1. Business economic concepts of market structure, small and medium enterprises, multinational corporations and growth strategy of Tesco Plc:
In the contemporary global economic and corporate scenario, with the businesses becoming more complex, integrated, expanding and inclusive, almost in all types of industries, the operational framework of the businesses is becoming far more competitive and subjected to the variations of the various exogenous as well as endogenous factors (Jonesand Sloman 2017). Of the different aspects, there also remain different economic factors which affect the operational framework of the companies and based on which the business decisions and strategies are made by the contemporary commercial organizations in the global framework. These factors include the market structure in which the concerned company is operating, the demand and supply situations existing in the industry, level of competitions faced by the firm, nature of the commodity or service which the company is providing as well as the economic strategies taken by the firm as well as by its competitors, in order to achieve the general targets of profit maximization and increased cost efficiency (Frankand Cartwright2013).
Keeping this into consideration, the concerned report tries to analyse the business scenario and economic implications on the operational framework of Tesco, the largest supermarket operating primarily in the United Kingdom, with stores in many countries across Europe and Asia. The company is not only one of the largest grocery and merchandise retailers in Europe but is the third largest one in the global supermarket industry in terms of profit and ninth largest in the form of revenues (Tesco.com, 2018). With average annual revenue of nearly 56 million pounds and global employee strength of more than 476,000, the company enjoys immense global clientele as well as a robust supply chain consisting of long term relations with the different suppliers across the globe.
In the United Kingdom, however, Tesco operates in an oligopolistic market structure. In the theoretical framework of economics, Oligopoly is known as the market structure where there is presence of several suppliers (not more than twenty as per convention) and many buyers, which in turn gives each of the sellers considerably high share of market power and decision-making abilities regarding their products aa well as their prices. However, though the products sold by the suppliers are differentiated, the decisions regarding pricing and production of each producer is dependent on the actions and decisions taken by other producers in the same industry (Dunne et al. 2013).
Keeping this into consideration, it can be asserted that the supermarket industry of the UK is mostly of oligopolistic in nature. This is because, in spite of the presence of many supply side providers in the market, the market is primarily dominated by few large supply side players, each of which enjoy considerable market share in the supermarket industry, which can be shown with the help of the following figure:
Figure 1: Share of the different supply side players in the supermarket industry of the UK
(Source: Schiraldi, Smith and Takahashi 2012)
As is evident from the above figure, there are few dominant suppliers in the supermarket industry of the country and although Tesco enjoys largest share in the market, it still faces considerable competition from the other players including Asda, Morrisons and Sainsburys and the new ones including the Aldi and Lidl, who have been consistently making their place in the market through improved technologies and extreme cost efficiencies, thereby creating a situation of price war in the already oligopolistic market.
Tesco has responded to the immense price war situation in the market, by reducing their price levels considerably, taking advantage of the economies of scale which the company has acquired over the years of its operations. The company also has launched a “Price Promise Scheme” according to which the customers are entitled to get their money back if they get the products cheaper than Tesco (Nordic.businessinsider.com, 2018). Apart from that, the company has also implemented various cost reducing and efficiency improving policies, which have together helped in increasing the revenue of the company, as can be seen from its increasing profits in the last few years.
2. Business economics concepts of demand and supply and the monetary policy of the Bank of England to the UK Housing Market:
The economy of a country and its scope of progress and development largely depends on the efficient working of the demand and supply forces in different sectors of the economy as well as on the policy framework and regulatory or monitoring mechanisms taken by the governing authorities of the economy to maintain a balance between the demand and supply forces (Mankiw2014). The balance is required to be maintained between these two forces in order to maintain equilibrium in the market, as any discrepancy between the same may lead to excess supply or demand in the market, both of which may have negative implications on the overall economy as well as on the residents of the concerned country, individually.
Housing or residential properties are seen as a lucrative and an alternative form of investment in any economy. In this context, the housing market of the United Kingdom has faced considerable dynamics over the years, with the average price levels varying considerably with time, being subjected to various crisis and turmoil, which can be showed as follows:
Figure 2: Housing Price Index of UK (2007-2016)
(Source: Tradingeconomics.com 2018)
As can be seen from the above figure, the price of housing in the country fell considerably in 2008, owing to the initiation of the Global Financial Crisis, which led to a burst of the investment bubble in the housing market of several countries, specifically including the USA and the UK. However, with time the price of the housings has rose considerably and in the current period the housing market of the country has been facing severe unaffordability issues, much of which can be attributed to the comparatively lesser increase in the supply of the housings than the demand for the same (Ngaiand Tenreyro 2014).
Another factor affecting the decrease in the affordability of the residents of the country is the considerable fall in the real wage of the people in the country:
Figure 3: Ratio of house prices to average income in UK
(Source: Stewart 2018)
To tackle the situation the Bank of England has resorted to a policy of quantitative easing, thereby lowering the rate of interests, which in turn makes borrowing easy. The government has also launched policies, especially for those who are willing to have their first homes in the country(Stewart, 2018). These policies include that of Help to Buy and Schemes of Shared Ownerships. These monetary and financial aid providing policies, though has helped to some extent in addressing the affordability issues in the short run, however, has resulted in increasing the demand for housing in the country considerably, the effect of which can be seen as follows:
Figure 4: Increase in demand due to quantitative easing by Bank of England
(Source: Frank and Cartwright 2013)
As is evident from the above figure, due to the quantitative easing policy, the demand has increased considerably in the housing sector of the country, which by increasing the price levels even more, can have negative implications on the economy in the long run as a whole, provided the supply of housings are not increased at the same pace as that of demand.
Conclusion:
The policies taken by the Banks of England in the contemporary period, have considerable implications on the demand and supply side dynamics in the housing market of the country. Quantitative Easing policy is expected to increase the demand for housings even more, which, in the absence of adequate supply, can contribute in creating excess demand in the economy, which in turn, can lead to increase in the prices in the housing market of the United Kingdom.
3. Key macroeconomic indicators and trend in these indicators in UK for the past five years:
The word “Macro-economy” in the theoretical framework of economics refers to the overall economic traits and activities of broad region or a country as a whole. The progress and economic growth of a country, in this context, can be analysed and interpreted by observing the macroeconomic trends prevailing in the economy, which in turn are measured cardinally with the help of several macroeconomic variables which primarily include the Gross Domestic Product and its growth rate, the rate of unemployment, inflation and similar indicators (Burda and Wyplosz 2013). Together, the dynamics in these variables show the overall economic performance of the country.
In this context, the working of the economy of the United Kingdom in the last five years can be seen with the help of the macroeconomic indicators, which are as follows:
Figure 4: GDP Growth Rate of UK over the lase five years
(Source: Tradingeconomics.com 2018)
The Gross Domestic Product of a country and its growth rate shows the economic progress of the country as a whole. As is evident from the above figure, the GDP Growth Rate of the country has been subjected to considerable fluctuations in the last five years, with the trend however showing a moderate decreasing pattern. However, in the last couple of years it has shown increase to some extent.
Figure 5: Rate of Inflation of the UK over the last few years
(Source: Tradingeconomics.com 2018)
The rate of inflation of an economy shows the average level of prices prevailing in the economy. In this context, the rate of inflation of the UK, which remained considerably in 2013, reduced considerably post 2013 and the fall continued till 2016. However, owing to the recent economic policies and fluctuations faced by the economy the rate of inflation has increased considerably post 2016. However, though the increase has been noticeable, the rate is at a moderate level of 3%.
Another macroeconomic indicator of welfare of an economy is the level of unemployment prevailing in the country, as the same is linked with the economic stability and welfare of the residents of the country.
Figure 6: Rate of unemployment of UK over the last five years
(Source: Tradingeconomics.com 2018)
The unemployment in the country has considerably decreased over the last few years, which can be seen from the falling rate of the same in the last five years. This may be directly linked with the increase in the overall price levels in the economy as these two variables are inversely related.
Figure 7: Rate of Interest in UK over the last few years
(Source: Tradingeconomics.com 2018)
The country has maintained an interest rate of 0.5%, over the last few years, with an exceptional fall in 2017. The rate has however been restored in the current period.
Conclusion
From the above discussion it can be seen that the economy of the United Kingdom has not shown striking improvement or visible deterioration in the last five years. While the economy has been seen to perform considerably well in some sectors, several other macroeconomic indicators of the country has shown deterioration to some extent.
4. Application of leverage and current asset management in decision-making for the managers:
Leverage denotes the utilisation of fixed assets for enhancing the overall profitability level. Leverage helps the managers to assist in decision-making process in a number of ways, which are elucidated as follows:
This risk denotes that risk of the organisation not being able to cope up with the fixed operating costs. As indicated by Titman, Keown and Martin (2017), since operating leverage relies on fixed operational costs, greater costs denote greater degree of operating leverage and operational risk of the organisation. Thus, in case of rising sales, greater operating leverage is effective; however, such effectiveness is reduced in case of declining sales.
This risk signifies that risk, in which the organisation could not cover its fixed financial expenses. As financial leverage relies on fixed financial expenses, higher expenses denote greater degree of operating leverage and consequently, increased financial risk. Higher financial leverage is desirable during increasing operating income and vice-versa.
In order to design effective mix of capital structure, there needs to be relation of operating income with earnings per share. This would help the managers to gain an understanding of the impact of leverage on the financial performance of the firm.
For instance, if an organisation established with investment of £5 million from investors, the equity capital is £5 million required for operations. In case, the organisation obtains debt funding by borrowing £20 million for investing in business operations, additional opportunities would be there for maximising shareholders’ wealth. A vehicle manufacturer could obtain debt funding for establishing a new factory. This factor would help the manufacturer in raising the number of vehicles and in turn, the overall profit margin (Finkler et al. 2016).
Asset management is the primary aspect for an organisation to satisfy its obligations adequately along with fulfilling the set growth targets and objectives. In this case, it is necessary for the financial manager in stipulating and ensuring that current assets are handled in the most appropriate way possible. Hence, priority needs to be provided to the current asset management initially rather than fixed asset management. Current assets are those that provide cash benefits in near future like inventories or accounts receivables (Pugmire 2016).
On the contrary, fixed assets lack liquidity, as they are required for permanent operations like warehouses, vehicles, machinery and others. Hence, by managing the current assets in an effective fashion, it is necessary for the organisation to maximise its returns along with minimising illiquidity risk. For instance, Wal-Mart uses asset management systems for optimising $15 billion in real estate assets. Such asset management helps in leasing or buying decisions and the organisation could divest itself of unprofitable assets (Barr 2018).
5. Financial analysis, present value and capital budgeting:
|
Particulars |
Details |
2015 |
2016 |
|
Current assets |
A |
£ 11,819 |
£ 14,592 |
|
Current liabilities |
B |
£ 19,810 |
£ 19,714 |
|
Inventories |
C |
£ 2,957 |
£ 2,430 |
|
Quick ratio |
(A-C)/B |
0.45 |
0.62 |
|
Market value per share |
D |
£ 1.4950 |
£ 1.8900 |
|
Earnings per share |
E |
£ 0.0646 |
£ 0.0442 |
|
Price/earnings ratio |
D/E |
23.14 |
42.76 |
|
Revenue |
F |
£ 56,925 |
£ 54,433 |
|
Total assets |
G |
£ 44,214 |
£ 43,904 |
|
Total asset turnover ratio |
F/G |
1.29 |
1.24 |
|
Total equity |
H |
£ 7,071 |
£ 8,616 |
|
Equity ratio |
H/G |
0.16 |
0.20 |
|
Net profit/loss |
I |
£ 516 |
£ 353 |
|
Net margin |
I/F |
0.91% |
0.65% |
In accordance with the above table, it could be stated that Tesco Plc has experienced a rise in quick ratio in 2016 to 0.62 from 0.45 in 2015 because of increase in inventory level and short-term investments. On the other hand, the price/earnings ratio is observed to increase during the year and this denotes that the investors would be able to earn adequate returns in future. However, there is slight fall in asset turnover ratio denoting that the organisation has not managed to earn adequate revenues from its asset base to clear its debt burden. The equity ratio has increased over the year, which denotes that Tesco Plc has started to focus on raising funds through equity. However, the horse meat scandal in 2014 has hampered the brand image of the organisation due to which sales revenue has declined and as a result, the net margin has declined as well.
|
Particulars |
Units |
|
Earnings per year |
£ 650 |
|
Number of periods (in years) |
3 |
|
Expected total earnings/ Future value |
£ 1,950 |
|
Interest rate |
4.50% |
|
Present value/ Amount to be deposited |
£ 1,709 |
|
Year |
Project A |
Project B |
Discounting factor @10.25% |
Discounted Cash Flows- Project A |
Discounted Cash Flows- Project B |
|
0 |
$ (50,000.00) |
$ (50,000.00) |
1 |
$(50,000.00) |
$(50,000.00) |
|
1 |
$ 26,000.00 |
$ – |
0.91 |
$ 23,582.77 |
$ – |
|
2 |
$ 17,625.00 |
$ – |
0.82 |
$ 14,500.13 |
$ – |
|
3 |
$ 15,000.00 |
$ – |
0.75 |
$ 11,193.23 |
$ – |
|
4 |
$ 10,000.00 |
$ – |
0.68 |
$ 6,768.39 |
$ – |
|
5 |
$ 32,000.00 |
$ 99,500.00 |
0.61 |
$ 19,645.22 |
$ 61,084.37 |
|
Discount rate |
10.25% |
10.25% |
|||
|
Net Present Value |
$ 25,689.75 |
$ 11,084.37 |
The above table clearly indicates that the NPV of both the projects is obtained as positive. It is the technique with the help of which the viability of a project could be evaluated by anticipating the discount rate, future cash inflows or outflows and initial investment. A firm or an investor always prefers greater NPV, since the return on investment would be maximised (McKinney 2015). In the provided case, the NPV for project A is greater than that of project B. Thus, the organisation is advised to accept project A, as the return on investment would be maximised.
References:
Barr, M.J., 2018. Budgets and financial management in higher education. John Wiley & Sons.
Burda, M. and Wyplosz, C., 2013. Macroeconomics: a European text. Oxford university press.
Dunne, T., Klimek, S.D., Roberts, M.J. and Xu, D.Y., 2013. Entry, exit, and the determinants of market structure. The RAND Journal of Economics, 44(3), pp.462-487.
Finkler, S.A., Smith, D.L., Calabrese, T.D. and Purtell, R.M., 2016. Financial management for public, health, and not-for-profit organizations. CQ Press.
Frank, R. and Cartwright, E., 2013. Microeconomics and behaviour. McGraw Hill.
Jones, E. and Sloman, J., 2017. Essential Economics for Business (formerly Economics and the Business Environment).
Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.
McKinney, J.B., 2015. Effective financial management in public and nonprofit agencies. ABC-CLIO.
Ngai, L.R. and Tenreyro, S., 2014. Hot and cold seasons in the housing market. American Economic Review, 104(12), pp.3991-4026.
Nordic.businessinsider.com. (2018). Tesco’s ‘game changing’ price strategy is working. [online] Available at: https://nordic.businessinsider.com/tesco-first-half-2016-results-show-show-sales-growth-2016-10/ [Accessed 29 Mar. 2018].
Pugmire, R., 2016. Chapter IV: Financial Management. Review of Educational Research.
Schiraldi, P., Smith, H. and Takahashi, Y., 2012. Estimating a dynamic game of spatial competition: The case of the UK supermarket industry. Working paper.
Stewart, I., 2018. Quantitative easing has made houses hopelessly unaffordable | Coffee House. [online] Coffee House. Available at: https://blogs.spectator.co.uk/2017/08/quantitative-easing-has-made-houses-hopelessly-unaffordable/ [Accessed 29 Mar. 2018].
Tescoplc.com., 2018. [online] Available at: https://www.tescoplc.com/media/1426/tescoar15.pdf [Accessed 29 Mar. 2018].
Titman, S., Keown, A.J. and Martin, J.D., 2017. Financial management: Principles and applications. Pearson.
Tradingeconomics.com., 2018. United Kingdom GDP Growth Rate | 1955-2018 | Data | Chart | Calendar. [online] Tradingeconomics.com. Available at: https://tradingeconomics.com/united-kingdom/gdp-growth [Accessed 29 Mar. 2018].
Tradingeconomics.com., 2018. United Kingdom House Price Index | 1983-2018 | Data | Chart | Calendar. [online] Available at: https://tradingeconomics.com/united-kingdom/housing-index [Accessed 29 Mar. 2018].
Tradingeconomics.com., 2018. United Kingdom Inflation Rate | 1989-2018 | Data | Chart | Calendar. [online] Tradingeconomics.com. Available at: https://tradingeconomics.com/united-kingdom/inflation-cpi [Accessed 29 Mar. 2018].
Tradingeconomics.com., 2018. United Kingdom Unemployment Rate | 1971-2018 | Data | Chart | Calendar. [online] Tradingeconomics.com. Available at: https://tradingeconomics.com/united-kingdom/unemployment-rate [Accessed 29 Mar. 2018].
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