Introduction
In this report, the performance of Tesco and Carrefour is evaluated by using financial and non-financial information available in the public domain and compared in the last three years from 2016 to 2019. Furthermore, their decision to make a strategic alliance is discussed along with recommendations for their businesses.
Financial Ratio Analysis
Tesco – Profitability
The profitability ratios of Tesco are given in Appendix A. It is noted that the gross profit margin of the company has improved in the last four years, from 5.40% in 2016 to 7.55% in 2019. Although its revenue only increased by 15.81%, its gross profit increased by 61.99% in that period, which shows that the company managed to lower its cost of sales. The operating profit also increased slightly from 1.82% in 2016 to 3.89% in 2019. It indicates that the company continued to face business difficulties that forced it to incur high operating expenses. The company made a net loss in 2016, and its net profit margin remained weak in later years.
Furthermore, the Return on Equity (ROE) increased to 11.51% in 2017 after a year of net loss. However, its value declined in 2018 and 2019, which was a significant concern for shareholders (Wahlen, ‎Baginski, and ‎Bradshaw, 2018). Overall, the profitability of the company remained weak despite small improvements in its ratios.
Carrefour-Profitability
The profitability analysis of Carrefour is given in Appendix B. It is noted that the company’s gross profit margin slightly declined in the last four years. Moreover, its operating profit margin fell drastically in 2017 due to the high-incurred operating expenses. In 2017 and 2018, the company made a net loss but made significant improvement in 2019 as could be noted from the net profit margin and ROE values. Overall, the profitability position of the company was highly volatile.
Tesco – Efficiency
The sales revenue/capital employed indicates that the company generated £2.11 in revenue for every £1 in its capital. However, this value fell to just £1.88 in 2019, which shows that the inability to efficiently utilize its capital. However, the sales revenue/employee ratio value slightly improved from 0.12 in 2016 to 0.15 in 2019 because of the reduction in its number of employees. The debtor turnover of Tesco improved from 80.23 in 2016 to 85.55 in 2019, after a decline in 2017 and 2018. It implies that it took lesser time to receive cash from its credit sales. The creditor turnover was comparatively low, which implies that the company took a long time to pay its creditors. There was also a slight improvement in its inventory turnover in the last four years, which means that the company did not see any major improvement in its retail business. Finally, the non-current asset turnover also weakened as its value was 1.84 in 2016 and 1.64 in 2019. Overall, it could be stated that the company’s efficiency improved but did not significantly change.
Carrefour – Efficiency
The company’s revenue per €1 invested in capital declined in the last four years with a significant drop recorded in 2019. However, its revenue per employee slightly improved in 2019 after three years of no change. The debtor turnover of the company declined in the last four years, which implies that it took a long time to receive cash from its credit sales. The credit turnover of Carrefour was very low, which reflects its strategy to prolong its cash conversion cycle. The inventory turnover was also slow as the company’s stores and warehouses held inventories for a longer period. The non-current asset turnover also fell in the last four years. Overall, the company’s efficiency weakened in the selected years.
Tesco – Liquidity
The current ratio and quick ratio values of Tesco were well below the standard value of one (Wahlen, ‎Baginski, and ‎Bradshaw, 2018). It indicates severe liquidity issues that the company faced, which could adversely affect its business in the coming years. Overall, the liquidity position of the company remained weak in the last four years.
Carrefour – Liquidity
Carrefour’s current ratio and quick ratio values were less than one, which implies that its current liabilities exceeded its current assets. Overall, the liquidity position of the company was weak.
Tesco – Gearing
The loans/capital employed analysis shows that the company managed to reduce its debt in 2017 and 2018, but failed to generate sufficient earnings to keep its leverage low in 2019. Furthermore, it is noted that the company’s ability to generate high operating profit was affected in the last year as the interest cover ratio value declined significantly from 8.79 in 2018 to 3.34 in 2019. Overall, the solvency position of the company was volatile.
Carrefour – Gearing
Carrefour’s loan to capital employed ratio did not change, but there was an increasing trend since 2017. The company’s interest cover improved after a significant decline in 2017. Overall, it is noted that the company’s leverage position was stable.
Horizontal Common Size Analysis
It is noted that Tesco’s revenue was 15.81% higher than the base year in 2019. Furthermore, its operating income was 147.59% higher than in 2016 in 2019. Although the net income of the company also increased, it fell significantly in 2019. The horizontal analysis of the balance sheet indicates that the company’s current assets were much lower than in 2016. The company invested heavily in acquiring non-current assets over the last four years. Furthermore, there was a decline in the company’s current and total liabilities as compared to 2016. The company’s equity improved as Tesco accumulated large earnings in the last four years.
Moreover, Carrefour revenue was 5.88% lower in 2019 than in 2016. Its gross profit and operating income were much lower than in 2019 as compared to 2016. However, its net income in 2019 was 52.21% higher than the base year. The horizontal analysis of the balance sheet indicates that the company’s current assets were slightly lower than in 2016, whereas its non-current assets were higher. On the other hand, its current liabilities declined in 2019, but total liabilities increased. The company’s equity deteriorated in the last four years due to net losses in 2017 and 2018.
Vertical Common Size Analysis
The vertical analysis indicates that the current assets of Tesco declined as a proportion of total assets, and its non-current assets increased. On the other hand, it is noted that the company’s current liabilities and total liabilities declined as a proportion of total assets, whereas its total equity increased.
The current assets of Carrefour also declined as a proportion of total assets, and its non-current assets increased. On the other hand, it is noted that the company’s current liabilities and total liabilities increased as a proportion of total assets, whereas its total equity declined.
Comparative Analysis of Tesco and Carrefour
The analysis given above indicates that Tesco performed better than Carrefour in terms of profitability. However, both companies faced significant uncertainties as competition intensified, and it is noted that both companies had financial losses in the last four years. Furthermore, the analysis shows that Tesco had stronger efficiency management as compared to Carrefour. Still, both companies faced cash-flow problems that forced them to delay payments to the suppliers, which could affect their relationships in the coming periods. Both companies had poor liquidity due to their high inventories and slow inventory movement. The gearing position of both companies was similar as they had maintained their capital structure and had low operating profits in the last four years.
Evaluation of Performance
The analysis showed that both companies lacked the strategic will and ability to face the increasing competition from physical-store retailers and online companies. Other companies were able to achieve stronger results due to their strong product diversification and acquisition strategies. Both Tesco and Carrefour focused on expanding their sales network due to which they lost their focus on primary high-profit markets, which allowed competition to strengthen and impose greater challenges for these companies.
Analysis of the Alliance
The strategic alliance between Tesco and Carrefour signed on July 2, 2018, was expected to enhance their product choices and supply chain management through the development of effective and efficient relationships with suppliers. Both companies opted for this alliance to improve the shopping experience of customers and increase their sales and profitability. However, it is noted that the revenues of both companies increased in 2019, but Tesco’s profitability weakened, whereas Carrefour made a significant recovery in the last year. The results showed that these companies did not have the low-price competitive advantage anymore, and they need to redevelop their strategies to avoid the declining phase in their lifecycles.
Conclusions and Recommendations
The primary weakness of Tesco and Carrefour is that they lost their focus on primary markets that generated high profits for them in previous years. Moreover, these companies failed to accept and address the challenges imposed by low-cost online companies. It is recommended that both companies should focus more on diversifying their product lines and improving the quality of branded items. Furthermore, they should lower their operating costs by closing down low-profit generating big retail stores, and investing additional amounts in their online businesses. These companies should invest in opening small stores that have greater customer reach. Both firms must work with local and international suppliers who can promise a high quality and timely delivery of products.
Reference List
Wahlen, J. M., ‎Baginski, S. P. and ‎Bradshaw, M. (2018) Financial reporting, financial statement analysis and valuation. 2nd ed. Boston, MA: Cengage Learning.