Tesco

Introduction to Finance & Economics

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Coursework
Header Sheet
239097-198 
          

 

Course

FINA1126:
Intro to Finance & Economics

Course
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B/UG

Coursework

Assignment

Assessment
Weight

40.00%

Tutor

G Sarwar

Submission
Deadline

23/01/2018

 

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Contents
Introduction…………………………………………………………………………………………………. 4
Macro-environmental factors……………………………………………………………………… 5
Determinants of Demand & Supply……………………………………………………………… 6
Increase interest rates & Effects on borrowing………………………………………….. 7
Interest rates & Growth………………………………………………………………………………. 8
Corporate Governance & FTSE 350 index…………………………………………………… 9
Conclusion…………………………………………………………………………………………………. 10
References…………………………………………………………………………………………………. 11
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Introduction

 

Tesco is an ever growing multinational grocery store and
third largest retailer in the world measured by profits, with a market
capitalization of roughly £17 billion.  Tesco
is a large supermarket company associated with selling household goods and
services as well as other retail banking and insurance services. In this report
I will be discussing the financial and economical factors the affect Tesco as a
whole company.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Macro-environmental
factors

 

Macro-environmental factors can be defined as external
and uncontrollable influences that affect an organization’s business
performance. These factors include, demographic, economic, political,
sociocultural, technological, global and physical changes, which lead to a
company’s decision making.

 

One major factor, which has affected Tesco in the way its
business is conducted, is politics, legislations and the level of government
intervention within Public Limited Companies. There are a range of laws and
regulations Tesco must adhere to within its industry, to ensure political
stability, as well as fair and appropriate business. For instance, in regards
to 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 for
farmers will result in a fall of their ability to supply and meet Tesco’s
agricultural standards. In addition, substantial penalties can be imposed on
Tesco, if this leads to them forcing suppliers to sell at a price, which is
lower than costs. (Winnett 2015).

 

Another example is that the Food Retailing Commission in
2004 announced a policy, that Tesco are not allowed to demand payments from
suppliers or change their prices without prior notice. To implement these,
Tesco offers its customers many promotional bargains and perks in accordance to
the amount of grocery shopping with them. One is with the use of their loyalty
club card customers can receive discounts on many things such as cinemas, theme
parks and saving in the price of fuel.

 

More so, technological advances are crucial for big firms
such as Tesco as they are not only needed for the production and distribution
of goods, but for engaging and communicating with customers also.  According to the ONS, In January 2017, the
weekly average spending online was £1billion; 10% more than the previous year
statistics. This is of great advantage to Tesco as it has given them the
opportunity sell their products and services using their online website and
mobile phone app, which means people can shop from their comfort as well as
arrange home delivery. This has boosted Tesco’s overall revenue vastly
according to (Tomlinson and Evans, 2005, n. p.) who stated ‘mobile technology
helped improve Tesco’s distribution service because customers can select their
preferred food and wine through their mobile.’ In addition, having self-checkout
services at Tesco’s has reduced its manual labour costs and proved to be more
convenient and effective for the ease of customers.

 

With the rise of global warming and emphasis on
environment sustainability, a study completed by Sustainable Brands, produced
results that 84% of consumers would rather purchase products that are
environment-friendly. This has increased pressure on companies such as Tesco to
take measures to ensure they are protecting and preserving the environment. In
November 2015, Tesco joined the UN Global Compact, an initiative that
encourages businesses worldwide to adopt sustainable and socially responsible
policies. Some key commitments Tesco have adopted, taken from their 2017 annual
report, includes achieving zero net deforestation in their supply chain by 2020
and increasing their range of eco-labelled certified fish by partnering up with
the Marine Stewardship Council (MSC).

 

Determinants of Demand &
Supply

 

Supply generally refers to the quantity of a product
available in the market for sale at a specific price and at a given time.  The level of supply can be determined from
many factors; the obvious being price, as the increase of price of a product
increases its supply. The supply of a good is based on the level of stock and
its market price, as sellers would tend to increase the supply of a product if
its market price is more than its cost price, as this would generate profit for
them.

 

For example, if Tesco this week have 1000 sack of rice
stock selling at a market price of £5 each, and it costs them £4 a sack to
produce, due a to a benign shock of weather adversity no more rice can be
produced over the next couple months; all of a sudden the demand for rice may
increase so much, that the market price of rice may increase to £15. Therefore
Tesco can afford to increase their supply of rice sacks as the market price is
higher than usual and they can generate greater profit.

 

Other factors which can determines Tesco’s supply of
products, is the cost of factor of productions and cost of raw materials. If
the cost of factor of production were to be greater than the market price of
rice, than Tesco would decrease their supply of the rice and wait for the
future when the price will seize to rise. In addition if there was a sudden
demand for wheat instead of rice due to it being cheaper, then farmers may have
to use larger expenses to harvest more wheat than rice, which in turn will
increase the amount of wages Tesco has to give to its agricultural farmers.

 

Moreover, government regulations and policies can affect
Tesco’s supply as a greater tax can decrease their supply. However this depends
on the type of tax, for e.g. the excise tax on cigarettes introduced in 2017
did not lead to a fall in supply by Tesco, due to the demand for cigarettes
being inelastic of price. This means consumer demand for cigarettes due to
addiction, is still visible and suppliers such as Tesco have no reason to
decrease its supply as it is still generating profit from them.

 

Additionally, the level of demand for goods and services
can be determined from many other factors, and Tesco usually operates on the
same 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 same
price levels at each competitor store. Customer demands for necessity food
items such as bread, eggs, milk will hardly decrease but customers will be
price 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 and
this will decrease the demand at Tesco’s. However if it was an item with low
price elasticity of demand and with no close substitutes such as salt, the
income effect will not be as much and people would still buy it at Tesco’s
despite its increase in price.

 

Furthermore, other factors which effect demand for
Tesco’s good and services are consumers taste and preferences, as well as
effective advertisement. Persuasive and eye catching advertisement from Tesco
may attract customers into shopping with them over shopping at competitor
stores. These can be from commercials and billboards, which display great
offers and therefore increase its demand.

Increase interest rates &
Effects on borrowing

Interest rates are the cost and extra percentage of money
charged on a loan borrowed from the bank. Generally, higher interest rates
makes borrowing more expensive for any person or company because this means
giving back a larger percentage to the bank.

 

Firstly, Tesco being a large PLC does
not necessarily have to borrow funds from a bank, as shareholders own its
company and there are many investors who would invest into Tesco for a greater
return in the future. More so, Tesco has its own financial bank for consumers
and could give out loans at a fixed interest rate instead of rising rates like
the Bank of England. This would increase Tesco’s funds as they are being
injected with more money than they loaned out.

 

In addition, taken from Tesco’s annual
statistics, it has nearly £17billion in shares, starting from around £207 a
share. If Tesco needed further finances, they could attract many more
shareholders by decreasing share prices or even increasing the amount of
dividends.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rates & Growth

 

From a consumers point of view, higher interest rates
means it is more expensive to borrow which therefore discourages spending and
consumption.  If majority of Tesco
customers 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 to
pay off the bank more. Also if people have savings in banks, they will be
further encouraged to save as they are receiving a greater interest return on
their money. Correspondingly, this will make the pound the stronger and
increase imports, as the pound is more valuable. This may lead to a decline in
Tesco sales if consumers are spending more on goods from overseas.

 

In addition, higher interest rates will increase the UK government’s
over £40bn a year national debt and as a result, this may lead to them
increasing corporate tax which in turn will effect Tesco.  Another negative effect higher interest rates
could have on Tesco is that, they may have to make workers redundant and cause
unemployment due to their sales output falling and as a result not needing that
many workers.

 

Overall, high interest rates can be unhealthy for Tesco’s
growth as well as the economy as a whole because aggregate demand will
decrease. This can be depicted from the graph below. (Figure 1)

 

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Figure 1- a decrease in Aggregate demand from AD1 to AD2
as a result of higher interest rates.

 

 

 

 

 

 

 

Corporate Governance & FTSE
350 index

 

Corporate governance is the effective and practical management
system of ensuring long term business success within a company. The board of
directors in Tesco are the governors who are liable for directing decisions and
responsibilities to different participants within the business as well as
keeping them informed with corporate affairs; these include managers, audit
committee, remuneration committee, regulators, shareholders, etc.

 

All companies within the FTSE 350 index are aligned to
act within the interest of their shareholders and build relationships with
their investors, as this is their form of finance. This is also in relation to
previous corporate accounting frauds during early 2000’s and the financial
crisis in 2008, which led to people losing their money.

 

Tesco’s advantage of being part of the FTSE 350 index
also includes diminishing conflict of interest between shareholders.  As there are agency problems in large
corporations, which include a split between ownership and management as well as
distribution of information, Tesco looks to overcome this by building trust
between its shareholders and not hiding any information as this attracts new
investors. Besides, Tesco attract many more investors by being part of the FTSE
350 index as there is a greater pool of capital and security for shareholders.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conclusion

 

This report has
touched upon the influence of micro and macro economical factors on the
business performance of Tesco. Backed up by its annual report, Tesco is a major
PLC, which holds a substantial amount of stakeholder shares and dominates in
terms of revenue and sales within its supermarket industry.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

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