Accounting
Financial and Strategic Analysis: Carrefour versus Tesco

Introduction

In the process of globalization, many big and powerful multinational retailers had emerged to dominate the worldwide retailing landscape in the past decades. Despite a highly competitive industry landscape, it can be seen that the multinational retailers are growing fast and have been successfully expanding to other regions around the world. Today, the brand name of large retailers such as Wal-Mart, Carrefour, and Tesco are widely known around the globe.

In order to understand the retailing industry, as well as the financial profitability outlook of the retailing industry, a comprehensive analysis is essential. In this report, the discussion will be focused on one of the famous multinational retailers in the world – Tesco. In other words, the financial and business analysis of Tesco will be emphasized. The relative performance and the expected performance of Tesco in the future, in comparison or relation to its peers, will be discussed. To do so, a comprehensive industry analysis is carried out to understand the business environment facing the multinational retailers in competitive world today. For this, Carrefour will be primarily selected as the peer to be compared with. By using the financial information obtained from Thomson Analytics, the profitability of two firms, which are Tesco and Carrefour, will be compared and discussed. Financial ratio decomposition methods will be used for profitability analysis of these companies. After financial analysis for Tesco and Carrefour had been performed, this report will proceed to discuss the valuation of share prices of Tesco and Carrefour. Lastly, the future outlook of Tesco and Carrefour will also be articulated.

Research Methods

In this report, the following research methods will be employed to study the profitability of Tesco. In order to better understand the relative performance of Tesco, Carrefour will be selected as the peer for analysis purposes. This will put Tesco into the perspective with its close competitors. As such, the details, fundamentals and data pertaining to both Tesco and Carrefour will be studied and analyzed. In order to analyze the two companies in greater depth, both qualitative and quantitative aspects of the two companies will be studied. The sequence of the research approach is as follow. Firstly, the macro environment of the retailing industry will be analyzed. Then, the qualitative analysis will be focusing more on understanding the strategies of Carrefour and Tesco. The core competencies and the relative competitive advantages of Tesco and Carrefour will also be investigated. Such an analysis will put the two companies into perspective in relation to the financial performance of the respective companies in the later part. Then, financial statement analysis for both the companies will be performed. Reformulated financial statement will be used. The financial data pertaining to Carrefour and Tesco will be obtained from database provided by Thomson Analytics. Reformulation of financial statement is necessary for more accurate and meaningful financial comparison and analysis in the later part of this business analysis report. Then, in order to analyze the financial profitability of Tesco and Carrefour, the decomposition approach will be utilized. From the decomposition approach, the sources and causes of profitability of both Tesco and Carrefour can be better analyzed. Then, the meaningful interpretation of the financial ratios of both the corporations can be discussed in a more accurate manner. Upon completion of both qualitative and quantitative analysis, an evaluation on the stock prices of both the firm will be presented. The future profitability, on a best effort basis, will be predicted. Depending on the relative attractiveness of Tesco or Carrefour in the retailing industry, the prospects of the stocks of these companies will be commented.

Internal and External Factors Affecting Carrefour and Tesco

Industry Analysis: The Retailing Sectors

In this section, the analysis of the retailing industry will be presented. Industry analysis is necessary to understand the industry players that will affect the competitive structure of the retailing industry. The competitive moves by the competitors or peers of Tesco will also affect the future outlook of Tesco. By understanding on the industry structure, strategies, core competencies as well as the relative competitive advantages of the various industry players in the international retailing landscape, the current profitability of Tesco and Carrefour can be better understood. Besides, a solid understanding on the strategies and relative core competencies of the various business players enable researcher to form better prediction on the future performance of the companies being analyzed.

Generally speaking, the industry landscape of the retailing industry is a highly competitive one. Among the famous, respectable and powerful industry players include the following: Wal-Mart Stores, Inc. (United States), Carrefour S.A. (France), Metro A.G. (Germany), Tesco PLC (United Kingdom), Group Auchan S.A. (France), Albrecht Discounts (ALDI) Group (Germany), PriceSmart Inc. (United States), Fred’s Inc (United States), Costco Wholesale Corporation (United States) and many others. The existence of many powerful industry players has been creating an industry structure with intense competition between the various industry players. Moreover, the domestic markets of the retailers, mostly from the western countries, are saturated and experiencing slow growth. Such a situation is driving the many retailers to expand to the international market. However, expansion to the international market comes with its own risks. Not all retailers able to achieve consistent success in the foreign market (Calof et. al., 2005).

In the past decades, the engine of economy growth seemingly had been switching from the west to the east. Consistent with that, many of the powerful retailers are expanding aggressively to China. For example, Tesco, Carrefour and Wal-Mart have been concentrating on their expansion efforts on China for the past few years. The expansions to China, despite the retailing industry in the nation is a highly competitive one, is justifiable. As discussed by Rigby (2007), it is estimated that the China retail market will be worth around USD 600 billion in 2010, from only USD 166 billion in 2007. However, it is also argued by Rigby (2007) that the retailing business situation is expected to be challenging in the future, as the rising real estate costs in China will definitely cause shrinking margins for these retailers in the long run.

There are however, little choices for the retailers. As discussed by Passariello et. al. (2011), the economic outlook in the western countries, particularly in the Europe and North America region is gloomy. In both of the region, consumer sentiment has been weak. Unemployment rate has been staying high for years, despite highly aggressive monetary easing by central banks of the countries in the region. Then, Europe region is haunted by the fiscal austerity measures – whereby government spending had been cut – in line with conservative fiscal policies. Worse, several countries, particularly the PIIGS, are suffering from serious sovereign debt issues.

Overall, the macroenvironment outlooks remain challenging and turbulent – which could affect the profitability of Tesco and Carrefour in the future. In the western regions, the economy outlook is weak and gloomy. Although the economic outlook in emerging countries in the east is relatively brighter, the competitions within retailers in the regions are intense. To stay competitive in such an environment is nothing easy. In order to understand the firm specific factors that could affect the profitability of Tesco and Carrefour in such a business landscape, the strategies, core competencies as well as competitive advantage of Tesco and Carrefour will be articulated and analyzed in the following sections.

Core Competencies, Strategies and Competitive Advantage of Tesco

Tesco, a highly successful multinational retailer from United Kingdom, has business operations in three regions, namely Europe, United States and Asia. Aside from retailing business, Tesco has been fast to capture opportunities available in the marketplace through related diversification. Strategic business units have been established for this purpose. Among the strategic business units established include: tesco.com, Tesco Telecoms and dunnhumby (Tesco’s  Annual Report, 2010). In this section, the strategies and core competencies, giving rise to the sharpening of competitive advantages of Tesco will be discussed.

The fast growth of Tesco has often been associated with effective market penetration strategies. As observed by Plimmer (2010), Tesco success comes from low cost leadership in the retailing industry in United Kingdom as well as in the international markets. The ability of low costs structure of Tesco further contribute to the firm success, when the corporation grows larger, achieving economies of scale and constantly improvement of efficient supply chain of the business. Besides pricing advantages, Tesco strategically located stores are also contribute to the corporation long term track records. Through strategic located stores, consumers find it is convenient to buy from Tesco. Indeed, in certain strategic places, Tesco stores are open for 24 hours a day. Coupled with the corporation’s strategies to deliver pleasant shopping environment and customer satisfaction to the consumers, the firm has been able to generate many long term loyal Tesco customers (Tesco’s Annual Report 2010). Besides, Tesco success has also always contributed to the effective Clubcard Loyalty Scheme promoted by the firm. As discussed by Baker (2010), the loyalty scheme is designed to reward consumers to save more when the customers spent more in Tesco stores (in which, will likely to lead the customers to spent even more in the stores). Apart from that, the loyalty scheme also enables Tesco to observe and study consumer behaviors. Ma et. al. (2010) argued that combining the data related to consumer spending patterns, Tesco able to tap into opportunities generated from insights gathered from the Customer Relationship Management programs associated with Clubcard. This effectively enables Tesco to market the right products, at the right timing to the customers, under a right atmosphere.

Then, Tesco is also famous for internal marketing competencies, whereby the benefits and well-fares of employees are taken good care of, so that these employees subsequently take good care of the precious customers of Tesco (Plimmer, 2010). Employees are treated as part of the company strategies. As discussed in Tesco’s Annual Report 2010, significant emphasis is concentrating on motivating, engaging, training, developing, and managing employees in the firm. Resources have been spent to train new talents – for better leaders to chart the future growth of Tesco in the competitive business landscape in the future.

Then, Tesco success over other competitors in United Kingdom, such as Sainsbury, is due to the firm commitment to become one-stop solution – that offers end to end products to consumers. Many products, not sold in conventional supermarket are marketed to customers, in order to provide greater convenience to customers. Through such a strategy, not only Tesco has been able to enhance the profitability of the firm, but also able to attract more customers seeking convenience to stay loyal to buy things from Tesco stores (Palmer, 2005). Indeed, as of today, Tesco is still committed to enlarge products portfolio whenever necessary and relevant. In a similar manner, Tesco has also been promoting products under its own brand name to enhance profit margin. When the products are marketed with a cheaper price to consumers, the consumers can enjoy more saving by shopping in Tesco. In turn, as the profit margin of products sold under Tesco own brand name is higher than those products of different brand by the respective manufacturer, the profit margin of Tesco can be enhanced. Essentially, this is a win-win strategy (Orsingher et. al., 2011).

Apart from that, Tesco has also been successful in expand to the international marketplace due to its ability to think global and act local (Lowe et. al., 2010). To explain, Tesco often found to be able to export its successful business model and philosophy to the foreign countries, with the relevant adaptation and adjustment to fit the local context. One important aspects of the ability to act local is through the hiring and development of local talents to cater for the respective domestic market (Palmer, 2005). Moreover, not only Tesco has been aggressive to venture into the global market, it is determined to venture into the market space as well. As discussed by Plimmer (2010), the ‘Click-and-Collect’ approach is introduced to consumers, so that busy people today can buy what they require online, and to collect them through drive-through counters.

Core Competencies, Strategies and Competitive Advantage of Carrefour

In the international context, Carrefour is one of the widely popular and respectable multinational retailers. The ability of Carrefour to growth from a single supermarket in France in 1963 is often attributed to the strategies and core competencies of the corporation (Kamath & Catherine, 2001). In this section, the strategies and core competencies that contributed to the competitive advantage of Carrefour will be discussed.

As discussed by Shiue, Horng & Yeh (2006), there are several important strategies driving Carrefour’s expansion to the international market to become one of the biggest retailers around the world. Carrefour is mentioned to be adopting a triple strategy – through: internal growth, cooperation and franchising. Specifically, internal growth means that Carrefour had been expanded through product and market expansion; together with vertical integration and M&A (merger and acquisition) activities. Then, the strategy of cooperation is about Carrefour cooperating with its competitors in order to reduce market risks through joint venture. Lastly, the strategy of franchising is about having a contractual agreement at which the franchisee owns and operate a business using the franchiser’s brand name. To growth via franchising is important for Carrefour operations in these countries: United Arab Emirates, Qatar Romania, Santo Domingo, Tunisia, Egypt, Norway, Oman, Saudi Arabia and Japan.

From another perspective, as discussed by Colla and Dupuis (2002), Carrefour strategies, as according to their studies, are to go globalized, to tap into global middle class market that has the consciousness to choose, to reflect on what it wants and subsequently to buy. Carrefour has a worldwide ambition, with strong presence in Asia and Latin America. The entry strategies of Carrefour to the international market are through strategic alliances with management control. Then, many researchers and observers argued that the ability to think global and act local is the key factor contributes to success of Carrefour in the international context. Among the literature attributing successes of Carrefour to such perspective include: Cambra-Fierro & Ruiz-Benitez (2011), Aoyama (2007), Child (2006), and Baek (2004).

Carrefour strategies and core competencies appears to be multi-dimensional. For example, in the context of human resource management, Carrefour is having a highly decentralized culture. Carrefour position itself as low prices retailers, that able to offer rational and pleasant buying experience for consumers. This is consistent with the discussions by Kamath & Godin (2001), which Carrefour core business philosophy and strategy is to ensure customer satisfaction with low prices. Then, Cambra-Fierro & Ruiz-Benitez (2011) however, perceived that one of the key strategies of Carrefour is to have efficient supply chain management. Carrefour is having a ‘back margin’ strategy with the suppliers (Colla and Dupuis, 2002). Efficient supply chain is one of the key factors enable Carrefour to offered low prices to the marketplace in the growth and expansion of the company from a historical perspective.

However, despite great success track records in the past decades, Carrefour has been troubled with several issues in the recent years. In the international expansion context, Carrefour had committed to several mistakes. For example, Carrefour made the mistakes of entering into the Chile market without having access to local knowledge and advice. The expansion to Chile ended up badly in 2003. As discussed by Strategic Direction (2006), the failure of expansion to Chile market is due to Carrefour inability to adjust accordingly to the needs and wants of the local market. Besides, Carrefour had also no real viable plan for growth in the market. Besides, observers opinioned that Carrefour had also expanded too aggressively – without cutting off or fixing those money losing ventures in certain oversea markets (The Economist, 2007).

Then, Carrefour is having serious issues in the domestic market, whereby the company market shares is increasingly eaten away by the competitors. Such a situation will have significant adverse impacts to Carrefour, as nearly 40% of the revenue and profits of Carrefour is contributed by the domestic market (The Economist, 2007). There are many reasons cited in relation to Carrefour lost of market shares to competitors. For example, it is mentioned that people prefer to visit smaller and closer shops near their home compared to huge, out-of-favor stores of Carrefour in France. Then Carrefour had also committed to wrong strategic move by passing increases of commodity prices to consumers several months earlier than the competitors, such as Leclerc and Intermarche in France (The Economist, 2011). Then, Matlack (2008) also asserted that the slow growth of Western European market had also affected Carrefour profitability adversely. It is also commented that Carrefour had lost it low prices reputation – when the corporation implement stop-and-go policy of cutting prices in the first half of the year, while raising the prices during the Christmas season – that had significantly irritated consumers (Diderich, 2011). Overall, currently, the consumers no longer perceive Carrefour as low price leader anymore – when the rivals today able to held prices up to 5% lower than Carrefour’s for the long term (Schultes, 2011).

Concluding Remark

Overall, it can be seen that both Tesco and Carrefour has relatively similar strategies, in the sense that they grow fast through a focus on customer satisfaction, lowest possible pricing to customers as well as to venture into the global market for better opportunities. However, in the recent years, Carrefour has not been doing well, as it is observed that the firm had deviated from a low pricing value proposition to consumers – and hence, losing market shares to competitors. On the other hand, it is apparent that Tesco has been able to stay committed to delivering lowest price possible to customers, as well as continuously improve and enhance the value proportion to consumers. Tesco has a long term view – and follow through the strategies, while Carrefour, had fallen back due to a more short term oriented mindset. As a result, Carrefour had suffered lost of market shares in chase of short term profits by trying to pass the prices increases to consumers.

Analysis of Profitability of Tesco and Carrefour

In this section, financial statement analysis will be performed to analyze the financial profitability of Tesco, in comparison to Carrefour. For this, the relevant financial data will be obtained from the database of Thomson Analytics. Upon downloading the financial data from the database of Thomson Analytics, the financial statements of Tesco and Carrefour will be reformulated. Reformulation of financial statement is necessary for more accurate and meaningful financial comparison and analysis in the later part of this business analysis report. Then, in order to analyze the financial profitability of Tesco and Carrefour, the decomposition approach will be utilized. From the decomposition approach, the sources and causes of profitability of both Tesco and Carrefour can be better analyzed. Then, the meaningful interpretation of the financial ratios of both the corporations can be discussed in a more accurate manner.

Reformulation of Financial Statement of Tesco and Carrefour

In this section, both Tesco and Carrefour’s reformulated financial statement will be analyzed and compared. In Figure 1 below, the reformulated balance sheet (from year 2004 to 2010) for Tesco is presented. Firstly, it can be observed that the total operating assets for Tesco has been increasing constantly from year 2004 to 2010. A closer investigation on such issue found that the increase of total operating assets for Tesco is primarily driven by increase in net property, plant and equipment. This is sensible because Tesco has been expanding fast in these periods, whereby it has been expanding fast to the global context. Similarly, the total operating liabilities of Tesco has also been increasing. This is primarily driven by increasing amount of accounts payable, other current liabilities and provision for risk and charges. Overall, the increases of these items are reasonable because as Tesco is growing bigger, the working capital required will be generally greater. This is confirmed by the trend of increase in net operating assets and cash and short term investment held by Tesco. One notable change is Tesco has been increasing the usage of long term debt in its capital structure, which subsequently resulted in a rising trend of net financial liabilities of the firm. Overall, this indicates that Tesco is indeed relying on gearing for expansion purposes. Nonetheless, the expansion of Tesco is profitable, as the total equity of the company has been increasing steadily in the past few years. In order to gain more insights on the profitability of Tesco over the past few years, an analysis of Tesco income statement will be provided in the following paragraph.

 

Figure 1: Reformulated Balance Sheet for Tesco

 1

Source: Data adjusted from Thompson Analytic

 

The reformulated income statement of Tesco is shown below. Overall, it is obvious that Tesco has been expanding fast, as the total revenue of the group almost double in a period of 6 years. Besides, as the revenue increases, EBIT for Tesco is also increasing fast and steadily. That is same for the increase of net income, whereby it had more than doubled in a period of 6 years. The uninterrupted profitability of Tesco, as measured by the growth of revenue and net income, is indeed remarkable, considering that the company is relatively unaffected by the worldwide recession and crisis in 2008. However, it is also observed that the net interests of the company had also doubled in the period under investigation. This is primarily because the company is expanding through leverage (i.e., financing growth via debt instruments). Although it is too early to judge the management decision in Tesco expansion through gearing, it is believed that a more highly leveraged or geared Tesco is justifiable, considering the uninterrupted track records of revenue and net income growth over the past few years.

 

Figure 2: Reformulated Income Statement for Tesco

 2

Source: Data adjusted from Thompson Analytic

 

Without comparing the performance of Tesco to a peer in the retailing industry, the relative achievement of the management of Tesco can hardly be analyzed in a more objective manner. A comparison of Tesco performance to the peers enable analysts to compare Tesco performance to objective reference points, and hence, enable better judgment to be drawn from the comparison process. In Figure 3, the reformulated balance sheet for Carrefour is presented. It is noticed that total operating assets for Carrefour has also been increasing, albeit in a more volatile manner, from year 2004 to year 2010. The increasing total operating asset is due to the increase in other current assets. Then, in a similar manner, the total operating liabilities of Carrefour had also increased from 2004 to 2010. Such an increase is also contributed by the increase in other current liabilities. Apart from that, it is also noted that the amount of cash and short term investment held by Carrefour has also increased from 2004 to a peak in 2008, and then recorded a smaller decrease towards the end of 2010. Overall, the increases of these financial variables are pretty similar to the case of Tesco. However, on deeper investigation, it is found that from 2009 onwards, Carrefour recorded zero long term debt in its capital structure. Such a drop of long term debt is parallel to the rise of short term debt in the capital structure. This indicates that Carrefour had switch to the usage of short term debt recently. This is different to the case of Tesco. From another perspective, the shareholders’ equity of Carrefour looks less promising. Although the management able to generate higher shareholder equity from year 2004 to 2008, the lower shareholder equity since 2008 onwards indicates that the management of Carrefour is actually destroying shareholders’ value in the past two years. This is consistent without discussion on the issues haunting Carrefour in the recent years, where Carrefour is losing market shares significantly to the local competitors in France. As discussed before, due to wrong pricing decision, consumers no long perceive Carrefour as the low price leader retailer in the domestic market – affecting adversely the profitability of Carrefour. The financial performance of Carrefour is affected materially as the revenue generated from domestic market used to be approximately half of the revenue and profits of Carrefour.

 

Figure 3: Reformulated Balance Sheet for Carrefour

 3

Source: Data adjusted from Thompson Analytic

 

In Figure 4 below, the reformulated income statement of Carrefour is shown. It is obvious that the rising trend of revenue recorded by Carrefour is interrupted in year 009, which is due to the gloomy economic outlook and financial crisis around the world in 2009. Then, the company net income dropped significantly from year 2008 to 2009. The net income of the company remained low until 2010. Overall, when compared to Tesco, it is shown that Carrefour had been affected seriously and adversely by the outbreak of financial crisis in 2009. The combined net income for the year 2009 and 2010 are even lower than the net income achieved by Carrefour in 2004. Apart from that, it is also observed that Carrefour net income is indeed more volatile and bumpy (when compared to the net income of Tesco that is obviously had been rising constantly over the past few years).

 

Figure 4: Reformulated Income Statement for Carrefour

 4

Source: Data adjusted from Thompson Analytic

 

In order to allow reader to make more direct comparison on key financial information of Tesco and Carrefour, the respective financial metrics are presented in Figure 5 and Figure 6 below. Overall, as discussed previously, one significant findings from a review of the balance sheet and income statement of both the companies from 2004 to 2010 indicates that Tesco is indeed a better performing company, as Tesco is found to be relatively unaffected by financial crisis in 2009. Besides, the revenue and net income of Tesco is observed to be rising steadily – producing uninterrupted profitability track records even when economy outlook is gloomy around the world. In contrast, the net income of Carrefour is proven to be volatile and bumpy. Besides, it is apparent that Carrefour has not really recovered from the negative impacts due to financial crisis in 2009. Ceteris paribus, purely from an analysis of the historical track records of net income for both the companies, it can be concluded that management in Tesco was indeed more competent and capable in managing the retailing business.

 

Figure 5: Key Financial Information for Tesco

 5

Source: Data adjusted from Thompson Analytic

 

Figure 6: Key Financial Information for Carrefour

 6

Source: Data adjusted from Thompson Analytic

 

Interpretation and Analysis on Decomposed Financial Ratios

In this section, Return on Capital Employed (ROCE) will be used as the key financial metrics to analyze the profitability of Tesco and Carrefour. In order to yield more meaningful and in-depth analysis, ROCE will be further decomposed into different components. The decomposition of ROCE is shown in formula below.

 

ROCE = RNOA + [FLEV * SPREAD]
  = (OI/NOA) + [FLEV * SPREAD]
  = [(OI/Sales)(Sales/NOA)] + [FLEV * SPREAD]
  = (PM)(ATO) + [FLEV * SPREAD]

 

Where:

RNOA = Return on net operating assets
OI = Operating income
NOA = Net operating asset
FLEV = Financial leverage
SPREAD = Calculated by subtracting net borrowing costs from return on net operating assets
ATO = Asset turnover ratio
PM = Profit margin

 

In figure 7, ATO of Tesco and Carrefour is compared. Generally speaking, the higher the ATO, the better, as the management is able to generate more revenue from a unit of operating asset. Purely from ATO perspective, Carrefour is obviously more profitable than Tesco, as the ATO figures fall in the range of 4.5 to 5.5; whereas Tesco ATO approximately fall in the range of 2.5 to 3.0. This indicates that the management of Carrefour is more efficient or effective in generating revenue from the utilization of the net operating assets available to the company. It is worthy that from year 2004 to 2009, the net operating assets for both Tesco and Carrefour is approximately the same.

 

Figure 7: Comparison of Asset Turnover Ratio (ATO) for Tesco and Carrefour

 7

Source: Data adjusted from Thompson Analytic

 

In Figure 8, RNOA of Tesco and Carrefour is compared. RNOA is calculated as a product of PM and ATO. A close investigation on the PM of Tesco and Carrefour found that the profit margin of Tesco is higher than that of the Carrefour. Higher profit margin often indicates that the company is having certain competitive advantage against the competitors. Mathematically, Tesco profit margin apparently is always higher than the profit margin of Carrefour by 1%. The higher PM figure of Tesco can indicate that the company is having a more efficient supply chain. Thus, it can be seen that Tesco is superior from higher PM, while Carrefour is better in terms of higher ATO. Taking into the effects of PM and ATO into consideration, it is found that the RNOA of Carrefour is higher than that of the Tesco. Purely from RNOA perspective, Carrefour can be assumed to be more profitable than Tesco, from 2004 to 2008.

 

Figure 8: Comparison of Return of Net Operating Assets (RNOA) for Tesco and Carrefour

 8

Source: Data adjusted from Thompson Analytic

 

In Figure 9, ROCE of both Tesco and Carrefour is analyzed. In this section, the various key drivers of ROCE will be investigated. The key drivers of ROCE include RNOA, FLEV and SPREAD. In order to present graphical view for easily analysis visually, the key drivers are plotted in time series graphs from Figure 10 to Figure 13. By analyzing the changes on these key drivers, the various essential factors affecting the profitability of both Tesco and Carrefour can be better analyzed. The respective analysis on the trends of these key drivers will be presented in the paragraphs below.

 

Figure 9: Analysis ROCE of Tesco and Carrefour

 9

Source: Data adjusted from Thompson Analytic

 

In Figure 10, it can be observed that RNOA of Carrefour has been usually higher than Tesco in the past. However, in the year 2008, Tesco RNOA surpassed the figure of Carrefour. Besides, it is also easy to observe that the RNOA of Carrefour had been volatile and fluctuating in greater magnitude, when compared to the relatively stable figure of RNOA achieved by Tesco. This indicate that the volatility of RNOA of Tesco is lesser, and thus, possibly more easy to be predicted than the RNOA of Carrefour.

 

Figure 10: RNOA of Tesco and Carrefour from 2004 to 2008

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Source: Graph plotted from Table in Figure 9

 

In Figure 11, the financial leverage of both Tesco and Carrefour is compared. It can be seen that Carrefour is a more aggressive company, purely from the financial management perspective – as Carrefour is more heavily geared. In contrast, Tesco is less dependent on financial leverage in its capital structure. Nonetheless, it can be observed that Carrefour is reducing its leverage from year 2004 to 2008. Having to mention that, due to the fact that Carrefour is a highly geared company when compared to Tesco, the financial risks pertaining to Carrefour will likely to be greater.

 

Figure 11: FLEV of Tesco and Carrefour from 2004 to 2008

 11

Source: Graph plotted from Table in Figure 9

 

In Figure 12, the SPREAD of Tesco and Carrefour is compared. It is observed that the operating spread of Tesco is improving steadily from year 2004 to 2008. This is an indication that the management has been improving the returns of the company (in relative to borrowing costs) successfully. However, the spread of Carrefour had been volatile. The volatility of the operating spread of Carrefour make it a harder company to be analyzed, as the business or company outlook is more uncertain (from historical stand points). Worse, the spread of Carrefour had dropped significantly in the year 2008. Such a dramatic deterioration of operating spread of Carrefour indicates that the company may be suffering from inconsistent and potentially troublesome profitability.

 

Figure 12: SPREAD of Tesco and Carrefour from 2004 to 2008

 12

Source: Graph plotted from Table in Figure 9

 

After the main key drivers of ROCE are investigated, the trend of ROCE for both Tesco and Carrefour is plotted in Figure 13 below. Overall, it can be seen that unless in year 2008, the ROCE of Carrefour had been higher than of the Tesco. This is contributed largely by the higher ATO and financial leverage employed by Carrefour. However, in 2008, ROCE of Carrefour dropped dramatically, and performed significantly worse than the achievement of Tesco. This is due to the deterioration of operating spread of Carrefour. Overall, it can be seen that Carrefour financial performance is more volatile and uncertain. The higher profitability of Carrefour is partly contributed by the use of debt – and this indicates that Carrefour can be a more risky company, as aggressive financial management is adopted in the firm.

 

Figure 13: ROCE of Tesco and Carrefour from 2004 to 2008

 13

Source: Graph plotted from Table in Figure 9

 

Comparing ROCE of Tesco and Carrefour to Respective Industry Average

In Figure 14 below, the ROCE of Tesco is compared to the UK industry average. It is found that Tesco ROCE has been outperforming the industry median throughout the years. Indeed, since year 2006, Tesco has been the top performer above the 1st Quartile. This is consistent with our qualitative research discussed above, whereby Tesco has been performing extraordinarily in beating the competitors in United Kingdom, and emerge as the dominant market leader in the nation.

 

 

Figure 14: Comparing ROCE of Tesco to UK Industry Average

 14

Source: Data adjusted from Thompson Analytic

In Figure 15 below, the ROCE of Carrefour is compared to the industry average in France. It is observed that Carrefour performance has been deteriorating seriously throughout the years. The performance of the retailing industry, as indicated by the ROCE of the industry average is similar. As discussed above, such a situation is contributed by heightened price competition between the retailers in France. As the competition is focus on pricing, the margin of the retailers operating in France is likely to be squeezed. As such, over the years, the ROCE of both Carrefour and the industry average deteriorated. This provide strong evidences that occurrence of price war is generally bad for every industry players in the retailing industry.

 

Figure 15: Comparing ROCE of Carrefour to France Industry Average

 15

Source: Data adjusted from Thompson Analytic

 

Overall, from a review of Tesco and Carrefour performance in the respective domestic market revealed that the retailing landscape in France is becoming highly unfavorable for Carrefour. This will likely hurt the profitability of Carrefour significantly in the future. Considering that nearly half of Carrefour revenues and profits are generated from France, the deterioration of retailing business environment and competitive landscape in the nation will affect Carrefour seriously.

Discussion on the Current Share Prices of Tesco and Carrefour

In Figure 16 below, the stock prices of Tesco since 2003 is presented. It is discovered that the stock prices of Tesco has been performing well – embarking on a rising trend since 2003 to a peak in 2008. However, due to the financial crisis in 2009, the stock prices plummeted. After three years since the global recession in 2009, the stock prices recovered slowly, but yet to reach the peak achieved in 2008. Indeed, in the past two years, the stock prices of Tesco has been sloping downwards slightly – perhaps in anticipation of possible recessions in the Europe regions, due to serious sovereign debt crisis in Eurozone.

 

Figure 16: Stock Prices of Tesco Since 2003

 16

Source: Yahoo Finance

 

In Figure 17 below, the stock prices of Carrefour is shown. Overall, it can be observed the stock prices of Carrefour are on a serious downtrend. Prior to year 2008, the stock prices of Carrefour have been trading without an obvious trend. However, due to the financial crisis in 2009, the stock prices of Carrefour plummeted. This is similar to the case of Tesco in year 2008 – 2009 as discussed above. However, the situation for Carrefour is not as optimistic as was the case for Tesco. The stock prices of Carrefour had never recovered satisfactory, and worst, the stock prices plummeted again in year 2011. This is largely due to firm specific issues. As discussed above, Carrefour has been losing market shares to the competitors in France in the recent years. Such a situation is significantly hurting the profitability of Carrefour, and indeed, being priced into the stock of Carrefour by the investing fraternity.

 

Figure 17: Stock Prices of Carrefour Since 2003

 17

Source: Yahoo Finance

 

In Figure 18 below, the financial information related to profitability of Tesco is summarized. In the recent past five years, the company is doing very well. There are obvious trends of rising revenue and net income steadily achieved by Tesco. The financial ratios of Carrefour are also satisfactory. Gross profit margin is about 8.3%. This indicates that the retailing industry is indeed competitive – consistent with our discussion and findings from section above. Despite low gross profit margin, the net profit margin of Tesco of 4.38% is indeed encouraging, given that it is indeed operating in a tough business environment. From another perspective, ROA, ROE and ROI for Tesco are also outstanding. Although it is discussed that the high ROE is contributed by increasing usage of debt over the past few years, the ability of the company to stay competitive in the retailing industry, while expanding the market presence of Tesco around the glove is indeed encouraging. These are the reasons supporting the outperformance of Tesco’s stock prices when compared to the competitors, such as Carrefour.

 

Figure 18: A Summary of Profitability of Tesco in the Past Five Years

 18

Source: FT.com (Financial Times)

 

In Figure 18 below, the financial information related to profitability of Carrefour is summarized. In the recent past five years, the company is doing badly. Although the revenue of Carrefour stays relatively constant in the past five years, the net income performance has been miserable. The net income fallen sharply in year 2008 toward 2009. However, even after the economy has been recovering in 2010, the net income of Carrefour had never recovered fully. Although the gross margin of Carrefour is high, the net profit margin is worrying. A net profit margin of 0.53% indicates the firm is indeed suffering from certain serious issues. As discussed before, this is contributed by increase price wars in retailing landscape in France. All of the returns ratios, namely ROA, ROE and ROI for Carrefour had also fallen to a low level. Although the ratios are still within the positive range, it suggests the company may suffer badly if the root causes affecting the firm adversely are not solved.

 

Figure 19: A Summary of Profitability of Carrefour in the Past Five Years

 19

Source: FT.com (Financial Times)

 

Lastly, Figure 19 below shows the valuation metrics of Carrefour and Tesco. At the moment, Tesco is valued by the financial market at a P/E ratio of 11.24. Such a valuation is granted, given the firm extraordinary performance in the past, as well as the relatively stable financial performance of the firm even during the recessionary era in 2008 and 2009. The valuation of Tesco is nonetheless affect by the gloomy economic outlook in the Europe region as well as turbulent economy recovery around the world. Otherwise, Tesco should be able to get a high valuation or price multiples given the firm track records of success in the retailing industry. In contrast, the Carrefour price multiple is 32.46. The high multiple indicates that investors somehow believe that the company may be on the path to recovery, given the new management being appointed to turnaround the firm. Part of the reason contributing to such a high price multiple, despite weak financial performance of Carrefour is due to investors inherent understanding that earnings of the firm may improve swiftly when corrective actions are taken, given that the revenue of Carrefour is relatively stable even during the past few years.

The dividend yield for Carrefour is 5.84% while it is 3.91% for Tesco. Technically speaking, this suggests Carrefour as a more attractive company to be invested. However, the high dividend yield may not be sustained, if the company performance remains highly unsatisfactory, or worse, turns red (i.e., making a loss on net income). Then, the price to sales ratio for Carrefour is 0.14, while it is 0.49 for Tesco. This suggests that Carrefour is a relatively more undervalued company when compared to Tesco – purely from price to sales ratio. However, the undervaluation of Carrefour comes with valid reasons. The deterioration of financial performance as well as losing of its competitive advantages and market shares to the competitors in the domestic market can easily justified the undervaluation of Carrefour. Similarly, from the price to book value ratio, Carrefour is indeed undervalued when compared to Tesco.

 

Figure 20: Valuation Metrics and Comparisons between Carrefour and Tesco

 20

Source: FT.com (Financial Times)

 

Overall, this section put the stock prices of Carrefour in light of the qualitative and quantitative findings discussed in the previous sections. Apparently, the financial market is roughly efficient in discounting all of the relevant information known to marketplace. In the next section, conclusion of this report will be presented.

Conclusion

This report had performed a profitability analysis on Carrefour and Tesco. In order to do that, the financial information of these companies is investigated. Financial decomposition methods are employed to truly analyze the components contributing to the financial performances of the respective companies. In order to make sense on the financial numbers and performances, a review of the macroenvironment as well as the industry structure is performed. Besides, the strategies, core competencies and the competitive advantages of Carrefour and Tesco are analyzed. By combining both the qualitative and quantitative picture pertaining to the companies, the stock prices of the companies are discussed. Future profitability of Carrefour and Tesco can also be more reasonably estimated.

Generally speaking, Tesco is found to be a superior company due to the management capabilities of expanding and growing the firm profitability in a steady manner. In contrast, Carrefour had deviated from the low price strategies for short term profits. The lost of lowest price leader in France is haunting the company in the past few years, and as shown in the case of Carrefour, to recover from the mess is nothing fast or easy. This is understood well by investors, as the stock prices of Tesco has been recovering satisfactory after the financial crises and recession in 2009; while The stock prices of Carrefour is making new lows even after the crisis.

Going forward, it is reasonable to expect that Tesco will be able to gradually enhance its profitability, by increasing the revenue and net income despite turbulent economy situation. Tesco had shown itself as a relatively resilient company during the past recession. The company will buy a good investment target if the stock prices drop sharply due to emotional factors in the financial market. The situation of Carrefour is harder to be analyzed. The success of Carrefour will be highly dependent on the new management ability to revitalize and rebuilt the reputation of the company in the competitive retailing industry landscape.

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