Financial Statement

Analysis and Valuation

Lecture 2 WEEK 3 Seminar
In a group of three, conduct Industry and Company
Analysis for Tesco PLC based on its 2023 financial
statements.
Lecture 2 WEEK 3 Seminars
Group No Time Location(s) Attendance Code
Group 2 Tue 27 Feb 15:00 – 16:00 C/B/101 Flat 225633
Group 3 Tue 27 Feb 16:00 – 17:00 Lecture, Campus 292099
Group 4 Tue 27 Feb 14:00 – 15:00 West - Chemistry 397520
Overview

2023 Annual Report to find Tesco Inc Tesco PLC FY End 25 Feb 2023
strategic priorities and business model:
https://www.tescoplc.com/investors/reports-res
ults-and-presentations/annual-report-2023
IBISWorld
https://my.ibisworld.com/uk/en/industry/g47.1
10/competitive-forces
LSEG workspace
https://uoy.atlassian.net/wiki/spaces/SSI/pages/ P3 of 2023 Annual Report
12256885/LSEG+Workspace+and+Datastream
+previously+known+as+Refinitiv

3
Industry Analysis
Identify Tesco’s sector/industry (Refinitiv: TRBC or GICS)

*The Refinitiv Business Classification (TRBC):

https://en.wikipedia.org/wiki/The_Refinitiv_Business_Classificati
on

4
Industry Analysis
Tesco’s sector/industry and Tesco’s Peers in the UK
(IBISWorld: UKSIC)

5
Industry and Strategy Analysis:
a. Porter’s five forces applied to the retail industry
Industry and Strategy Analysis:
a. Porter’s five forces applied to the retail industry

Barriers to Entry
Def. How difficult it would be for new competitors to enter the industry.
barriers to entry () -> threat of entry () -> competitive advantage of incumbent players () -> price power ()
Items
Minimum efficient scale
Network effects
Customer switching
costs
Capital requirements
Incumbents' possession
Restrictive government
regulation
also affected by rivalry among existing competitors
and linked to customers’ purchase decisions
Reasons Effect
Start-up costs High
More demand (more people use products/services) may cause price war (i.e., Not present
price-cutting competition) from rivals so potentially value decreases.
e.g., Tesco offers its customers highly competitive prices through its Aldi Price Match,
Clubcard Prices and Low Everyday Prices.
Customers can easily shop from stores to stores effortlessly Low
Substantial start-up costs; on-going online investment High
• Brand loyalty: Customer loyalty programme: Club Card prices/rewards Do possess (Yes)
• Proprietary technology?
• Preferential access with suppliers so cheaper prices for raw materials e.g.,
scheme to help net zero commitment; investment to egg sector (British dairy
industry) and pig supply chain; periodical review resilience of suppliers
• Preferential access to distribution channels e.g., rollout of UK distribution and
customer fulfilment centres
• Geographical diverse of supply base, stores, and distribution network (learning
experiences from pandemic responses/actions)
Legal concerns; approval of authorities required e.g., Competition Act 1998; Food Do exist
Safety Act 1990, etc.
Conclusion HIGH
8
 Industry Analysis
The Porter’s five forces competitive analysis for Tesco PLC
https://my.ibisworld.com/uk/en/industry/g47.110/competitive-forces

9
Supplier Bargaining Forces
Def. The pressure that suppliers can put on companies by raising their prices, lowering their quality, or reducing the
availability of their products.
Items
Concentration
Dependency
Supplier switching costs
Differentiation of
products
Substitutes for the
products or services
Forward integration
Reasons Effect
Less concentrated than the industry it sells to. For example, Tesco signs of 5-year Low
contracts with supplier partners and make effort to keep diversity but all treated
fairly.
The suppliers increase dependency on Tesco/supermarkets for revenue in Low
response to increasing costs of fuel, feed, fertiliser, labour, and raw materials.
Tesco/supermarkets conduct periodic review considering switching their suppliers Low
who are more dependent on Tesco/supermarkets
Not too much variety of essential food and groceries, etc. Low
Supermarkets have immense bargaining power to select favourable contracts from Low
suppliers to suppliers. Tesco adopts long-term collaborative partnerships with
suppliers (record level of Group supplier satisfaction 86.6% in 2023)
Forward integration is a form of vertical integration in which a supplier moves Do not exist
further in the direction of controlling the distribution of its products or services.
Conclusion LOW
1
Buyer Bargaining Forces
Def. The pressure that customers/consumers can put on businesses to get them to provide higher quality products, better
customer service, and/or lower prices.
Items Reasons Effect

Quantity A lot of buyers and each purchases small quantities (like millions; in-store/online Low
shopping)
Product Quality Tesco/supermarkets offer standardised or undifferentiated products High

Buyer switching costs No cost of switching at all High

Backward integration Buyers that start manufacturing a product or service in-house will no longer need to Exist so High
purchase it from a provider.
Conclusion HIGH

1
 Industry Analysis
The Porter’s five forces competitive analysis for Tesco PLC
https://my.ibisworld.com/uk/en/industry/g47.110/competitive-forces

1
Industry Analysis
Supermarkets industry in the UK

1
Product/Service Substitution Threat
Def. The extent to which different products and services can be used in place of your own.

Items Reasons Effect

Price/Performance of Yes, e.g., differentiated products; adaptive to customers’ needs, such as Hello High
the substitute Fresh; Farmers’ market, etc.

Buyers’ cost of None High

switching
Conclusion HIGH

1
 Industry Analysis
The Porter’s five forces competitive analysis for Tesco PLC
https://my.ibisworld.com/uk/en/industry/g47.110/competitive-forces

1
Internal Competition Forces
Def. The rivalry among existing competitors.
Items Reasons Effect

Many competitors; This industry is an increasing complex and fast-

1 Quantity evolving competitor landscape
High

Yes; Market Shares (%): Tesco (19.8%), J Saintsbury (12.6%), Asda

2 Roughly equal size of competitors? (9.7%), Aldi (7.3%), etc. in 2023
High

Industry of supermarkets in the UK (£212.07 billion) is at the stage of

3 Industry growth maturity towards decline.
High

4 Exit barriers Costly High

5 Incumbent firms’ commitments Highly committed to the businesses High

Neutral – continuous challenges of competitor landscape and market
6 Understanding other firms’ strategies? conditions; reviews conducted periodically
Neutral

7 Direct substitutes of services/products Yes. All the products and services provided in supermarkets are alike. High
Yes. High fixed costs due to hypermarkets in malls on a leasehold
High fixed costs and low marginal basis, leased buildings, network of stores/logistics operation, stocks in
8 High
costs warehouses, etc. Supermarket normally has high overheads and low
marginal costs.
9 Excess capacity Market saturation is high Low

10 Perishable products or services Yes High

Conclusion HIGH

16
 Industry Analysis
The Porter’s five forces competitive analysis for Tesco PLC
https://my.ibisworld.com/uk/en/industry/g47.110/competitive-forces

17
Industry Analysis

The Porter’s five forces competitive analysis for Tesco PLC

https://my.ibisworld.com/uk/en/industry/g47.110/competitive-f
orces

18
Company Analysis

19
 Company Analysis

• What is the Company’s competitive

strategy?
Cost leadership strategy.
• Strengths?
Protection against the threat of entry (low),
the power of suppliers (low), the power of
buyers (high) the substitute products
(high), and price wars (high competition)
• Weakness?
Erosion margins e.g., ranging over 3.0% -
5.1% between 2019 and 2023;
Replacement (especially faced innovation)
e.g., Local farmers’ organic products and
HelloFresh; Non-price attributes
(sustainability; warfare of stakeholders) ;
Danger of lowering costs too much
(concern about the quality of products)

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Company Analysis

Erosion margins of Tesco Inc (retail)

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 Company Analysis

• Threats ? (2023 Annual Report Risk disclosure P40 – 45)

Cyber security; Data privacy; Climate change; Pandemics; Technology; Political, regulatory and compliance; People; Health and
safety; Product safety and food integrity; Responsible sourcing; Financial performance; Customer; Tesco Bank (due to inflationary
pressures, rising interest rates and cost-of-living concerns for our customers); Competition and markets; Security of supply.

• Opportunities ? (2023 Annual Report Business Model P15 – 29)

Growth by long-term direction and purpose-led engagement; Promote sustainability; Helping customers spend less (enormous
customer base via customer royal/low-price schemes)

• Cost leadership strategy. It works for Tesco retails, but does it also work for Tesco bank? (Tesco Bank
offers a range of personal banking and insurance products with the aim of making financial products easier
and better value for its customers.)?
• Note 2 Segmental reporting 2023 Annual Report P133- 137 shows limited synergy effect of managing two
businesses
• 9 Feb 2024: Barclays to acquire Tesco's banking business for around £600M
https://finance.yahoo.com/news/barclays-bcs-acquire-tescos-retail-151100062.html?guccounter=1

22
Company Analysis

23
Company Analysis – whether cost leadership
strategy can sustain?

24
Industry Analysis
Supermarkets industry in the UK

2
Appendix