An Analysis Of Tesco’s Financial Report And Social Responsibility

Tesco’s Background and Financial Performance

This report is meant for two different purposes- to analyze the performance of Tesco in respect of its annual financial report of 2016 with identification of stakeholders and subsequent discussion about them for three categories of such stakeholders, and the achievement of Tesco in respect of social and environmental review from the annual report of Tesco along with corporate governance issues; and the derivation of accounting ratios of Benedict.co with available resources of financial data provided. 

Tesco is known as one of the leading retail chain outlets of UK. They are also dealing with food items and are reckoned as largest food retailers globally. The company had put its footmark in 1919 in UK with the business of grocery by Mr. Cohen. The company was listed in UK stock exchange market in the name of Tesco stores Holdings Ltd in 1947. (Tim Clark, 2014) As per historical financial record, Tesco had recorded revenue of GBP 42,641 million with the profit of 2,468 million GBP in 2007. Although Tesco had started with grocery shop, the company gradually increased its operation with varied products of retail market along with enhancement through varied range of services. Their product range includes travel agency, insurance, telecom, financial and other products and retailing of fossil fuel, too. (ukessays, 2015)

This article will feature different types of stakeholders along with discussion on three types of stakeholders of Tesco. Being a responsible global corporate, the company is aware of its duties to the society and environment. Those fields are attended by the company and the same are featured in the annual report of the company through reports.  In these reports, all these domains of Tesco will be highlighted as per their annual financial report of 2016.

Moreover, the financial ratio analysis will be done in the second part of this report with financial data of Benedict Co. This part of report will highlight different types of financial ratios and its implication to understand the financial performance of the company along with its financial health prevailing for the period.

Definition

Stakeholders are defined as member of those communities, who has got direct or indirect interest in the business performance of any business entity. There are two types of stakeholders defined in broader sense- internal and external stakeholders. Internal stakeholders of any organization are the employees, the board and the management team. External stakeholders are of varied ranges that are not taking direct part in the daily activities of the business entity, but have direct or indirect interest about the performance of the entity. External stakeholders include supply chain associates, distribution channel partners, trade union, shareholders, customers, government, different statutory bodies, financial analysts, investors, communities, societies, auditors etc. (Spacey, 2017)

Stakeholders in Tesco

Out of all the external and internal stakeholders, three types of stakeholders are identified for this discussion: customers, supply chain associates and employees.

Customers are the key external stakeholders of any business. It is the prime objective of any business to satisfy them with time management, quality assurance and price factor. The products sold by Tesco are mainly dispensed through their retail chain outlets. As per the business strategy, Tesco is extending different types of products under their umbrella including food products, also. As customers are the target audience of Tesco, the company has to be attentive about their needs to fulfill them. Revenue from operation generates from customers only. Hence, the company should have the patience to hear from them regarding problem areas to resolve them at an urgent manner.

Supply chain associates are another key factor of Tesco business. As the company is engaged in retail business, they sell products from different manufacturers. Supply chain associates bridge the gap between the company and the manufacturers. It is the prime objective of Tesco to ensure value chain management through their suppliers to keep the customers happy and satisfied. Core value of Tesco’s business is to “treat people how we liked to be treated”. To honor this core value, Tesco has to make a strong relationship with their supply chain associates to ensure proper flow of quality products to their outlets.

Employees are the basic component of internal stakeholders of any business entity. As they are the ears and eyes of the organization, they must be satisfied related to their job satisfaction, job ambience and other related amenities. As they are the bridge between external stakeholders and the company, they are ready to share their opinion about the operation of the organization. Different workshop to add values to their contribution, the company makes the employees well equipped with their duties and expected level of feedback asked from their side.

The company is practicing efficient and transparent communication process within the organization. This communication process can add value to the stakeholders. Effective communication management enables the stakeholders to communicate their needs to the company. As a result of this effort, the stakeholders can be well positioned to present their demands to be met by Tesco. Communication system plays a vital role in any organization for interaction between the stakeholders. Tesco, being a professionally managed company, always gives priority to this area with highlighting the needs and extending effort to fulfill them for the satisfaction of the stakeholders. Tesco is doing business in a very competitive market. Effective communication can remove the hurdle of miscommunication between the stakeholders and the company to ensure smooth business operation ensuring growth.  The themes of Tesco are to honor the following corporate values:

1. work as a team
2. trust and respect each other
3. listen, support and say thank you
4. share knowledge and experience
5. Training and development
6. Rewards and benefits
7. Diversity and inclusion
8. Communication
9. Customer service training
10. Health and safety

Tesco’s Social and Environmental Responsibility

All these above values enable the company to perform to the level of expectation and satisfy their stakeholders. (Ukessays, 2015)

As per the Environmental and Social Review report published in the annual report of 2016, Tesco management had shown different positive steps to enhance the lifestyle of the stakeholders. We will emphasize on two groups of stakeholders for this discussion- customers and employees, who are benefited by the steps ensured through this report. (Tesco, 2016)

The company is run with the purpose to serve the customers in a better style on regular basis. Main objective for this purpose is to ensure the strategies to tackle the challenges related to social and environmental aspects, which tends to affect the communities in which the company is operative. In the annual report, it is mentioned that the company has reviewed its third value to ensure combating the challenges in the field of environment and society through different steps initiated from tiny but thoughtful actions. It is the contribution from the employees to come forward with their views and the resultant feedback of ‘Every little help makes a big difference’, as considered to be the best mode to articulate the company objective. There are other two core values of the company like ‘No one tries harder for customers’ and ‘we treat people how they want to be treated’. These values remind the organization of the micro effects of these small efforts, which turns to be good for the customers in macro level through enhancement of service and attentiveness. Both the stakeholders in the form of customers and employees are adding value through these believes and both are benefitted in macro level. The followers of these values can enable the ambience of better and healthier lifestyle for the employees and the customers by reducing food waste when it occurs. This system can enhance the level of sustainability in supply chain management.

 The company is focusing in corporate social responsibility as a fundamental area of performing duties to the society. In the CSR report published by the company, Tesco had emphasized on their policies and key data online as a part of their CSR activities. The company has become signatories of the United Nations Global Compact or UNGC, which proves to be an initiative to encourage global business with policies to prove sustainable and socially responsible effort by the company. The initiative is concentrated on a commitment to 10 UN principles of labor rights, human rights, anti-corruption and environment. As a company, Tesco feels proud of this alliance with UN and ensures implementation of the policies through initiatives in respective fields.

Financial Ratio Analysis of Benedict Co.

 The company is maintaining a strong governance to ensure its CSR program through robust framework. This governance is provided in two different ways- through board committees, internally; and through advice and critical feedback strategy, externally.  The CSR committee is chaired by the group Chairman.

 In health sector, the company proves its thoughtfulness by exercising strategies for the stakeholders like customers, colleagues and the wider community to make them live in healthier fashion. The company has certain corporate objectives for this area and that endorses provision for good health for one and all of the community. The company has entered in partnership with Diabetes UK and the British heart Foundation to support prevention and curing process to combat health challenges the community faces. The company combines the effort with a close style of working together with the expertise provided by the charities to reach the target audience of UK internally and externally. The internal stakeholders like employees and the external stakeholders like customers are the biggest target audiences for this health initiative to ensure them healthier life style.  The company’s strategic charity partnership with Diabetes UK and the British Hear Foundation are pioneers in the domain. The company is instrumental in fixing of fund raising target 30m GBP to ensure promoting healthy living.  The customers also responded in positive note for this community project by the yield of 11.5 m GBP, which is raised by selling Tesco Bags in the UK since October, 2015. This fund is donated through the project Bags for help, which proves to be a largest environmental improvement drive of the UK, as ever seen.

The company has raised funds worth 7.89 m GBP for the prevention projects followed by important researches related to health. Tesco has reached around 1.3 million children as component of the project- The Tesco Eat Happy Project. This project includes two initiatives-Let’s Cook courses and Farm to Fork Trails.  These projects make the children aware of the sources of foods and the skill to cook of their own. For serving the customers on health sensitive issues, the company has reformulated the soft drinks by removing substantial quantity of sugar and calories from them. As a socially responsible stakeholder, the company had initiated certain steps to reduce food waste. This is being done by approaching to the suppliers with proper specification of food crop and broadening them for more use.

 In a more socially responsible approach, the company is thinking of reducing food waste by channelizing them through proper way to make the best use of them. The company is running a project named Community Food Connection or CFC with the alliance of FareShare FoodCloud. This initiative is with the objective to use maximum amount of food waste with the category of ‘could be eaten’. The system is to make the charitable organizations aware through advertisement. They can communicate through app and SMS is forwarded to them when the occurrence of food waste happens in the stores. The company has started this initiative since 2012 and in 2016; the company is extending this service through their 100 large outlets. Through this effort, the company ensures that food will not be wasted; instead these should reach the target audience of needy people. The company has another option of donating food through Neighborhood Food Collection; by which the company extends its service to the community by donating 18 million meals to help people of need.

 With the above analysis of environmental and corporate social responsibility report of the company, it is understood that the company is taking care of their stakeholders in different levels. Out of them, customers and employees are discussed here as the beneficiaries. Through different health drive, the company ensures increase of health consciousness for the customers and employees through different awareness program related to diabetes and heart disease. The company is also taking firm steps regarding avoidance of food waste. Ultimate objective is to ensure that the community to be served with best possible way by extending generous support with employees and customers as part of that community. The company also ensures different social security programs for the employees which costs good amount to the company. All these efforts can highlight the eagerness of the company to serve the stakeholders and the community as a whole to prove their responsible attitude towards them.

The corporate governance report has highlighted the reaction from the PLC Chairman. In this report he stated that he had met so many of his colleagues globally, specifically from UK and overseas. It is observed that the employees had shown passion and enthusiasm they have for their organization.  During his recent journey to the South East Asia, he had observed the recognition received by the company as a very attractive employer. This was possible as the employees work hard for accomplishment of their micro objectives to ensure group macro objectives of the company during the tough time.

The company serves its customers with the set objective of customer satisfaction. The company also set the customers as their core area of importance. Ultimate objective is to ensure best possible quality, price and service to the customer with the availability and range of products. The company is more committed to become efficient by reinvesting some of the savings the company made for improving the shopping experience for the customers. The objective for this strategy is to ensure more improvement of sales, which will make more customers happy and insist on more reinvestment of savings for the sake of better service to the customers.

With the above analysis, it is proved that the company is keen to improve their performance in all fields of service to the customers and employees, chosen as stakeholders of discussion.  The company has strong corporate governance system, which is not only focusing on the operational areas, but also to emphasize different level of stakeholders to protect their interest and keep them happy and satisfied with the association of the company.

Ratios in Consideration

For the purpose of evaluating the financial performance of Benedict Co, I have chosen four types of broad categories of ratios-:

1. Turnover ratio
2. Liquidity ratio
3. Solvency ratio
4. Profitability ratio

Turnover ratio highlights the turnover in days for inventory, payable and receivable and asset turnover. These turnovers give ideas of the performance of the company related to respective features. Basically turnover ratios are helpful for stakeholders like suppliers, debtors and investors. (tools, 2018)

Liquidity ratio is highlighting the financial strength of the company with its liquidity as financial strength. These ratios are helpful for investors, supplier and employees to understand the financial viability of the company. (Coach, 2017)

Solvency ratio depicts the ability of the company to cover its debt by different assets and capital. This ratio is informative for the lenders, investors and the suppliers. (PEAVLER, 2018)

Profitability ratio denotes the ability of the organization to generate profit in respect of different criteria. This ratio also covers return on assets and return on equity, too. This segment of accounting ratio is helpful for the stakeholders like investors, lenders, customers and the board of directors of the company. (PEAVLER, 2018)

Financial ratios of Benedict. Co
Ratios	result	Competitor	Reason for movement between two years
	ratio-20×1	ratio- 20×0
Turnover ratios:
Inventory in days	119	96	60	the inventory holding is longer
receivables in days	90	56	55	more days taken to recover
payables in days	155	108	90	flexible payment to suppliers
Asset turnover	0.69
Liquidity Ratios:
Current Ratio	1.19	1.25	1.6	decreasing due to inefficient working capital management
Quick Ratio	0.70	0.75	1	more or less same
Solvency Ratios:
Debt-to-assets ratio	21%	13%		liabilities are increasing in respect of assets
Debt-to-capital ratio	45%	34%		debts are increasing in respect of equity and debt
Debt-to-equity ratio	81%	51%		debts are increasing in respect of equity
Interest coverage ratio	738%	1840%		interest coverage is decreasing due to increased finance cost
Profitability Ratios:
Gross profit margin	48%	42%		due to increase in gross profit
Operating profit margin	27%	35%		due to increase in expenses
Net profit margin	21%	28%		Do
Return on assets (ROA)	13%	18%		net income reducing in respect of total assets
Return on equity (ROE)	24%	27%		net income reducing in respect of total equity

As per the ratio analysis, following areas are of concern and need urgent attention:

1. Inventory in days- Stock holding is high compared to industry trend as per competitor’s ratio analysis
2. Receivables in days- Recovery of outstanding is getting longer; needs rigorous follow-up by sales and marketing team
3. Quick ratio- it showed <1, which means cash and cash equivalent fell short of current liabilities
4. Solvency ratio- all ratios in this segment projects efficiency of the debt management of the company, and the performances are not satisfactory as it is not maintaining the benchmark set by last year.
5. ROA- it showed decreasing compared to last year and coverage of assets by net income is only 13%; need to increase the same through proper working capital management and sales performance.
6. ROE- it is decreasing sending alarm to the investors. Net income covers only 24% of stockholders’ equity; need to be taken to focus for required steps to enhance the ratio.

There are several types of financial ratios meant for different stakeholders to meet their interest of knowledge. With the broad division of those ratios, following analysis can be done with the respective stakeholders taken into consideration:

Turnover ratios-These ratios can help the stakeholders like debtors, creditors and overall financial analysts to understand the number of days consumed by the company to manage receivables, payables, movement of inventories and assets.

Liquidity ratios- These ratios generally considered for understanding the financial health of the company with the efficiency parameter on working capital management. All stakeholders are interested to know these ratios for their decision making.

Solvency ratios- These ratios mainly focus on the debt management of the company and are the areas of focus for lenders and investors.

Profitability ratios- These ratios are the concern for all stakeholders including the board of directors. These ratios can guide the investors to think about fresh investment or withdrawal of erstwhile investment.

References

Coach, A., 2017. What is a liquidity ratio? [Online] Available at: https://www.accountingcoach.com/blog/liquidity-ratio [Accessed 25 May 2018].

PEAVLER, R., 2018. Profitability Ratio Analysis. [Online] Available at: https://www.thebalancesmb.com/profitability-ratio-analysis-393185 [Accessed 25 May 2018].

PEAVLER, R., 2018. What Are Solvency Ratios and What Do They Measure? [Online] Available at: https://www.thebalancesmb.com/what-are-solvency-ratios-and-what-do-they-measure-393211 [Accessed 25 May 2018].

Spacey, J., 2017. 7 Examples of External Stakeholders. [Online] Available at: https://simplicable.com/new/external-stakeholders [Accessed 25 May 2018].

Tesco, 2016. Annual Reprt and Financial Statment-2016. Fianncial Reprot. Tesco.

Tim Clark, S.P.C., 2014. A history of Tesco: The rise of Britain’s biggest supermarket. the Telegraph, UK, 4 October.

tools, a., 2018. Turnover Ratios. [Online] Available at: https://www.accountingtools.com/articles/what-is-a-turnover-ratio.html [Accessed 25 May 2018].

ukessays, 2015. A Brief History Of Tesco Supermarket Business Essay. [Online] Available at: https://www.ukessays.com/essays/business/a-brief-history-of-tesco-supermarket-business-essay.php [Accessed 24 May 2018].

Ukessays, 2015. The successful path way to Tesco. [Online] Available at: https://www.ukessays.com/essays/economics/the-mission-values-and-stakeholders-of-tesco-economics-essay.php [Accessed 25 May 2018].