Appraisal Methods To Manage Financial Resources Finance Essay

Financial performance

ABP level 7

Lecturer: Mr. Saad Siddiqi

This assignment is submitted for Post-Graduate Diploma in Marketing Management from ABP via London Academy of Management Sciences.


Student’s Details

Surname: Majid Forename: Abdul

Student Reference: 8670m/abdu


Financial performance

Financial performance assignment will help learners to:

Understand the impact of financial resourcing on an organisation’s performance.

Understand how to use appraisal methods to manage financial resources

Know how to assess the performance of organisation


The comparison of financial performance with has been a popular field of study over the past 25 years. The results, while broadly conclusive of a positive relationship, are not entirely consistent. In addition, most of the previous studies have concentrated on large-scale cross-industry studies and often with a single corporate performance, in order to produce statistically significant results. Following a review of the literature this research presents the initial findings from a study of the TESCO Supermarket which suggest that contemporaneous financial performance are negatively related, while prior-period financial performance is positively related with subsequent social performance. Positive relationships between both age and size of the company with social performance are also found.


In this study there are some assumptions and limitations which are described as follows; it is assumed that the data or information available over the internet is reliable. Time is the biggest constraint in student‘s research because they have a limited period of time and it is impossible to discuss all the topics related to the specified research. It is hard to know the exact share price per value because it is confidential companies do not open it on the internet or anywhere else.

Task: 1

Examine the need for financial resources within a strategic plan.

Importance of financial Resources

A company’s financial resources provide various financial information that investors and creditors use to evaluate a company’s financial performance. Financial statements are also important to a company’s managers because by publishing financial statements, management can communicate with interested outside parties about its accomplishment running the company. Different financial statements focus on different areas of financial performances. Financial statements are important reports which show how a business is doing and are very useful internally for a company's stockholders and to its board of directors, its managers and some employees, including labour unions. Externally, they are important to prospective investors, to government agencies responsible for taxing and regulating, to lenders such as banks and credit rating agencies, and to investment analysts and stockbrokers.

Sources of finance

There are different sources of finance that are available to a small business or a big company. With each source of finance listed the report will assess the implications that can arise and along with this the report will look at the cost to the business to taking a curtain source of finance. All businesses need short-term finance from the very beginning to start up the business and to cover day-to-day running costs. This provides the business with working capital. However businesses also need long-term capital to help them to grow and expand, and this is paid back over a number of years. Without finance a business would find it difficult to accomplish anything.

For my assignment purpose I have chosen Tesco, source of finance can be define into two ways such as

Internal source of finance

External source of finance

Internal Sources of finance of Tesco

Personal savings

This is most often an option for small businesses where the owner has some savings available to use as they wish. Practically tesco depends on their savings for source of finance.

Retained profit

This is profit already made that has been set aside to reinvest in the business. It could be used for new machinery, marketing and advertising, vehicles or a new IT system.

Working capital

This is short-term money that is reserved for day to day expenses such as stationery, salaries, rent, bills and invoice payments.

Sales of assets

There may be surplus fixed assets, such as buildings and machinery that could be sold to generate money for new areas. Decisions to sell items that are still used should be made carefully as it could affect capacity to deliver existing products and services.

External Sources of financing


Limited companies could look to sell additional shares, to new or existing shareholders, in exchange for a return on their investment.


There are debenture loans, with fixed or variable interest, which are usually secured against the asset being invested in, so the loan company will have a legal shared interest in the investment. This means that the company would not be able to sell the asset without the lender's prior agreement. In addition the lender will take priority over the owners and shareholders if the business should fail and the cost will have to be repaid even if a loss is made.

There are other types of loan for fixed amounts with fixed repayment schedules. These may be considered a little more flexible than debenture loans.


A bank overdraft may be a good source of short-term finance to help a business flatten seasonal dips in cash-flow, which would not justify or need a long-term solution. The advantage here is that interest is calculated daily and an overdraft is therefore cheaper than a loan.

Hire purchase

Hire purchase arrangements enable a firm to acquire an asset quickly without paying the full-price for it. The company will have exclusive use of the item for a set period of time and then have the option to either return it or buy it at a reduced price. This is often used to fund purchases of vehicles, machinery and printers.

Credit from suppliers

Many invoices have payment terms of 30 days or longer. A company can take the maximum amount of time to pay and use the money in the interim period to finance other things. This method should be treated with caution to ensure that the invoice is still paid on time or else the firm might risk upsetting the supplier and jeopardise the future working relationship and terms of business. It should also be remembered that it's not 'found' money but rather a careful balancing act of cash-flow.


Grants are often available from councils and other Government bodies for specific issues. For example there may be a council priority to regenerate a particular area of a town and who are happy to help fund refurbishment of buildings. Alternatively there may be an organisation that specialises in helping young entrepreneurs to launch new businesses. Assessment for grants can be very competitive, is very individual and not automatic.

Venture capital

This source is most often used in the early stages of developing a new business. There may be a huge risk of failure but the potential returns may also be big. This is a high risk source as the venture capitalist will be looking for a share in the firm's equity and a strong return on their investment. However the significant experience these investors have in running businesses could prove valuable to the company.


This involves a company outsourcing its invoicing arrangements to an external organisation. It immediately allows the company to receive money based on the value of its outstanding invoices as well as to receive payment of future invoices more quickly. It works by the firm making a sale, sending the invoice to the customer, copying the invoice to the factoring company and the factoring company paying an agreed percentage of that invoice, usually 80% within 24 hours. There are fees involved to cover credit management, administration charges, interest and credit protection charges. This must be weighed up against the benefit gained in maximising cash flow, a reduction in the time spent chasing payments and access to a more sophisticated credit control system. The downside is that customers may prefer to deal direct with the company selling the goods or services. In addition ending the relationship could be tricky as the sales ledger would have to be repurchased.

Money is a scarce resource and each source has its own advantages and disadvantages. Lenders will be looking for a return on investment, the size of the risk and the flexibility with which they can get their money back when they want or need it. For the company seeking money, the decision as to the best source will ultimately depend on what the money is for, how long the money is needed for, the cost of borrowing and whether the firm can afford the repayments.

Appraise the methods by which financial resources are allocated, managed and controlled.


Risks and Uncertainties

The Board has overall responsibility for risk management and internal control within the context of achieving the Group’s objectives. The Board agrees the strategy for the Group, approves the Group’s risk appetite as well as specific high level policies and the delegated authorities, and monitors the risk profile of the Group.

The key risks and uncertainties faced by the Group are set out below. Further detail on these risks and uncertainties can be found in the Tesco Personal Finance Plc Directors’ Report and Financial Statements for the year ended 29 February 2012.The key risks and uncertainties at the period end are consistent with those at 29 February 2012, with the exception that the Group has successfully migrated its credit card customers to its own platform. This completes the ‘Transformation Programme’, enabling the Group to conduct banking and insurance business independently of RBS, and therefore Transformation is no longer included in the list of principal risks.

Credit Risk - External Environment

The Group is exposed to general UK economic conditions and market trends, including impacts such as a sudden movement in interest rates, in the areas in which it operates. Risks, which mainly impact credit portfolios, include government spending cuts, fragile consumer confidence and a squeeze on real incomes due to inflation exceeding wage growth. The Group’s entry into the secured lending market with the launch of mortgages will result in greater exposure to the impact of house price changes. The continuing Euro zone debt crisis may result in contagion to the wider global economy which could result in further economic shocks.

Legal and Regulatory Compliance Risk

Legal and Regulatory Compliance Risk is the risk of consequences arising as a result of non- compliance with the laws and regulations affecting the Group’s governance, prudential arrangements, business activities, risk management and its conduct with customers. The Group is subject to significant regulatory oversight, including supervision by the Financial Services Authority (FSA) which has substantial powers of intervention.

The regulatory landscape is changing with current FSA responsibilities migrating to the new Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA). Although the PRA and FCA will not formally exist until early 2013, operationally the FSA has already moved to a ‘twin peaks’ structure to reflect the way the two organisations will operate. Effectively, the Group is now dual regulated and is supervised by two independent regulators for prudential and conduct risk.

Regulatory focus remains high in relation to ‘Conduct Risk’ and ‘Treating Customers Fairly’. Specifically there has been continued industry-wide focus on provision of redress in relation to past sales of PPI.

Insurance Risk

The Group is exposed to insurance risks through its 49.9% ownership of Tesco Underwriting Limited, an authorised insurance company.

Liquidity and Funding

Liquidity risk is the risk that the Group, although solvent, either does not have available sufficient financial resources to enable it to meet its obligations as they fall due, or can secure such resources only at excessive cost. Funding risk is defined as the risk that the Group does not have sufficiently stable and diverse sources of funding or the funding structure is inefficient. The Group relies upon significant amounts of on demand retail funding.

Operational Risk

Operational risk is the risk of loss caused by human error, ineffective or inadequately designed processes, system failure or improper conduct (including criminal activity).

Market Risk

Market risk is defined as the risk that the value of the Group’s assets, liabilities, income or costs might vary due to changes in the value of financial market prices; this includes interest rates, foreign exchange rates, credit spreads and equities



Operating activities £’000 £’000

Profit before taxation 105,272 45,602

Adjusted for:

Non-cash items included in profit before taxation 86,332 142,043

Changes in operating assets and liabilities (180,017) (18,910)

Income taxes paid (14,002) (3,117)

Cash flows (used in)/generated from operating

activities (2,415) 165,618

Investing activities

Purchase of non-current assets



Purchase of available for sale investment securities



Sale of available for sale investment securities



Loan to associate



Investment in associate



Cash flows generated from/(used in) investing

activities 329,893 (402,812)

Financing activities

Proceeds from issue of debt securities 198,401 -

Proceeds from issue of share capital




Dividends paid to ordinary shareholders



Dividends paid to holders of other equity



Interest paid on subordinated liabilities



Cash flows generated from financing activities



Net increase/(decrease) in cash and cash equivalents



Cash and cash equivalents at the beginning of the period



Cash and cash equivalents at the end of the period



Critically evaluate the impact of financial resource decision making on business strategy.

Financial metrics have long been the standard for assessing a firm’s performance. The BSC supports the role of finance in establishing and monitoring specific and measurable financial strategic goals on a coordinated, integrated basis, thus enabling the firm to operate efficiently and effectively. Financial goals and metrics are established based on benchmarking the "best-in-industry" and include:

Free Cash Flow

This is a measure of the firm’s financial soundness and shows how efficiently its financial resources are being utilized to generate additional cash for future investments. It represents the net cash available after deducting the investments and working capital increases from the firm’s operating cash flow. Companies should utilize this metric when they anticipate substantial capital expenditures in the near future or follow-through for implemented projects.

Economic Value-Added

This is the bottom-line contribution on a risk-adjusted basis and helps management to make effective, timely decisions to expand businesses that increase the firm’s economic value and to implement corrective actions in those that are destroying its value. It is determined by deducting the operating capital cost from the net income. Companies set economic value-added goals to effectively assess their businesses’ value contributions and improve the resource allocation process.

Asset Management

This calls for the efficient management of current assets (cash, receivables, inventory) and current liabilities (payables, accruals) turnovers and the enhanced management of its working capital and cash conversion cycle. Companies must utilize this practice when their operating performance falls behind industry benchmarks or benchmarked companies.

Financing Decisions and Capital Structure

Here, financing is limited to the optimal capital structure (debt ratio or leverage), which is the level that minimizes the firm’s cost of capital. This optimal capital structure determines the firm’s reserve borrowing capacity (short- and long-term) and the risk of potential financial distress. Companies establish this structure when their cost of capital rises above that of direct competitors and there is a lack of new investments.

Profitability Ratios

This is a measure of the operational efficiency of a firm. Profitability ratios also indicate inefficient areas that require corrective actions by management; they measure profit relationships with sales, total assets, and net worth. Companies must set profitability ratio goals when they need to operate more effectively and pursue improvements in their value-chain activities.

Growth Indices

Growth indices evaluate sales and market share growth and determine the acceptable trade-off of growth with respect to reductions in cash flows, profit margins, and returns on investment. Growth usually drains cash and reserve borrowing funds, and sometimes, aggressive asset management is required to ensure sufficient cash and limited borrowing. Companies must set growth index goals when growth rates have lagged behind the industry norms or when they have high operating leverage.

Risk Assessment and Management

A firm must address its key uncertainties by identifying, measuring, and controlling its existing risks in corporate governance and regulatory compliance, the likelihood of their occurrence, and their economic impact. Then, a process must be implemented to mitigate the causes and effects of those risks. Companies must make these assessments when they anticipate greater uncertainty in their business or when there is a need to enhance their risk culture.

Tax Optimization

Many functional areas and business units need to manage the level of tax liability undertaken in conducting business and to understand that mitigating risk also reduces expected taxes. Moreover, new initiatives, acquisitions, and product development projects must be weighed against their tax implications and net after-tax contribution to the firm’s value. In general, performance must, whenever possible, be measured on an after-tax basis. Global companies must adopt this measure when operating in different tax environments, where they are able to take advantage of inconsistencies in tax regulations.

Task: 2

Critically evaluate the modern and traditional investment appraisal techniques to assess strategic investment opportunities.

Payback method

The payback is another method to evaluate an investment project. The payback method focuses on the payback period. The payback period is the length of time that it takes for a project to recoup its initial cost out of the cash receipts that it generates. This period is some times referred to as" the time that it takes for an investment to pay for itself." The basic premise of the payback method is that the more quickly the cost of an investment can be recovered, the more desirable is the investment. The payback period is expressed in years. When the net annual cash inflow is the same every year, the following formula can be used to calculate the payback period.

Formula / Equation:

The formula or equation for the calculation of payback period is as follows:

Payback period = Investment required / Net annual cash inflow*

*If new equipment is replacing old equipment, this becomes incremental net annual cash inflow.

To illustrate the payback method, consider the following example:


York company needs a new milling machine. The company is considering two machines. Machine A and machine B. Machine A costs £15,000 and will reduce operating cost by £5,000 per year. Machine B costs only £12,000 but will also reduce operating costs by £5,000 per year.


Calculate payback period.

Which machine should be purchased according to payback method?


Machine A payback period = £15,000 / £5,000 = 3.0 years

Machine B payback period = £12,000 / £5,000 = 2.4 years

According to payback calculations, Company should purchase machine B, since it has a shorter payback period than machine A.

Accounting rate of return

A problem with the payback period method of investment appraisal was that it does not account for depreciation of the capital assets purchased. The accounting rate of return seeks to average estimated yearly net inflows as a percentage of the net investment outlays.

Average Rate of Return = (Average annual profit/Initial investment)*100

The ARR can be expressed as follows:

ARR = (C-D)/I

where ARR = the accounting rate of return

C = average annual net inflows, from the investment

D = annual depreciation, of the equipment purchased

I = net investment outlay i.e. the total cost of the equipment

Using the figures given in the payback period example the ARR would be calculated as:

Depreciation D = frac{£200,000}{5} = £40,000pa

ARR = frac{£60,000-£40,000}{£200,000}times 100%= 10%

ARR = frac{£60,000-£40,000}{£200,000}times 100%= 10%

Another way of looking at this investment is that £200,000 is invested and £300,000 is returned i.e. net savings/profit is £100,000. The rate p.a. of this profit is thus:

£100,000/5 = £20,000 p.a. i.e. a rate of return p.a. on the investment of:

frac{£20,000}{£200,000}times100% = 10%

frac{£20,000}{£200,000}times100% = 10%

This method of evaluating project incomes overcomes the disadvantage of the payback method in that it attempts to calculate the profitability of various projects under study. Its main disadvantage is that it fails to consider the changing value of money due to inflation in the economy.

So, if senior management are considering whether to purchase a digital oscilloscope, a surface mount machine or MRP software they can compare the ARR of each item of equipment and use this information when making a decision.

Internal rate of return

Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. Internal rate of return is used to evaluate the attractiveness of a project or investment. If the IRR of a new project exceeds a company’s required rate of return, that project is desirable. If IRR falls below the required rate of return, the project should be rejected.

How It Works/Example:

The formula for IRR is:

0 = P0 + P1/(1+IRR) + P2/(1+IRR)2 + P3/(1+IRR)3 + . . . +Pn/(1+IRR)n

where P0, P1, . . . Pn equals the cash flows in periods 1, 2, . . . n, respectively; and

IRR equals the project's internal rate of return.

Let's look at an example to illustrate how to use IRR.

Assume Company XYZ must decide whether to purchase a piece of factory equipment for £300,000. The equipment would only last three years, but it is expected to generate £150,000 of additional annual profit during those years. Company XYZ also thinks it can sell the equipment for scrap afterward for about £10,000. Using IRR, Company XYZ can determine whether the equipment purchase is a better use of its cash than its other investment options, which should return about 10%.

Here is how the IRR equation looks in this scenario:

0 = -£300,000 + (£150,000)/(1+.2431) + (£150,000)/(1+.2431)2 + (£150,000)/(1+.2431)3 + £10,000/(1+2431)4

The investment's IRR is 24.31%, which is the rate that makes the present value of the investment's cash flows equal to zero. From a purely financial standpoint, Company XYZ should purchase the equipment since this generates a 24.31% return for the Company --much higher than the 10% return available from other investments.

A general rule of thumb is that the IRR value cannot be derived analytically. Instead, IRR must be found by using mathematical trial-and-error to derive the appropriate rate. However, most business calculators and spreadsheet programs will automatically perform this function.

IRR can also be used to calculate expected returns on stocks or investments, including the yield to maturity on bonds. IRR calculates the yield on an investment and is thus different than net present value (NPV) value of an investment.

Net present value

Net present value is one of the most reliable measure used in capital budgeting. It is the present value of net cash inflows generated by a project less the initial investment on the project. The use of discounted cash inflows means that net present value accounts for time value of money. Before calculating NPV, a target rate of return is set which is used to discount the net cash inflows from a project.

Calculation Methods and Formulas

The major component of NPV is the present value of net cash inflows which may be even (i.e. equal cash inflows in different periods) or uneven (i.e. different cash flows in different periods). Where net cash inflows are even, present value can be easily calculated by using the present value formula of annuity. However if net cash inflows are uneven we need to calculate the present value of each individual cash inflow separately. Thus we have two formulas for the calculating of NPV:

When cash inflows are Even:

NPV = R × 

1 − ( 1 + i )-n

 − Initial Investment


In the above formula,

   R is the net cash inflow expected to be received each period;

   i is the required rate of return per period;

   n are the number of periods during which the project is expected to operate and generate cash inflows.

When cash inflows are uneven:

NPV = 







 + ...


 − Initial Investment

( 1 + i )1

( 1 + i )2

( 1 + i )3


   i is the target rate of return per period;

   R1 is the net cash inflow during the first period;

   R2 is the net cash inflow during the second period,

   R3 is the net cash inflow during the third period, and so on ...

Decision Rule

Accept the project if its NPV is positive. Reject the project having negative NPV. While comparing two or more exclusive projects, all having positive NPV, accept the one with highest NPV.

Example : Even Cash Inflows Calculate the net present value of a project which requires an initial investment of £243,000 and it is estimated to generate a cash inflow of £50,000 each month for 12 months. Assume that the salvage value of the project is zero. The target rate of return is 12% per annum.


We have,

Initial Investment = £243,000

Cash Inflow per Period = £50,000

Number of Periods = 12

Discount Rate per Period = 12% / 12 = 1%

Net Present Value

= £50,000 × ( 1 - ( 1 + 1% )^-12 ) / 1% − £243,000

= £50,000 × ( 1 -1.1^-12 ) / 0.1 − £243,000

≈ £50,000 × 0.68137 / 0.1 − £243,000

≈ £50,000 × 6.8137 − £243,000

≈ £340,685 − £243,000

≈ £97,685

Cost benefit analysis

Cost benefit analysis is a technique for assessing the monetary social costs and benefits of a capital investment project over a given time period. The principles of cost-benefit analysis (CBA) are simple:

Appraisal of a project: It is an economic technique for project appraisal, widely used in business as well as government spending projects (for example should a business invest in a new information system)

Incorporates externalities into the equation: It can, if required, include wider social/environmental impacts as well as ‘private’ economic costs and benefits so that externalities are incorporated into the decision process. In this way, COBA can be used to estimate the social welfare effects of an investment

Time matters! COBA can take account of the economics of time – known as discounting. This is important when looking at environmental impacts of a project in the years ahead

Uses of COBA

COBA has traditionally been applied to big public sector projects such as new motorways, by-passes, dams, tunnels, bridges, flood relief schemes and new power stations. Our example later considers some of the social costs and benefits of the new Terminal 5 for Heathrow airport.

The basic principles of COBA can be applied to many other projects or programmes. For example, - public health programmes (e.g. the mass immunization of children using new drugs), an investment in a new rail safety systems, or opening a new railway line. Another example might be to use COBA in assessing the costs and benefits of introducing congestion charges for motorists in London. Or the costs and benefits of the New Deal programme designed to reduce long-term unemployment. Cost benefit analysis was also used during the recent inquiry into genetically modified foods. Increasingly the principles of cost benefit analysis are being used to evaluate the returns from investment in environmental projects such as wind farms and the development of other sources of renewable energy, an area where the UK continues to lag behind.

Because financial resources are scarce, COBA allows different projects to be ranked according to those that provide the highest expected net gains in social welfare - this is particularly important given the limitations of government spending.

Criticisms of COBA

There are several objections to the use of CBA for environmental impact assessment:

Problems in attaching valuations to costs and benefits: Some costs are easy to value such as the running costs (e.g. staff costs) + capital costs (new equipment). Other costs are more difficult – not least when a project has a significant impact on the environment. The value attached to the destruction of a habitat is to some "priceless" and to others "worthless". Costs are also subject to change over time – I.e. the construction costs of a new bridge over a river or the introduction of electronic road pricing

The CBA may not cover everyone affected (i.e. all third parties) – inevitably with major construction projects such as a new airport or a new road, there are a huge number of potential "stakeholders" who stand to be affected (positively or negatively) by the decision. COBA cannot hope to include all stakeholders – there is a risk that some groups might be left out of the decision process

Distributional consequences

Costs and benefits mean different things to different income groups - benefits to the poor are usually worth more (or are they?). Those receiving benefits and those burdened with the costs of a project may not be the same. Are the losers to be compensated? To many economists, the equity issue is as important as the efficiency argument.

Valuing the environment

How are we to place a value on public goods such as the environment where there is no market established for the valuation of "property rights" over environmental resources? How does one value "nuisance" and "aesthetic values"?

Valuing human life

Some measurements of benefits require the valuation of human life – many people are intrinsically opposed to any attempt to do this. This objection can be partly overcome if we focus instead on the probability of a project "reducing the risk of death" – and there are insurance markets in existence which tell us something about how much people value their health and life when they take out insurance policies.

Task: 3

Using the Tesco financial statements critically evaluate the financial and business performance of the Tesco using financial and non-financial information. Investigate the importance of the provision of e-services to other countries.

Acid-test ratio

The acid-test ratio is a measure of how well a company can meet its short-term financial liabilities.

Acid-Test Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities

A common alternative formula is:

Acid-Test Ratio = (Current assets – Inventory) / Current Liabilities

The acid-test ratio is a more conservative version of another well-known liquidity metric the current ratio. Although the two are similar, the Acid-Test ratio provides a more rigorous assessment of a company's ability to pay its current liabilities. It does this by eliminating all but the most liquid of current assets from consideration. Inventory is the most notable exclusion, because it is not as rapidly convertible to cash and is often sold on credit. Some analysts include inventory in the ratio, though, if it is more liquid than certain receivables.


Profitability Ratio


Net Profit/Loss Margin



(In millions £)

Net Sales






Net Profit / lossMargin %




Gross Profit/Loss Margin



(In millions £)

Net Sales



Gross Profit



Gross Profit/Loss Margin%




Gross Return On Capital Employed



(In millions £)

Capital Employed









Liquidity Ratio


Current Ratio



(In millions £)

Current Assets



current Liabilities



Current Ratio




Quick Ratio



(In millions £)

Current Assets-Inventories



Current Liabilities



Quick Ratio



Efficiency Ratios


Account Recievable Collection Period



(In millions £)

Net Sales



Account Recievable




14 days

15 days


Account Payables payment Period



(In millions £)




Account Payables




68 days

69 days


Inventory Holding Period



(In millions £)








21 days

22 days

Financial Ratios


Interest Coverage Ratios



(In millions £)

Profit/loss before interest and tax










Gearing Ratio



(In millions £)







Debt/Equity Ratio



Capital Employed is calculated by deducting current liabilities from total assets

Capital Employed= Total Assets- Current Liabilities

Receivable Collection Days, Payable Payment period and Inventory Days are Calculated at the end year not Average.

TESCO operating performance in UK

Strong sales growth of 12.8% was achieved in the year with stores more than one year old increasing their sales by 7.5%. Volume growth was 4.5%, a notable achievement in the current competitive climate and in view of falling inflation in food prices.

New store sales were good, and in line with our expectations. Our flexible store formats have helped us maintain a healthy opening programme.

A good year of sales growth has enabled us to increase our market share from 13.7% to an estimated 14.5%.

UK operating profit has increased by 6.6% to £760m.

A strong performance on food allowed us to increase profit despite the substantial cost of the petrol price war, which occurred in the first half of the year. Tesco estimate the cost of this was around £35m and impacted UK profit growth by about 5% and the gross margin by about 0.3% of sales for the full year.

Existing stores sales growth (%)

During the year, we have driven our food sales and profits forward. This has been achieved through our trading strategy of continuing to improve the shopping trip for customers through our initiatives.

UK market share (%) (source: IGD/Tesco) Year ended 31 December


Customers want low prices, and Tesco have invested to keep their prices low. This has been achieved mainly by our investment of over £30m in Unbeatable Value. Better buying, savings from our supply chain and an improving sales mix have limited the impact upon margins of our investment to only 0.1% of sales. This, combined with petrol, means that total UK gross margins were down 0.4% of sales in the year.