OXFORD BROOKS UNIVERSITY

RESEARCH AND ANALYSIS REPORT

TOPIC: 8
An analysis of the financial situation of
Tesco PLC

By:
Muhammad Osama
m.osama@hotmail.co.uk

ACCA Registration Number: 1229172

October 2008

RESEARCH & ANALYSIS PROJECT

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 4,979 words

CONTENTS PAGE Page

1. Introduction 3
1.a Reasons for choosing the topic
1.b Company Profile
1.c Aims and Objectives of the Report
1.d Executive Summary

2. Information Gathering 6
2.a Sources used and their reasons
2.b Methods used

3. Research & Analysis 8

3.a Porter’s Generic Strategies
3.b SWOT Analysis
3.c Recovery Plan
3.d Financial Performance

4. Conclusions 22

5. Bibliography 25

6. Appendices 27

1 INTRODUCTION
1.1 Reasons for choosing the topic
After completing the ACCA fundamental level, I met the eligibility criteria of BSc
Honours Programme, and had to select a topic from a list of more than twenty to
embark upon. After short listing them one by one Topic 8 “An Analysis of the
financial situation of your choice of organization” stood out.
There were several reasons for choosing this particular topic. Apart from my
personal interest, this the choice of this topic able to apply my academic learning
into a real world scenario as well as further refine my analytical skills. This would
also help me in my future as I have plans to invest into Plc’s through the stock
exchange once I start my career.
I wanted to perform the analysis on an organisation that was involved in a highly
competitive environment so that I would be able to compare its results with a
competitor to see the financial performance and its relation to the strategy. This
would also help make the report more interesting for readers. Then while reading
an article in the Independent with the heading ‘Sainsbury's outpacing Tesco with

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sales growth’ it occurred to me that Sainsbury’s is an ideal organization to
analyze that operates in a highly competitive industry-Food Retail.
It was then that I decided to analyse the financial performance of Sainsbury’s and
to compare it with Tesco.

1.2 Company Profile

“J Sainsbury plc is a public limited company listed on the London stock exchange.
Sainsbury's was founded in 1869 by John James and Mary Ann Sainsbury. They
opened their first small dairy shop at one of London's poorest areas and the
Sainsbury’s shop quickly became popular for offering high-quality products at low
prices. It was so successful that further branches were opened in other market
streets.”
(J Sainsbury’s Plc, Our History [online])
J Sainsbury plc is a leading UK food retailer with interests in financial services. It
serves 16 million customers each week in over 780 stores across the country. The
supermarket chain operates three main store formats; regular Sainsbury's stores,
Sainsbury's Local (convenience stores) and Sainsbury's Central (smaller
supermarkets in urban locations) stores. Sainsbury's also operates an internet
shopping service branded as "Sainsbury's Online". This service is available to over
75% of the UK population.
The group also has interests in property and banking. It provides financial
services through the Sainsbury's Bank. This is joint venture between J Sainsbury
plc and Halifax Bank of Scotland (HBOS). The current product range includes
savings and loan products, credit cards and a number of insurance products.

1.3 AIMS AND OBJECTIVES OF THE REPORT

The primary aim of this report is a thorough investigation of the financial
performance of Sainsbury’s over the last few years (2004 -2007) emphasising on
retail operations in UK. The main focus of this report can be summarised into:
• To understand Sainsbury’s Business Strategy; and how it has facilitated
Sainsbury’s to achieve success.
• To analyze and present financial information in a form which will enable to
assess the overall financial performance of the group from the year-ended
27/03/2004 to 24/03/2007.
• Analyze major business decisions it has taken and new products it
launched during the years mentioned above.

1.4 Executive Summary

Sainsbury’s aim is to provide its customers with ‘Great quality food at fair prices’.
According to Porter’s Generic Strategies this would be more of a ‘stuck in the
middle’ position, as it is competing with the market cost leaders as well as
product differentiators. However, the Sainsbury’s success has shown that it has
successfully operated in such a mid-market position.
The overall business strategy has been successful. However, there was a decline
in performance in 2004 and to get the company back on track a sales-led
recovery plan named ‘Making Sainsbury’s Great Again’ was launched in October
2004. This has involved steps such as fixing the problems with Supply-chain and
IT systems, improving existing product ranges, introducing new ranges and
investing into price-cuts and promotions. This has worked extremely well and has
led to an exceptional financial performance in 2007.
Turnover ↑ 6.8%

Gross Profit ↑ 9.8%

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 Profit before tax ↑ 58.7%

Earnings per share ↑ 405%

Overall the figures look promising and have shown great improvements, however
comparing them to Tesco’s shows that there is a need for further improvement.
Tesco’s EPS in 2007 was 23.6p and Net profit Margin was 4.4% as compared to
Sainsbury’s EPS of 19.2p and a Net profit margin of 1.9%. It has yet to improve
its profit margins and reduce administration costs which are relatively high, which
include further reducing its IT and supply-chain related costs.
The company has set a target to increase Sales turnover by 3.5 billion in 3 year’s
time to March 2010. Uncertain economic outlook and inflationary pressures may
act as barriers to this target, but it is highly probable that it will be achieved.
Sainsbury’s biggest weakness is in the non-food retail. It ranks third largest in UK
retail, whereas excluding non-food it holds the second position. Non-Food sales
contribute to less than 10% of its turnover, as compared to over 25% of Turnover
for Tesco and Asda. If in the next few years the company is able to gain a good
market-share in non-food retail, which it intends to, it is highly likely that it will
narrow Tesco’s market lead and over take its rival ASDA as the second largest
retailer in UK.
2 INFORMATION GATHERING

2.1 Sources used and their reasons

2.1.1 Primary Research
Primary research involves getting original data directly about the product and
market. It is data that did not exist before. Due to availability of adequate
information from secondary sources, I felt that there was no need of primary
information. Hence, most of my work is based on secondary sources.

2.1.2 Secondary research

I used two main sources for the secondary research.
1. Library
I went through various books in the College library. I used BPP study text
‘Success in your research and analysis project’ which gave me an initial outline,
approach, and structuring for the project. The study texts published for ACCA
examinations provided me with an array of analytical tools to use in achieving the
aims of this report.
2. Electronic research
I mainly relied on the Internet to formulate this report. The various databases
and search engines to collect the information I needed for the report were:
• Sainsbury’s website was the most important source of information. It
provided me with the annual reports I needed for this report which
includes the audited financial statements. The website also had an archive
of company news which gave me a hindsight of the more immediate
matters faced by the company.
• Competitor websites (for the same reasons)
• Reuter’s website (http://stocks.us.reuters.com), this provided me with the
financial statements of Sainsbury’s and Tesco for the past five years along
with ratios of both companies and the industry averages for the current
period.
• London Stock Exchange website, providing details of historic share
performance and relevant industry and competitor news

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 • Using internet search engines (Google, and MSN) to gather information
related to Sainsbury’s and the UK retail industry.

Other business related databases used to obtain relevant industry and

competitor news are:

 Financial Times (www.ft.com)

 Accountancy age (www.accountancyage.com)

 Business Week (www.businessweek.com)

2.2 Methods Used

Information gathering is a critical phase and should be done in an organized way.
Information access has become simpler with extensive details and volume available
online and offline and one has to plan beforehand to be able to extract the relevant
material to form a well-structured report.
The main method I used to collect information was to use the GOOGLE search engine.
Entering a few key words in the search bar provided me with the links of different
websites where I could find the information I needed to formulate this report.
Although there were a few irrelevant search results, I went through most of the
search results gather relevant information.
I wanted to have the relevant material to hand before starting the report writing
process. I had bookmarked the web pages which had the relevant articles using the
Internet Explorer so that I would not have any problems referencing the information if
I had chosen to quote it in my report. I printed the Financial Statements of
Sainsbury’s that I downloaded from its website and had also imported it into MS Excel
to perform the ratio analysis on.

3 ANALYSIS
3.1 PORTER’S GENERIC STRATEGIES
Sainsbury’s aim is to provide customers with ‘Great quality food at fair prices’.
Michael Porter identified three generic strategies (See Appendix A) through which
organizations gain competitive advantage. Porter argued that to be successful an
organization should select either cost-leadership or differentiation. According to
Porter’s viewpoint Sainsbury’s would be a classic ‘stuck in the middle’ whereby it
is trying to compete with the Industry Cost Leaders, Tesco and Asda as well as
the Product Differentiators, Waitrose and Marks & Spencer.
However, the overall success of Sainsbury’s has proved quite the opposite and
there exists another viewpoint that a single generic strategy is not always best
because within the same product customers often seek multi-dimensional
satisfactions such as a combination of quality, style, convenience, and price.
Sainsbury’s seeks to provide its customers with fair price products without
compromising on their quality and has successfully operated in such a mid-
market position.
It has over the years been continuously building up its brand equity and is well
positioned to anticipate and meet the increasing consumer focus on fresh,
healthy, quality foods as well as fair price products.

“When interpreted narrowly as referring to the appeal of a product to its target

buyers, the proposition that firms should not be ‘stuck in the middle’ should not
be taken to imply that companies must be down-market or up-market, but
nothing in-between. Such a view is belied by the evident success of companies

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such as Sainsbury's, which earn substantial economic rents in a mid-market
position.”
“PIMS (Profit impact of marketing strategy) data and other evidence shows,
however, that intermediate positions are indeed profitable and are
successfully exploited by many firms.”
(Michael Cronshaw, Evan Davis and John Kay (1994), pp. 19-33)

3.2 SWOT ANALYSIS ----- J Sainsbury’s Plc

STRENGTHS WEAKNESSES
• Strong brand • Small store sizes
Equity • High
• Wide Range of administration
Food-Products costs

OPPORTUNITIES THREATS
• Expand into Non- • Competitor price
Food industry war
• Marketing
Opportunity

Strengths
STRONG BRAND EQUITY
Sainsbury’s has enormous brand equity and has built customer loyalty by
providing them with ‘Great quality food at fair prices’. The core U.K business
covers the grocery market and this means everything that is food related. It has
over the years successfully delivered to its customers according to their needs
regarding the quality, style, convenience, and price of different products and
continues to provide them with the best offers.
WIDE RANGE OF FOOD PRODUCTS
Sainsbury’s has aimed to provide its customers with a range of products to
choose from. It has accordingly sub-branded own label products to fit the
requirements of different customers segments. It is continuously working to
introduce new ranges and improve existing ones in order to meet the demands of
its customers.
WEAKNESSES
SMALL STORE SIZES
Although Sainsbury’s have a large number of stores spread all over U.K, most of
the current stores have relatively smaller sizes as compared to its competitors.
Due to this there is less room for goods other than groceries and customers
cannot be provided with a complete shopping experience
‘Sainsbury's property portfolio was built up during the 1980s, when supermarkets
averaged 20-30,000 square feet, compared with 40-50,000 square feet during
the 1990s.’ (Jorn Madslien, 2006)

HIGH ADMINISTRATION COSTS

Sainsbury’s administration costs in recent years have been very high due to its
supply-chain and IT costs. Although its previous supply-chain problems were
resolved and IT costs have reduced in 2007, they are still higher than its
competitors. Due to this it has lower operating and net profit margins although
gross profit margin is much higher.

OPPORTUNITIES
EXPAND INTO NON-FOOD RETAIL

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Non Food products are very appealing to grocery supermarkets as they offer
higher profit margins. The growth potential for non-food products is also much
more as compared to the food-items. According to Verdict consulting (2006) the
Sales of electricals will grow by 71.1% from 2006 to 2011, whereas Food and
grocery will only grow by 16% in this period.
Non-food accounts for less than 10% of Sainsbury's total sales turnover whereas
Tesco’s non-food contributes to 25% of the total turnover. Sainsbury’s has
therefore planned to increase its store sizes, where possible, and to open new
larger stores in the near future to have more space available for non-food items
and increase their market share in the non-food retail. However, it should also
carryout additional market research to ensure the success of the Non-food items.
HEATHY FOODS - MARKETING OPPORTUNITY
A major advantage that Sainsbury’s has over the market cost-leaders is the
superior product quality. This can be made use of and exploited by Sainsbury’s in
its advertisements to increase consumer awareness and their focus on Fresh and
Healthy foods. This may help stealing customers from the market cost-leaders
and increase Sainsbury’s market share.
THREATS
COMPETITOR PRICE WAR
The retail industry is a highly competitive industry. Sainsbury’s has over the past
few years invested heavily on price-cuts and promotions. However if cost-leaders
retaliate this may have serious consequences as the business strategy of
Sainsbury’s is different to the cost-leaders, and it may not be able to compete
with them in this area. Also indulging in a price war would mean that the quality
of its products may have to be compromised, which is a one of its key success
factors.

3.3 RECOVERY PLAN

For much of the 20th century Sainsbury's was the market leader in the UK
supermarket sector, but in 2004 the group had suffered a decline in performance
relative to its competitors, and in March 2005 this was shown on the balance
sheet as a Loss (from continuing operations).
Since then, the company launched a sales-led recovery plan that was named
‘Making Sainsbury’s great again’, under the leadership of Justin King, the CEO
appointed in March 2004. The major changes the company has undergone as per
the recovery plan are as follows:

3.3.1 Supply Chain

The main reason for the decline in performance in 2005 was attributed to the
supply chain problems experienced by Sainsbury’s. The company had previously
invested around 400m into four automated depots, which were later found to be
flawed. Due to this there was a break-down in process between supply and retail
leading to products being unavailable at point-of-sale.
By 2005 the company had written down £120m in automated distribution and
invested into manual depots. Within months the new depots brought
improvements in stock availability and sales have been on the rise.
“Our major focus on availability is beginning to show results with both colleagues
and customers noticing improvements in store”
(Justin King, Sainsbury's chief executive, 24 March 2005)

3.3.2 IT Systems
Sainsbury’s outsourced part of its IT to consultancy firm Accenture in November
2000. The £1.8 billion seven-year contract was designed to back up the supply
chain systems as efficiently and cost effectively as possible.
However, the new systems implemented by Accenture failed to deliver. In
October 2005, the IT services previously provided by Accenture were migrated

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back to the Group. Sainsbury’s has reported a better than expected reduction in
IT costs less than a year after it terminated its outsourcing contract with
Accenture.
“Sainsbury's saves on IT after ditching Accenture” (IT week 2006)

3.3.3 New and Improved Products

Sainsbury's focuses on its strengths and are always working to introduce new
ranges and improve established products. In the past few years it has done this
in the following ways:
Food Items:
Basics:
A wide range of everyday essentials that offering value for money. The range was
re-launched in January 2005 and re-branded from Low Price to Basics. In January
2007 a number of changes were made to the labeling of company's ‘basics’ range
to enable customers to make healthier choices.
Taste the Difference:
This is the largest of Sainsbury’s sub-brands and the company it is integral to the
business’s goal of delivering premium food “at fair prices”. In September 2006
Sainsbury’s re-launched its ‘Taste the difference’ range to very strict guidelines
regarding its ingredients. Since this range was launched in November 2000, it has
grown from 250 products to over 1400 in March 2007.
Be Good to Yourself:
This brand range consisting of premium products was completely re-launched in
January 2006 with new product lines and completely new packaging designed to
emphasize its healthy qualities. This now has over 350 product lines.
Not Just For Vegetarians:
Sainsbury’s launched a new range of ready meals in September 2006, to appeal
to both meat lovers and vegetarians. In April 2007, twelve new were added to
this range.
Kids:
In February 2006, Sainsbury’s launched its new children’s range, Sainsbury’s
Kids. This nutritionally balanced range of over 80 products replaced the previous
kid’s range, Blue Parrot Café and offered over 50 brand new products.
Non-Food Items:
In order to increase market share in the non-food retail sector, Sainsbury’s in
recent years has taken the following steps:
TU:
Sainsbury’s introduced its own label clothing brand, 'TU', in September 2004.This
features adult’s wear, children’s wear and accessories By August 2007 the
buying, merchandising and technical teams responsible for TU adult and
Children’s wear were brought in-house.

Different by Design:
In March 2007 the company introduced a new premium homeware range under
the ‘Different by design’ brand which mirrors the premium ‘Taste the difference’
food offer.
3.3.4 Price-cuts and Promotions
In order to make its price more competitive and encourage more sales
Sainsbury’s is continuously working to provide customer with better offers.
Another significant announcement in 2005 was the halving of the dividend to
increase funds available for price cuts and quality.
“The £400 million of investment in the customer offer was completed by
December 2006 and additional funds were invested in early 2007, improving
product quality and giving us our most competitive price position for many years”
(J Sainsbury’s Plc. Annual report 2006-2007)

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3.4 FINANCIAL PERFORMANCE
The activities of the company in recent years have resulted in an exceptional
financial performance.

3.4.1 SALES REVENUE

Sainsbury's Sales Turnover

17,500.00

17,000.00

16,500.00
Turnover in £m

16,000.00 Sales Turnover

15,500.00

15,000.00

14,500.00

14,000.00
2004 2005 2006 2007
Year ending march

The sales revenue of the group in 2005 fell by 11.3% from £17,141 million in
2004 to £15,202m in 2005. Then in the two years to 24 March 2007 the sales
have risen by 5.6% and 6.8% respectively.
The decrease in 2005 was mainly due to the supply chain problems experienced
by Sainsbury’s. Early sales increases were credited to solving problems with the
company's distribution system whereas more recent sales improvements have
been put down to price cuts and product launches and improvements.

3.4.2 PROFITABLITY RATIOS

Profitablity

10.00%

8.00%

6.00%
Percentage

Gross Profit margin

4.00% Net Profit margin

2.00%

0.00%
2004 2005 2006 2007
-2.00%
Year Ending March

Gross Profit Margin

The gross profit margin has decreased in 2005 by 4.6%. This again was due to
the supply chain problems mention above, which had adversely affected sales.
The cost of sales also decreased, but by a smaller percentage, because of the
nature of costs consisting of both variable and fixed elements.
In 2006, the company had improved its Gross profit margin to 6.6%. This
increase gives the initial indication of the successful running of the new supply
depots. In 2007 this had further improved by 0.2% to 6.8%. However, as
compared to the 2004 figure of 8.96% this may seem low. This is due to recent
price cuts in Sainsbury’s stores in order to uplift sales turnover which has lowered
the profit margin in products.
“‘Supermarket chain Sainsbury's has seen a 2.8% rise in quarterly sales after it
boosted advertising and cut prices.” (BBC 2005)

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Tesco’s G.P margin was 7.7% in 2006 and this increased to 8.1% in 2007. This
shows a better GP margin than Sainsbury’s. This is due to the increased
economies of scale because of its size. In addition, it is due to the non-food factor
which contributes more to its total Turnover, offering better profit margins.

Net Profit Margin

Net profit margin in 2005 was down by 3.6% to -1.23%. Along with the reasons
mentioned above this was also due to Business Review and Transformation
operating costs of £497m. This was in accordance with the recovery plan to sort
out the supply chain problems and the problems with IT systems.
In 2006 and 2007 the net profit margin was 0.36% and 1.89% respectively. This
has shown an improvement in both years. In 2007 the net profit margin has
increased more than the gross profit margin. This was primarily because of the
IT cost savings resulting from migrating IT services back in-house.
Tesco’s gross profit margin in 2007 increased from 5.7% in 2006 to 6.2% in
2007. Although the Tesco’s GP margin is 1.3% higher, its NP margin is 2.52%
higher showing exceptional efficiency in overhead cost control. Admin expenses of
Sainsbury’s and Tesco’s are 669m and 907m respectively, although Tesco’s
turnover is nearly 2.5 times as much as Sainsbury’s.

Return on Capital Employed

The return on capital employed (ROCE) assesses profits with the amount of funds
(capital) employed to make the profits. This fell from 8.63% in 2004 to -2.29% in
2005. This was because of the loss made in 2005. Subsequently, in 2006 this
improved by 5.18% to 2.89% on 2006 and further increased by 4.70% to 7.59%
in 2007. This increase is evident of the improving financial situation of
Sainsbury’s.
On the other hand Tesco’s ROCE in 2007 increased by 0.75% to 11.29%. This
difference shows that Tesco is managing its resources much better. Sainsbury’s
should increase its profits using existing resources to improve its ROCE.

3.4.3 LIQUIDITY RATIOS

Current Ratio:
This is a measure of the adequacy of company’s current assets to meet short-
term liabilities as they fall due. A ratio between 1 and 1.5 is considered to be
norm for most businesses. Sainsbury’s current ration was 0.58, 0.79 and 0.70 in
2005, 2006 and 2007 respectively. Whilst varying from industry to industry for
most business such a current ratio trend indicates an alarming liquidity position.
Comparing the ratio to the industry average of 0.53 in 2007 shows that the
situation is certainly not alarming, rather it’s due to the nature of the industry it
operates in.

Quick Ratio:
This differs from current ratio as it eliminates inventory from current assets
providing a more useful position of the company to settle its immediate liabilities.
Norms for quick ratios range from 0.7 to 1. Sainsbury’s quick ratio has been 0.47,
0.67, 0.49 for 2005 2006 and 2007 respectively.
This may again seem very low, but the industry average of 0.30 in 2007 shows
that this is not the case. This is again due to the nature of the business company
operates in.
Tesco’s current ratio was 0.52 in 2006 and 0.56 in 2007. Its quick ratio was 0.33
and 0.22 in 2006 and 2007 respectively. This shows that Sainsbury’s in a better
liquidity position and it may not face any problem settling short-term debts,
whereas there may be pressure on Tesco’s suppliers. It indicates that Tesco is
making better use of its working capital, but on the other hand also leads to

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corporate social responsibility issues for which Tesco’s already has a bad
reputation.

3.4.4 GEARING RATIOS

Capital Gearing Ratio:
This indicates the extent to which the business relies on debt financing.
Sainsbury’s gearing ratio changed from 63.33% in 2006 to 57.39% in 2007,
whereas Tesco’s gearing ratio was 54.25% and 57.44% in 2006 and 2007
respectively. This is a moderate level of gearing for both businesses.
This decrease for Sainsbury’s illustrates that it has relied more on equity
financing that debt financing during the course of the year whereas the Tesco
gearing increase shows quite the opposite.
Interest cover:
The interest coverage ratio indicates the extent of which earnings are available to
meet interest payments. An interest cover ratio of more than 3 times is
considered safe as even if profits are reduced to half the company will still be able
to meet its financing costs.
Sainsbury’s interest cover increased from 1.48 times in 2006 to 4.86 times in
2007. The Company’s position in 2006 was relatively risky but now it is a more
than satisfactory level of cover and indicates that a fall in profits is unlikely to
prevent the company from meeting its financial obligations.
3.5 INVESTOR OUTLOOK
The earnings per share (EPS) fell from 20.7p to -0.174p in 2005. However since
the start of the recovery plan it has increased in the next years. In 2006 this
increased to 3.8p and in 2007 to 19.2p showing an increase of 405%.
The dividend per share was also approximately cut by half from 15.69p in 2004 to
7.80p in 2005. This was done in order to raise money for investment into price-
cuts and promotions. In 2006 this was increased to 8.00p, and then further
increased to 9.75p in 2007.
EPS V DPS

25.00

20.00

15.00
Pence per share

EPS
10.00
DPS

5.00

0.00
2004 2005 2006 2007

-5.00
Year Ending March

Although the dividends in 2005 and 2006 were low, they were yet higher then the
EPS. This shows that the company had paid out more dividends then it had
earned in these periods. This is because the dividends in 2005 had been halved
already and a lower return would further reduce their confidence. In 2007 this
has returned to normal where part of the earning was retained for future
investments.
Tesco’s EPS in 2006 was 20.2p in 2006 and increased to 23.6p in 2007. The
dividends per share were 8.6p and 9.6p in 2006 and 2007 respectively. Although
there was a major difference in EPS in 2006 of Sainsbury’s and Tesco, this has
reduced significantly in 2007. Another point to be noted is that Tesco has retained
more than half of the earnings for future investments. This is one of the reasons
of its rapid expansion and Sainsbury’s may have to follow in its footsteps and
retain a larger proportion of its earnings for future investments.

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(Source: London South East 2008)
As of 31 March 2007 the shares of Sainsbury's were trading at 549.5p and
Tesco’s share price was 444.25p. From the above graph it is quite visible that the
share price of Sainsbury’s has fluctuated enormously in the last year. This was
due to the takeover bids (see Appendix E) received by Sainsbury’s after months
of speculation in the last quarter of year 2007. The main reason that makes
Sainsbury’s an attractive for takeover bids is due to its huge property portfolio
valued at around £7.5 billion in 2007.
When the bids were rejected the share price started falling. For shareholders a
better option would be to sell off their shares at the year end, as an EPS of 19.2p
indicates that the company may not be able to deliver £5.50 in the current
economic climate. However, the property portfolio can ensure that there will
always be a demand for these shares and other such opportunities may arise.

4 CONCLUSION
Sainsbury’s financial performance in 2007 was exceptional. Improvement in
sales, profit margins, dividends and a stable liquidity position should send positive
messages to all stakeholders.
The key corner stone of Sainsbury overall success is providing its customers with
‘Great quality food at fair prices’. It has stayed closely connected with the needs
of the customers regarding the quality, style, convenience, and price of different
products and have delivered accordingly by sub-branding own label products to fit
the requirements of different customer segments. E.g.’ Basics’ for the down-
market, ‘Be Good to Yourself’ for the up-market, and ‘Taste the difference’ for the
‘mid-market’.
Since the launch of King's recovery programme, the turnaround has been
phenomenal and the company has reported twelve consecutive quarters of sales
growth, most recently in January 08. Despite distractions from potential takeover
speculation in the last quarter of the year 2007, strong performance was
delivered.
‘Over the past year we delivered another strong performance and our recovery is
ahead of plan. Since March 2005, we have grown sales by an additional £1.8
billion with over £1 billion delivered in the 2006/07 financial year. This means we
are ahead of our target to grow sales by £2.5 billion by March 2008.’
(J Sainsbury’s Plc. Annual report 2006-2007)
“Sainsbury’s has been named Supermarket of the Year for the second year
running at the Retail Industry Awards.”

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(J Sainsbury’s Plc, Awards 2007)
However, comparing the results to Tesco shows that there is yet a need for
further improvement. Sainsbury’s profit margins are lower than Tesco’s and it
may have to increase production efficiency to improve profit margins. Although its
gross profit margin is lower there is less difference as compared to the difference
between both company’s net profit margin. This is due to the relatively high
administration costs of Sainsbury as compared to Tesco.
Tesco’s return on capital employed has also been higher than Sainsbury’s and this
is evident of Tesco’s managing its resources efficiently. Due to this the EPS was
also higher by 4.4p in 2007.
Although the differences have decreased in the last year the results have yet to
improve If Sainsbury’s is to be the best in the market.
Sainsbury’s main weakness is in non-food items which make up less than 10% of
its total sales. This is mainly because of its small store sizes which do not have
enough room to accommodate many non-food products. Another reason is that
the non-food products launched have not been very successful and the sales
growth of any such products have saturated in a short period of time.
However, Sainsbury’s has realized the growth potential of the non-food retail and
plans to increase its presence in this sector.

(J Sainsbury’s Plc. Annual report 2006-2007)

The existing plan was to get the company back on track and now that this has
been accomplished, the company plans to invest around 2.5 billion by March
2010 into opening larger stores and increasing its existing stores sizes most
importantly to increase its market-share in non-food retail.
Along with store increased store sizes, Sainsbury’s should also carry out more
market research before launching its non-food ranges to ensure they are popular
with consumers and prove out to be successful.
Market share statistics by TNS Global (2008) show that the company has 16.4%
share of the grocery market with nearest rival Asda on 16.9 per cent and Tesco
with a 30.9% market share.
If in the next few years the company is able to gain a good market-share in non-
food retail, it is very likely that it will over take its rival ASDA as the second
largest retail in UK and reduce Tesco’s market lead.
Overall Sainsbury’s growth will be affected by general market issues such as the
impact of regulatory and planning regimes on store development and economic
factors such as the level of household disposable income. However, Sainsbury’s is
well positioned to anticipate and meet the increasing consumer focus on fresh,
healthy, quality foods and fair prices.
Based on the analysis undertaken in the report Sainsbury’s is likely to continue to
further improve its financial performance and capture more market share over
the coming years.
5 BIBLIOGRAPHY
Company Published Sources
Sainsbury’s Publications
• J Sainsbury’s Plc., 2007. Annual report 2006-2007. [Online].
Available at: <http://www.j-sainsbury.co.uk/index.asp?pageid=20>

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 • J Sainsbury’s Plc., 2006. Annual report 2005-2006. [Online].
Available at: <http://www.j-sainsbury.co.uk/index.asp?pageid=20>
• J Sainsbury’s Plc., 2005. Annual report 2004-2005. [Online].
Available at: <http://www.j-sainsbury.co.uk/index.asp?pageid=20>
Tesco Publications
• Tesco Plc., 2007. Annual report 2006-2007. [Online].
Available at: < http://www.tescocorporate.com/page.aspx >
• Tesco Plc., 2007. Annual report 2005-2006. [Online].
Available at: < http://www.tescocorporate.com/page.aspx >
News papers, Online news, and Specialist Journals
BBC (2005), Cut prices aid Sainsbury's sales, BBC [online], Available at:
<http://news.bbc.co.uk/1/hi/business/4318042.stm>,
[Accessed 7 March 2008]
IT week (2006), Sainsbury's saves on IT after ditching Accenture, Accountancy
age, [online], Available at:
<http://www.accountancyage.com/accountancyage/news/2169234/sainsbury-
cuts-costs-ditching>, [Accessed 27 February 2008]
J Sainsbury’s Plc (2007), Awards, [online], Available at:
<http://www.sainsburys.co.uk/aboutus/awards/retailer_of_the_year_2007.htm>
[Accessed 29 February 2008].
J Sainsbury’s Plc, Our History, [online],
Available at: < http://www.j-sainsbury.com/index.asp?pageid=188>
[Accessed 23 February 2008].
Jorn Madslien (2006), ‘Sainsbury's chief cheers strong recovery’, BBC [online],
<http://news.bbc.co.uk/1/hi/business/5251902.stm> [Accessed 3rd March 2008]
Justin King (2005), Improved supply lifts Sainsbury's, BBC [online],
Available at :<news.bbc.co.uk/1/hi/business/4378035.stm>
[Accessed 3 March 2007]
London South East (2008), Sainsbury Share Charts, LSE [online image], Available at:
<http://www.lse.co.uk/ShareChart.asp?sharechart=SBRY> [Accessed 6 March
2008].
Michael Cronshaw, Evan Davis and John Kay (1994) ‘Stuck in the Middle or Good
Food Costs Less at Sainsbury's’, British Journal of Management, Volume 5,
Issue 1, pp. 19-33
TNS Global (2008), Market Share Data Release, IGD Retail Analysis [online],
Available at: http://www.igd.com/analysis/news/news_detail.asp?articleid=4613
[Accessed 18 March 2008]
Verdict Consulting (2007), ‘UK Retail Futures 2011: Food and Grocery’, Verdict
Consulting, Available at: <http://www.verdict.co.uk/Marketing/dmvt0375m.pdf>
[Accessed 22 March 2008]
Wikipedia (2008), Sainsbury's, <http://en.wikipedia.org/wiki/Tesco>,
[Accessed 22/02/08, 01/03/08]

Wikipedia (2008), Tesco, <http://en.wikipedia.org/wiki/Tesco>

[Accessed 22/02/08, 11/03/08]
Textbooks and Accountancy Publications
BPP (2003), Success in your Research & Analysis Project, London, BPP
FTC Foulks Lynch (2006) ACCA paper 2.4 Financial Management & Control,
Berkshire, Foulks Lynch Publishing.
FTC Foulks Lynch (2006) ACCA paper 2.5 Financial Reporting, Berkshire, Foulks
Lynch Publishing.
Kaplan Financial (2007) ACCA paper P3 Business Analysis, Berkshire,
Kaplan Publishing.
Kaplan Financial (2007) ACCA paper P2 Corporate Reporting, Berkshire,
Kaplan Publishing.

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Michael, E. Porter (1980) Competitive Strategy: Techniques for Analysing
Industries and Competitors, New York, The Free Press
Saunders, M. Lewis, P. Thornhill, A. (2003) Research Methods for Business
Students. 3rd Edition, Harlow, Financial Times/Prentice Hall
Online Financial Information
http://www.accountancyage.com
http://www.businessweek.com
http://www.ft.com
http://retailtrafficmag.com/retailing/
http://stocks.us.reuters.com

6 APPENDICES
A. Porter’s Generic Strategies
Michael Porter in his 1980 classic ‘Competitive Strategy: Techniques for Analyzing
Industries and Competitors’ identified three generic strategies through which an
organization could achieve competitive advantage. These are:
1. Cost Leadership Strategy: This strategy emphasizes efficiency. By
producing high volumes of standardized products, the firm hopes to take
advantage of economies of scale and experience curve effects, ideally
more than any competitor.
2. Differentiation Strategy: This involves creating a product that is perceived
as unique. The unique features or benefits should provide superior value
for the customer if this strategy is to be successful. This opens up the
profit margin by raising selling prices.
3. Focus Strategy: This is where the organization is concentrated on a small
segment of the market. Within the focus strategy(also known as niche
strategy), the organization must choose whether or not to become a cost
leader or a differentiator

Porter argued that to be successful over the long-term, a firm must either cost-
leadership or differentiation. Otherwise, with more than one single generic
strategy the firm will be "stuck in the middle" and will not achieve a competitive
advantage.
B. J Sainsbury’s PLC
Consolidated Income
Statement
In Millions of GBP 2007 2006 2005 2004
(except for per share items) 24/03/2007 25/03/2006 26/03/2005 27/03/2004
Total Revenue (continuing 17,151.00 16,061.00 15,202.00 17,141.00
operations)

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Cost of Revenue 15,979.00 14,994.00 14,544.00 15,606.00

Gross Profit 1,172.00 1,067.00 658.00 1,535.00

Administrative Expenses 669.00 839.00 830.00 800.00

Depreciation/Amortization -- -- -- 11.00
Unusual Expense -- -- -- 68.00
Other Income -17.00 -1.00 -21.00 --

Operating Profit (PBIT) 520.00 229.00 -151.00 656.00

Finance Cost -107.00 -155.00 -132.00 -85.00

Finance Income 64.00 30.00 45.00 25.00
Gain (Loss) on Sale of Assets -- -- -- 14.00
Net Income Before Taxes 477.00 104.00 -238.00 610.00

Provision for Income Taxes 153.00 46.00 -51.00 206.00

Net Income After Taxes 324.00 58.00 -187.00 404.00

Summary Group
Balance Sheet

In Millions of GBP 2007 2006 2005 2004

(except for per share items) 24/03/2007 25/03/2006 26/03/2005 27/03/2004
Total Inventory 590 576 559 753
Other Current Assets 1325 3244 2342 3302
Total Current Assets 1,915 3,820 2,901 4,055
Total Non-Current Assets 7,661 8,927 8,717 8,452
Total Assets 9,576 12,747 11,618 12,507

Short-term Borrowings 373 253 354 403

Other Current Liabilities 2348 4557 4682 4503
Total Current Liabilities 2,721 4,810 5,036 4,906
Long Term Debt 2,123.00 2,208.00 1,846.00 1,904.00
Other Non-Current Liabilities 383.00 1,843.00 709.00 679.00
Total Non-Current Liabilities 2,506 4,051 2,555 2,583

Total Equity 4,349 3,886 4,027 5,018

Total Liabilities & Shareholders’ 9,576 12,747 11,618 12,507
Equity
C. Tesco PLC
Tesco
Summary Group Income Statement
Year ended February 2007 2006
£m £m

Total Revenue (Continuing operations) 42,641.00 39,454.00

Cost of Revenue -39,401.00 -36,426.00
Pensions adjustment – Finance Act 2006 258.00 –
Impairment of the Gerrards Cross site -35.00 –
Gross profit 3,463.00 3,028.00
Administrative expenses -907.00 -825.00
Profit arising on property-related items 92.00 77.00
Operating profit 2,648.00 2,280.00

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Share of post-tax profits of joint ventures and
associates (including £47 million of property-
related items (2005/06 – £nil)) 106.00 82.00
Profit on sale of investments in associates 25.00 –
Finance income 90.00 114.00
Finance costs -216.00 -241.00
Profit before tax 2,653.00 2,235.00
Taxation -772.00 -649.00
Net Income After Taxes 1,881.00 1,586.00

Summary Group Balance sheet

In Millions of GBP 2007 2006

(except for per share items) 02/24/07 02/25/06
Total Inventory 1,931 1,464
Other Current Assets 2645 2455
Total Current Assets 4,576 3,919
Total Non-Current Assets 20,231 18,644
Total Assets 24,807 22,563
Short Term Debt 1,554 1,646
Other Current Liabilities 6,598 5,872
Total Current Liabilities 8,152 7,518
Long Term Debt 4,146 3,742
Other Long-Term Liabilities 2,003 1,923
Total Non-Current Liabilities 6,149 5,665
Total Equity 10,506 9,380
Total Liabilities & Shareholders’ Equity 24,807 22,563
D. Ratio Analysis
Sainsbury's
2007 2006 2005 2004
Profitability and Return
ROCE % (PBIT/Capital Employed) 7.59% 2.89% -2.29% 8.63%
Gross Profit margin % (Gross profit/ Turnover) 6.83% 6.64% 4.33% 8.96%
Net Profit margin % (Net profit/ Turnover) 1.89% 0.36% -1.23% 2.36%

Liquidity
Current Ratio (Current Assets/ Current Liabilities) 0.70 0.79 0.58 0.83
Quick Ratio (Current Assets - Inventory/Current
Liabilities) 0.49 0.67 0.47 0.67
Admin expenses % (Administration expenses/
Turnover) 4.67% 5.46% 5.22% 3.90%

Gearing
Capital Gearing Ratio(Total Debt/ Total Equity) 57.4% 63.3% 54.6% 46.0%
Interest cover (Operating Profit/ Finance cost) 4.86 1.48 -1.14 7.72

Investment
EPS (pence) 19.2 3.8 -17.4 20.7
Dividend (pence) 9.75 8.00 7.80 15.69
Dividend cover 1.97 0.48 -2.23 1.32

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 Tesco

Profitability and Return

ROCE % (PBIT/Capital Employed) 11.29% 10.54%
Gross Profit margin % (Gross profit/ Turnover) 8.12% 7.67%
Net Profit margin % (Net profit/ Turnover) 4.41% 4.02%
Admin expenses % (Administration expenses/
Turnover) 2.13% 2.09%

Liquidity
Current Ratio (Current Assets/ Current Liabilities) 0.56 0.52
Quick Ratio (Current Assets - Inventory/Current
Liabilities) 0.32 0.33

Gearing
Capital Gearing Ratio (Total Debt/ Total Equity) 0.57 0.54
Interest cover (Operating Profit/ Finance cost) 12.26 9.46

Investment
EPS (Basic) 23.6 20.2
Dividend (pence) 9.64 8.63
Dividend cover 2.45 2.34

E. Takeover Bids
Takeover Bid 1:
In February 2007, after months of speculation about a private equity bid, CVC
Capital Partners, and Blackstone Group announced that they were considering a
bid for Sainsbury's. The consortium grew to include Goldman Sachs and Texas
Pacific Group.
On 5 April the consortium submitted an "indicative offer" of 562p a share to the
company's board, but the offer was rejected. On 9 April the indicative offer was
raised to 582p a share, however this too was rejected. On 11 April the CVC-led
consortium abandoned its offer, stating "it became clear the consortium would be
unable to make a proposal that would result in a successful offer."

Takeover Bid 2:
In April 2007 Delta Two, the investment fund backed by the Qatar Investment
Authority, purchased 17.6% of Sainsbury's shares. In June 2007 this was
increased to 25%. On 18 July BBC News reported that Delta Two had tabled a
conditional bid proposal. On 5 November 2007 it was announced Delta Two had
abandoned its takeover bid due to the "deterioration of credit markets". Following
the withdrawal of the interest of the QIA, shares in Sainsbury's dropped around
20% on the day of this announcement.

(Source: Wikipedia <http://en.wikipedia.org/wiki/Sainsbury's>)

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