1. Masters Programmes
Assignment Cover Sheet
Submitted by: 1557875
Module Title: Financial Analysis for Management
Module Code: IB910Z
Date/Year of Module: Spring Term 2016
Submission Deadline: 13/04/2016
Word Count: 2000 / 688 (Section A / B)
Number of Pages: 27
Question: Section A and Section B Question B2
“This is to certify that the work I am submitting is my own. All external references
and sources are clearly acknowledged and identified within the contents. I am aware
of the University of Warwick regulation concerning plagiarism and collusion.
No substantial part(s) of the work submitted here has also been submitted by me in
other assessments for accredited courses of study, and I acknowledge that if this
has been done an appropriate reduction in the mark I might otherwise have received
will be made.”
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EXECUTIVE SUMMARY
This report focuses on financial analysis of Greggs’ performance in comparison with
Ocado, the online grocery retailer, over the last five years (2011-2015). As to provide
accurate interpretations for informed decision in respect of the company’s future marketing
plan and reorganisation.
The analysis is structured on the basis of CORE approach and showing that Greggs
is overall in a good financial health. Although the profit margin has once slumped, the
change of company’ strategy has received positive feedback and resulted in significant
growth since 2014.
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INTRODUCTION
Established as a single bakery store in 1951 by John Gregg, the family business
started to grow in the hands of the son, Ian Gregg, by acquiring local bakeries since 1964.
While continuing its expansion, Greggs also built reputation on its good quality. The
company was first on the London Stock Exchange in 1984.
Confronted competitions in 1990s, Greggs kept focusing on maximum freshness and
quality of food as competitive advantage. By 2000s, invested in a large technical centre
has put up its research ability in improving exist products and developing new recipes.
Nowadays, Greggs has more than 1671 shops across the UK, operating by 12 regional
bakeries (planning to close 3 recently for future development), 2 distribution centres, and
2 centres of excellence. The company is looking forward to further expansion by
transforming from a bakery chain to a modern food-on-the-go retailer, with diversified
products under healthier concept.
This analysis aims not only for the purpose of Greggs’ future development, but also
evaluating the result of its transformation through the financial figures and ratios change in
the past five years.
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CONTEXT-EXTERNAL
PEST Analysis
l Political
Healthy eating policies raised by the UK government could potentially affect food
industries and consumers’ behaviour.
l Economical
The UK’s recovering economy might increase consumers’ willingness to pay more for
better food quality with possibly higher disposable income. Which is a factor urging the
company’s transformation.
l Social
With health consciousness rising, consumers are changing their favour to healthier
food products, like salads and soups instead of sausage rolls and pasties.
l Technological
Advanced technologies could benefit Greggs by increasing efficiency and accuracy in
production and distribution.
Porter’s Five Forces
l Competitive Rivalry
Competitions come from various positions due to diversified products. It is highly
competitive to operate well against the other resourceful chains.
l Buyer’s Power
Most of the products can be easily replaced by similar choices provided by competitors,
which means the bargaining power of customers is quite high with many alternatives.
l Supplier’s Power
Greggs is likely to have strong bargaining power towards suppliers with its business
size. Therefore, the power of suppliers is relatively low.
l Substitute Product
With many supermarkets, bakeries, coffee shops providing similar products, the
substitution level could be very high.
l New Entrants
As a very competitive market and already has many dominant players. The threat of
new entrants could be considered fairly low since the bar of entrance is beyond reach.
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CONTEXT-INTERNAL
Business Model and Expansion
As a business built up by acquisitions, reaching a coherent standard is an important
but challenging task. Greggs invested considerable resources in technology and process.
The success of vertically integrated supply chain, from production to distribution and final
retailing, which are usually well located, allows the company to provide daily fresh made
foods to customers with high quality but affordable prices. Greggs’ newest target is to enter
Northern Ireland market. Start from a planning ‘flagship’ store in Belfast city centre, up to
50 stores are expected in the future across Northern Ireland.
Marketing Strategy and Transformation
From 2014, the company started working on transforming to a food-oh-the-go retailer
from a traditional bakery chain. The reorganization plan includes closing few regional
bakeries and reinvest them into centre of excellence, to develop comprehensive product
lines for target market. Furthermore, in order to provide better shopping experience.
Greggs’ has been refitting stores and centralizing bakery facilities step by step, which also
creating more efficient operations.
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OVERVIEW
2011 2012 2013 2014 2015
Turnover 701,088 734,502 762,379 803,961 835,749
Cost of Sales (272,778) (285,748) (307,598) (315,797) (305,116)
Gross Profit 428,310 448,754 454,781 488,164 530,633
Operating Profit (=EBIT) 60,431 53,293 33,358 49,568 73,113
Profit after Tax (=Net Income) 44,503 40,567 24,189 37,556 57,600
Dividends (18,286) (19,406) (19,582) (19,570) (43,714)
Retained Profit 26,217 21,161 4,607 17,986 13,886
ROCE (%) 26.49 21.41 13.18 18.58 26.28
Profit Margin (%) 6.35 5.52 3.17 4.67 6.89
EBITDA Margin (%) 13.02 11.67 8.75 10.84 13.55
Total Assets 309,000 328,357 333,798 368,936 384,247
Total Liabilities (110,617) (101,567) (97,621) (122,233) (117,973)
Shareholders Funds (Equity) 198,383 226,790 236,177 246,703 266,274
Operating Cash Flow 72,184 57,287 73,324 96,540 103,721
Table-1 Key Financials of Greggs
For the bakery giant, 2013 is a meaningful turning point. Strong competitions had
made its profit decline to the lowest point. However, Greggs responded with new strategy
to transform towards food-on-the-go market. The serial changes including business model,
operations, and product portfolios have reflected on the company’s profit margin with
significant improvement. Additionally, its sufficient operating cash flow states the company
has enough cash to support these activities and pay out dividends to reward shareholders.
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FINANCIAL ANALYSIS
Profitability
Return on Capital Employed (ROCE) is a key indicator to measure business
performance by comparing the profit before interest and tax deduction with the capital
invested to generate this profit. It tells how effective company utilising resources. Profit
margins, defined as net income to net sales, are presented to show whether the profits are
actually growing along with revenue.
Greggs’ ROCE hit to the bottom in 2013, and rose up in two consecutive years till 2015.
Same pattern is also found in its profit margin, suggesting that Greggs’ profit might be
affected by severe competitions from rivals. But the company’s transformation based on
new target market had successfully brought it back. Overall, the company has shown its
capability of generating profit and adaptability to fast moving market.
On the other hand, Ocado has been struggling with its profit before 2013 but started
to turn better afterwards with positive but minor net income.
Figure-1 ROCE of Greggs and Ocado
Figure-2 Profit Margins of Greggs and Ocado
26.49
21.41
13.18
18.58
26.28
0.41 0.91 -0.8
4.4 5.41
-10
0
10
20
30
2011 2012 2013 2014 2015
ROCE (%)
Greggs Ocado
6.35 5.52
3.17
4.67
6.89
-0.08 -0.35
-1.58
0.77 1.07
-5
0
5
10
2011 2012 2013 2014 2015
Profit Margin (%)
Greggs Ocado
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Working Capital
Stock days, debtor days, and creditor days, are the average time of how quick a
business turns its stock to revenue, receives payments and pays to trade suppliers. They
are put into daily context in order to be more specific.
2011 2012 2013 2014 2015
Stock & WIP (=Inventories) 14,274 17,658 15,405 15,290 15,444
Cost of Sales (272,778) (285,748) (307,598) (315,797) (305,116)
Stock Days 19.10 22.56 18.28 17.67 18.48
Trade Debtors 1,119 4,750 5,331 7,311 9,496
Turnover 701,088 734,502 762,379 803,961 835,749
Debtors Days 0.58 2.36 2.55 3.32 4.15
Trade Creditors (37,346) (36,390) (36,152) (40,865) (42,405)
Cost of Sales (272,778) (285,748) (307,598) (315,797) (305,116)
Creditors Days 49.97 46.48 42.90 47.23 50.73
Table-2 (a) Working Capital of Greggs
2011 2012 2013 2014 2015
Stock Days 12.63 13.55 16.02 15.84 14.90
Debtors Days 7.24 4.36 10.64 3.69 9.66
Creditors Days 44.81 46.47 35.52 35.18 31.69
Table-2 (b) Working Capital of Ocado
An average 20-day of stock days may be a little higher than expected as Greggs’ pride
of freshness. Nevertheless, it is justifiable as its centralising business model would require
more ingredient stocks in regional bakeries and distribution centres to maintain the supply.
Considering most of the transactions are paid by cash, the debtor days are kept relatively
short as typical cash business, and increased popularity of credit card payments could
result in the upward trend. Ocado, as an online grocery retailer, debtor days are slightly
higher due to the payments are taken through online transaction. The company also
performs very efficiently with short stock days.
Ideally, creditor days greater than debtors is a good sign for business for the reason
of cash. Long periods of creditor days for both companies could be regarded as an
approach to maximise cash in hands by prolonging the time for obligated payments. Being
the most powerful food chain and online grocery in the UK. They could take advantage of
the bargaining power over their suppliers with high volume trades. However, long creditor
days sometimes can also imply the business is having difficulty in sufficing payments with
cash turnover problem.
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Liquidity
Current ratio is current asset divided by current liabilities, to show whether a business
is able to pay off its obligations at the moment. Considering the fact that inventories are not
guaranteed to turn into revenue immediately. By further deducting the inventories from
current asset, quick ratio can be more accurate to measure a company’s paying ability.
2011 2012 2013 2014 2015
Current Asset 55,447 63,956 64,989 101,496 86,006
Current Liabilities (80,893) (79,415) (80,716) (102,119) (106,035)
Current Ratio 0.69 0.81 0.81 0.99 0.81
Current Asset 55,447 63,956 64,989 101,496 86,006
Stock & WIP (=Inventories) 14,274 17,658 15,405 15,290 15,444
Current Liabilities (80,893) (79,415) (80,716) (102,119) (106,035)
Quick Ratio 0.51 0.58 0.61 0.84 0.67
Table-3 (a) Liquidity of Greggs
2011 2012 2013 2014 2015
Current Ratio 1.45 1.17 1.13 0.88 0.70
Quick Ratio 1.31 1.03 0.98 0.71 0.54
Table-3 (b) Liquidity of Ocado
The ratio below 1 generally means an ill financial health. But it is less meaningful
without appropriate context and other figures. With good profitability and steady cash flow
as Greggs, the unusually low liquidity can be associated with long creditor days, justifying
the assumption of the approach to maximise cash flow for company discussed in previous
section. Ocado, on the other hand, has higher liquidity ratios. But while company’s
performance turned up since 2014, the ratios dropped below 1 as well. The similar scenario
like Greggs, but deserves more awareness since its profit margins are significantly lower
in comparison with Greggs.
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Solvency
Interest coverage ratio defines how many times over a company to cover its current
interest payment. Gearing ratio is a measurement of a business’ leverage, total debt to
equity is adopted among various definitions in this report.
2011 2012 2013 2014 2015
Operating Profit (=EBIT) 60,431 53,293 33,358 49,568 73,113
Interest Paid - - (182) - -
Interest Coverage Ratio - - 183.29 - -
Long Term Debts - - - - -
Short Term Loans - - - - -
Total Debts - - - - -
Shareholders Funds (=Equity) 198,383 226,790 236,177 246,703 266,274
Gearing Ratio - - - - -
Table-4 (a) Solvency of Greggs
2011 2012 2013 2014 2015
Interest Coverage Ratio 0.21 0.75 0.26 1.72 2.21
Gearing Ratio 0.64 0.69 0.67 0.79 0.71
Table-4 (b) Solvency of Ocado
No debts to pay, suggesting the funds for Greggs’ investing activities are all from
shareholders’ funds and retained profit instead of borrowed. This also reflects on interest
coverage ratio that the company has no interest to pay except 2013, which is still well
covered by its profit. Showing Greggs’ stability in operations and capable of sufficing
investments for future growth.
In contrast, Ocado’ interest cover ratios stand above 1 after 2014, but barely higher
than 1.5, the generally considered minimum for good financial health. Corresponding to the
fact that though Ocado’s profitability is growing but still poor, and consequently, not
generating sufficient profit to cover its interest expenses. Its gearing ratios also indicates a
certain level of funds are borrowed capital.
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Shareholders’ View
In financial performance, net profit is more related to shareholders’ perspective while
operating profit is more in relation to all investors. Thus, Return on Equity (ROE) derived
from net income to equity, would be an ideal measurement for shareholders’ evaluation.
2011 2012 2013 2014 2015
Profit after Tax (=Net Income) 44,503 40,567 24,189 37,556 57,600
Shareholders Funds (=Equity) 198,383 226,790 236,177 246,703 266,274
ROE (%) 22.43 17.89 10.24 15.22 21.63
Profit after Tax (=Net Income) 44,503 40,567 24,189 37,556 57,600
Ordinary Share Issued (th shares) 101,160 101,160 101,160 101,160 101,160
EPS (p) 44 40 24 37 57
EPS Growth (%) 18.90 (8.84) (40.37) 55.26 53.37
Share Price (p) 506 456 439 732 1314
P/E Ratio 11.50 11.37 18.36 19.72 23.08
Dividends Paid (18,286) (19,406) (19,582) (19,570) (43,714)
Ordinary Share Issued (th shares) 101,160 101,160 101,160 101,160 101,160
Dividend per Share (p) 18 19 19 19 43
Dividend Payout Ratio 0.41 0.48 0.81 0.52 0.76
Table-5 (a) Shareholders’ View of Greggs
2011 2012 2013 2014 2015
ROE (%) (0.29) (1.17) (6.18) 3.35 4.88
EPS (p) (0.09) (0.41) (2.12) 1.24 2.00
EPS Growth (%) - - - - 61.64
P/E Ratio (994.76) (181.79) (193.18) 262.34 181.54
Dividend per Share (p) - - - - -
Dividend Payout Ratio - - - - -
Table-5 (b) Shareholders’ View of Ocado
Figure-3 ROE of Greggs and Ocado
The changes of ROE are similar to ROCE and profit margin in profitability section,
demonstrating the performance of two companies. They are also closed to the fluctuation
of share price in Figure-4.
22.43
17.89
10.24
15.22
21.63
-0.29 -1.17
-6.18
3.35 4.88
-10
0
10
20
30
2011 2012 2013 2014 2015
ROE (%)
Greggs Ocado
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Figure-4 (a) Share price change of Greggs over 5 years (2011-2016)
Figure-4 (b) Share price change of Ocado over 5 years (2011-2016)
P/E ratio calculates a company’s current share price relative to its Earning per Share
(EPS). It helps potential investors to evaluate whether to invest in the company and for
shareholders, whether to realise their investments. An extremely high number may not be
attractive enough, but it is showing shareholders’ high expectation on investing company’s
future growth. Which can explain Ocado’s P/E ratios in 2014 and 2015. On the other hand,
Greggs’ growing profits can justify its upward share price and retain P/E ratios from waving
to high. An indication of stability and profitability for a sophisticated business.
Dividend policies can vary from different stages at which companies are. Dividend
payout ratio, the ratio of Dividend per Share (DPS) to EPS, is showing how much earning
is given back to shareholders, and how much is kept as retained profit for reinvestment,
payments, or cash reserved. As a matured company with steady performance, Greggs has
been constantly paying dividends around 20p per share every year. When the company
performed well with increasing EPS, the dividends also rose to 43p as a record high. It is
delivering a strong message to shareholders regarding positive prospect. Worth noted, in
2013, the poorest performance ended up with the peak ratio. Meaning even though the
slumped earning for that year, Greggs still paid approximately same amount of dividends
to prevent shareholders from disappointment, and therefore, causing the high ratio. In
consideration that Ocado is still at growing stage, it is understandable for the company to
preserve profit for expansion instead of paying small amount of dividends.
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EVALUATION
Although P/E ratio is widely used as an evaluation tool for investment, it is actually
incapable of providing further information besides whether the investment is worthy. There
is other way to provide shareholders a more substantial measurement such as net present
value and dividend yield. Aside from dividend payout ratio, delivering a whole picture of
business development. Dividend yield, calculating DPS over share price, is more
specifically pointing out the cash return rate on investment.
To conclude, from observing company’s dividend policy, not only profitability, but also
the possible future movement of business can be acquired. Moreover, as dividend is paid
in cash, the figure can also be used to measure business’ cash flow status. In other words,
the decision making of either how business give out dividends or why choose not to would
have great influence on share price change. As it comprises sufficient information in every
aspect as long as interpreted within appropriate context.
Based on the analysis, Ocado demonstrates its great potentiality of future growth, but
instability performance of last five years still remains to be reversed. As for Greggs, it shows
an overall healthy financial status. The company utilises its cash from operation effectively
in reinvestment and contenting shareholders. The steady and ample profit retained would
also be supportive of any activities for development.
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REFERENCES
l Atrill, P. & McLaney, E. 2015, Accounting and Finance for Non-Specialists (Ninth
Edition), Pearson, Harlow.
l BBC News, 2014, Greggs Shares Fall 9% after Profits Drop, BBC News, 26
February 2014.
Available at: http://www.bbc.co.uk/news/business-26351756
l BBC News, 2016, Greggs to Close Three UK Bakeries, Including Edinburgh, BBC
News, 1 March 2016
Available at: http://www.bbc.co.uk/news/uk-scotland-scotland-business-35695591
l Campbell, J. 2016, Greggs Confirms Plans to Open up to 50 Stores in Northern
Ireland, BBC News, Northern Ireland, 23 February 2016.
Available at: http://www.bbc.co.uk/news/uk-northern-ireland-35645146
l Fame.
l London Stock Exchange.
l Greggs 2015 Annual Report, 30 March 2016.
Available at: https://corporate.greggs.co.uk/results-centre
l Greggs’ Share Price, Google Finance.
Available at:
https://www.google.co.uk/finance?q=LON%3AGRG&ei=YDz9VoGRJIi9U_21kfAN
l Ocado Group PLC 2015 Annual Report, 2 February 2016.
Available at: http://results15.ocadogroup.com/
l Ocado’ Share Price, Google Finance.
Available at: https://www.google.co.uk/finance?cid=11353934
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[A]
The Breakeven Point (BEP) is to determine the minimum sales number when a
company covers all the cost (fixed and variable) and starts to making profit.
F$2 =
T.U*N #38-8
V/.- 2+.C* − W,+.,<6* #38-8
=
KM???? + >?????
>?? − (YM + >?? ∗ ?. ?M)
= [???
The fixed cost consists of manufacturing (£350,000) and advertising (£100,000).
Divide it by the gross profit of each product sold (subtract variable costs from unit price).
The result indicates the company have to sell at least 9,000 bags to cover all the costs,
under the premise that production capacity does not exceed 12,000 bags.
[B]
F$243+ .0S #,),C.-J =
M????? + >?????
>?? − (YM + >?? ∗ ?. ?M)
= >]???
Due to the demand of enhancing capacity, the fixed cost of manufacturing has to add
up additional £150,000, which make it rise to £500,000 in total. The advertising costs and
variable remain unchanged. The calculation shows the company will have to sell another
3,000 bags to cover the increased fixed cost. That makes the new breakeven point come
to 12,000 bags.
This means when the production reach over 12,000 bags (exclude 12,000), the
company’s total gross profit would start over again just like the range between 9,000 to
12,000, but with more potentiality of growth (refer to Figure-1).
Figure-1 BEP and Profit
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[C]
According to the market research survey, 10% reduction in the selling price will result
in 25% increase in sales. The evaluation for whether price reduction should be
implemented would be conducted on the basis of existing sales level.
F$2 43+ £[? =
KM???? + >?????
[? − (YM + [? ∗ ?. ?M)
= >>>>>. > => >>>>]
>. ]M` = >>>>] ` = aaa[. L => aa[?
>. ]M` = >]??? ` = [L??
First of all, assuming the original sales number is X, the new sales number with 10%
price reduction can be presented as 1.25X. Then, recalculate BEP again with reduced price,
£90, a result as 11,112 bags can be obtained. Set 11,112 equals to 1.25X, the original sales
X would be 8,890 bags. Since this number is below the BEP for original price, adopting
reduced price would be better off for the company. Secondly, 9,600 bags could be reached
by reversing the capacity threshold 12,000 bags for new price and new sales volume. The
upper limit for not exceeding current capacity after price reduction.
In consideration of pushing production capacity over 12,000 bags. The new BEP would
be 14,815 bags. Reverse it back to original sales number, 11,852 bags, which is below the
original BEP for the capacity over 12,000. Under this circumstance, reducing price and
increasing sales seems to be not appropriate. Finally, convert 12,000 sales from original
price to 15,000 bags for new price, it is clear to see a more profitable result with new price
since 15,000 is much more than the new BEP level.
F$2 43+ £[? ,/N .0S #,),C.-J =
M????? + >?????
[? − (YM + [? ∗ ?. ?M)
= >Ya>Y. a => >Ya>M
>. ]M` = >Ya>M ` => >>aM]
` = >]??? >. ]M` = >M???
In conclusion, the combination result indicates the decision of whether to reduce
selling price by 10% should be separated into 4 scenarios:
1. If the original sales number is under 8,890, the company will lose money in either
option. However, the loss would be lower with reduced price and increased sales.
2. If the original sales number is between 8,890 to 9,600, the strategy of price reduction
should be implemented as it could bring more profit for the company.
3. If the original sales number is between 9,600 to 12,000, keep the original price would
make the company most profitable.
4. If the original sales number is over 12,000, the company should reduce selling price
to £90, which is the better off option in terms of profit.
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[D]
Pricing strategy will not only fluctuate the sales number, but also affect the the position
of product and its brand value. With the same product specification, a more affordable price
usually has better penetration ability to market. But it will also lower the perception value
of the product and even the brand value in consumers’ mind. On the other hand, like most
of luxury brands, relatively higher prices could maintain their images of high-end product.
Which is the most important part for these brands in respect of brand value.
In addition, learning curve of manufacturing new product is another key factor should
be taken into consideration. Any new designs, fabrics or technologies used will potentially
make manufacturing new product begins with a higher variable cost. And then gradually
decrease with the more volume produced. The prediction of learning curve on the basis of
previous experience will help the company to decide its price strategy.
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Table of Contents
Section A ........................................................................................................................ 2
EXECUTIVE SUMMARY ................................................................................................ 3
INTRODUTION............................................................................................................... 4
OVERVIEW..................................................................................................................... 5
CONTEXT-EXTERNAL................................................................................................... 6
CONTEXT-INTERNAL.................................................................................................... 7
FINANCIALANALYSIS ................................................................................................... 8
Profitability................................................................................................................... 8
Working Capital........................................................................................................... 9
Liquidity ..................................................................................................................... 10
Solvency.....................................................................................................................11
Shareholders’ View ................................................................................................... 12
EVALUATION................................................................................................................ 14
REFERENCES ............................................................................................................. 15
APPENDIX.................................................................................................................... 16
Greggs PLC .............................................................................................................. 16
Ocado Group PLC..................................................................................................... 20
Section B ...................................................................................................................... 24
QUESTION [A] [B]......................................................................................................... 25
QUESTION [C].............................................................................................................. 26
QUESTION [D].............................................................................................................. 27](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)