Annual Reportand FinancialStatements2012
Tesco at a glance 2011/12We are one of the world’s largest retailers with operationsin 14 countries*, employing almost 520...
Tesco at a glance 2011/12We are one of the world’s largest retailers with operationsin 14 countries*, employing almost 520...
OVERVIEW1 Chairman’s statementSTRATEGIC REVIEW3 Chief Executive’s review*9 Strategy in action*24 Business model*PERFORMANC...
Chairman’s statement“There are many things that strike anewcomer to Tesco. This is a businesswith an unusual range and dep...
We have moved to address performance issues in the UK. Thechallenge of refocusing the UK business to ensure it sustains he...
“My first year as Chief Executivehas been a year where we haveimplemented important changesat Tesco, a year when we have b...
Performance in 2011/12We delivered modest profit growth in a challenging economicenvironment, with a strong international ...
We are clear on what we need to do, we have trialled substantialelements of the changes and we know they work. Our investm...
To be as strong in everything we sellas we are in foodIt has been tough to achieve growth in sales of discretionary items ...
To put our responsibilities to the communitieswe serve at the heart of what we doWe have reinforced our commitment to be a...
To build our team so that we createmore valueStrengthening our managementThis time last year we were in the early days of ...
Strategyin actionHaving given you an overviewof the implementation of ourstrategy over the past year, thissection sets out...
UK: Giving our customersthe best shopping tripWe always want to provide our customerswith the best shopping experience and...
The Big Price DropIn September 2011, we launchedThe Big Price Drop, investing morethan £500 million to reduce theprices of...
UK: Refreshing our storesfor customers and staffThe way stores look and feel is an importantpart of the shopping trip. Cus...
Click  CollectAs the option of ordering online andpicking up in store continues to grow inpopularity, our stores are ideal...
Online groceryWhen we first launched a grocery home shopping service in 1997we were viewed as pioneers, and we have grown ...
International growthWe already have profitable online grocerybusinesses in South Korea and the Republicof Ireland, launche...
Consistent propertyblueprintsAs we continue to grow ourinternational businesses there isa significant opportunity to makes...
Smaller format storesSmaller format stores complement our established storenetworks to meet growing demands for convenienc...
Diversity and complexityA market of China’s scale brings not onlysignificant opportunities but also hugediversity and comp...
The Fresh  Easy shopping tripOur Fresh  Easy business is aboutwholesome, fresh, high-quality food in theheart of the neigh...
Scan here to watch ourvideo about Tesco Bank,or visit www.tescoplc.com/ar2012/tescobankvideoSince we took full ownership o...
Insurance:Our products help support customers intheir daily lives, giving them peace of mindwherever they are. Simple to u...
Our dedication to the community:ThailandOur stores are importantparts of local communities.We are committed to beinga good...
Like all Thai retailers, we faced a major challenge with the flood crisis butat Tesco Lotus the team worked incredibly har...
BusinessmodelOur strategy is put intoaction through our businessmodel. At its heart is ourcore purpose: ‘To createvalue fo...
SellmoreDevelopeconomiesof scaleBuy forlessSell forless MoveSell BuyInsightBuildingthe TescobrandLeveragingGroup skilland ...
With our established private label programme, we produce greatquality Tesco brands at a range of price points, from Everyd...
Group skill and scale supports each of our core activities: utilisingInsight, Buying, Moving and Selling. Utilising Insigh...
PerformancereviewIN THIS SECTION29 Key performance indicators33 Financial reviewThis section providesdetailed information ...
Our KPIs measure how we are doing across the Group in terms of both operationaland financial performance in the context of...
Group financial ratios continuedKey performance indicators123411/1210/1109/1008/0907/0806/07TimesNet indebtedness Definiti...
Supermarket annual report_2012
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Supermarket annual report_2012

  1. 1. Annual Reportand FinancialStatements2012
  2. 2. Tesco at a glance 2011/12We are one of the world’s largest retailers with operationsin 14 countries*, employing almost 520,000 people andserving millions of customers every week.£72.0bnGroup sales+5.3%Group profit before tax growth£3.8bnGroup profit before tax+7.4%Group sales growth+2.1%Underlying diluted earningsper share**†14.76pFull year dividend per share+1.6%Underlying profit before tax*** In India, we have an exclusive franchise agreement with Trent, the retail arm of the Tata Group. We are supporting the development of theirStar Bazaar format. Continuing operations exclude Japan which has been treated as discontinued following our decision to sell the business.** See glossary for full accounting definitions.† Calculated on a constant tax rate basis.AsiaRevenue growth±+10.5%Employees117,015Stores1,719Trading profit growth+21.8%Revenue± Trading profitMarket position 1st or 2nd in all except ChinaMultiple formatsincludeHypermarkets, supermarkets,convenienceLoyalty scheme Clubcard in Malaysia and Thailand,Family Card in South Korea, LegouTesco Membercard in China – over20 million active members across Asiadotcom South Korea 2002, plannedlaunches in at least one major cityin each market in the next few yearsFascia brands include:£10.8bn17% of Group£737m20% of GroupEuropeRevenue growth±+7.3%Employees94,409Revenue±Market position 1st oMultiple formatsincludeDepsupehypeLoyalty scheme Clubactivdotcom Repu20112012in eaFascia brands include:£9.9bn15% of GroupUKRevenue growth±+5.0%Employees300,373Stores2,979Trading profit growth(1.0)%Revenue± Trading profitMarket position 1stMultiple formatsincludeHypermarkets, superstores,supermarkets, convenienceLoyalty scheme Clubcard – around 16 millionactive membersdotcom First grocery home shoppingservice 1997Fascia brands include:£42.8bn66% of Group£2,480m66% of Group
  3. 3. Tesco at a glance 2011/12We are one of the world’s largest retailers with operationsin 14 countries*, employing almost 520,000 people andserving millions of customers every week.£72.0bnGroup sales+5.3%Group profit before tax growth£3.8bnGroup profit before tax+7.4%Group sales growth+2.1%Underlying diluted earningsper share**†14.76pFull year dividend per share+1.6%Underlying profit before tax*** In India, we have an exclusive franchise agreement with Trent, the retail arm of the Tata Group. We are supporting the development of theirStar Bazaar format. Continuing operations exclude Japan which has been treated as discontinued following our decision to sell the business.** See glossary for full accounting definitions.† Calculated on a constant tax rate basis.± Revenue excludes the accounting impact of IFRIC 13.USRevenue growth±+27.3%Employees5,056Stores185Improvement in trading loss+17.7%Revenue± Trading lossMarket position A West Coast start-up businessLoyalty scheme Friends of Fresh Easy – two-thirdsof a million active membersFascia brand:£0.6bn1% of Group£(153)m(4)% of GroupAsiaRevenue growth±+10.5%Employees117,015Stores1,719Trading profit growth+21.8%Revenue± Trading profitMarket position 1st or 2nd in all except ChinaMultiple formatsincludeHypermarkets, supermarkets,convenienceLoyalty scheme Clubcard in Malaysia and Thailand,Family Card in South Korea, LegouTesco Membercard in China – over20 million active members across Asiadotcom South Korea 2002, plannedlaunches in at least one major cityin each market in the next few yearsFascia brands include:£10.8bn17% of Group£737m20% of GroupEuropeRevenue growth±+7.3%Employees94,409Stores1,351Trading profit growth+0.4%Revenue± Trading profitMarket position 1st or 2nd in all except TurkeyMultiple formatsincludeDepartment stores, hypermarkets,supermarkets, compacthypermarkets, convenienceLoyalty scheme Clubcardinallmarkets–over7millionactive members across Europedotcom Republic of Ireland 2000, Prague2011, planned launches in Warsaw2012 and in at least one major cityin each market in the next few yearsFascia brands include:£9.9bn15% of Group£529m14% of GroupUKRevenue growth±+5.0%Employees300,373Stores2,979Trading profit growth(1.0)%Revenue± Trading profitMarket position 1stMultiple formatsincludeHypermarkets, superstores,supermarkets, convenienceLoyalty scheme Clubcard – around 16 millionactive membersdotcom First grocery home shoppingservice 1997Fascia brands include:£42.8bn66% of Group£2,480m66% of GroupTesco BankRevenue growth±+13.6%Employees2,818Baseline profit growth+29.3%Trading profit growth(36.4)%Revenue± Trading profitInsurance Car, home, pet, travel, life, over 50s,health, dental, breakdownSavings Fixed rate, internet, instant access,retail bondsCash Loans, credit cards, ATMs, travelmoneyFuture launches Mortgages, current accountsLoyalty scheme Clubcard£1.0bn2% of Group£168m4% of GroupFinancial calendarDesigned and produced byCONRAN DESIGN GROUPThis Report is printed on Revive 100 Pure White Silk paper and has beenindependently certified on behalf of the Forest Stewardship Council®(FSC).The inks used are all vegetable oil based.Printed at Pureprint Group Ltd, ISO14001, FSC certified and CarbonNeutral®Financial year end 2011/12 25 February 2012Final ex-dividend date 25 April 2012Record date 27 April 2012Q1 Interim Management Statement 11 June 2012Annual General Meeting 29 June 2012Final dividend payment date 6 July 2012Half-year end 2012/13 25 August 2012Interim Results October 2012Q3 Interim Management Statement December 2012Financial year ended 2012/13 23 February 2013Please note that dates are provisional and subject to change.GlossaryCapital expenditure: the additions to property, plant and equipment,investment property and intangible assets (excluding assets acquiredunder business combinations).Capex % of sales: capital expenditure as defined above, divided byGroup sales including VAT and excluding IFRIC 13.Constant tax rate: using the prior year’s effective tax rate.EBITDAR: operating profit before depreciation, amortisation, rentand movements in impairments of property, plant and equipment,investment property and intangible assets.Fixed charge cover: the ratio of EBITDAR (excluding Tesco BankEBITDAR) divided by financing costs (net interest excluding IAS 32 and39 impacts and pension finance costs) plus operating lease expenses.Gearing: net debt divided by total equity.Net indebtedness: the ratio of adjusted net debt (net debt pluspension deficit and the present value of lease obligations) dividedby EBITDAR (excluding Tesco Bank EBITDAR).Return on capital employed: profit before interest and tax less tax atthe effective rate of tax divided by the calculated average of opening andclosing net assets plus net debt plus dividend creditor less net assets heldfor resale.Total shareholder return: the notional return from a share, measuredas the percentage change in the share price, plus the dividends paid withthe gross dividends reinvested in Tesco shares. This is measured over afive-year period.Underlying diluted earnings per share: underlying profit less tax atthe effective tax rate and minority interest divided by the diluted weightedaverage number of shares in issue during the year.Underlying profit before tax: underlying profit before tax excludesthe impact of non-cash elements of IAS 17, 19, 32 and 39 (principally theimpact of annual uplifts in rents and rent-free periods, pension costs, andthe marking to market of financial instruments); the amortisation chargeon intangible assets arising on acquisition and acquisition costs, and thenon-cash impact of IFRIC 13. It also excludes restructuring and otherone-off costs.US UK Asia*South KoreaThailandChinaMalaysiaIndiaEuropeRepublic of IrelandPolandHungaryCzech RepublicSlovakiaTurkey
  4. 4. OVERVIEW1 Chairman’s statementSTRATEGIC REVIEW3 Chief Executive’s review*9 Strategy in action*24 Business model*PERFORMANCE REVIEW29 Key performance indicators*33 Financial review*GOVERNANCE38 Board of Directors40 Principalrisksanduncertainties*48 General information*50 Directors’ report on corporategovernance64 Directors’ remuneration reportFINANCIAL STATEMENTS88 Statement of Directors’responsibilities89 Independent auditors’ reportto the members of Tesco PLC90 Group income statement91 Group statement ofcomprehensive income92 Group balance sheet93 Group statement of changesin equity94 Group cash flow statement94 Reconciliation of net cash flowto movement in net debt note95 Notes to the Group financialstatements142 Tesco PLC – Parent Companybalance sheet143 Notes to the Parent Companyfinancial statements151 Independent auditors’ reportto the members of Tesco PLC152 Five year recordIBC Financial calendarIBC GlossaryThis year online, you can hear from our leadership team, explore our businessthrough our interactive map and download our financial statements in Excel.Visit www.tescoplc.com/ar2012 or use your smartphone to scan the QRcodes in the Report to go straight to the relevant information online.Scan here to visit the 2011/12Annual Report online homepageThe easy way to get onlinewww.tescoplc.com/ar2012* These sections form the Business Review and have been prepared pursuant to the Companies Act 2006. Together with the Board of Directors section and the Directors’ reporton corporate governance, these sections form the Report of the Directors.
  5. 5. Chairman’s statement“There are many things that strike anewcomer to Tesco. This is a businesswith an unusual range and depth ofcore competencies; it has outstandingoperational effectiveness; it understandsdeeply what it means to orientate abusiness around the customer; it ispassionate, and successful, aboutdeveloping talent from within; andit manages a complex operatingenvironment with great team work.”Nearly six months after taking over from Sir David Reid, it isgood to have this opportunity to share my perspective on recentdevelopments which I will do under three headings: context;transition; and governance.ContextThere are many things that strike a newcomer to Tesco. This is abusiness with an unusual range and depth of core competencies; ithas outstanding operational effectiveness; it understands deeply whatit means to orientate a business around the customer; it is passionate,and successful, about developing talent from within; and it managesa complex operating environment with great team work.It is also a business that is not afraid to learn and change, capacitiesperhaps more than any others which are essential to long-term growth.In this respect there are three areas in particular worth identifying.First, Tesco is a business with significant strategic optionality. It hasexpertise and capital, human and financial, that can be leveragedin different geographies, in different sectors of retailing and throughnew and different channels, notably of course the internet. Thedevelopment of these opportunities can make Tesco a strongercompany and benefit the UK as a whole. And with such opportunityalso comes responsibility – to ensure that the trade-offs betweendifferent investments are reached in a disciplined way; and thatthe optimum balance is struck overall between current returns andfuture growth.Second, as the business grows internationally, it is important not onlythat we explain ourselves to the world but also that we listen and seeourselves as others do. Since arriving at Tesco last year I have visitedmany different parts of the business around the world, met many ofour staff, talked to shareholders, suppliers, commentators, communityleaders and to customers. This is the broader context of our businessto which we need continuously to relate, openly, honestly andconstructively for the long-term benefit of our business.Third, I have been impressed by the skills, commitment and values heldby the people who work at Tesco and all of whom not only contribute toits success but make the company what it is. They are a great team andall those with a stake in Tesco have reason to admire and be grateful fortheir efforts. I would like to thank them, on behalf of the whole Board,for all that they do.TransitionThis has been a year of transition.Philip Clarke took over as Chief Executive at the beginning of the yearand he has been shaping both the organisation of the business and themanagement team which inevitably, after a long period of stability, areentering a period of change and development. This work takes time butis essential to our future as a strong and profitable company.All successful companies go through periods of transition. Indeed,the capacity to change and develop over time is fundamental to trulyworld-class companies. The critical issue for those responsible is to fullyacknowledge the need for and to manage change in a measured andtimely fashion when it is called for.Sir Richard BroadbentChairmanScan here to hear morefrom Sir Richard Broadbent,or visit www.tescoplc.com/ar2012/chairmanTesco PLC Annual Report and Financial Statements 2012 1STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTSOVERVIEWChairman’s statement
  6. 6. We have moved to address performance issues in the UK. Thechallenge of refocusing the UK business to ensure it sustains healthymarket leadership is important enough to make it worth givingup some profit in the short term to safeguard the business in thelong term. We laid out in April how we intend to do this.Elsewhere, we have continued the substantial re-orientation of theUS business to give it the best possible opportunity to secure its futurewith all the potential for longer-term growth that would bring. We haveannounced our intention to exit from Japan. We are willing to investfor the long term but where we cannot see a profitable, scalablebusiness earning good returns within an acceptable timescale, weprefer to pursue better opportunities. And we have slowed down thedevelopment of Tesco Bank to increase its focus on quality, serviceand risk management.These are substantial changes, in management, organisation andbusiness and they need to be seen as part of a continuing processof moving the company forward, making changes where necessaryto ensure long-term stability and sustainable profitability.GovernanceGovernance is the framework that articulates a company’s values andsupports its behaviours. During the year, we updated our governanceframework and processes as described in more detail on page 50.An important aspect of these changes was the creation of the BoardCorporate Responsibility Committee to ensure that the Boardmaintains a strategic focus on corporate responsibility in its widestsense, reflecting the importance to the Group of how it engagesexternally. When a company has significant economic and social scaleit is essential that it reflects on the full nature of its accountabilityfor its activities, and how it should discharge that responsibility to thecommunities in which it operates. This will be an important focus forthe new Committee.There have been a number of changes to the Board. In addition toSir David Reid, David Potts retired during the year, Richard Brasherstepped down from the Board in March, and Andrew Higginson willretire in September. We thank them all for their contribution to thebusiness over the years. We are also pleased to welcome DeannaOppenheimer to the Board as a Non-executive Director. Deannabrings valuable international, retail, banking and digital experienceto our Board.Financial resultsIn the year, we delivered sales growth of 7.4%. Profit growth wasmodest, with a strong international performance largely offset by areduction in UK profits. Trading profit grew by 1.3%, and profit beforetax grew by 5.3%. Return on capital employed improved from 12.9%last year to 13.3%, and we continued our long record of dividendgrowth for shareholders, with the full year dividend up 2.1% to 14.76p.The fact that in a year when economic headwinds have been evidentin practically every part of the globe our business increased sales,profits, return on capital and dividends speaks for its overall resilience.Looking aheadLast year was a challenging one for the business and we are acutelyaware that this was reflected for our shareholders in the share price.We will continue in 2012/13 to address long-standing business issuesin the UK and elsewhere in order to secure future prosperity as well asensuring that our financial and human resources are developed anddeployed where they are able most effectively to generate futuregrowth and returns.If I have one overriding impression of Tesco after six months, it is thathere is a truly international business, deploying its expertise across theworld to drive opportunity, growth and returns, all of which ultimatelybenefit the UK. I look forward to being part of it.Sir Richard BroadbentChairmanChairman’s statement2 Tesco PLC Annual Report and Financial Statements 2012
  7. 7. “My first year as Chief Executivehas been a year where we haveimplemented important changesat Tesco, a year when we have builtstrength for the future.”It has been a year of significant change and one in which we tookdecisive action on some very important issues for Tesco: our resetof expectations for the UK for the forthcoming year, the announcementof our intention to dispose of our business in Japan, the focus onmoving Fresh Easy closer to profitability and the renewed focuson delivering a reliable Tesco Bank. As a part of this we made severalkey management changes during the year which have allowed somesignificant new appointments as we renew and reinvigorate theTesco team.This has very much laid the ground for the future; a future where wewill make sure that our capital and our talent are put to work where itbenefits most our customers and hence our shareholders. The futureTesco will demonstrate greater innovation and creativity as we addressthe needs of consumers around our world – both in store and online.We regularly deliver over 75 million shopping trips a week and as aretailer are only as good as the last trips. Ensuring that Tesco is highlyvalued by customers on each and every one of those shopping trips willbe what makes Tesco achieve sustainable success. That is what we setout to do every day.I believe that we have faced into challenges with real determinationand taken decisions for the future. I know that it has been a tough yearto be a Tesco shareholder. I know too that my whole team and I areconfident that the changes we are making are the right things to do –for customers, staff, the business and its shareholders – and thatthe long-term opportunities for Tesco remain undiminished.Chief Executive’s reviewScan here to hear morefrom Philip Clarke, or visitwww.tescoplc.com/ar2012/ceoreviewBuildingfor thefuturePhilip in conversation with Ellen and Jobe at the Tesco Extra store in BaldockTesco PLC Annual Report and Financial Statements 2012 3STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTSOVERVIEWChief Executive’s review Strategy in action Business model
  8. 8. Performance in 2011/12We delivered modest profit growth in a challenging economicenvironment, with a strong international performance largely offsetby a reduction in UK profits. Whilst the year gave us many things to beproud of, overall it was not the most pleasing performance. My teamand I are resolved to get Tesco back to winning, particularly at home.Group sales increased by 7.4% to £72 billion, while Group tradingprofit was up 1.3% on last year and underlying profit before tax roseto £3.9 billion, an increase of 1.6%. Group capital expenditure in theyear was £3.8 billion. Group return on capital employed (‘ROCE’)increased – to 13.3% (last year 12.9%).The Board has proposed a final dividend of 10.13p per share, taking thefull year dividend to 14.76p, which is an increase of 2.1% on last year.The decisions we have taken during the year have had an impact onour financial performance. We decided to forego some short-termprofit to re-invest in the long-term health of the business, with a clearfocus on improving the shopping trip for customers.The UK business clearly did not meet our own expectations in theyear and, partly as a result of this, we decided to accelerate ourplan to make improvements which has meant a necessary reset toexpectations for our growth in 2012/13 as well. This acceleration andreset were announced with our Christmas trading update in January.Despite this significant re-investment programme, we remaincommitted to driving higher returns for shareholders. Althoughour investment plans in the UK make achieving our ROCE targetmore challenging in the short term, we still expect to deliver aROCE of 14.6% by 2014/15, with broadly based growth fromaround the Group.Strategic updateIn last year’s Annual Report, I set out an evolution of our strategyinto seven parts:To grow the UK core;To be an outstanding international retailer in storesand online;To be as strong in everything we sell as we are in food;To grow retail services in all our markets;To put our responsibilities to the communities we serveat the heart of what we do;To be a creator of highly valued brands; andTo build our team so that we create more value.This strategy remains as relevant now as it did a year ago andI’m pleased to be able to update you on the progress we havemade on each of these strategic objectives. I also set out immediatemanagement priorities for the business last year – keeping the UKstrong and growing; becoming outstanding internationally, not justsuccessful; becoming a multi-channel retailer wherever we trade;delivering on the potential of retail services; applying Groupskill and scale; and delivering higher returns. You will see howthese priorities have shaped our actions through the year.To grow the UK coreThe deli counter in our Hertford Superstore has a flat glass front, brightlighting and warmer, more engaging signageIn the UK, high petrol prices and falling real incomes affected customers’discretionary spending in the year. The combination of disappointingsales in the second half of the year and our decision to increase investmentinto the shopping trip meant that our UK performance was weakerthan planned. Sales grew by 6.2%, supported by excellent new storeperformance, but trading profit declined by (1.0)%.The issue we are addressing is that the shopping trip just hasn’t beenimproving fast enough and our standards haven’t been as consistent asour customers have come to expect. As a result, we are taking action toimprove each aspect of the customer offer. This will involve significantrevenue and capital investment in a comprehensive plan encompassingsix key areas.The UK Plan – Building a Better TescoOur Plan for the UK business has six elements:Service Staff: helping our people deliver great service by investmentin recruitment, training and equipment, dedicated to particulardepartments such as produce so that our customers notice the change.Stores Formats: making our stores better places in which to shopand work, with the pace of new store development moderating, andthe pace of refreshing our existing stores stepping up.Price Value: delivering great value for money through the rightblend of price, promotions, couponing and loyalty.Range Quality: building the right ranges of quality products,reviewing and refreshing our entire range of Tesco brand products,making our ranging more store and format-specific, and bringingdunnhumby, our marketing insight business, back into the heartof Tesco.Brand Marketing: making sure that we get back to having the rightconversation with our customers about Tesco.Clicks Bricks: making this a potent combination for our customers,with the roll-out of Click Collect and the transformation of our rangeand online presence.Chief Executive’s review4 Tesco PLC Annual Report and Financial Statements 2012
  9. 9. We are clear on what we need to do, we have trialled substantialelements of the changes and we know they work. Our investmentprogramme has already started and we expect this to deliver strongerresults. The Big Price Drop in September 2011 was the first step, butthe changes we are making are about much more than price. They area combination of price, quality, range and service, including a significantinvestment to create an additional 20,000 jobs over the next two years.These changes will reinvigorate the shopping trip for customers, andconsequently deliver improved performance for shareholders.To be an outstanding international retailerin stores and onlineOur international businesses performed strongly, with trading profitsup 18%, or by 22% before the impact of a crisis tax levied in Hungary.We have seen progress in our established businesses, such as inCentral Europe, South Korea and Thailand, and from our newer, rapidlygrowing businesses, such as Fresh Easy in the United States andTesco Malaysia. It is encouraging that we are winning market sharein almost all of our markets and, in some countries, at a faster rate thanfor many years.Asia: another strong performanceI am pleased with the performance of our businesses in Asia. Salesand profit grew well – sales by over 10%, and trading profit by over20%. We delivered solid like-for-like sales growth and an excellentcontribution from new stores.Our business in Thailand had an extraordinary year. The worst floodingfor 70 years caused us to close over 150 stores temporarily and all fourof our distribution depots. The superb dedication of our team enabledus to keep supply lines open for customers and to support staff affectedby the flooding, and we have come out of the crisis stronger. We grewlike-for-like sales and profits in the year. South Korea had another goodyear, although I anticipate a modest reduction in like-for-like sales nextyear as restrictions on trading hours for large retailers are implementedacross the country.In China, we have continued to focus on building scale in three regionsof the country. With the economic environment currently provingchallenging for mainstream retailers, we have decided to take a morecautious stance on the market, at least for now. We have decided notto commit substantial new capital to freehold shopping centres, andwe have also elected to hold back on the pace of new hypermarketdevelopment this year. We will only open 16 stores, instead of steppingup as we had planned. We still believe that China can be an engine ofgrowth and we can speed up again when the outlook improves.We took an important step this year in deciding to exit Japan. It isright to focus on our larger, profitable and growing businesses in theAsia region. It is never easy to make decisions of this kind and I wouldlike to thank our staff in Japan for their continued hard work andprofessionalism through this time.Europe: growth in a difficult environmentFollowing a strong performance in Europe in the first half of the year,the performance in the second half was weaker than expected. Salesfor the year grew by 8% and trading profit increased marginally, by0.4%. Trading profit growth would have been in line with sales had itnot been for the impact of the crisis tax imposed in Hungary, whichcost £38 million in the year.The economic background was particularly difficult in Hungary andin the Republic of Ireland this year. Given the current conditions, weare focusing on growth primarily through our existing stores in thesemarkets, rather than investing substantial new capital. In addition tothese headwinds in two of our largest markets, profits were held backby disruption connected to the opening of our new distribution centrein Poland, but this is behind us now.We have made good progress with the closer integration of ourEuropean businesses this year, from sharing infrastructure to buyingas a single region. This means that we can leverage the skill and scaleof the Tesco Group to deliver a better shopping trip for customersand higher returns for shareholders. One example of this is our recentlaunch of grocery dotcom in Prague, with initial sales well ahead ofplan, and our dotcom business in Warsaw will be launched soon.Our Extra format stores delivered an encouraging performance throughthe yearUnited States: on the path to profitabilityIt has been a year of encouraging progress in Fresh Easy. Sales grewby 27%, with almost 12 percentage points coming from like-for-likestores. We have also delivered reduced trading losses for the first time,with an 18% improvement on last year. After four years of rising losses,this is a decisive change of trend, driven by further improvements to ourcustomer offer. Features such as in-store bakeries, more loose produce,additional ranges and new Fresh Easy products have been verypopular with customers and we have seen an acceleration in ouralready strong growth in customer numbers.The progress we have made gives us more confidence that we willdeliver a further significant reduction in losses in the coming year. Thetiming of break-even will be later than we had previously expected, aswe will focus on getting more of our existing stores to reach profitabilitybefore we step up the rate of new store openings. We can then reachsufficient scale to cover our substantial central overhead costs and weanticipate that we will reach the break-even point during 2013/14.Tesco PLC Annual Report and Financial Statements 2012 5STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTSOVERVIEWChief Executive’s review Strategy in action Business model
  10. 10. To be as strong in everything we sellas we are in foodIt has been tough to achieve growth in sales of discretionary items –not least in the UK, where we have seen a number of specialist generalmerchandise retailers go into administration – and our UK like-for-likegrowth in general merchandise, clothing and electricals has remainednegative. To adjust to this, we have been allocating more space to themost popular products and improving merchandising. We are committingless capital to new space for non-food and instead focusing moreresource on continuing to develop our online capability.Baldock Extra Electricals department. We are seeing the early benefitsof our changes, but much remains to be doneEurope and Asia delivered stronger performances in generalmerchandise, clothing and electricals, despite subdued consumerconfidence even in the better performing economies. I was pleasedwith the performance of clothing in Central Europe, with sales growingby 12% at constant exchange rates. This is testament to the strengthof the FF brand and also to the performance of our new Extraformat stores. We ended the year with 44 of the new Extras in Europeand three in Asia. These stores are introducing our customers to adifferent way of shopping, with stronger ranging and new services, withextremely encouraging results. Different categories of food and generalmerchandise have their own distinctive look and feel within the Extrastore, known as ‘Worlds’, such as Baby World and Sports World. We aremaking similar changes to the look and feel within our large UK stores,partly as a result of the encouraging performances in Europe.To grow retail services in all our marketsTesco Bank is a key part of the potential we see in retail services.Since we took full control of the Bank in 2008, our focus has been ondeveloping our own systems and infrastructure and recruiting anddeveloping a new team to run the operation. I’m delighted to say thatthis period of migration from The Royal Bank of Scotland (‘RBS’) to ourown platforms is now nearing an end. Building a bank is a complex taskand I took the decision during the year to slow down the migration, soas to minimise the customer impact. This final stage of migration willbe completed imminently, at which point the business can put moreemphasis on growth and on developing the potential we see infinancial services.We have delivered good business growth in the year with revenueup 14%, driven by a good performance in the insurance business.The Bank’s profit figure includes several accounting adjustments,so we measure business performance using baseline profitability,which increased by a very encouraging 29%. The Bank’s capitalposition has also remained strong through the year, supported bya 7% growth in savings balances.With the migration almost completed, the Bank is well positioned forfuture growth. We are also on track to launch new products, startingwith mortgages, to broaden into a full-service retail bank.Customers can purchase insurance and other Tesco Bank products instore, alongside their weekly shopChief Executive’s review6 Tesco PLC Annual Report and Financial Statements 2012
  11. 11. To put our responsibilities to the communitieswe serve at the heart of what we doWe have reinforced our commitment to be a good corporate citizenthis year: as a retailer, an employer and a neighbour. We employover half a million people worldwide, which allows us to make a realdifference in the communities where we operate. Our core businessinvolves two vital roles in the heart of the community: providingcustomers with safe, good quality, affordable, nutritious food andcreating good jobs and careers. Beyond this, we have demonstratedthat we put our responsibilities to communities at the heart of whatwe do in a huge variety of ways: I want to pay tribute to just some ofthe great achievements of the last year.Even when their own homes were in danger or flooded, our peoplein Thailand went to extraordinary lengths for customers. Some evengave up their days off and travelled for hours by boat to continue toget essential supplies to our customers. There is no better example ofour colleagues living true to the Tesco Values: ‘No one tries harder forcustomers’ and ‘Treat people how we like to be treated’.Our responsibility to our people is to provide them with good jobsand careers. In the last year, we have created thousands of jobsacross our businesses, invested in a state-of-the-art, zero-carbontraining academy in South Korea and have continued our work inthe employment of young people, university graduates and thelong-term unemployed.Our customer offering is based on strong relationships with oursuppliers. For example, we now have supplier academies in all of ourCentral European markets for suppliers to present their products toour buyers. This enables us to support the growth of our supplierswhilst sourcing the best local and regional products for our customers.Any business on the scale of Tesco has the opportunity to make asignificant difference in tackling climate change. We were proud tobe recognised by the Carbon Disclosure Project again this year, withTesco named the top retailer in the world. We will continue our workas we progress towards our ambitious target of being a zero-carbonbusiness by 2050.Our state-of-the-art, zero-carbon training academy in South Korea,to train staff from across the Tesco GroupTo be a creator of highly valued brandsFinest sold well over £1 billion in the UK alone this year. In April 2012 werelaunched Tesco Value as Everyday Value, with quality improvementsto hundreds of productsAcross our markets our own-label programme encompasses abroad spectrum of ranges to appeal to diverse customer needs,giving customers the quality products they are looking for atcompetitive prices.In the last year we have expanded our offering, launching new rangessuch as Venture Brands in the UK and Europe – including Chokablokchocolate and ice cream and Carousel children’s toys – which offercustomers premium quality at great prices.We have started to differentiate our ranges more clearly, such asour sub-brands Gourmet and Eat Well in Fresh Easy and Goodness,which is a range of healthy and nutritious children’s products nowalso available in the UK.We recently relaunched our UK Tesco Value range as Everyday Value,with quality improvements to hundreds of products and new, brighterpackaging. This is the first stage in a refresh of our entire range of over8,000 Tesco brand products in the UK in the next two years, includinga comprehensive update to our Tesco Standard range.This is an area of substantial and growing strategic importance for us,as we recognise the role that our brands play in attracting customersand as we start to leverage our expertise in brand management acrossour markets.Tesco PLC Annual Report and Financial Statements 2012 7STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTSOVERVIEWChief Executive’s review Strategy in action Business model
  12. 12. To build our team so that we createmore valueStrengthening our managementThis time last year we were in the early days of some of our newmanagement structures. I had just introduced a matrix structurethroughout Tesco with CEOs for each of our key business areas – theUK, Asia, Europe, and the US – supported by integrating functions,such as Property, Human Resources and Marketing. I am very pleasedwith how this structure has bedded in and expect to see even greatervalue creation as a result.The introduction of a dedicated UK Operating Board has enabledgreater focus at home and given the importance of the changeswe are currently making for customers, I have recently decided toassume direct responsibility for the UK business during the processof its renewal.I have continued to strengthen both the Executive Committee and oursenior management teams through the last year, drawing on our deeppool of internal talent.We have also been fortunate to welcome our new Chairman, Sir RichardBroadbent, following Sir David Reid’s decision to retire. I want to thankDavid for his lasting contribution to Tesco over 26 years on our Boardand, on a personal level, for all the help he has given me in settling intomy role as CEO.Building the Tesco teamWe will create 20,000 more jobs in the UK over the next two years andmany more around the worldTesco’s most important asset will always be its people, who live byour Values to do their very best for customers. Many of our plans forthe coming year are built on investment in our people. We employ morethan half a million people across the globe and this will continue toincrease, with plans to create an additional 20,000 jobs in the UK alonein the coming two years and to continue to grow our teams around theworld. It is the quality, commitment and dedication of our people thatgives me so much confidence that we can and will achieve our plansfor the years ahead.Delivering higher returnsIn April last year we set out a target to increase our already goodlevel of ROCE to 14.6% by 2014/15. We improved ROCE from 12.9% to13.3% in 2011/12. Although it is likely that we will see a small reductionin 2012/13 as a result of our UK investment plans, we continue to see anumber of opportunities to drive returns and we still expect to deliverour targeted increase to 14.6% by 2014/15.Doing the right thingI am confident that we are ready to tackle whatever challenges lieahead. The decisive action that we have taken in the past year andthe management changes which have reinvigorated the Tesco teamhave laid the ground for the future; a future where we will make surethat our capital and our talent are put to work where it benefits mostour customers and hence our shareholders. We have and will continueto focus on doing the right thing for customers, for communities, forstaff, for the business and for our shareholders.Philip ClarkeChief ExecutiveChief Executive’s review8 Tesco PLC Annual Report and Financial Statements 2012
  13. 13. Strategyin actionHaving given you an overviewof the implementation of ourstrategy over the past year, thissection sets out some detailedcase studies showing ourstrategy in action.In the next few pages, you’ll read about the£1 billion commitment we’re making to improvethe shopping trip in the UK, our excitinginnovations online, what we mean by Groupskill and scale, our businesses in newer markets,the progress of Tesco Bank over the last threeyears and our team’s extraordinary responseto the flooding in Thailand.IN THIS SECTION10 UK: Giving our customersthe best shopping trip12 UK: Refreshing our storesfor customers and staff14 Online: Making ‘Clicks Bricks’ a reality for customers16 International: Moving intothe next phase of growth18 International: Footholdsin newer markets20 Retail services: A TescoBank for Tesco customers22 Our dedication to thecommunity: ThailandTesco PLC Annual Report and Financial Statements 2012 9STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTSOVERVIEWChief Executive’s review Strategy in action Business model
  14. 14. UK: Giving our customersthe best shopping tripWe always want to provide our customerswith the best shopping experience and set thestandard in the UK. Focusing on food first, weare making a £1 billion commitment this yearto improve the shopping trip, driving a strongpace of improvement in the things that matterfor customers – service, range, quality, price,availability and the store environment.Creating more good jobs and careersOver the next two years, we will create 20,000 new jobsto deliver new levels of excellence in customer service.Customers will benefit from more staff on the shop floor atbusy times, greater staff expertise and enhanced serviceacross the store.The investment goes to the heart of our promise to creategood jobs and careers, with opportunities focused on youngpeople who are currently unemployed. British Prime MinisterDavid Cameron described the investment as “a massiveconfidence boost for the UK economy”.The Fruit and Veg teamFresh food is an area where customers really appreciatehaving dedicated, specially trained and knowledgeable staff.With the additional investment in staffing, training andequipment, the Fruit and Veg team can focus on freshproduce, improving product availability and presentationfor customers.We are also increasing the number of staff across the wholeof fresh food – meat, produce and chilled convenience foods.More staff, better serviceOne of the largest elements of our investment is in increasedstaffing levels, training and equipment for key departments inexisting stores – such as produce and meat. We saw markedimprovements in customers’ perceptions and sales performanceof 200 pilot stores. This success has given us the confidence tomove quickly to apply these changes to all of our large stores –an investment of over £200 million.We are improving the look and feelof many of our fresh departments usingmore engaging signage, stronger graphics,warmer colours and better lighting10 Tesco PLC Annual Report and Financial Statements 2012
  15. 15. The Big Price DropIn September 2011, we launchedThe Big Price Drop, investing morethan £500 million to reduce theprices of over 3,000 everyday products.Big Price Drops target the productsthat customers buy week in, week out.The progress is encouraging and we’renow more competitive. It’s an importantstep in the journey but there’s moreto do to get the blend right on price,promotions, couponing and loyalty.Quality and innovationWe are reviewing and refreshing our entire rangeof over 8,000 Tesco brand products starting withthe relaunch of Tesco Value as Everyday Value, withquality improvements to hundreds of products. Helpingcustomers manage on tight budgets, Value was alreadygrowing at twice the rate of the market as a whole:these changes will further strengthen its position.We will also be comprehensively updating our otherTesco ranges this year.We have already stepped up the pace of innovationwith our new Venture Brand exclusive products – suchas Chokablok ice cream, Parioli authentic Italian rangesand the Latham’s range of premium pet food.With such a strong variety of ranges to appeal to theneeds of different customers, we will also be applyingmore personalisation and localisation in stores to helpthem tailor their ranges much more for their local area.Over the pageTesco PLC Annual Report and Financial Statements 2012 11STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTSOVERVIEWChief Executive’s review Strategy in action Business model11
  16. 16. UK: Refreshing our storesfor customers and staffThe way stores look and feel is an importantpart of the shopping trip. Customers wanteda warmer, friendlier look and feel, so wehave accelerated our Refresh programme toimprove the environment in all our stores.BakeryCustomers love being able to choose fromfreshly baked breads and cakes and seeour bakers at work in the background.Displaying the goods in baskets, not onstandard shelves, also helps to make ourbakeries much more appealing.Investing over £200 million of additionalcapital, we will refresh 430 stores in thecoming year, representing about 25% of ourUK space. Bringing in a warmer, friendlier lookand feel will go hand in hand with our work onquality and range, so that we offer customersgreat products displayed in an attractive,inviting store environment.Listening to our staffMost of our changes are visible to customersbut we are making some equally importantchanges behind the scenes. We ran aprogramme this year for staff to email ortext in comments about what they feltneeded to be fixed in their stores. With40,000 comments received, we’ve respondedby rolling out new and better equipment,like checkout chairs and handheld printers.This has helped deliver the best staffViewpoint feedback survey results forfive years.The Extra formatCustomers are noticing the changes we aremaking in stores across all of our formats –Extra, Superstores, Metro and Express– but we’re also making some changes thatparticularly affect our larger stores. We’redrawing on the great success of our newExtra format in Europe to make sure that ourUK Extras continue to meet our customers’changing needs, as they increasingly combineshopping in store and online.Future investmentIn the last few years, both convenienceand online shopping have been growingrapidly. While our existing large stores inthe UK perform very well, recognising thecurrent economic climate and the growingimportance of online shopping, we are notplanning to open many more of the verybiggest. Instead, more of our investment isgoing into refreshing our existing stores.New investment will be channelled intoExpress stores and our online offer.Fixtures and fittings,lighting and spaceWe are refreshing our stores, inside and out,to make them more inviting. Wooden claddingand brighter signage welcome customers intothe store. Inside, different areas are being givena more distinctive look and feel, such as woodenfixtures in Bakery, or sleek shelving and lightingin Health Beauty. Our produce aisles aremore spacious, and our counters have lessfunctional, more engaging signage, flatglass fronts and better lighting, to showoff our meat, fish, cheese anddeli products at their best.Scan here to see some of theimprovements we’re makingin store, or visit www.tescoplc.com/ar2012/ukvideo12 Tesco PLC Annual Report and Financial Statements 2012
  17. 17. Click CollectAs the option of ordering online andpicking up in store continues to grow inpopularity, our stores are ideal collectionpoints. We will add 700 new collectionpoints for Tesco Direct orders in the nextyear – customers can already collectfrom over 770 stores, including 70 Expressstores. We will also continue to increasethe number of stores with collectionpoints for grocery, as well as triallingconvenient joint collection points.ClothingThe UK clothing market, worth £33 billion,is one of the few areas of discretionaryspend that continues to grow and is acategory where the internet has so far hada limited impact. Our Central EuropeanExtras have shown us that Clothing tendsto benefit from more space and betterlighting on the shop floor, as customerslove seeing more of our range. As well asgiving Clothing more space in store, wewill be improving the ranges and qualitywe offer to ensure broad appeal.Retail servicesThe services we offer in store – like anoptician, pharmacy, phone shop or customerrestaurant – all help customers to get moreout of their everyday shopping trip. Weended the year with over 180 opticians andare planning to increase the number of ourphone shops to over 260 in the coming year.Tesco PLC Annual Report and Financial Statements 2012 13STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTSOVERVIEWChief Executive’s review Strategy in action Business model
  18. 18. Online groceryWhen we first launched a grocery home shopping service in 1997we were viewed as pioneers, and we have grown to be the world’slargest and most profitable online grocery retailer with sales ofwell over £2 billion.As technology moves forward so do we. We use it to help makeshopping easier for customers with a mobile web platform forshopping on the go, features like ‘Favourites’ and tailored onlineoffers developed for Tesco via analysis from dunnhumby, ourmarketing insight business.Where customer demand is very high we have complemented ourin-store picking model with a number of specialised dotcom-onlystores. In January, we opened our fourth in Enfield. We currentlyfulfil over 80% of London orders from our dotcom-only stores,providing our customers with our total food range – more thancan be offered from any one store.Growing our online businesses in all our markets isa strategic priority for us and it shows how we areadapting to our customers’ changing needs. Storescontinue to sit at the heart of our business, but weare aiming to become a multi-channel retailerwherever we trade.Customers increasingly expect to be able to shop where, when and how they want:the boundary between stores and online is blurring. In developing our online offer,we are drawing on our convenient store network and our expertise to meet ourcustomers’ needs and help make their lives easier, progressing towards an offeringwhere customers can shop with us ‘anywhere, any time, any how’.We’ve taken online far beyond everyday grocery shopping. Digital technology allowsus to meet the ‘on the go’ needs of our customers – with you can streamentertainment on the move and with our virtual stores in South Korea you can evenshop during your commute to work.We want to offer our customers convenient options to shop with us using thoseaccess points – stores, computers and mobile devices – which are part of their dailylives. Whether customers want to shop on the move using their smartphones, ortake their time at home, we are innovating to help them shop however they want,with quick and easy apps and improved platforms.Tesco DirectWe have upgraded our Tesco Direct website to bettershowcase our great quality range and offer customersimproved functionality and ease of use. For the firsttime it is now configured for mobile devices. We willbe moving our other UK Clothing and Entertainmentwebsites onto the same platform later in the year.By Christmas we will have increased our Directrange to 200,000 items, thanks in part to third-partySellers. Having introduced our first Sellers at TescoDirect recently, we are offering our customersadditional ranges teamed with Clubcard points andconvenient store collection points, while our SellerPartners benefit from our volume of online trafficand expertise.Online: Making ‘Clicks Bricks’a reality for customersScan here to see howwe’re developing ouronline offer, or visitwww.tescoplc.com/ar2012/onlinevideo14 Tesco PLC Annual Report and Financial Statements 2012
  19. 19. International growthWe already have profitable online grocerybusinesses in South Korea and the Republicof Ireland, launched dotcom in the CzechRepublic this year and are planning tobegin soon in Warsaw. In the next few years,we are planning to launch online groceryshopping in at least one major city in eachof our markets, using our operating modelto roll this out quickly and cost-effectively.In Asia, we’re innovating to access the biggestopportunities – for example, in addition toour online grocery service, our virtual storesin South Korea enable busy customers to shopon their way to work. The Homeplus app hasbeen downloaded over a million times.Social mediaAs our customers spend an increasing amount of timeonline we are able to use social media to build trustand understanding of our business. This in turn helpsto drive loyalty.We have built our business on listening to our customersand acting on their feedback. Social media allows us tohave conversations with them on any issue at any time– in the UK, we now have more than 680,000 ‘likes’ onour Facebook page.In 2011 we acquired BzzAgent – a unique businesscombining word-of-mouth marketing with a commercialapplication of social media, helping to drive consumeradvocacy and broaden our capability and innovation inproduct marketing.Social media also helps us to be more effective andinnovative in existing tasks such as recruitment and staffcommunication. For example, our staff use Yammer –a private social network for businesses – to share bestpractice and celebrate success, often by posting photos,and we use it operationally for sharing messages andasking for feedback.Click CollectClick Collect is a key component of our multi-channeloffering. Our store and distribution networks meanwe can give customers the opportunity to pick upproducts whenever it suits them from over 770 stores,close to where they live or work. 70% of online generalmerchandise orders are handled in this way.Click Collect is becoming increasingly relevant forall product groups. We currently have 45 stores thatoffer grocery Click Collect and we expect this numberto increase quickly. Our customers appreciate thisinnovative, quick and convenient service which fitswell into their busy schedules.Tesco PLC Annual Report and Financial Statements 2012 15STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTSOVERVIEWChief Executive’s review Strategy in action Business model
  20. 20. Consistent propertyblueprintsAs we continue to grow ourinternational businesses there isa significant opportunity to makesavings from applying standardisedproperty blueprints. With thesame specialist team designingthe stores, we can build great storesfor customers more quickly, morecheaply and with a reduced carbonfootprint. We also ensure the newspace is best used by reducing thespace given to offices and chillersin the back, providing more roomon the shop floor.Retailing is a local business. Customerslove local and regional products; we prideourselves on having local people running ouroperations; and we use local knowledge tosource and to allocate space to the mostpopular products. However, lots of what wedo – especially behind the scenes – is bestdone in the same way across our markets.We are increasingly realising our vision towin locally by applying our skills globally.‘Group skill and scale’ describes this step inour evolution to becoming a global business.By Group skill, we mean applying expertisefrom individual countries to all of our markets:Clubcard is a great example. Having investedmillions of pounds to develop the UK schemein the late 1990s, we have been able tointroduce a loyalty scheme to each of ourmarkets for a fraction of the cost.By Group scale, we mean using the size ofthe Tesco business to benefit our customersby lowering prices, improving quality, andsourcing new and different products fromthe best suppliers around the world. Globallysourcing food, general merchandise, and thegoods that we use in store is one way thatwe are doing this. We buy some productsfrom the same source for all our markets,such as bananas, and we buy others for awhole region, such as FF clothing forCentral Europe. Buying on a larger scalemeans that we can achieve a better costprice and create headroom to invest inimproving the shopping trip for customers.Since the mid-1990s, we have built an internationalbusiness of more than 3,200 stores, which deliveredmore than £1 billion trading profit for the first timethis year. As we strive to become an outstandinginternational retailer, we are drawing on Tesco’s skilland scale to move into the next phase of growth.International: Moving intothe next phase of growthSince the mid-1990s, we have built an international business with more storesthan we have in the UK, which has delivered more than £1 billion trading profitfor the first time – larger than any of our UK competitors. With strong marketpositions, we are well positioned to move into the next phase of growth.* 11/12 trading profit excludes Japan, which has been treated as discontinued followingour decision to sell the business. 10/11 has been re-presented to be consistent. The dataup to and including 05/06 is statutory operating profit; from 06/07 it is trading profit.Our evolution to becoming a global businessInternational trading profit of over £1 billion*£bn96/97 01/02 06/07 11/121.00.5Scan here to find outmore about ourinternational businesses,orvisitwww.tescoplc.com/ar2012/asiaandeurope16 Tesco PLC Annual Report and Financial Statements 2012
  21. 21. Smaller format storesSmaller format stores complement our established storenetworks to meet growing demands for convenience.These formats are not only great for customers but arealso cost-effective, utilising our existing distributionnetworks and requiring less capital.One platform, manymarkets – the besteverywhereRolling out the same processes andsystems across the Group deliversa better shopping trip for lowercost. Shelf-ready packaging andbest practice replenishmentprocesses support great availabilityfor customers in store, whilewarehouse processes minimisestock loss and wastage. We increaseback-office efficiency through ourshared service centre in India withthe same team designing commonfeatures, such as self-servicecheckouts, for all our markets.Reaping the benefitsof centraliseddistributionAs we buy more and more productson a regional or global scale, itbecomes easier and more effectiveto organise our distribution acrossborders. We have opened newdepots in Poland and China thisyear, building them to a Groupblueprint and implementing bestpractice processes, equipmentand systems.Rolling out servicesAt year end, we had 47 of our Extra format stores internationally.These stores offer customers a whole range of services, suchas photo shops, opticians and phone shops, for relatively lowinvestment as they use existing hypermarket space and customerfootfall. Retail financial services are well established in Thailandand South Korea, where Tesco partners with leading financialservices providers, and in an earlier stage of development inanother seven of our markets.Investinthebestlocal offer IdentifybestpracticeandrolloutinallmarketsWorktogether where it makes senseWinning locally,applying our skillsgloballyTesco PLC Annual Report and Financial Statements 2012 17STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTSOVERVIEWChief Executive’s review Strategy in action Business model
  22. 22. Diversity and complexityA market of China’s scale brings not onlysignificant opportunities but also hugediversity and complexity. To be successful,we need a deep understanding of regional,provincial and city-level differences, as wellas an ability to leverage our global expertiseand systems in order to build scale. Ourvision of winning locally by applying our skillsglobally is key to our ambition to drivelong-term, sustainable growth in China.The importance of being local...Even within a single region temperatures,tastes and preferred brands can all vary,so our operation is ‘local’ in many ways.For example, our buying teams are basedin different regions and even in specificprovinces and cities to be close to ourcustomers and suppliers. We have appointedmore local Directors this year to strengthenour China Board and have ongoing plansto recruit and develop local talent.... and operating responsiblyOur stores are active in their local communities,for example through ‘Care for the Needy’, wherewe donate daily essentials to elderly and infirmpeople. Drawing on our Group expertise andtechnologies,ournewdistribution centre inJiashan uses 45% less energy than a traditionaldepot. These are just two examples of how weoperate responsibly through a combination ofbeing local and applying our skills globally.Group skill and scaleTesco’s skill and scale are crucial todifferentiating our business in China. Ournew distribution centre was an importantfirst step to streamlining our supply chain,allowing us to buy on a greater scale andgiving us more control over the storage andtransportation of freshproduce.Drawingonourbrandcapabilities, we have recently relaunchedthe packaging for 250 of our own-brandproducts, with hundreds more to follow in thecoming year. Our Shenyang Extra store hasbenefited from the success of our new formatin Europe, with the senior team trained in ourExtra store in Bratislava, Slovakia.Our strategy in China isto focus on building scalein three regions whichtogether have a populationof over 600 million.China: three regions the size of countriesNorth regionHymall opened here in 2001 and 11years later we have 39 stores trading.Our first Extra opened in Shenyang inDecember. Freezing cold in winter,our clothing and food ranges are verydifferent to the East and SouthA large, rapidly growing market, China offersreal long-term potential for growth, despite acurrently challenging consumer environment.East regionThe ‘home’ of Tesco in China isShanghai and here we are tradingour first Express convenience storesSouth regionPresent in this region for onlyfour years, we continue to adaptour offer to meet consumer needsin this warmer part of ChinaInternational: Footholds in newer markets18 Tesco PLC Annual Report and Financial Statements 2012
  23. 23. The Fresh Easy shopping tripOur Fresh Easy business is aboutwholesome, fresh, high-quality food in theheart of the neighbourhood, with great staffgiving the best customer service. We havemade changes this year to bring out thesefeatures and give them more prominence inour stores. With a friendlier store environmentand atmosphere, the quality of our fresh andprepared produce more apparent and thelaunch of our Friends card to thank our loyalcustomers, we have driven 12% like-for-likesales growth this year and total salesgrowth of 27%.The journey to profitabilityThe results of these changes mean that weare more confident about the outlook for thebusiness, although clearly much remains tobe done. We have reduced trading losses by18% and are on track for another significantreduction in 2012/13, even if the timing ofbreak-even will now be later than our earlierexpectation. This is because we will focus onmore stores reaching profitability first, beforepushing on faster with the expansion weneed to create sufficient scale to cover ouroverheads. We ended the year with 185 storesand will have approaching 230 stores by theend of the coming year.The changes we havemade to stores thisyear are building realmomentum in Fresh Easy, driving growingcustomer numbers andsales and deliveringreduced losses for thefirst time.Fresh Easy: progress in the United StatesFriends loyalty cardthanks our customersfor shopping withFresh EasyCustomers can see andfeel the quality of ourloose fresh produceWelcomingcustomers withnew fresh ranges:flowers, fresh breadand coffee to goFresh Easy superstars gothe extra mile for customersand help create a culture ofpersonal serviceDoors on our fridges andfreezers, wooden floors andbrighter walls all make ourstores more inviting forcustomersScan here to hear morefrom our Fresh Easycolleagues, or visit www.tescoplc.com/ar2012/freshandeasyvideoNew prepared rangesfrom the Fresh EasyKitchen, offeringwholesome, naturaland tasty mealsTesco PLC Annual Report and Financial Statements 2012 19STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTSOVERVIEWChief Executive’s review Strategy in action Business model
  24. 24. Scan here to watch ourvideo about Tesco Bank,or visit www.tescoplc.com/ar2012/tescobankvideoSince we took full ownership of Tesco Bank in2008 we have been in a period of transition.In just over three years we have developed acompletely new infrastructure for the business,built up a new team and brought in newexpertise – effectively building a new bankfrom scratch. We are now completing the veryfinal stages of this huge project, as we movetowards offering a full-service retail bank.At its core, Tesco Bank is underpinned by theTesco brand and Clubcard, and its operationsare effective because of our people, systemsand IT.Being part of Tesco delivers benefits forcustomers and Tesco Bank. For example,the insight we gain from Clubcard allowsus to understand our customers’ needswell, helping us to provide them with themost relevant offers in a clear and simpleway and at a great price.Tesco Clubcard credit card rewardscustomers with Clubcard points wheneverthey use their card. Clubcard customerscan also receive preferential deals whenbuying Tesco Bank products – includingdiscounts on car, home, pet and travelinsurance – and can use Clubcard points tobuy Tesco Bank insurance. This year, TescoBank gave customers around £70 millionof Clubcard points to spend in store or onClubcard rewards.The Tesco Values sit at the heart of TescoBank. Our core purpose is ‘To create valuefor customers to earn their lifetime loyalty’,so our people focus on providing greatcustomer service. At our Glasgow andNewcastle customer service centres, staffare not incentivised to sell, which meansthat discussions with customers canfocus solely on meeting their banking andinsurance needs. Over the last three years,we have built a strong team with experienceand expertise, growing dramatically from300 to 2,800 people.In terms of systems and IT, our newplatforms have enabled some significantcustomer service improvements. Instantdecisions are now available on loanapplications, and customers can open andfund savings accounts in just ten minutes,which had previously taken aroundtwo weeks.While we have completed the majorityof the transition from The Royal Bank ofScotland’s (‘RBS’) systems and platforms toour own, we did encounter some technicalissues during the summer of 2011. We prideourselves on being a bank that customerscan rely on and trust, and to ensure thatthe continuing process was as smooth aspossible for customers and staff, we decidedto slow the remaining transition of our2.8 million credit card accounts. This isnow nearing completion.Even with all this work going on, we havegrown the business during 2011/12. Thesavings book was up 7% versus a marketof 3%, and the underlying performance ofthe Bank remained good, with strong growthin baseline profit (which excludes key non-trading provisioning movements).In the last three years, we have seensignificant growth across key Bank products.We have laid our foundations for growthand, with the transition from RBS almostcomplete, we are now in a position to growthe business faster.Tesco Bank brings Tesco’s Values, customer focusand trusted brand name to a big market and isdifferentiated by being a bank that has Tesco at itscentre. We offer simple, convenient, value for moneyproducts in what can be a highly complex market.Savings and loans:Our savings book continues to growwell, with retail savings depositsincreasing by around £330 millionthis year. Clubcard insight supportsour competitive customer offeringand high quality loan book. Eventhough loan balances have beentemporarily reduced this year as wehave undergone migration, customeraccounts in loans and savings haveincreased by 30% since 2008. We arecontinuing to attract new customerswho know that the Bank is reliable,trustworthy and good value.Retail services: A TescoBank for Tesco customers20 Tesco PLC Annual Report and Financial Statements 2012
  25. 25. Insurance:Our products help support customers intheir daily lives, giving them peace of mindwherever they are. Simple to understand,our range of products continues to provepopular with customers. Around 1.5 millionpeople now insure their cars and homeswith Tesco Bank. Since 2008, our carinsurance gross written premiums haveincreased by 39% and pet insurance grosswritten premiums are up by 44%.Transaction services:Our transaction services – ATMsand travel bureaux – offer customersconvenience while they are on the go.Both saw strong growth in the year,with ATM transactions up 9% andtravel money transactions up 12%.We ended the year with 3,265 ATMs,up from 2,600 three years ago, andwe have close to 200 travel bureauxacross our store network.Credit cards:We are increasing our share of the market,with 57% growth in credit card transactionssince 2008. Three years ago, Tesco Bankcredit cards made up 9% of all MasterCardand Visa credit card transactions in theUK – that figure is now 12%. Customersbenefit from the added ‘Tesco’ extrasthat come with their credit card, such ascollecting one Clubcard point for every£4 spent.Rates are subject to change and are correct as at April 2012. Fixed rate saver: one-off payment and money cannot be withdrawn until the end of the term.New products:Tesco Bank has been growing welleven without new product launches,but the products we’ve launchedon our own systems have enjoyedhuge success. Our Fixed Rate Saver,launched in October 2010, has grownto £1.5 billion and our retail bonds haveattracted investments of £185 million.These initiatives diversify our fundingbase and increase the long-termfunding available to the Bank.We always want to give our customersthe best products and the bestexperience, so we believe gettingit right at launch is more importantthan rushing the process. Once wehave completed the final stage ofmigration, we can push on fasterwith more substantial new products,starting with mortgages.Current accounts are plannedto follow and we welcome therecommendation of the IndependentCommission on Banking to makeit easier for customers to switchbetween banks.Newproducts Credit cardsSystemsClubcardPeople ITandloansservicesSavingsTransactionInsuranceTesco PLC Annual Report and Financial Statements 2012 21STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTSOVERVIEWChief Executive’s review Strategy in action Business model
  26. 26. Our dedication to the community:ThailandOur stores are importantparts of local communities.We are committed to beinga good neighbour andmaking a difference tothe communities we liveand work in, includingsupporting the causes thatmatter to our customersand our people.In 2011, Thailand suffered its worst floodsin 70 years. At Tesco Lotus our staff wentto incredible lengths through immenselydifficult conditions to get essential suppliesinto our stores for customers.Events such as the floods are a reminder ofthe strength of local communities and howpeople turn to them in times of need. Theyare also a reminder of the importance ofproviding customers with good quality, safe,affordable food, whenever they need it.22 Tesco PLC Annual Report and Financial Statements 2012
  27. 27. Like all Thai retailers, we faced a major challenge with the flood crisis butat Tesco Lotus the team worked incredibly hard to find ways to get productsinto store and support local people.Our people came into work even when their own homes were flooded. We used trainsand planes to bring products in and worked together across the Group to securedeliveries. Tesco in Malaysia provided three million litres of water and eight millionpackets of noodles and our global suppliers helped to secure canned fish, eggs andUHT milk.We used our stores as donation centres for customers who wanted to supportflood victims and contributed almost £500,000 of essential products. For ourstaff affected, we provided financial support as well as relief bags, food,temporary accommodation and transport.Through teamwork at Tesco Lotus and the support of the Group, we wereable to help the people of Thailand during this difficult time – a recoveryeffort that is still continuing. I would like to thank the whole teamagain for their extraordinary dedication.Chris BushCEO Tesco Lotus at the time of the floods, now COO Tesco UKScan here to seeour Thai team inaction, or visitwww.tescoplc.com/ar2012/thailandvideoTesco PLC Annual Report and Financial Statements 2012 23STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTSOVERVIEWChief Executive’s review Strategy in action Business model
  28. 28. BusinessmodelOur strategy is put intoaction through our businessmodel. At its heart is ourcore purpose: ‘To createvalue for customers to earntheir lifetime loyalty’.24 Tesco PLC Annual Report and Financial Statements 2012
  29. 29. SellmoreDevelopeconomiesof scaleBuy forlessSell forless MoveSell BuyInsightBuildingthe TescobrandLeveragingGroup skilland scaleDevelopingour peopleCreatingvaluablepropertyInnovatingour offerresponsiblyOperatingCore purpose:To create valuefor customers toearn their lifetimeloyalty–– Core activities–– The virtuous volume circle–– EnablersCore activitiesOur core business model is simple: we buy,move and sell products and services to ourcustomers and use customer insight to dothis slightly better each time.Insight:Improving the customer offerListening to customers in a wide variety of ways is key to what wedo. We engage with customers through a range of focus groupsand ongoing research trackers, and actively seek feedback on whatis good or not so good, such as through our Every Comment Helpsscheme in the UK. Online and social media make it easier to listenand respond to large numbers of customers in real time, throughwebchats, Facebook and Twitter. The insight from all of theseconversations increasingly feeds into the customer offer so thatwe can continually drive incremental improvements for customers.Our loyalty schemes, such as Clubcard or Legou Tesco Membercardin China, are not only great for our customers but also provide datainsight to enable us to continually improve the shopping trip. Witha loyalty scheme in all of our markets and around 44 million activecustomersintotal,weareinauniquepositiontounderstandcustomers’shopping patterns. Our marketing insight business, dunnhumby,provides analysis which we feed back into our business model, shapingour product and range development and enabling us to offer customersthe best products and promotions for their particular needs.Buy:A great range of productsIn food, general merchandise and services, we work with our suppliersand develop our brands to bring a great range to our customers.The relationship with our suppliers is the foundation of our customeroffer. We work with a broad range of suppliers, from global producesuppliers and international FMCG companies to local suppliers whoprovide products for a single region in one of our markets. We sell over£1 billion of local products annually in the UK and, across Europe, ourseries of ‘meet the buyer’ events helped us to stock hundreds of newlocal products this year.Tesco PLC Annual Report and Financial Statements 2012 25STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTSOVERVIEWChief Executive’s review Strategy in action Business modelBusiness model
  30. 30. With our established private label programme, we produce greatquality Tesco brands at a range of price points, from Everyday Value upto Finest. Our product brands also have established market positions.For example, FF, which is the market leader in clothing in the CzechRepublic, Slovakia and Hungary, is itself diversified into distinct sub-brands for different clothing styles.In services, we often work with specialist partners to source the bestproduct offerings. For example, we created a joint venture betweenVodafone and Tesco Hungary this year, and Tesco Bank insuranceunderwriting is primarily provided in partnership with AgeasInsurance Limited.Move:The right products at the right timeOur network of distribution centres (‘DCs’) and advanced technologysupport a modern, efficient and cost-effective supply chain.An efficient distribution system starts with understanding whichproducts our stores need. We do this in two ways. First, we forecastwhat customers will buy, using sophisticated, detailed models toconsider variables such as seasonality, weather forecasts and likelyresponse to promotions. Second, our ordering systems automaticallyupdate in real time based on what customers do actually buy, so thatwe can quickly and accurately supply stores with the right productsat the right time.We plan our distribution processes, systems and network of DCs tomaximise efficiency. Labour scheduling and transport planning systemsenable our pickers and drivers to operate highly effectively, and wedevelop our distribution networks to minimise the mileage needed toget products to store in perfect condition. We also use transport otherthan lorries such as our four train services in the UK, which save 15,000tonnes of CO2 per year.Continually striving to make every part of the process productive,through primary distribution, we use our network to pick products upfrom some of our suppliers and transport them to our depots, whichcan be more cost-effective than individual suppliers delivering to us.We also use return journeys from stores to depots to pick up wastematerials which we sell for recycling.Sell:The best shopping tripWhether in store, online or a combination of both, we pride ourselves ondelivering a great shopping trip for our customers, week in, week out.One of Tesco’s Values is ‘No one tries harder for customers’, and thiscan be seen in how we strive to improve the shopping trip. This representsevery element of the customer shopping experience, including price,range, quality, availability and service. Our loyalty schemes are key tothe customer offering, thanking customers each time they shop at Tesco.We take a multi-format approach to our store network, to be able tomeet our customers’ needs for different types of shopping trip, fromlarge Extra stores that offer a full range of food, general merchandiseand services, to Metro and Express convenience stores.‘Selling’ refers to a broader and broader range of activities as wedevelop our multi-channel offer. We launched a grocery homeshopping service in the UK in 1997. Since then, we have grown thisbusiness to over £2 billion of annual sales, launched grocery homeshopping in South Korea, the Republic of Ireland and the CzechRepublic, and launched further online businesses, such as Direct,Clothing and Entertainment. We are increasingly offering customersthe option of combining stores and online with Click Collect, whichmakes the most of our convenient store locations, giving customersan easy way to pick up products ordered online.We also offer a wide range of services to our customers. With opticians,pharmacies and phone shops available in our larger stores, and TescoBank products available to buy in store, over the phone or online, weare deepening our customers’ relationship with Tesco, bringing ourvalues of convenience, simplicity, reliability and great customer serviceinto what can be complex markets.We don’t always sell our products ourselves. In South Korea and theCzech Republic, we operate franchise chains alongside our own stores,and we have also recently announced a new franchise model for ourFF clothing brand in Saudi Arabia.The virtuous volume circleBy keeping our customer focus central to our business model, we areable to provide a leading customer offer: a broad range of productsand services at great prices, sold in shops in convenient locations and,increasingly, available online. A great customer offer drives the virtuousvolume circle, which means that we can continuously improve our offer.By selling more products, we are able to work with our suppliers to drivemutually beneficial economies of scale, creating headroom to investand to offer lower prices to customers. An important element of ourPlan to improve business performance in the UK is centred on investingin the shopping trip so that customers will reward us by buying morefrom Tesco.EnablersOur core business model is supported byenablers which maximise the potentialof our core activities to give our customersthe best shopping trip and ensure that ouractivities are carried out in a sustainable way.Leveraging Group skill and scale:Making our business Better, Simpler, Cheaper, FasterSharing best practice systems, processes and approaches across allof our markets takes our business model to the next level. By identifyingbest practice in each market, we can improve our offering aroundthe Group. For example, some of the very popular brands we havedeveloped in Fresh Easy in the US have recently been introducedinto the UK and South Korea. As our international experience grows,we are increasingly benefitting from sharing best practice – with ourUK Operating Board all having spent some of their careers in ourinternational businesses.Business model26 Tesco PLC Annual Report and Financial Statements 2012
  31. 31. Group skill and scale supports each of our core activities: utilisingInsight, Buying, Moving and Selling. Utilising Insight as a Group, with aloyalty scheme in all of our markets, means we can continually innovatethe customer offer. Our Turkish business launched Clubcard thisyear, which would not normally be possible for a business of its size.Buying as a Group is cost-effective, creating headroom to invest in thecustomer shopping trip, such as by sourcing consumables in CentralEurope as a Group. Moving as a Group, with distribution centreblueprints, systems, and the early stages of borderless distribution,makes our deliveries simpler and faster, with new distribution centresopened in both Poland and China this year. Selling as a Group, withour Extra format already in eight international markets, including theCzech Republic, Thailand and China, offers customers a bettershopping experience.Of course we don’t believe in ‘one size fits all’. There are many thingsthat are best done locally because customer tastes and lifestyles arenot uniform. Our businesses are run predominantly by local teams,not by expats, so that our operations can be close to the customerswe serve, and our local ranges both support our smaller suppliers andgive customers a tailored product offering.Developing our people:Our most important assetGreat service can make a customer’s day, and we achieve this whenour people live the Tesco Values: ‘No one tries harder for customers’and ‘Treat people how we like to be treated’. Our business is built onthe commitment of more than half a million people across the worldand, in return for their commitment, we offer them good jobs andcareers with Tesco. Developing our people takes many forms, fromtraining in our state-of-the-art training academy in Asia, to offering jobsto the long-term unemployed through Regeneration Partnerships andsupporting the development of women to management positions.Creating valuable property:The best located and best designed storesOur site research and property capabilities enable us to identifyand develop the best sites for our stores. Tesco has great depthof experience in property development all around the world.Optimal sites for new store developments and extensions are identifiedby our site research departments. We have a flexible approach toproperty acquisition, considering both freehold and leasehold sitesand assessing each opportunity on its merits. Using a range of data,such as demographics and competitor activity, we forecast salesfor a new store to a high degree of accuracy, so that we can developthe stores with the greatest potential.Once a site has been identified, approved and secured, our propertydevelopment and construction teams design and develop the site. Yearsof experience have fed into Group-wide blueprints and specifications sothat all of our development takes place to the highest standard.In many of our international markets, Tesco owns or leases whole malls,which are anchored by a Tesco hypermarket. Operating the mall andrenting out the space to other retailers, cafés and cinemas creates agreat destination shopping centre for customers, as well as bringingin significant rental income, which makes Tesco one of the largest malloperators in the world.Operating responsibly:Ensuring that growth is sustainableBy operating responsibly, we not only benefit and secure the futureof our business but we can bring real benefits to the communities inwhich we operate.At the heart of our commitment to operating responsibly is providingour customers with good quality, safe and affordable food. This is easilytaken for granted in developed economies, but can be a real challengein economies with low penetration of modern retail and under-developed supply chains.We can only achieve this by working with our suppliers to ensureour supply chain is both resilient and efficient. Strong, fair, mutuallybeneficial, long-term partnerships with suppliers, from local to global,are at the heart of this. The strength of our supply network was evidentduring the Thai floods this year, enabling us to secure essential suppliesfrom Malaysia and other markets.We are committed to the responsible sourcing of raw materials,ensuring the resilience of our supply chain and managing our impacton the environment. We work with the wider industry on core issues,such as water scarcity, and co-chair the Sustainability Steering Groupof the Consumer Goods Forum, which has pledged to help enddeforestation by 2020. We aim to be a zero-carbon business by 2050and are mapping the biggest opportunities to cut carbon in our supplychain, as well as continually exploring new energy efficiency measuresto be introduced across the Group.Innovating our offer:Constantly improving our customer offerTo continue to meet customers’ changing needs, we are constantlyinnovating our offer in a whole variety of ways. Innovation canbring greater convenience to an existing way of shopping, as withself-service checkouts. It can offer customers a new way of shopping,as with Click Collect grocery or our virtual stores in South Korea.It can combine our presence in shops and online into a compellingcustomer proposition: for example, a customer registered with Blinkboxcan automatically receive a digital copy of most new Hollywoodreleases when they buy the DVD with a Clubcard in store. By drawingon the breadth of our expertise and by always putting the customerfirst, we continue to serve customers how they want to be served ina changing and increasingly joined-up world.Building the Tesco Brand:To be seen as the most highly valued business in the worldThrough everything we do, we strive towards our vision of being seenas the most highly valued business in the world – valued not only byour customers, but also by the communities we serve, our staff and ourshareholders. Protecting and developing our brand reputation is thefoundation of customer loyalty and of how we are seen by our manystakeholders and enables our business model to operate effectively. Forexample, our diversification into services such as Tesco Bank is built oncustomers’ trust in the Tesco brand to offer good value, simple solutionsand great customer service; and our recruitment and retention of greatstaff depends on our reputation for customer service and offering goodjobs and careers.Tesco PLC Annual Report and Financial Statements 2012 27STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTSOVERVIEWChief Executive’s review Strategy in action Business model
  32. 32. PerformancereviewIN THIS SECTION29 Key performance indicators33 Financial reviewThis section providesdetailed information on ourfinancial and non-financialperformance over thepast year.In Key performance indicators, you will findsections covering Group performance, Groupfinancial ratios and all seven parts of ourstrategy. Our Financial review section thentakes you through the financial performanceof each of our business segments in the year.More detailed definitions for our Groupperformance and Group financial KPIscan be found in the glossary on the insideback cover.28 Tesco PLC Annual Report and Financial Statements 2012
  33. 33. Our KPIs measure how we are doing across the Group in terms of both operationaland financial performance in the context of the key elements of our strategy.More detailed definitions for our Group performance and Group financial KPIs can be found in the glossary on the inside back cover.All KPIs exclude the results from our operation in Japan for 2011/12 unless stated otherwise.Group performance* Restated for IFRS 2 and IFRIC 13.Group financial ratios4681011/1209/1007/0805/0603/0401/02%Capital expenditure(‘capex’)%ofsalesTotalshareholderreturn (‘TSR’)08/09 09/10 10/11 11/128.0% 9.5% 6.7% (3.0)%DefinitionTSR is the notional annualised return froma share: the percentage change in the shareprice, plus the dividends paid and reinvested,over the last five years. For example, five-yearTSR for 11/12 is the annualised growth inthe share price from 06/07 and dividendspaid and reinvested in Tesco shares, as apercentage of the 06/07 share price.PerformanceReturns reduced reflecting the effect onour share price of our decision to investsignificantly in the customer offer in the UK.DefinitionCapex is the investment in property, plantand equipment, investment property andintangible assets. This is divided by Groupsales (inc. VAT, inc. petrol) to show a relativeinvestment to sales.PerformanceThis year we reduced our rate of capitalinvestment to reflect the challenging tradingenvironment and increased our focus onlower capital-intensive investments withhigh returns, such as online and convenience.Last year we set a target of 5% to 5.5% ofsales. We will reduce capex to £3.3 billion in12/13 and, beyond that, comfortably lessthan 5.0% of sales.1.6%Growthinunderlyingprofitbeforetax08/09 09/10 10/11 11/129.8%* 8.7% 12.3% 1.6%DefinitionOur underlying profit provides informationon the underlying trend and performanceof the business. It is adjusted for a numberof (non-cash) accounting adjustments andone-off costs.PerformanceWe saw modest progress in the year, withthe rate of improvement impacted by twoevents: the Hungary crisis tax (£38 million)and the increase in provision for PaymentProtection Insurance (‘PPI’) in Tesco Bank(£57 million). Growth before these impactswas 5.4%.14.6%10/11 11/12 14/15TARGET12.9% 13.3%Return onCapitalEmployed(‘ROCE’)13.3%DefinitionROCE is a relative profit measurement thatdemonstrates the return the business isgenerating from its gross assets.PerformanceAlthough our UK performance was weakerthan planned, ROCE improved by 40 basispoints, benefiting from Japan now beingclassified as a discontinued operation.2.1%Growthinunderlyingdilutedearningspershare(ataconstanttaxrate)08/09 09/10 10/11 11/1211.0% 7.7% 10.8% 2.1%DefinitionUnderlying diluted earnings per share(‘EPS’) is the amount of underlying profit,adjusted for the number of shares in issue.PerformanceThe growth in underlying diluted EPS reflectsmodest progress in earnings in the year. Theproposed full year dividend per share grew by2.1%, in line with this, to 14.76p, continuingour unrivalled record of consecutive years ofdividend growth in the FTSE 100.Tesco PLC Annual Report and Financial Statements 2012 29STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTSOVERVIEWKey performance indicators Financial reviewKey performance indicators
  34. 34. Group financial ratios continuedKey performance indicators123411/1210/1109/1008/0907/0806/07TimesNet indebtedness DefinitionNet indebtedness shows debt inrelation to operating cashflow(‘EBITDAR’). Debt is adjusted netdebt, calculated as net debt, thepension deficit and the net presentvalue of lease obligations.PerformanceNet indebtedness remainedbroadly flat, reflecting a slowerthan expected working capitalimprovement and higher pensiondeficit, offset by cash generatedfrom retail operations (excludingworking capital). Our target for netindebtedness is 2.5 times.246811/1210/1109/1008/0907/0806/07TimesGearing Fixedchargecover DefinitionThe number of times that ouroperating cashflow (‘EBITDAR’)covers our debt obligations (largelyrent and interest payments).PerformanceOur fixed charge cover remainedbroadly flat due to increased rentoffsetting our reduced interest andincrease in operating cashflow(‘EBITDAR’). Our target is a level ofcover in the band of 4 to 4.5 times.08/09 09/10 10/11 11/1274.4%* 54.0% 40.8% 38.4%†DefinitionThe proportion of net assets financed through debt ratherthan equity, calculated as net debt divided by total equity.PerformanceOur gearing continued to decrease, reflecting our stabledebt position despite our investment in assets growing.* Restated for IFRS 2 and IFRIC 13.† Includes Japan.Group strategy: To grow the UK coreUKtradingprofitFOCUSFOR2012/1308/09 09/10£2,309m £2,413m10/11 11/12£2,504m £2,480mUKlike-for-like(inc.VAT,exc. petrol)08/09 09/10 10/11 11/123.0% 2.6% 1.0% 0.0%DefinitionThe growth in sales from stores thathave been open for at least a year.PerformanceHaving delivered a disappointingperformance, particularly during thesecond half, our UK Plan aims to drivestronger like-for-like sales.DefinitionThe profit generated from the UKbusiness in its retail operations.PerformanceHaving delivered a solid first halfprofit outcome, profits weakenedin the second half, reflecting adisappointing sales performanceand the initial investment inimproving the shopping trip forcustomers which we began duringthe second half of the year.76% +10%CustomerratingofoverallshoppingexperienceasexcellentorgoodGrowthinUKonlinesalesFOCUSFOR2012/13DefinitionPercentage of customer ratings,measured in exit interviews.PerformanceThree quarters of customers find theirshopping experience good or excellent,and 98% find it reasonable, good orexcellent. With our UK Plan, we aimto improve customers’ shoppingexperiences from reasonable to goodand from good to excellent.DefinitionThe year-on-year sales growth fromtotal tesco.com and online telecoms.PerformanceWe are pleased with the performanceof our online businesses. Our largestbusiness, grocery, accelerated itsalready strong rate of growththrough the year.Source: Marketing Sciences.30 Tesco PLC Annual Report and Financial Statements 2012

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