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Wal-Mart and Tesco Incorporation Dissertation


Wal-mart

Analysis and Interpretation of Sales and Profit Figures

Wal-Mart and Tesco operate within the retail industry. Wal-Mart Stores Incorporation has a number of retail stores under different formats which are distributed around the world. In the United States, Wal-Mart operates three main formats which include Sam’s Club, International and Wal-Mart US. Since its inception, Wal-Mart has been committed towards saving the customers money (EBIT Financial Analysis Center. 2011, para. 4).

Over the past few years, Wal-Mart and Tesco have been successful as a result of effective management. On the other hand, Wal-Mart has incorporated a low pricing strategy which enables it to attract a large number of customers.

Besides, the store stocks a large assortment of goods to as to be able to have a constant market for the different products. However, as a result of the 2007 economic recession, the firms experienced a significant reduction in their sales level. The table below illustrates Wal-Mart’s growth in sales over the past five years.

Gross and Net Profit Margin

According to Booker (2006, p. 34), these ratios are used to indicate a firm’s profitability. Wal-Mart has experienced a rise in its profitability for the past five years. However, Wal-Mart’s profitability has been relatively high compared to Tesco’s. Its gross and net profit margins have been on an upward trend as illustrated in table 2.

According to Pinson (2008, p. 115), a high gross profit margin indicates the efficiency of the firm in paying for the goods. From the chart below, the rise in the firm’s gross profit margin indicates that Wal-Mart has been effective in paying for its goods.

Operating Profit Margin

This ratio describes the proportion of a company’s revenue that remains after the company has settled its cost variables. An efficient company should have a relatively high operating profit margin for it to be able to take care of its fixed expenses. Wal-Mart has been effective in improving its operating profit margin. On the other hand, its operating profit margin for the past five years has been fluctuating.

Analysis and Interpretation of Financial Ratios

Return on Assets (ROA)

This ratio indicates a firm’s effectiveness in utilizing its assets to generate profits (Needles, Powers &Crosson, 2008, p. 210). For the past five years, Wal-Mart’s average ROA is 8.3%.

Return on Equity (ROE)

The ratio is used to determine the effectiveness with which a firm is utilizing the capital invested by the shareholders to generate profits (Dorsey & Mansueto, p. 23). Wal-Mart’s return on equity has been for the past five years approximately 20.9%.

Earnings per Share

This ratio is indicates the proportion of a firm’s total income which ‘belongs’ to each ordinary share holder. The ratio is very important in determining the value of a firm’s share. Wal-Marts EPS during its 2010 financial year was $1.67.

Dividend Payout Ratio

This ratio indicates the proportion of a firm’s earnings which is issued to ordinary and preferred shareholders. During its 2010 financial year, Wal-Mart’s dividend payout ratio was 27%.

Tesco

Analysis and Interpretation of Sales and Profit Figures

Over the past few years Tesco have been successful as a result of effective management. For example, Tesco has managed to maintain a relatively high sales revenue level (Tesco, 2010, 2010). This has resulted from its effectiveness in formulating and implementing the pricing strategy.

Its strategy to incorporate a broad assortment of consumer products has played a vital role in the firms’ effort to attract and retain its customers. Just like Wal-mart, Tesco also capitalizes of low pricing strategy and wide assortment of products on its shelves to ensure sustainable market throughout the year.

Table 1: Wal-Mart’s and Tesco’s net sales

Year 2010 2009 2008 2007 2006
Wal-Mart (Amount in $) 405, 046 401, 087 373,821 344, 759 308,945
Tesco (Amount in $) 93,275.5094 88,338.8404 77,521.4381 42,641.0 39,454.0

From the table above, it is evident that Wal-Mart has a relatively strong performance with regard to net sales compared to Tesco. According to Hitt, Ireland and Hoskisson (2011, p.137), Wal-Mart is facing stiff competition from other firms which is leading into a decline in its sales revenue. This arises from the fact that the firm is losing its customers to local and international firms operating in the US.

Gross and Net Profit Margin

Booker (2006, p. 34), asserts that these ratios are used to indicate a firm’s profitability. Tesco has also experienced increased profitability over the past five years despite economic problems. Nevertheless, its profitability has been relatively lower than that of Wal-mart.

Its gross and net profit margins have been on an increase table 2 indicates. According to Pinson (2008, p.115), a high gross profit margin indicates the efficiency of the firm in paying for the goods.

Table 2: Wal-Mart’s and Tesco’s gross profit and net profit margins

Year 2006 2007 2008 2009 2010
Gross profit margin (%)
Wal-Mart
23.1 23.4 24 24.2 24.8
Tesco 20.3 21.6 22 23 23.7
Net profit margin (%)Wal-Mart 3.54 3.34 3.4 3.27 3.59
Tesco
Net profit margin
6.28 % 5.3 4.6 4.3 4.10

With regard to its net profit margin, Wal-Mart experienced a decline in its net profit margin in 2007 and 2009. However, this trend was reversed in 2010 with the margin rising to 3.59% from 3.275. This illustrates that the firm has a relatively high profitability potential (Pinson, 2008, p.115).

Operating Profit Margin

This ratio depicts the proportion of a firm’s revenue which remains after settling the variable costs. A firm operating efficiently should have a relatively high operating profit margin so as to be able to cater for its fixed costs. Tesco has managed to maintain stability in its operating profit margin as illustrated by table 3.

Table 3: Tesco and Wal-Mart’s operating profit margins

Year 2010 2009 2008 2007 2006
Operating profit margin (%)
Wal-Mart
5.91 5.68 5.87 5.94 5.93
Tesco 6 6 6 6 6

Analysis and interpretation of financial ratios

Return on Assets (ROA)

This ratio indicates a firm’s effectiveness in utilizing its assets to generate profits (Needles, Powers & Crosson, 2008, p.210). For the past five years, Tesco Incorporation is 7.2%.

Ratio 2007 2008 2009 2010 2011 TTM
Wal-Mart ROA 7.8 8.1 8.2 8.6 9.3 9.3
Wal-Mart ROE 19.7 20.2 20.6 21.2 23.6 23.5
Tesco ROA 7.5 6.1 8.53 5.41 7.3 7.2
Tesco ROE 19.5 16.7 20.7 14.06 10 17.4

Return on Equity (ROE)

The ratio is helps in determining the effectiveness of utilizing invested capital. Tesco’s ROE for the past five years is 7.2%. This means that Wal-Mart has been effective in utilizing the shareholders equity compared to Tesco.

Earnings per share

EPS is usually calculated after all the preferred shareholders have been issued their dividends. The ratio is very important in determining the value of a firm’s share. Tesco had an EPS of $0.93.

Dividend Payout Ratio

Tesco had a relatively high dividend payout ratio which averaged 41.6%. This indicates that the firm Tesco has a relatively strong dividend policy.

Conclusion

The analysis above indicates that Wal-Mart has a relatively strong market position compared to Tesco. For example, its high sales revenue and profit indicates that the firm has been effective in attracting and retaining its customers. In addition, its pricing strategy has also contributed towards its high sales revenue and profitability.

Despite this, the firm has not been effective in maintaining a stable operating profit margin as it is in the case of Tesco. Tesco’s operating profit margin is high indicating its strength in meeting fixed costs. With regard to asset utilization so as to generate profit, Wal-Mart is relatively effective compared to Tesco as illustrated by the high ROA.

Similarly, Wal-Mart has also been effective in utilizing the shareholder’s capital to generate profit as indicated by the high ROE. Its earning per share is high compared to that of Tesco.

This indicates that an investor can achieve high returns by investing in the company’s share. On the other hand, Tesco has a relatively high dividend payout ratio compared to Wal-Mart. This indicates that Tesco has implemented a strong dividend policy.

In the analysis of the strategies for success it is clear that the two companies employ different strategies for success. Walmart has been more client-centric in its effort to boast its growth.

It boost of having a strong mechanism that aims at saving the clients money through offering the best value service as well having the most affordable retail goods. It also offers the widest product portfolio in the retail market in the economies that it operates in.

As such it boasts of a very wide consumer base. Tesco, on its part, boost of having an efficient management system. Such efficiency in management results to consistent high profit ratio through out the years.

Since its inception Walmart has had a preference to invest in emerging markets as part of its international business growth strategy. The company sees emerging markets such as Indian as possible avenues to increase it revenue growth. As such this has seen the company make concerted efforts in pressurizing the government of India to relax it anti foreign investment policy.

India is considering doing so a latest reports indicate that allowing foreign investors into the humongous economy would have direct positive impact on the economy. Walmart has promised to buy directly from the India’s farmers, a move that would see the farmer fortunes group by at least 20%.

Recommendations

As a strategy to investing in emerging markets Walmart should enter into agreement and partnership with local enterprise as it has done in India. This has seen it open up several outlets in collaboration with Bharti on a 50% ownership basis. Tesco on its part has had a successful interment policy in merging markets. In the last few years it has seen its profits rise by an average figure of 7% (Sharma. and Parija 2010).

This growth is largely attributed to investment in the said markets. As a result the company should follow it s peer Walmart and establish outlets in India. The company should do this as one of its asset recovery strategy in efforts to boost its asset maturity especially after the recent downturn in its asset base and decline in fortunes.

The effort to invest in emerging markets is going to have a significant effect on large food retailers as well as suppliers in that market. This is because fro these companies especially Walmart, food business consist of about 50% of its business activities. Walmart takes great pride in sourcing and selling quality groceries and other food products in all its stores.

Furthermore the company has intended to raise its stake in groceries and the entire agricultural industry by investing heavily in environmental friendly agriculture. This effort is aimed at enhancing its efforts to support sustainable farming. This is an open opportunity for both small and larger scale farmers to engage directly with farmers. As a result more produce from farmer will find its way into Walmart grocery business.

Walmart also hopes to improve its packaging of its food products and as such reduces wastages by at least 15%. Furthermore the company has the biggest supply chin mechanism in food business in the world. In countries where thus company has established business such as America and Canada the company has utilized these two strategies to effectively boast its food busies.

As a result, some manufacturers of food product have had to redesign their products to fit in the company’s stores. Moreover this strategy has been very sufficient in pushing to the periphery other major food supply. The company hopes to invest and sell about US$ 1 billion worth of groceries in its emerging business. This will also see it gain an advantage over major food suppliers.

However it is worth to know that already there are existing major suppliers in these new markets. As such the company should utilize its expansive food supplies chain as well as holding to its promise to buy food directly from farmers. This will se it gain positive rating from such government for its efforts to improve local economies.

Walmart as well as Tesco investment policies in markets outside USA and Canada have been cautious. The companies have chosen to invest in countries where that is a sizeable number of middle class citizens. This is because Walmart see this group of population as the best in growing its retail business. As such in choosing its investment in emerging market the companies should hold on to this policy.

Some of the best investment opportunity that satisfies this investment criterion includes India. So the company is well informed to push hard in establishing a foothold in India’s retail markets. The companies in investing in emerging economies should tread cautiously and not offend the local social cultural sensitivities.

This is because consumers rate companies on their ability to identify and respect local cultures as such in a country like Indian these two giant retailers should establish their business operations with respect to the local Wallah Culture. This will adds to the appeal that the company’s have in India society that has strong social cultural identities.

Reference List

Booker, J., 2006. Financial planning fundamentals. Toronto: CCH Canadian Limited.

EBIT Financial Analysis Center. 2011. Wal-Mart Stores Incorporation. Web.

Hitt, M., Ireland, D. & Hoskisson, R., 2011. Strategic Management: Competitiveness and Globalization. Mason, OH: Cengage Learning.

Needles, B., Powers, M. & Crosson, S., 2008. Principles of Accounting, Boston, MA: Houghton Mifflin.

Pinson, L., 2008. Anatomy Of A Business Plan: A Step By Step Guide To Building Business And Securing Your Company’s Future. Tustin, CA: Out Of Your Mind And Into The Market Place.

Tesco. 2010. A Business for a New Decade. London: Tesco Incorporation.

Sharma, M. and Parija, P. 2010. Wal-Mart Optimistic’ India to Allow Foreign Retail Investment.Web.

This Dissertation on Wal-Mart and Tesco Incorporation was written and submitted by user Sebastian Berg to help you with your own studies. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly.

Sebastian Berg studied at Worcester Polytechnic Institute, USA, with average GPA 3.58 out of 4.0.

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Berg, S. (2020, February 10). Wal-Mart and Tesco Incorporation [Blog post]. Retrieved from https://ivypanda.com/essays/wal-mart-and-tesco-incorporation-dissertation-2/

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Berg, Sebastian. "Wal-Mart and Tesco Incorporation." IvyPanda, 10 Feb. 2020, ivypanda.com/essays/wal-mart-and-tesco-incorporation-dissertation-2/.

1. Sebastian Berg. "Wal-Mart and Tesco Incorporation." IvyPanda (blog), February 10, 2020. https://ivypanda.com/essays/wal-mart-and-tesco-incorporation-dissertation-2/.


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Berg, Sebastian. "Wal-Mart and Tesco Incorporation." IvyPanda (blog), February 10, 2020. https://ivypanda.com/essays/wal-mart-and-tesco-incorporation-dissertation-2/.

References

Berg, Sebastian. 2020. "Wal-Mart and Tesco Incorporation." IvyPanda (blog), February 10, 2020. https://ivypanda.com/essays/wal-mart-and-tesco-incorporation-dissertation-2/.

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Berg, S. (2020) 'Wal-Mart and Tesco Incorporation'. IvyPanda, 10 February.

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