Tesco Vs Ocado

EXECUTIVE SUMMARY

The UK retail market is set to increase in size by 15% over the next five years, taking its value to just over £312bn. The retail industry is susceptible to economic and consumer trends (UK Retail Futures 2011: Sector Summary, Datamonitor).

Tesco Plc is the third-largest retailer in the world measured by revenues and the second-largest measured by profits with presence in over 14 countries world-wide. Tesco has a strong brand image and caters to all segments of the market. Even during the economic recession, Tesco showed a sales gain in both its domestic and international markets. The basic earnings per share and the shareholder's return have been steadily increasing over the years and the profits have been booming. All this add up to Tesco being a safe harbour for investors for both long and short term investments.

Ocado Group Plc is a British internet retailer specialising in groceries and has won numerous customer service awards in the UK. The company has a warehouse based model operating from a purpose-built picking centre, purely online without any physical shops. Although Ocado has never been able to make a profit till date, it is a promising long term investment to invest in given the expansion and development plan laid out for Ocado in the future years to come.

The choice of investment on either Tesco Plc or Ocado Group Plc depends on the risk taking appetite of Mighty Investment Ltd. If you are risk adverse, then Tesco is a safe harbour to invest in. If you are a risk taker then Ocado is a good investment for long term. The recommended investment for Mighty Investment Ltd is to invest about 40% in Tesco, 20% in Ocado and 40% in other companies so as to diversify the portfolio.

TESCO PLC

INTRODUCTION

Tesco PLC is a global grocery and general merchandising retailer headquartered in Cheshunt, United Kingdom. It is the third-largest retailer in the world measured by revenues and the second-largest measured by profits. It has stores in 14 countries across Asia, Europe and North America and is the grocery market leader in the UK (where it has a market share of around 30%), Malaysia and Thailand. The chain was founded by Jack Cohen in 1919. Originally a UK-focused retailer specialising in food and drink, it has diversified both geographically and by product, into areas such as clothing, electronics, financial services, telecoms, home, health, car and dental insurance, retailing and renting DVDs, CDs, music downloads, Internet services and software. Tesco's strategy is to appeal to all segments of the market. One plank of this strategy has been Tesco's use of its own-brand products, including the upmarket "Finest", mid-range Tesco brand and low-price "Value" encompassing several product categories such as food, beverage, home, clothing, Tesco Mobile and financial services.

MERITS OF INVESTING

1. Tesco won Retailer of the Year 2008 at the "World Retail Awards" thus securing commercial standing within the global market. This can be used for marketing campaigns to drive advantage towards the demographic base for future growth and sustainability.

2. In an atmosphere where the global retail sales are depicting decline, Tesco has shown a sales increase of 13% in UK market and 26% growth in international markets.

3. Statistics suggest TESCO is the third largest global grocer which indicates a level of buying power to ensure mainstream economies of scale.

4. The development of Tesco Direct through online and catalogue shopping will grow the use of technology, providing the launch pad for larger non food based products with moderate to high margin returns and less focus on sales and margin per foot return to space.

5. Tesco has a powerful brand combined with a reputation for value, low prices and for being customer focused.

6. Tesco has a good range of products, including own label products which helped strengthen profits for the group.

7. Aggressive overseas expansion has helped to keep profits high.

8. Tesco developed different formats for shopping - convenience, metro, express and superstores. It has been the best retailer for format delivery and obtaining some of the best retail positions.

9. The high level of sophistication by understanding the consumers through IT and research and development has helped Tesco to remain leader within the UK market.

10. The organisation has a diversified product portfolio, which includes telecommunications, finance, insurance, which provides cross and up sell opportunities to customers.

DEMERITS OF INVESTING

1. TESCOs position as a price leader in UK markets can lead to reduced profit margins in order to retain the key price points on must have commercial items.

2. Grocer outlets are not set up to operate as specialist retailers in specific areas of product which can be capitalised on by other smaller bespoke retailers.

3. Tesco's non-essential and mid to high ticket price items may suffer from the rising cost of living and lower disposable incomes.

4. Rising raw material costs from both food and non food will impact profit margins overall.

5. Changes to consumer buying behaviours require further analysis - as technology develops consumer buying patterns change which will result in product areas requiring evaluation.

6. For TESCO there is a persistent threat of takeover from the market leader Wal-Mart who has both means and motive to pursue such action.

7. Due to the 'credit crunch', lower available income will impact and strategic focus may need to change to lower priced basic products with less focus on higher priced brands suggesting a switch in price architecture.

8. Exporting restrictions on some non food product areas will reduce margin rates on products with already low margins.

OCADO GROUP PLC

INTRODUCTION

Ocado is a British Internet retailer specialising in groceries, headquartered in Hatfield Hertfordshire, England. Although an independent business, Ocado is partly owned by the John Lewis Partnership pension fund. The limited company was founded in January 2002 by Jonathan Faiman, Jason Gissing and Tim Steiner, former Goldman Sachs merchant bankers. Ocado has won numerous customer service awards in the UK, but has never