882. 0| 14521. 0| Fixed Investments| 321. 0| 309. | 322. 0| 480. 0| 423. 0|Total Fixed Assets| 32008. 0| 23864. 0| 20231. 0| 18644. 0| 16931. 0| Stocks| 2669. 0| 2430. 0| 1931. 0| 1464. 0| 1309. 0| Cash at Bank and in Hand| 3509. 0| 1788. 0| 1042. 0| 1325. 0| 1146. 0| Total Assets| 46053. 0| 30164. 0| 24807. 0| 22563. 0| 20155. 0| Total Liabilities| 33058. 0| 18262 . 0| 14236. 0| 13119. 0| 11501. 0| Net Assets| 12995. 0| 11902. 0| 10571. 0| 9444. 0| 8654. 0| Net Current Assets| n/a| n/a| n/a| n/a| n/a| Called Up Share Capital| 395. 0| 393. 0| 397. 0| 395. 0| 389. 0| Share Premium Account| 4638. 0| 4511. 0| 4376. | 3988. 0| 3704. 0| Other Reserves| 40. 0| 40. 0| 40. 0| 40. 0| 40. 0| Profit and Loss Account| 7865. 0| 6871. 0| 5693. 0| 4957. 0| 4470. 0| Shareholders Funds| 12938. 0| 11815. 0| 10506. 0| 9380. 0| 8603. 0| Source: www. redmayne. co. uk A balance sheet lists all a business' assets and liabilities, giving a â€Å"snapshot† of the its overall money value at a given time. The Tesco balance sheet [Figure 5] indicates that it is very healthy financially. It shows that net assets [total assets – total liabilities] have increased tremendously from ? 8654 million to ? 12,995 million.The profit and loss account [net profit, or loss, made] has almost doubled in the five years shown from ? 4470 million to ? 7865 million. Figure 6: Key Figures for Tesco 2005-2009| Year Ended 28 February| 2009| 2008| 2007| 2006| 2005| Earnings Per Share Growth (%)| 6| 22| 10| 16| n/a| Total Dividend (p)| 11. 96| 10. 90| 9. 64| 8. 63| 7. 56| Operating Margin (%)| 6| 6| 6| 6| 6| ROCE (%)| 13| 17| 19| 20| 18| Dividend Yield| 3. 60| 2. 70| 2. 20| 2. 60| 2. 50| Price / Earnings Ratio| 11. 40| 14. 60| 19. 90| 16. 50| 17. 60| Dividend Per Share Growth (%)| 10| 13| 12| 14| 11| Source: www. redmayne. o. uk Return on capital employed (ROCE) is a key measure of an industry's financial health and performance [Atrill and Melaney, 2004]. It is calculated as the earnings before interest and taxes (EBIT) divided by the difference between total assets and current liabilities.It shows whether an organisation is obtaining a decent profit for the amount of capital it owns. The higher the ratio, the better the company is. Tesco’ ROCE is down slightly but a return of 13% is still much better than any bank account interest rate and shows a ve ry effective investment of capital employed [Figure 6]. . 2 Walmart The USA based Walmart superstore chain is the biggest company in the world. Almost fifty years on since Sam Walton opened his first store, 90% of the US population is within fifteen miles of a Walmart [Luce, 2005]. With over 1. 3 million employees and sales at a quarter of a trillion, it is the biggest retailing success in history. With the goal of low prices, the average customer saves 15% shopping at Wal-Mart [Walmart, 2010, online]. Despite stiff competition, Wal-Mart's annual income from 1996 to 2006 increased steadily, as shown below in Figure 7.Figure 7: Walmart’s 10 Year Income For the fiscal year ending January 31, 2009, Wal-Mart brought in $405. 6 billion of total revenue [sales]. The income that the firm made after subtracting costs and expenses from the total revenue [net income] was $13. 6 billion [Foley, 2009, online]. Figure 8: Walmart’s Annual Report 2008-2009| | 01/01/2010| 01/01/2009| Revenue| $m| 405,607| 408,214| Pre-tax Profit| $m| 20,898| 22,579| EPS| $m| 3. 39| 3. 70| Dividend| $m| 0. 95| 1. 09| ROCE| 21. 00% Source: www. walmart. com| | | | |Even higher than Tesco, Walmart’s ROCE index of 21%, is indication of its great financial success. Walmart’s share price was hit by the recent economic recession but, as Figure 9 shows, has started to rise again. Figure 9: Walmart’s Share Price 2007-2010 Source: www. walmart. com In 1999 Asda was acquired by Walmart and in 2006 the company expanded even further internationally. They opened 537 new international stores, employing over 50,000 new employees. International revenues soared by 17. 4% to $7. 87bn, helped by store openings in markets such as Canada and Scotland [I. G. D. 2010, online]. Walmart’s market share continues to rise in the United States, but also in the United Kingdom and Mexico. In the midst of a global depression it is obvious that everyday low prices are a big consumer d raw. 4. Cultural Style ;amp; Leadership 4. 1 TESCO As a performance-driven organization, Tesco’s mission statement is â€Å"to create value for customers to earn their lifetime loyalty. † They are determined to strike up a close relationship with its customers. Consequently, Tesco endeavors to provide better, more innovative products and services than any of its competitors.It believes if you treat customers well and operate efficiently then shareholders’ will inevitably benefit by growth in sales, profits and returns [Enfield, 2009, online]. The customer/staff focus of Tesco is reflected in the far-sighted leadership of Terry Leahy, Chief Executive Officer. Representing a new era, Leahy adapted a more participative style of leadership, where employees are given a voice in the decision-making process. Terry Leahy, Tesco CEO The organizational structure is now simple and flat with fewer levels in the management hierarchy.There are fewer formal rules, more decentr alization and shared decision making throughout the organisation. Leadership roles are delegated to best informed and capable individuals in the organization to ensure that the company operates effectively. As values and beliefs develop, so does commitment to the organization and this is much more productive than a formal hierarchy (Miner 2002). The organic structure suits the pressure to be innovative – given its flexibility it can respond to environmental variations quickly (Salaman 2001, p. 106). 4. 2 WALMARTMuch of Wal-Mart's success is due to a strong and all-encompassing, corporate culture, originally developed by Sam Walton. At the core of this culture is a relentless push for the lowest prices. This penny-pinching is achieved using state of the art technology and by its â€Å"plus one† policy, which demands that suppliers lower their prices or increase the quality on every item every year. In â€Å"The Wal-Mart Effect,† Charles Fishman shows how the pric e of a four-pack of General Electric light bulbs decreased from $2. 19 to 88 cents within five years [Fishman, 2006].Because of this culture, Wal-Mart no-frills headquarters are in Bentonville, Arkansas, not an expensive city like New York. Executives start work before 6. 30 am, never use limousines, always fly economy-class and often share hotel rooms with colleagues. The company offers basic wages and health care plans. It demands that hourly workers do overtime without pay. Store managers regularly work 70 hours per week. They are expected to pinch pennies wherever they can, even on things like the heating and cooling of the stores.In the winter stores are kept at 70 degrees Fahrenheit and in the summer, they stay at 73 [Seth and Randall, 1999]. In almost fifty years of operation, Wal-Mart has managed to keep these cultural components, as well as its enterprising spirit. Leadership Walmart’s present chairman, S. Robson Walton [son of the founder] is reported to have said i t is the job of leaders to â€Å"listen to customers, listen to customers, listen to customers† [Fishman, 2006, p32]. Choosing to be a humble-servant type of leader, Mr Walton has established a spirit of customer service throughout the whole company. S. Robson Walton,Walmart Chairman Like Tesco, Walmart believes that delegation and limited supervision increases efficiency. Additionally, if leaders trust workers then they will develop quality decision-making skills. Fewer managerial, supervisory jobs also reflect Walmart’s culture of saving money wherever possible. 4. 3 Ethical & Environmental Issues In response to increasing consumer awareness of environmental and ethical issues, the supermarket chains have adopted a range of initiatives. In 2008 Walmart introduced new Fair Trade certified coffee products which provide plantation workers with better wages and working conditions.Similarly, to benefit farmers growing Fair Trade cotton in Africa and India, Tesco was t he first supermarket to bring in Fair Trade cotton knitwear and is presently doubling its range of Fair Trade cotton school uniforms [Wiener, 2009]. Also, to support local producers, much of Tesco’s meat and vegetables come from farmers within the region. With environmental issues becoming mainstream, Tesco has recently promised to attach a carbon label to all its goods and install sophisticated new refrigeration techniques to reduce its consumption of climate changing hydro-fluorocarbons.Wal-Mart now claims it will power its US stores entirely using renewable energy [Walmart, 2010, online]. The introduction of clear labelling regarding fat and calorie content of products has allowed supermarkets to take advantage of the increased consumer awareness of health issues. In the case of a health scare [e. g. BSE], their sophisticated communications networks make product traceability very easy. 5. CONCLUSIONS In conclusion, the retail market has been completely transformed in recen t years by the large supermarkets.Whether your preferred criteria for financial success is square footage of retail space, sales, net profit or dividend growth, both Tesco and Walmart have reached heights that few others in the retail industry can hope to match. To counter the image that they destroy the environment and are enemies of society, both Tesco and Walmart have adopted a range of environmental, social and ethical programs. The so called â€Å"Walmark effect† may yet be seen as a force for the good.