Tesco Introduction to Finance & Economics Author Name Coursework Header Sheet 239097-198 Course FINA1126: Intro to Finance & Economics Course School/Level B/UG Coursework Assignment Assessment Weight 40.
00% Tutor G Sarwar Submission Deadline 23/01/2018 Coursework is receipted on the understanding that it is the student’s own work and that it has not, in whole or part, been presented elsewhere for assessment. Where material has been used from other sources it has been properly acknowledged in accordance with the University’s Regulations regarding Cheating and Plagiarism. 000959382 Tutor’s comments Grade Awarded___________ For Office Use Only__________ Final Grade_________ Moderation required: yes/no Tutor______________________ Date _______________ Contents Introduction..
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…. 4 Macro-environmental factors..
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.. 5 Determinants of Demand & Supply…..
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.. 6 Increase interest rates & Effects on borrowing……
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7 Interest rates & Growth……..
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. 8 Corporate Governance & FTSE 350 index….
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……………………………………………………….. 10 References…………………………………………………………………………………………………. 11 Introduction Tesco is an ever growing multinational grocery store andthird largest retailer in the world measured by profits, with a marketcapitalization of roughly £17 billion. Tescois a large supermarket company associated with selling household goods andservices as well as other retail banking and insurance services. In this reportI will be discussing the financial and economical factors the affect Tesco as awhole company. Macro-environmentalfactors Macro-environmental factors can be defined as externaland uncontrollable influences that affect an organization’s businessperformance. These factors include, demographic, economic, political,sociocultural, technological, global and physical changes, which lead to acompany’s decision making. One major factor, which has affected Tesco in the way itsbusiness is conducted, is politics, legislations and the level of governmentintervention within Public Limited Companies. There are a range of laws andregulations Tesco must adhere to within its industry, to ensure politicalstability, as well as fair and appropriate business. For instance, in regardsto the UK agricultural market, which receives, subsidies of £3.2billion a year,the government has deemed to decrease this sum by year 2020 unless farmers’earn it’ (BBC, 2017). This in turn will affect Tesco, as lower subsidies forfarmers will result in a fall of their ability to supply and meet Tesco’sagricultural standards. In addition, substantial penalties can be imposed onTesco, if this leads to them forcing suppliers to sell at a price, which islower than costs. (Winnett 2015). Another example is that the Food Retailing Commission in2004 announced a policy, that Tesco are not allowed to demand payments fromsuppliers or change their prices without prior notice. To implement these,Tesco offers its customers many promotional bargains and perks in accordance tothe amount of grocery shopping with them. One is with the use of their loyaltyclub card customers can receive discounts on many things such as cinemas, themeparks and saving in the price of fuel. More so, technological advances are crucial for big firmssuch as Tesco as they are not only needed for the production and distributionof goods, but for engaging and communicating with customers also. According to the ONS, In January 2017, theweekly average spending online was £1billion; 10% more than the previous yearstatistics. This is of great advantage to Tesco as it has given them theopportunity sell their products and services using their online website andmobile phone app, which means people can shop from their comfort as well asarrange home delivery. This has boosted Tesco’s overall revenue vastlyaccording to (Tomlinson and Evans, 2005, n. p.) who stated ‘mobile technologyhelped improve Tesco’s distribution service because customers can select theirpreferred food and wine through their mobile.’ In addition, having self-checkoutservices at Tesco’s has reduced its manual labour costs and proved to be moreconvenient and effective for the ease of customers. With the rise of global warming and emphasis onenvironment sustainability, a study completed by Sustainable Brands, producedresults that 84% of consumers would rather purchase products that areenvironment-friendly. This has increased pressure on companies such as Tesco totake measures to ensure they are protecting and preserving the environment. InNovember 2015, Tesco joined the UN Global Compact, an initiative thatencourages businesses worldwide to adopt sustainable and socially responsiblepolicies. Some key commitments Tesco have adopted, taken from their 2017 annualreport, includes achieving zero net deforestation in their supply chain by 2020and increasing their range of eco-labelled certified fish by partnering up withthe Marine Stewardship Council (MSC). Determinants of Demand generally refers to the quantity of a productavailable in the market for sale at a specific price and at a given time. The level of supply can be determined frommany factors; the obvious being price, as the increase of price of a productincreases its supply. The supply of a good is based on the level of stock andits market price, as sellers would tend to increase the supply of a product ifits market price is more than its cost price, as this would generate profit forthem. For example, if Tesco this week have 1000 sack of ricestock selling at a market price of £5 each, and it costs them £4 a sack toproduce, due a to a benign shock of weather adversity no more rice can beproduced over the next couple months; all of a sudden the demand for rice mayincrease so much, that the market price of rice may increase to £15. ThereforeTesco can afford to increase their supply of rice sacks as the market price ishigher than usual and they can generate greater profit. Other factors which can determines Tesco’s supply ofproducts, is the cost of factor of productions and cost of raw materials. Ifthe cost of factor of production were to be greater than the market price ofrice, than Tesco would decrease their supply of the rice and wait for thefuture when the price will seize to rise. In addition if there was a suddendemand for wheat instead of rice due to it being cheaper, then farmers may haveto use larger expenses to harvest more wheat than rice, which in turn willincrease the amount of wages Tesco has to give to its agricultural farmers. Moreover, government regulations and policies can affectTesco’s supply as a greater tax can decrease their supply. However this dependson the type of tax, for e.g. the excise tax on cigarettes introduced in 2017did not lead to a fall in supply by Tesco, due to the demand for cigarettesbeing inelastic of price. This means consumer demand for cigarettes due toaddiction, is still visible and suppliers such as Tesco have no reason todecrease its supply as it is still generating profit from them. Additionally, the level of demand for goods and servicescan be determined from many other factors, and Tesco usually operates on thesame basis as other super market competitors such as ASDA, Sainsbury’s, Lidl,etc. This is because the demand for basic groceries can be seen across the sameprice levels at each competitor store. Customer demands for necessity fooditems such as bread, eggs, milk will hardly decrease but customers will beprice sensitive about these items. If the price of bread increases from £1 to£5 at Tesco’s, consumers will most likely go to other stores to buy bread andthis will decrease the demand at Tesco’s. However if it was an item with lowprice elasticity of demand and with no close substitutes such as salt, theincome effect will not be as much and people would still buy it at Tesco’sdespite its increase in price. Furthermore, other factors which effect demand forTesco’s good and services are consumers taste and preferences, as well aseffective advertisement. Persuasive and eye catching advertisement from Tescomay attract customers into shopping with them over shopping at competitorstores. These can be from commercials and billboards, which display greatoffers and therefore increase its demand.Increase interest rates &Effects on borrowingInterest rates are the cost and extra percentage of moneycharged on a loan borrowed from the bank. Generally, higher interest ratesmakes borrowing more expensive for any person or company because this meansgiving back a larger percentage to the bank. Firstly, Tesco being a large PLC doesnot necessarily have to borrow funds from a bank, as shareholders own itscompany and there are many investors who would invest into Tesco for a greaterreturn in the future. More so, Tesco has its own financial bank for consumersand could give out loans at a fixed interest rate instead of rising rates likethe Bank of England. This would increase Tesco’s funds as they are beinginjected with more money than they loaned out. In addition, taken from Tesco’s annualstatistics, it has nearly £17billion in shares, starting from around £207 ashare. If Tesco needed further finances, they could attract many moreshareholders by decreasing share prices or even increasing the amount ofdividends. Interest rates & Growth From a consumers point of view, higher interest ratesmeans it is more expensive to borrow which therefore discourages spending andconsumption. If majority of Tescocustomers have bank loans or savings, and there is a rise in interest rates;then people will have less real disposable income to spend as they will have topay off the bank more. Also if people have savings in banks, they will befurther encouraged to save as they are receiving a greater interest return ontheir money. Correspondingly, this will make the pound the stronger andincrease imports, as the pound is more valuable. This may lead to a decline inTesco sales if consumers are spending more on goods from overseas. In addition, higher interest rates will increase the UK government’sover £40bn a year national debt and as a result, this may lead to themincreasing corporate tax which in turn will effect Tesco. Another negative effect higher interest ratescould have on Tesco is that, they may have to make workers redundant and causeunemployment due to their sales output falling and as a result not needing thatmany workers. Overall, high interest rates can be unhealthy for Tesco’sgrowth as well as the economy as a whole because aggregate demand willdecrease. This can be depicted from the graph below. (Figure 1) . Figure 1- a decrease in Aggregate demand from AD1 to AD2as a result of higher interest rates. Corporate Governance & FTSE350 index Corporate governance is the effective and practical managementsystem of ensuring long term business success within a company. The board ofdirectors in Tesco are the governors who are liable for directing decisions andresponsibilities to different participants within the business as well askeeping them informed with corporate affairs; these include managers, auditcommittee, remuneration committee, regulators, shareholders, etc. All companies within the FTSE 350 index are aligned toact within the interest of their shareholders and build relationships withtheir investors, as this is their form of finance. This is also in relation toprevious corporate accounting frauds during early 2000’s and the financialcrisis in 2008, which led to people losing their money. Tesco’s advantage of being part of the FTSE 350 indexalso includes diminishing conflict of interest between shareholders. As there are agency problems in largecorporations, which include a split between ownership and management as well asdistribution of information, Tesco looks to overcome this by building trustbetween its shareholders and not hiding any information as this attracts newinvestors. Besides, Tesco attract many more investors by being part of the FTSE350 index as there is a greater pool of capital and security for shareholders. Conclusion This report hastouched upon the influence of micro and macro economical factors on thebusiness performance of Tesco. Backed up by its annual report, Tesco is a majorPLC, which holds a substantial amount of stakeholder shares and dominates interms of revenue and sales within its supermarket industry. References
