SAINSBURY Vs TESCO

SAINSBURYS STRATEGIC
RECOVERY PLAN

SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

TABLE OF CONTENTS

1.

INTRODUCTION ------------------------------------------------------------------------------------------------------------ 2

2.

COMPETITIVE ANALYSIS OF SAINSBURY & TESCO FINANCIAL POSITIONS ----------------------- 2

i.

Sainsburys Financial and Competitive Position ----------------------------------------------------------------------- 2

ii.

Financial Analysis Sainsbury ------------------------------------------------------------------------------------------- 5

iii.

Financial Analysis Tesco ------------------------------------------------------------------------------------------------ 7

iv.

Sainsbury SWOT Analysis ------------------------------------------------------------------------------------------------- 9

PROPOSED SAINSBURYS RECOVERY PLAN-------------------------------------------------------------------- 10

3.
i.

Investment Strategies for Recovery -------------------------------------------------------------------------------------- 10

ii.

Key Financials Underpinning Investment Strategies ------------------------------------------------------------------ 10

iii.

Resources Required to Implement Investment Strategies ------------------------------------------------------------- 11

4.

KEY FINANCIAL PROJECTIONS ------------------------------------------------------------------------------------- 11

i.

Summary of Sainsburys Key Financials Post Recovery ----------------------------------------------------------- 11

ii.

Impact of Investment Strategies on Sainsburys Key Financials ---------------------------------------------------- 11

5.

INVESTMENT APPRAISAL OF INVESTMENT PROJECTS --------------------------------------------------- 11

i.

Summary of Investment Strategy ----------------------------------------------------------------------------------------- 11

ii.

Investment Appraisal ------------------------------------------------------------------------------------------------------ 13

6.

SOURCES OF FINANCE AND THE COST OF CAPITAL -------------------------------------------------------- 14

i.

7.

Sainsburys Investment Funding Plan and Revised Capital Structure ---------------------------------------------- 14

RISK ASSESSMENT ------------------------------------------------------------------------------------------------------- 14

i.

Identified Risks and Impact on Sainsburys Cost of Capital --------------------------------------------------------- 14

Page 1 of 15

SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

1. INTRODUCTION

Sainsbury and Tesco are two largest grocery retail chains primarily operating in United Kingdom.
Sainsbury, once the market leader, has gradually lost its market share to Tesco over time and Tesco
has now emerged the market leader in grocery retail industry. In this assignment, I am required to
analyze Sainsbury and Tescos financial and competitive positions by doing strategic and financial
statement analysis for the last five years. On the basis of such analysis, I am required to propose a
strategic recovery plan for Sainsbury, outlining key investment strategies to be undertaken, evaluating
proposed investment strategies to be undertaken and identifying the risks involved therein and also
evaluating the impact of such investment strategies on Sainsburys financial and competitive position.
In this assignment, I have used various tools and techniques available for such financial and
competitive analysis, including but not limited to Value Chain Analysis, Porters Five Forces Model,
BCG Growth Matrix and traditional financial statement and ratio analysis. I wouldnt have been able
to produce following structured analysis and propose recovery strategies had I not utilized such tools
and techniques of financial and competitive analysis.

2. COMPETITIVE ANALYSIS OF SAINSBURY & TESCO FINANCIAL POSITIONS

i.

Sainsburys Financial and Competitive Position

Over the last five years, Sainsbury has been noticeably different and lagging behind Tesco on number
of fronts and consequently such factors had contributed towards its downfall. A summary of such
differences is outlined below.
Low Profitability Relative to Tesco
Over the last five years, Sainsbury has been living on relatively low operating profit margins due to
number of factors. Major ones are concentration on low margin products, inefficiencies in controlling
costs and lack of value added through suppliers chain. As shown by the following graphs, Sainsbury is
lagging behind Tesco in EBITDA margin and net profit margin.

Page 2 of 15

SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

EBITDA Margin

EBIT Margin

9.0%

6.0%

8.0%

5.0%

7.0%

4.0%

6.0%

3.0%

5.0%
2.0%
4.0%
1.0%

3.0%

0.0%

2.0%
1.0%

-1.0%

0.0%

-2.0%
2001A

2002A

2003A

Tesco

2004A

2005A

2001A

2006A

2002A

2003A

Tesco

Sainsbury

2004A

2005A

2006A

Sainsbury

Such low profitability has also resulted in relatively low return on invested capital and return on equity
ratios despite not many differences in the utilization of capital and use of leverage.

Return on Invested Capital

Return on Equity

12.0%

20.0%

10.0%

15.0%
8.0%

10.0%

6.0%
4.0%

5.0%

2.0%

0.0%
0.0%
-2.0%

-5.0%
2001A

2002A

2003A

Tesco

2004A

2005A

2001A

2006A

2002A

2003A

Tesco

Sainsbury

2004A

2005A

2006A

Sainsbury

Low Sales Growth Relative to Tesco

Another factor that has contributed to the downfall of Sainsbury over the last few years is its low sales
growth relative to Tesco as shown by the following graph.

Page 3 of 15

SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

Despite high sales growth of Tesco in Asia, the major sales growth contribution of Tesco has come
from UK alone. The following charts can better present the Tescos sales growth contribution story.

GEOGRAPHICAL SALES MIX - TESCO

90%

88%

85%

82%

80%

Tesco's Geographical Weighted Sales Grow th

13.3%

14.0%

80%

80%
12.0%

70%
10.0%

60%

8.0%

40%

6.0%

30%
20%
10%

7.7%

7.8%

50%

8%
4%

9%
6%

4.0%

11%

10%
8%

9%

11%
9%

6.4%
2.8%
2.1%

2.7%

2.6%
2.1%

1.4%

2.5%

1.1%

2.0%
0.0%

0%
2002

2003
UK

2004
Rest o f
Euro pe

2005

2003

2006

Tesco
UK

A sia

2004

2005
Tesco
Rest o f
Euro pe

2006
Tesco
A sia

A number of factors have contributed to such low sales growth of Sainsbury. The major ones are high
payout ratios, non-responsiveness to Tescos convenient stores strategy and complacent / risk averse
attitude towards growth strategies.

Page 4 of 15

SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

ii.

Financial Analysis Sainsbury

SAINSBURY
2001A

2002A

2003A

2004A

2005A

2006A

Liquidity
Current ratio
Acid test ratio

0.74
0.46

0.55
0.43

0.47
0.51

0.30
0.34

0.20
0.36

0.68
0.48

Profitability
EBITDA margin
EBIT margin
Net profit margin
Return on invested capital
Return on equity

5.9%
3.3%
2.3%
6.5%
7.2%

5.8%
3.7%
2.2%
6.1%
7.3%

6.6%
3.8%
1.9%
4.1%
5.0%

6.6%
3.6%
1.9%
3.8%
5.0%

3.8%
-1.1%
-1.2%
-1.9%
-4.5%

4.3%
1.4%
0.4%
2.0%
1.5%

Efficiency
Operating capital turnover
Invested capital turnover
Receivable turnover (days)
Inventory turnover (days)
Payable turnover (days)

2.55
2.53
13
21
57

2.63
2.59
9
20
57

1.92
1.92
8
26
73

1.81
1.80
10
24
69

2.42
2.43
8
16
60

2.54
2.53
6
16
58

Growth
Sustainable growth rate
Sales growth (YoY)
Earnings per share growth (YoY)
Dividend per share growth (YoY)

0%
0.0%
0.0%
0.0%

2%
7.5%
3.6%
3.7%

2%
-17.8%
-29.0%
4.5%

1%
2.4%
2.7%
0.7%

0%
5.3%
-178.2%
-3.7%

3%
6.5%
-130.9%
-48.7%

21.3%
0.27
6.91

23.3%
0.30
12.80

28.3%
0.39
8.98

32.4%
0.48
8.70

34.3%
0.52
(1.95)

38.5%
0.62
1.82

94%
14.19
15.02
256.89

77%
14.72
19.16
262.41

65%
15.38
23.64
271.59

76%
15.49
20.28
278.88

92%
14.92
16.16
241.66

-136%
7.66
(5.61)
228.52

Financial Risk
Gearing ratio
Debt-equity ratio
Interest coverage ratio
Investment Ratios
Dividend payout ratio
Dividend per share (Pence)
Earnings per share (Pence)
Book value per share (Pence)

Page 5 of 15

SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

SAINSBURY FINANCIAL STATEMENTS

Income Statement
Sales (excldg. VAT)
Cost of goods sold
Gross profit
Selling & general expenses
EBITDA
Depreciation & Amorization
EBIT
Interest expense, net
Other net income
Profit before tax
Taxes
Net profit
Items recognized directly in equity
Comprehensive income b4 discont. Ops.
Discontinued operations
Comprehensive income after discont. Ops.

Balance Sheet
Cash
Accounts receivable
Inventories
Other net current assets
Total current assets

2001A

2002A

15,954
(13,089)
2,865
(1,918)
947
(422)
525
(76)
67
516
(157)
359
10
369
(79)
290

2001A

17,154
(13,982)
3,172
(2,169)
1,003
(376)
627
(49)
(5)
573
(200)
373
(1)
372
(1)
371

2002A

2003A
14,104
(11,386)
2,718
(1,781)
937
(398)
539
(60)
(8)
471
(206)
265
(4)
261
197
458

2003A

2004A
14,440
(11,512)
2,928
(1,981)
947
(425)
522
(60)
17
479
(206)
273
(10)
263
131
394

2004A

2005A

GBP Millions
2006A

15,202
(12,765)
2,437
(1,861)
576
(748)
(172)
(88)
22
(238)
51
(187)
87
(100)
375
275

2005A

16,061
(13,180)
2,881
(2,183)
698
(470)
228
(125)
1
104
(46)
58
(154)
(96)
(96)

GBP Millions
2006A

998
563
763
(713)
1,611

999
417
751
(878)
1,289

1,209
310
800
(1,211)
1,108

771
394
753
(1,233)
685

796
319
559
(1,237)
437

1,080
276
576
(411)
1,521

(2,058)
(127)
(2,185)

(2,200)
(140)
(2,340)

(2,274)
(98)
(2,372)

(2,191)
(85)
(2,276)

(2,093)
(125)
(2,218)

(2,094)
(154)
(2,248)

(574)

(1,051)

(1,264)

(1,591)

(1,781)

(727)

8,979
(2,764)
6,215

9,882
(2,976)
6,906

10,648
(3,108)
7,540

11,314
(3,100)
8,214

10,469
(3,393)
7,076

10,741
(3,681)
7,060

278
329
6,248

263
412
6,530

226
860
7,362

208
1,163
7,994

203
773
6,271

191
(194)
6,330

58

93

6,306

6,623

7,336

8,018

6,260

6,353

Interest bearing debt

Derivatives
Interest bearing debt, adjusted

1,346
1,346

1,542
1,542

2,074
2,074

2,599
2,599

2,147
2,147

2,431
12
2,443

Total shareholders' equity (incldg. Minority Int.)

Deferred tax, net
Adjusted equity

4,804
156
4,960

4,909
172
5,081

5,072
190
5,262

5,185
234
5,419

4,112
1
4,113

3,965
(55)
3,910

6,306

6,623

7,336

8,018

6,260

6,353

Accounts payable
Accrued liabilities
Non-interest bearing current liabilities
Operating working capital
Gross property, plant and equipment
Accumulated depreciation
Net property, plant and equipment
Intangible assets
Investment properties
Other net operating assets
Operating invested capital
Other net assets
Total Invested Capital

(26)

24

(11)

23

Liabilities and equity

Page 6 of 15

SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

iii.

Financial Analysis Tesco

TESCO
2001A

2002A

2003A

2004A

2005A

2006A

0.57
0.18

0.62
0.20

0.61
0.16

0.66
0.23

0.62
0.22

0.66
0.24

Profitability
EBITDA margin
EBIT margin
Net profit margin
Return on invested capital
Return on equity

7.8%
5.6%
3.4%
9.2%
13.3%

7.8%
5.6%
3.5%
9.2%
13.8%

8.0%
5.7%
3.6%
8.6%
13.4%

8.1%
5.6%
3.6%
9.1%
12.9%

7.8%
5.6%
4.0%
10.2%
14.8%

7.7%
5.6%
4.0%
10.7%
16.3%

Efficiency
Operating capital turnover
Invested capital turnover
Receivable turnover (days)
Inventory turnover (days)
Payable turnover (days)

2.48
2.40
6
18
58

2.38
2.31
7
18
59

2.14
2.09
9
20
67

2.29
2.24
10
18
66

2.46
2.39
8
19
72

2.62
2.53
8
18
62

Growth
Sustainable growth rate
Sales growth (YoY)
Earnings per share growth (YoY)
Dividend per share growth (YoY)

8%
0.0%
0.0%
0.0%

7.9%
12.7%
14.1%
13.7%

7.7%
9.9%
10.1%
9.8%

7.3%
18.5%
9.8%
9.8%

9.4%
9.9%
21.2%
3.6%

10.3%
6.5%
15.6%
10.8%

Financial Risk
Gearing ratio
Debt-equity ratio
Interest coverage ratio

38.1%
0.62
9.33

41.3%
0.70
8.64

43.2%
0.76
8.24

37.8%
0.61
7.78

35.6%
0.55
14.40

37.5%
0.60
17.31

Investment Ratios
Dividend payout ratio
Dividend per share (Pence)
Earnings per share (Pence)
Book value per share (Pence)

47%
4.90
10.40
78.13

47%
5.58
11.87
85.87

47%
47%
40%
38%
6.12
6.72
6.96
7.71
13.37
12.30
15.67
16.89
97.60 111.48 117.38 123.53

Liquidity
Current ratio
Acid test ratio

Page 7 of 15

SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

TESCO FINANCIAL STATEMENTS

Income Statement
Sales (excldg. VAT)
Cost of goods sold
Gross profit
Selling & general expenses
EBITDA
Depreciation & Amorization
EBIT
Interest expense, net
Other net income
PBT
Taxes
Net profit
Items recognized directly in equity
Comprehensive income b4 discont. Ops.
Discontinued operations
Comprehensive income after discont. Ops.

Balance Sheet
Cash
Accounts receivable
Inventories
Other current assets
Total current assets

2001A

2002A

20,988
(16,877)
4,111
(2,469)
1,642
(476)
1,166
(125)
7
1,048
(327)
721
721
721

2001A

23,653
(19,006)
4,647
(2,791)
1,856
(534)
1,322
(153)
19
1,188
(358)
830
830
830

2002A

2003A
26,004
(20,773)
5,231
(3,143)
2,088
(604)
1,484
(180)
36
1,340
(394)
946
22
968
968

2003A

2004A
30,814
(24,471)
6,343
(3,854)
2,489
(754)
1,735
(223)
59
1,571
(469)
1,102
(157)
945
945

2004A

2005A

GBP Millions
2006A

33,866
(25,296)
8,570
(5,935)
2,635
(734)
1,901
(132)
123
1,892
(539)
1,353
(127)
1,226
(6)
1,220

2005A

39,454
(29,686)
9,768
(6,740)
3,028
(829)
2,199
(127)
159
2,231
(645)
1,586
(243)
1,343
(10)
1,333

2006A

534
322
838
1,694

670
454
929
2,053

638
662
1,140
2,440

1,100
840
1,199
3,139

1,146
769
1,309
3,224

1,325
892
1,464
3,681

Accounts payable
Accrued liabilities
Non-interest bearing current liabilities

(2,684)
(292)
(2,976)

(3,061)
(259)
(3,320)

(3,799)
(230)
(4,029)

(4,456)
(308)
(4,764)

(4,974)
(224)
(5,198)

(5,083)
(464)
(5,547)

Operating working capital

(1,282)

(1,267)

(1,589)

(1,625)

(1,974)

(1,866)

Gross property, plant and equipment

Accumulated depreciation
Net property, plant and equipment

12,683
(3,103)
9,580

14,510
(3,478)
11,032

16,625
(3,797)
12,828

18,197
(4,103)
14,094

18,545
(4,024)
14,521

20,270
(4,388)
15,882

154
8,452

154
9,919

890
12,129

965
13,434

1,408
565
(735)
13,785

1,525
745
(1,211)
15,075

304

317

312

328

396

528

8,756

10,236

12,441

13,762

14,181

15,603

Interest bearing debt

Derivatives
Interest bearing debt, adjusted

3,340
3,340

4,230
4,230

5,377
5,377

5,200
5,200

5,045
5,045

5,388
463
5,851

Total shareholders' equity (incldg. Minority Int.)

Deferred tax, net
Adjusted equity

5,014
402
5,416

5,566
440
6,006

6,559
505
7,064

7,990
572
8,562

8,654
482
9,136

9,444
308
9,752

8,756

10,236

12,441

13,762

14,181

15,603

Intangible assets
Investment properties
Other net operating assets
Operating invested capital
Other net assets
Total Invested Capital
Liabilities and equity

Page 8 of 15

SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

iv.

Sainsbury SWOT Analysis

Strengths

Weaknesses

Brand recognition
Quality products
Presence in USA
Presence in banking sector

Opportunities

Non availability of non-food products

Product range attracting few
communities
Few stores at convenient locations
Relatively high prices of various products
Limited presence out of UK
Lack of strategic alliance with suppliers
Substandard sales growth
Inefficiencies in expense control
Concentration on low margin products
Non-responsiveness to competitors
strategies

Threats

Roll out new products

Enter into new markets
Cater to needs of all communities
Invest in technology to reduce operational
cost

Page 9 of 15

Losing sales to competitors

Flight of key personnel due to low
growth
Entrance of foreign retail chains in UK

SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

3. PROPOSED SAINSBURYS RECOVERY PLAN

i.

Investment Strategies for Recovery

On the basis of above mentioned financial and competitive analysis, I suggest the following strategies
for the recovery of Sainsbury.
Plan A:

Opening of new small (convenient) stores at various locations throughout UK

Plan B:

Entering into new markets like Pakistan, China, India, Brazil and Russia where population
growth along with economic growth is high and one can capture the first mover
advantage.

Plan C:

Rolling out new product stream of big ticket and high margin items and launching
products that catered to the needs of various communities in UK to attract new
customers.

ii.

Key Financials Underpinning Investment Strategies

Plan A:

Plan B:

Plan C:

No. of stores to be opened

1,500

Sales per store per annum ..

GBP 7.5 million

Operating profit margin.

3.5%

Fixed Capital Investment per store

GBP 1.5 million

Total no. of stores to be opened

100 (20 stores in each country)

Sales per store per annum...

GBP 20 million

Operating profit margin.

4.5%

Fixed Capital Investment per store

GBP 4 million

Increase in sales per annum...

GBP 2 million

Operating profit margin

10.5%

Fixed Capital Investment

GBP 0.5 million

Page 10 of 15

SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

iii.

Resources Required to Implement Investment Strategies

Total financial resources required to implement Plan A, Plan B and Plan C is GBP 2,650.5 million.
Plan A requires an initial investment of GBP 2,250 million, Plan B requires an initial investment of
GBP 400 million, whereas Plan C requires an investment of GBP 0.5 million. Since the target debt
ratio (gearing) is set at 40pc keeping in perspective financial flexibility and risk appetite, all
incremental resources are financed in the ratio of 40% debt and 60% equity.

4. KEY FINANCIAL PROJECTIONS

i.

Summary of Sainsburys Key Financials Post Recovery

After implementing the plans A, B and C, Sainsbury key financial would be as follows:
Sales growth...
EBIT Margin..........
Net Profit Margin...

ii.

82.5%
2.4%
1.1%

Impact of Investment Strategies on Sainsburys Key Financials

By implementing investment plans A, B and C, Sainsburys profitability has improved a lot and
sales growth has achieved a significant mark of 82%. Such phenomenal growth, though not
sustainable over the long run, yet, such growth would put Sainsbury on the route of recovery.

5. INVESTMENT APPRAISAL OF INVESTMENT PROJECTS

i.

Summary of Investment Strategy

Plan A: Since Sainsbury started to struggle and losing its market share when Tesco adopted the
aggressive growth strategy of building convenient stores throughout UK, it is vital for Sainsbury to
become more competitive and follow the same strategy of convenient stores to get advantage of
economies of scale that Tesco is enjoying currently.
Page 11 of 15

SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

I suggest that Sainsbury establish 1,500 new convenient stores to attract new customers and to put its
sales on a growth trajectory. Further details of the plan are as follows:
Sales per store per annum ..

GBP 7.5 million

Operating profit margin.

3.5%

Fixed Investment per store

GBP 1.5 million

Plan B: It is vital for Sainsbury to try new markets and capture the benefits of first mover advantage. I
suggest that Sainsbury invest in markets like Pakistan, India, China, Brazil and Russia where
population and economic growth shows an uptrend. Further details of the plan are as follows:
Total no. of stores to be opened

100 (20 stores in each country)

Sales per store per annum...

GBP 20 million

Operating profit margin.

4.5%

Fixed Capital Investment per store

GBP 4 million

Plan C: Another major factor that is affecting Sainsbury is its low profitability that results in relatively
low profit margins and low return on investments. I suggest Sainsbury launch new products that are
big ticket and high margin items and bring in products that cater to the needs of other communities in
UK. Further details of the plan are as follows:
Increase in sales per annum...

GBP 2 million

Operating profit margin

10.5%

Fixed Capital Investment

GBP 0.5 million

Page 12 of 15

SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

ii.

Investment Appraisal

Plan A:
NPV @ 10.0% p.a.
APPRAISAL DATE: 31-Dec-06
OPTION NUMBER & TITLE: Plan A - Opening 1,500 Convenient Stores in UK
GBP Millions

Year 0

CAPITAL COSTS
Plan A

A. Total Capital Costs (Annual)

2,250

2,250

Year 1

Plan A

C. Total Revenue Costs (Annual)

Year 1

Year 7

Year 8

Year 9

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9
10,856 -

- 10,856 - 10,856 - 10,856 - 10,856 - 10,856 - 10,856 -

10,856 -

10,856 -

10,856 -

Year 1

Year 0
-

Year 6

10,856 -

NPV CALCULATION
Net Undiscounted Cash Flow
DISCOUNT FACTOR @ 10% p.a.
ANNUAL NET PRESENT VALUE
TOTAL NET PRESENT VALUE =

Year 5

10,856 -

Plan A

G. Total Income

Year 4

- 10,856 - 10,856 - 10,856 - 10,856 - 10,856 - 10,856 -

Year 0

INCOME

Year 3

Year 10

TOTAL
-

Year 0

CURRENT COSTS

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

54,281
10,856 - 108,563

Year 10

11,250

11,250

11,250

11,250

11,250

11,250

11,250

11,250

11,250

11,250

11,250

11,250

11,250

11,250

11,250

11,250

11,250

11,250

Year 2
394
0.826
325

Year 3
394
0.751
296

Year 4
394
0.683
269

Year 5
394
0.621
244

Year 6
394
0.564
222

Year 7
394
0.513
202

Year 8
394
0.467
184

Year 9
394
0.424
167

TOTAL

10,856 -

11,250

394
0.909
358

Year 10

11,250

Year 1

2,250
1.000
2,250
169

Year 2

2,250
2,250

TOTAL
56,250
112,500

Year 10

TOTAL

394 0.386
152 -

281
757

Plan B:
NPV @ 10.0% p.a.
APPRAISAL DATE: 31-Dec-06
OPTION NUMBER & TITLE: Plan B - Opening 100 New Stores in China, India, Pakistan, Brazil and Russia
GBP Millions

Year 0

CAPITAL COSTS
Plan B

A. Total Capital Costs (Annual)

400

400

Year 1

Plan B

C. Total Revenue Costs (Annual)

Year 0

INCOME
Plan B

G. Total Income

NPV CALCULATION
Net Undiscounted Cash Flow
DISCOUNT FACTOR @ 10% p.a.
ANNUAL NET PRESENT VALUE
TOTAL NET PRESENT VALUE =

Year 0
-

400
1.000
400
153

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

TOTAL
-

Year 0

CURRENT COSTS

Year 2

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

1,910 -

1,910 -

1,910 -

1,910 -

1,910 -

1,910 -

1,910 -

1,910 -

1,910 -

1,910 -

1,910 -

1,910 -

1,910 -

1,910 -

1,910 -

1,910 -

1,910 -

1,910 -

1,910 -

1,910 -

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

2,000

2,000

2,000

2,000

2,000

2,000

2,000

2,000

2,000

2,000

2,000

2,000

2,000

2,000

2,000

2,000

2,000

2,000

2,000

2,000

Year 1
90
0.909
82

Year 2
90
0.826
74

Year 3
90
0.751
68

Page 13 of 15

Year 4
90
0.683
61

Year 5
90
0.621
56

Year 6
90
0.564
51

Year 7
90
0.513
46

Year 8
90
0.467
42

Year 9
90
0.424
38

Year 10
90
0.386
35 -

400
400

TOTAL
9,550
19,100

TOTAL
10,000
20,000

TOTAL
50
59

SAINSBURY Vs TECSO - SAINSBURYS STRATEGIC RECOVERY PLAN

Plan C:
NPV @ 10.0% p.a.
APPRAISAL DATE: 31-Dec-06
OPTION NUMBER & TITLE: Plan C - Launching Big Ticket and High Margin Items
GBP Millions

Year 0

CAPITAL COSTS
Plan C

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

TOTAL
-

1
-

A. Total Capital Costs (Annual)

Year 0

CURRENT COSTS
Plan C

Year 1
-

2 -

Year 2
2 -

Year 3
2 -

Year 4

Year 5

2 -

Year 6

2 -

Year 7

2 -

Year 8
2 -

Year 9
2 -

Year 10
2 -

TOTAL

2 -

9
-

C. Total Revenue Costs (Annual)

Year 0

INCOME
Plan C

2 -

Year 1
2

2 -

Year 2
2

2 -

Year 3
2

2 -

Year 4

2 -

Year 5

2 -

Year 6

2 -

Year 7

2 -

Year 8
2

2 -

Year 9
2

2 -

Year 10
2

18

TOTAL

10
-

G. Total Income

NPV CALCULATION
Net Undiscounted Cash Flow
DISCOUNT FACTOR @ 10% p.a.
ANNUAL NET PRESENT VALUE
TOTAL NET PRESENT VALUE =

Year 0
-

1
1.000
1
1

Year 1
0
0.909
0

Year 2
0
0.826
0

Year 3
0
0.751
0

Year 4
0
0.683
0

Year 5

Year 6

0
0.621
0

0
0.564
0

Year 7
0
0.513
0

Year 8
0
0.467
0

Year 9
0
0.424
0

Year 10
0
0.386
0

6. SOURCES OF FINANCE AND THE COST OF CAPITAL

i.

Sainsburys Investment Funding Plan and Revised Capital Structure

Total investment required to implement Plans A, B and C is GBP 2,650.5 million. Since 40% is to be
financed with debt and rest with equity, I dont suggest change in capital structure of Sainsbury as I
believe target debt ratio of 40% is in line with financial flexibility and risk appetite of Sainsbury.
7. RISK ASSESSMENT

i.

Identified Risks and Impact on Sainsburys Cost of Capital

With high growth comes risk. Since Sainsbury is investing in emerging markets, it is exposed to more risks than
previously. Specifically, it will be exposed to political risk, credit risk, event risk, exchange rate risk and legal
risk. The impact of such risks on Sainsbury would be an increase of its equity beta among investors and
consequently a rise in cost of capital to compensate for additional risks.

Page 14 of 15

20

TOTAL
1
0