You only need answer 1 question only :Evaluate Tesco’s performance from FY 2011/12 to FY 2015/16, based on the company’s financial statements.
Microsoft Word - 9B17B004 9B17B004 TESCO: FROM TROUBLES TO TURNAROUND1 Anupam Mehta, Utkarsh Goyal, and Sanchit Taneja wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e)
[email protected]; www.iveycases.com. Copyright © 2017, Richard Ivey School of Business Foundation Version: 2017-03-13 “We set out to start rebuilding profitability whilst reinvesting in the customer offer, and we have done this,”2 exclaimed Dave Lewis, chief executive officer (CEO) of Tesco PLC, while declaring the company’s annual results on April 13, 2016. Tesco, a U.K.-based retailer with a market capitalization of £14.73 billion,3 was Britain’s biggest grocer both by market share and revenue.4 The company had posted a £162 million pre-tax profit for fiscal year (FY) 2015/16, up from a loss of £6.38 billion in FY 2014/15. In Tesco’s 2016 annual report, Lewis stated, “This has been a significant year for Tesco. We have delivered unprecedented change over the past 12 months as we have begun to transform our business.”5 However, while the company had been able to churn out profitability, the net sales had consistently dropped since FY 2012/13. Similarly, the share price of the company had fallen by more than 20 per cent from January 2015 to January 2016, and by around 50 per cent from January 2014 to May 2016 (see Exhibit 1). What course of action would enable Lewis to improve Tesco’s value for shareholders? What area(s) should he focus on in order to bolster Tesco’s financial performance? What should Lewis do to improve Tesco’s market share in the United Kingdom? THE COMPANY Tesco was established as a grocery and general merchandise retailer in 1919.6 However, since 1990, the company had started to diversify by offering books, clothing, electronics, furniture, toys, petrol, software, financial services, and telecommunications/Internet services—all while expanding its reach geographically. Tesco offered both value range products (branded as “Tesco Value”) and premium range products (branded as “Tesco Finest”). As of 2016, the company had 3,460 stores in the United Kingdom (see Exhibit 2), 6,902 stores around the world, and 476,000+ employees (see Exhibit 3).7 Tesco ranked as the world’s fifth largest retailer in terms of revenue as of 2015.8 Tesco’s rank dropped from second in 2012 to fifth in 2013, attributed to the declining sales of the company.9 Tesco had been listed on the London Stock Exchange since 1947,10 and was a constituent of the Financial Times Stock Exchange 100 Index.11 The firm had a market capitalization of approximately £18.1 billion as of April 22, 2015—the 28th-largest of any company with a primary listing on the London Stock Exchange.12 Page 2 9B17B004 Business Model According to Tesco’s 2015 annual report, the company’s business model focused on four key areas: customers, products, reinvestment, and channels. The company had a simple mission: “To be the champion for customers, helping them to enjoy a better quality of life and an easier way of living.”13 Growth Strategy Tesco had refocused its business under three operational headlines: (1) listening to, understanding, and reaching out to customers to create the best possible offer; (2) working with growers and suppliers to make great products, and helping to deliver the best value to customers; and (3) working across different channels to get those products to customers in the most convenient way possible. The company had a special blend of capability, skills, and reach, complemented by a rich heritage in retail, which management hoped would help to earn customer loyalty and subsequently create value for shareholders.14 Past Performance With close to 100 years of corporate history, Tesco had pioneered smaller convenience stores and provided products under its own brand.15 The number of Tesco stores in the United Kingdom increased from 2,715 stores in FY 2010/11 to 2,979 stores in FY 2011/12.16 This rapid expansion helped the company emerge as one of the biggest retail chains in the world. Tesco’s financial performance was on an upward trend until FY 2011/12. The company’s revenue increased from £60.46 billion in FY 2010/11 to £64.54 billion in FY 2011/12 (an increase of 6.76 per cent), while the gross profit increased from £5.13 billion in FY 2010/11 to £5.26 billion in FY 2011/12 (an increase of 2.65 per cent) (see Exhibit 4). However, Tesco’s revenue then fell from £64.83 billion in FY 2012/13 to £63.5 billion in FY 2013/14 (see Exhibit 4). Tesco’s then CEO, Philip Andrew Clarke, tried to revive the business with a plan to inject £1 billion to refurbish 430 stores and hire 8,000 new store workers to enhance the shopping experience for customers.17 The idea was to turn Tesco into a multi-channel retailer in an effort to revitalize its business and grow with customers’ needs. Despite these efforts, profits and share prices continued to decrease. As a result, Clarke was fired. The New CEO: Dave Lewis Lewis became group chief executive of Tesco on September 1, 2014. He brought with him 28 years of experience at Unilever in a variety of roles, which took him across Greater Europe, Asia, and the Americas. His last three roles included chairman of Unilever in the United Kingdom and Ireland, president of the company’s divisions in the Americas, and global president of the personal care division. During his career, Lewis had been responsible for a number of business turnarounds within these roles and areas.18 Upon Lewis’s move to Tesco, former Tesco board director Andy Higginson said, “I think Dave Lewis is a great hire for Tesco. . . . He’s very seasoned and a successful manager. He’s got great values and will be very strong on sorting the strategy out.”19 Market analysts agreed that Lewis’s appointment brought hope for Tesco, with one analyst noting that the appointment, coupled with the recent hiring of Alan Stewart from Marks & Spencer as Tesco’s finance director, meant that “shareholders now have the change they have been pushing for.”20 Page 3 9B17B004 Lewis joined Tesco at a time when the company was undergoing a severe financial crisis. From the company’s cash position to its decreasing sales, Tesco’s new CEO had numerous issues to address. Soon after hiring Lewis in September 2014, Tesco experienced another massive setback in the form of an accounting scandal. Tesco’s previous chairman Sir Richard Broadbent explained: The issues that have come to light over recent weeks are a matter of profound regret. We have acted quickly to clarify the financial performance of the company. A new management team is in place to address the root causes of the misstatement, and to develop and implement the actions that will build the company’s future.21 The fraud was publicly exposed when the company’s predicted profits for the first half of 2014 were cut back from £1.1 billion to £263 million. Accounting issues further affected Tesco’s performance. THE RETAIL INDUSTRY Although the U.K. retail industry had grown steadily until 2013, the trend started to dip after this point. This decrease was attributed to the United Kingdom’s slow economy at the time. The growth rate decreased from 2.3 per cent in 2014 to 2 per cent in 2015. With the country’s gross domestic product growth hovering around 2 per cent (which was less than the long-term economic growth rate), retail spending was projected to decrease by around 0.2 per cent every year until 2020.22 Several reports and trends exhibited a move toward technology and online retail in the U.K. retail industry. Moreover, the industry began to experience a dramatic shift toward discount retail stores, which were very simple in design. Due to the volatile economy, consumers started to prefer discount stores over all other offerings. The average 12-week market share of German discount stores such as Aldi and Lidl saw a rise of over 1 per cent from 2014 to 2016, while other competitors in the U.K. market saw negative market share growth during the same period (see Exhibit 5).23 TESCO’S FINANCIAL RESULTS FOR FY 2014/15 AND 2015/16 During FY 2014/15, there had been renewed focus on corporate governance. The company’s board spent a significant proportion of its time examining and strengthening Tesco’s processes throughout the group. Low-performing stores were shut down, and many staff members were laid off to reduce costs. Tesco closed 43 stores that were not yielding any profits and stalled the opening of 49 new stores. Moreover, the company regained ownership of 21 superstores to reduce rent exposure. In an attempt to focus on its core customers, Tesco also sold off all major non-core business. The company’s Korean business, Homeplus, was sold for £4.2 billion as a measure to strengthen Tesco’s balance sheet.24 In FY 2015/16, Lewis’s primary focus was to turn Tesco back into a customer-centric business. Therefore, Lewis implemented many strategic changes with three focal points to help Tesco recover from the accounting scandal of 2014: (1) regaining competitiveness in core U.K. business; (2) protecting and strengthening the balance sheet and profits; and (3) rebuilding trust and transparency.25 Competition in the market was driving companies to lower their margins and offer deep discounts. Tesco’s top competitors—Asda, Morrisons, and Sainsbury’s—had a solid hold in the market, and new players— Aldi and