Increasing Financial Pressure In Tesco

  • Words 1674
  • Pages 4
Download PDF

Tesco is under increasing financial pressure, the extra choice available to consumers has meant a change in shopping habits. This has led to the rise of discount supermarkets more weekly shops taking place in convenience stores and continued growth in the popularity of internet spending. According to the statistics of Nils-Gerrit Wunsch (2018) in 2018, Tesco held a 27.4% market share with discount supermarket, Aldi, holding only 7.6% although looking into more historical data reveals in the years 2012-2018 Tesco actually dropped from 30.9% market share to 27.4% whilst Aldi grew over doubling its market share between these years from 3% to 7.6% which also shows fast growth within discount supermarkets and a decrease in popularity of the big 4 (Tesco, Sainsbury’s, Asda and Morrisons). The future of the big supermarkets is uncertain, according to Sarah butler of the guardian (2019) Sainsburys have in Sept 2019 announced plans to close and move around 70 Argos stores inside Sainsbury’s outlets in order to reduce costs as well as closing around 15 supermarkets with plans to only replace around 10 of them, on top of this Brexit is looming and with Tesco importing around 50% of fresh food it sells this could see major issues within supermarkets, Tesco’s chief executive Dave Lewis (2019) has already stated ‘ that sourcing fresh food will be a major issue if there is a disorderly no-deal Brexit’.

Tesco has worked hard in recent years to lower their debt and increase profitability, reducing both their long and short term debt since 2016 and increasing their fixed assets, this has however meant that there is less readily available funding to hand if it were to be needed, they have reduced their liquid assets. In an article by Tesco’s group chief executive Dave Lewis ( Tesco PLC 2019) he stated they had ‘significantly reduced our cost base; generated £2.5bn of retail operating cash this year’ the same report went on to state they have reduced their total indebtedness by £10bn, this has resulted in more retained profit being available to plow back into the business, however, Tesco’s debt to equity ratio is still higher than the market average this will have an effect on finance sources available to them and the interest rates being offered. There are many different funding sources available to Tesco, this includes long-term, medium-term, and short-term finance options as well as both internal and external sources of finance.

Click to get a unique essay

Our writers can write you a new plagiarism-free essay on any topic

If Tesco were to opt for a short-term source of finance which is typically financing for a period of less than one year, they would be able to take advantage of finance sources such as a bank overdraft which is an external source of finance. This would allow them to withdraw or spend more money than they actually have in the bank account. Although bank overdrafts can be quick to arrange and are fairly inexpensive when repaid quickly they do have a tendency to work out more expensive than bank loans etc when used over a long period of time especially if additional charges are levied to the account when exceeding the initial limit set. Tesco would be free to spend this money however they deem necessary; the bank would need to look at the business accounts like income statements and balance sheets to make sure it was comfortable that Tesco is not borrowing more than they can repay. Tesco could also use a debt factoring organization, this is another example of a short-term, external source of finance. By selling debts owed to them to a debt factoring organization Tesco would be guaranteed to receive a proportion of the outstanding debt while saving staff hours chasing unpaid invoices, Tesco will only receive a proportion of the debt amount and most organizations will only buy high value or large quantities of debts. Trade credit is also a short term external source of finance which would allow Tesco to be supplied with goods when needed and not pay their supplier until a later date, this means Tesco will have more money available in the short term but failing to pay back the supplier could result in a breakdown of business relationships and loss of suppliers as well as legal action. Another source of short-term external financing is granted these can be money received from the UK government, although they do not need to be paid back they take a long time to arrange and receive, the money received must go towards the pre-determined project. This will require paperwork and forms to ascertain eligibility and set conditions on how the money may be used.

Medium-term sources of funding will be repayable typically over 3-5 years, bank loans, leasing, and hire purchase are all sources of medium-term external funding. Bank loans are borrowed for specific purposes this will need to be pre-arranged with the bank, the repayment term will also be pre-agreed. Interest will need to be paid back on top of any initial borrowing so without using the money to invest you will always pay back more than you borrow. The bank will look at assets owned and current liabilities as well as historical and forecasted income, credit score will have an impact on the interest rate offered. Leasing is when a business rents equipment or vehicles, in the short term this is cheaper than purchasing, equipment is changed when outdated, and maintenance and servicing can also be included. Over the long term, this will be more expensive than purchasing the equipment outright as there will be leasing charges. The business will never actually own the equipment unlike if they were to use hire purchase instead which enables a business to have the equipment quickly without having to pay out a bulk sum for it, payments are made over a preset period of time, and once the final payment is made the equipment is then owned. Failure to make payments could lead to the equipment being taken back and interest charges will make this option more expensive than buying outright.

Long-term sources of finance are typically for a period of more than 5 years, external examples of long-term finance are mortgages, debentures, venture capital, and share issues. Mortgages can only be used to purchase property or land, they tend to have lower interest rates than bank loans and can be taken over a long period of time. Having a variable mortgage can make repayments increase due to interest rate rises and failure to keep up repayments can result in losing the land or property initially purchased. Mortgage lenders will need to analyze how much of credit risk the business is and so will look at a business’s credit report and score, liabilities, borrowing history, debt to income ratio, and payment history. When a business venture is deemed a financial risk by organizations like banks money can be obtained through investment from venture capitalists. The venture capitalists will offer guidance to try and ensure the investment will be successful, they tend to only be interested in large loans and they often will want a share in the business and decision-making rights within the business in exchange for their investment. If a business only wanted to give up a small part of the organization they could instead try share issues, by selling shares and creating shareholders large sums of money can be raised and repayments are not needed. Shareholders have limited liability and are paid dividends depending on the business’s profit for that year. Issuing shares is expensive and setting a price for them depends on supply and demand. Debentures can be a medium or long term example of external finance, debentures are unsecured so the reputation and credit report of the business which issues them is very important, they are generally borrowed from the general public as they do not have restrictions on how the money can be used as bank loans. Large sums of money can be raised but if repayments are not made the owners of the debenture can sell the business’s assets in order to recover the remaining balance owed.

Internal finance is finance that is generated from within the company this includes retained profits, reduction of working capital, and the sale of assets owned by the business. Retained profits are previous profits that have been kept back by the business to reinvest in themselves in order to make more profit, the speed at which the business grows will depend on the amount of retained profits are available, shareholders may not be happy as they will receive smaller dividends on their shares due to retained profits. Retained profits can be used as the business sees fit there are no limitations on their use as with many external finance options. Assets that are no longer used by the business can be sold on to generate a source of finance that also has no limitations on its use, sale of assets should be carefully considered as if the business was to need the equipment sold in the future they would have to spend more money on buying or leasing a new one. Reducing working capital is another source of internal finance source.

Tesco began life in 1919 with the personal investment of Jack Cohen, by doing so Jack had assumed all the risk of losing his money but saved himself interest charges associated with borrowing money from another source. In 1947 Tesco floated on the stock exchange at a share price of 25p (Tesco 2017), this would have increased the company’s public profile as well as providing capital for the business but floating shares are expensive and the company now has to ensure it maintains it’s responsibilities to shareholders, post-1992 Tesco would have also had to adhere to the UK corporate governance code in order to be allowed to keep trading on the stock market. Tesco continued to grow, in 1961 it secured a place in the Guinness book of world records as the largest store in Europe and soon became known as one of the ‘big four’ which consisted of Tesco and its 3 main competitors-Sainsburys, Asda and Morrisons. 


We use cookies to give you the best experience possible. By continuing we’ll assume you board with our cookie policy.