Even if the threat of substitute products it is not very high, evidence suggests that the four biggest supermarket chains exercise a very high level of competition with each other. (Guardian, 2006) This is also confirmed from a BBC article (B, 2006) that states the effects of high competition among the top 4 store chains is the lowering of prices, increased selection, and improved product quality.The first point that stands out in the ratios is that all the Sainsbury ratios shows a decrease in profitability from 2004 to 2005 while Tesco has slightly increased its Gross and Net Profit and had a small decrease in the Return of Capital Employed (ROCE). The ROCE ratio is much higher for Tesco with a difference of 25. 256% in 2005 and a large increase from the previous year.

This ratio clearly shows that from 2004 to 05 Tesco was more profitable and employed the capital invested in a more efficient manner.This is also confirmed in the Horizontal Analysis: Sainsbury made a loss in 2005 while Tesco had on average of 10.5% increase in Turnover, Gross and Net Profit from the previous year. The liquidity ratios are concerned with the ability of the company to cope with the short-term financial obligations. Among the first point that stands out in the ratios is that all the Sainsbury ratios are slightly higher than Tesco but in general all the figures are below 1:1. Sainsbury shows a little improvement from 2004 while Tesco none. Although those figures look very low, it is normal for this type of business because they hold mostly finished goods that are ready to be sold in a short time with a cash sale.

(Auton, 2005) The Quick ratio does not take in consideration the stock which is the main source of profit for this type of retailing business. However, as it is appear from the Horizontal analysis, Sainsbury has more Current Assets and less Current Liabilities than Tesco in both years. The stock turnover confirms the point regarding liquidity. Both companies on average sell their stock in approximately 2 weeks. There is little difference between the 2 companies, but Sainsbury has increased the speed of selling of its stock from the previous year while Tesco is roughly at the same pace.Both companies need about 1 month to pay their debts. Thus they pay their suppliers in about 31 days, although Sainsbury has increased this period of time by 1 week compared with the previous year.

The gearing ratios show the proportion of money that the business is financed through borrowings. Usually the lower this ratio the less risk in investing in the company. Although, both companies have decreased their gearing in 2005 compared with the previous year, their gearing is still a bit high. However, in both years Sainsbury had a gearing ratio lower than Tesco by approximately 10%.Although the earning per share ratio gives a clear indication of the performance of the shares and the trend can be used to assess the investment potential of a company’s shares, it will not be helpful for the purposes of this report to compare the ratio of these two businesses due to the differences in capital structure and level of gearing. (Atrill, 2005) However, it is notable that the ratio of Tesco has increased by 17% from 2004 to 05 while the ratio for Sainsbury is almost halved over the same period. Graph 3 shows the trends of the share price of the two companies over the last five years.It is notable that the Tesco share price had a steady increase since 2003 while the Sainsbury share price has been fluctuating and has a much lower value.

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Tesco has opened new stores with space for non-foods which has been successful over the last 2 years. (Datamonitor, 2004) The food retailing market is very competitive and the big supermarkets are expanding into non-food sales. (Fooddeserts, 2006) The biggest stores have also been able to expand their non-food growth into the health and beauty industry with a very significant fast increase over the last few years.(Datamonitor,2004) In 2003 Tesco bought many small-store chains and rebranded them with the name of Tesco Metro stores. (Fooddeserts, 2006) Tesco has expanded to six European countries and five Asian countries with a continuous growth that saw sales multiply by ten times over seven years. They have recently entered the US market and the Chinese market, which has one of the fastest growing economies in the world.

(Datamonitor, 2004)Two of the biggest competitors, Sainsbury and Morrison, are going to decrease their prices thus creating greater competition for Tesco.Tesco has a price agreement with its competitor Asda and has lost part of its control over pricing. (Datamonitor, 2004) Although there are good prospects investing overseas and in the European market, this international expansion has required heavy financing, including the expenses of advertising and marketing a new brand name. It is a risky investment because economic conditions could suddenly change or they are exposed toan unexpected reaction of the competition. (Datamonitor, 2004)The biggest stores have also been able to expand their non-food growth into the health and beauty industry with a very significant increase over the last few years. (Datamonitor, 2004) The competitor Asda has continuously increased its market shares and it overtook Sainsbury in 2003.

They are adopting new marketing strategies to expand their competition and acquire more market power over the customers. (Datamonitor, 2004) Many small grocery shops have not been able to cope with the increasing competition of big supermarket chains and have had to close.(FT, 2006). Under the pressure of small grocery retailers, the OFT is considering the possibility of unifying the grocery market to the food retailers. Under this circumstance, their proportion of the market is already too high, with a 31% share of the market equivalent to a monopoly, and it would require a reduction and restriction of its expansion. (Fooddeserts, 2006) Tesco’s share of the grocery market has grown from 15% to 31% since 2001.

This new proportion of market share is already too high and it could almost constitute a monopoly.(FT, 2006) An article in the Guardian (Finch, 2006) states that the future of Tesco is in jeopardy as the investigation of the OFT of the top 4 superstore has started. Tesco may have to reduce its market share by selling off some of its stores in order to reduce its monopoly.

To summarise the food retailer sector is an oligopolistic market with four bigger superstore’s chains that own around 75% of the market, of which 30% is owned by Tesco. Although most of them had increased their market share over the last ten years, Tesco has maintained and strengthened its first position.Political events over the last few years have shown that the OFT has been investigating the situation of the actual market in order to stop the growing power of superstores. Economic factors show that this market is growing at a slow rate and that the food price inflation over the last five years has been very low due to the high competition and price reduction strategy operated by the big chains. The increase in unemployment is also not a good influence on the retail industry. Social trends towards food have changed over the last five years, from ready-made and international foods to organic and healthy foods.This is due to a greater awareness of the long term bad health effects of eating junk-food.

Technology has increased the efficiency of the environment for the employees and improved the service for customers. This includes self-service checkouts, online shopping systems and improved electronic payment methods. The Porter’s 5 Forces analysis has shown that there is an imbalance between the forces. The customer’s power is very limited, most of the suppliers cannot exercise any power, barriers for new entrants are high, the threat of substitute products by corner shop is very weak and competition among the top 4 chains is strong.Analysis and comparison of the financial and business performance indicates that Tesco has had a better management and greater performance overtime compared with its competitor Sainsbury. This is also underlined by the share price and profitability ratios. Tesco continues to expand into the non-food market and grow internationally.

It has also increased its market share by taking over small stores in the UK. However, pricing pressure and the challenge of competition is a threat for the company. Besides, the OFT is investigating Tesco and the company’s international expansion may not continue to grow.