Section A: French Flavours at Sainsbury?

Executive Summary

Carrefour Group plc is one of the world’s leading retail companies and has been operating stores across the continent from Europe, Asia, South America and other parts of the globe.   Being a powerful market leader, Carrefour’s operation strategy can be adopted by other multinational companies, even outside the retail industry, to accelerate their growth. Sainsbury on the other hand is a more than a century old British grocer that has focused on serving the UK’s domestic market. While Sainsbury recorded a net loss in financial 2015, its financial performance based of profitability and liquidity ratios does not show any signs of threat.

In this comprehensive analysis report, a detailed evaluation of both Carrefour and Sainsbury financial performance, future growth potential, and opportunities existing for each company are examined. The analysis adopts a CORE structure approach whereby besides financial ratios, other aspects of business performance are examined through Context, Overview, Ratio analysis, and Evaluation

Table of content

  1. Introduction  

One of the world’s leading retailers and the largest in France, Carrefour has been experiencing a period of exponential growth at home, in Europe and abroad. In its quest to expand and increase its world market share, while maintaining progressive financial performance, the company must keep abreast with development of its worthy competitors and possible partners. One of the major retail markets that Carrefour has been unable to penetrate is the United Kingdom. While some international brands such as Amazon have reported a successful entry and penetration in the UK’s retail market, Carrefour has for long harboured interests.

Sainsbury on the other hand is a UK retail company and one of the most trusted brands. In order to understand the needs and preferences of the UK’s retail market, Carrefour strategic team believes that Sainsbury provides the one of the best window. This report provides an analysis of not only financial performance for both companies, but also a comprehensive comparison of non-financial factors. A CORE structure approach will be used to compare the performance and potential of both companies. CORE is a framework of strategic financial analysis consisting of context, overview, ratios and evaluation.

  • Context

The retail market represents one of the most dynamic ventures in the world today. According to Bain and Company’s research (2006), the move to expand retail business should not only be focussed on satisfying shareholders’ interests, but should also put into consideration the possibilities of achieving a positive Net Present Value and improved revenue and profits from such a move. The best way to arrive at an informed decision involving enterprise expansion strategy especially in the ever changing retail industry is through a comprehensive financial performance analysis and research. According to Elliot and Elliot (2008), measuring the profitability potential and financial performance of an enterprise may require more than just accounting data. A core analysis approach provides more details than accounting data as it considers both external and internal factors that might impact an organisation’s performance. Based on this wisdom, the context section of this paper will consider the external environment and internal strategies working for or against both Carrefour and Sainsbury companies.

2.1. External Environment of the Worlds Retail Industry

In a report published by Price Water Coopers (Kantar 2010), the retail industry, though faced by many challenges have shown tremendous strength and an opportunity for growth. Most companies have taken a global outlook in their expansion strategy, a development that has allowed the spread of renowned brand across continents. This optimistic development can be observed in the new and exciting new technologies, deployments, merger and acquisition activities,  and strategic global positioning by major players in the industry (Preda and Negricea 2010). These are all indications that the industry’s future might be even more exciting for consumers and investors alike.

Some of the positive forces influencing the retail market today include; access to consumer credit, low interest rates, moderated inflation trends, and higher investment values for both personal investment and the stock market. On the other hand, there are certain negative factors that tend to derail the progress in the industry, for example, high debt levels for consumers, global terrorism, and other forms of uncertainties (Preda and Negricea 2010). Companies with a global outlook of the industry such as Carrefour need to deal with relatively complex changes in the market. However, this report intends to focus on the opportunities within the reach of Carrefour and Sainsbury and therefore will present a comparative analysis based on the CORE approach.

2.2. Internal strategies for Carrefour and Sainsbury

The two companies have totally different approaches to market positioning. Carrefour for instance, has an expansion and diversity perspective in its growth strategy and therefore comes across as a “multi-format, multi channel, and a multi-local brand (Carrefour annual Report 2015). True to its brand, the company operates in about 35 countries in Europe, Asia, Latin America, Middle East, Africa, and Dominican Republic. The group also operates its stores in variety of formats and channels including hypermarkets, supermarkets, convenient stores, e-and commerce among other channels.  

  • Overview

Being one of the world’s leading retail groups, Carrefour recorded € 104.4 billion total sales in2015. This was a 4.5% increase from the previous year, 2014. The groups net sales reached €76.9 billion all generated from operations in its 12,300 stores which include 1,481 hypermarkets, 3,462 supermarkets, 7,181 convenience stores and 172 cash & carry stores. Being a multi-national company, Carrefour has achieved remarkable growth and has maintained an impressive performance against its primary competitors such as Wal-Mat and Tesco.

Unlike Carrefour, Sainsbury appear to be more focused on serving UK community and therefore has invested in exceptional customer service. Having operated in the UK for more than 150 years, Sainsbury has adopted a more conservative strategy of serving a small customer base with exceptional services and products. According to the company’s board chairman, Sainsbury’s strategy is founded on delivering “high quality customer service and value” (Sainsbury Annual Report 2015). This focus on customer relationship has informed the strategy to remain a relatively smaller enterprise serving only the UK market with diversified services and products including food products, money and finance, clothing, and general merchandise. In the financial 2015, Sainsbury recorded underlying sales of £26,122 million, which represented a 0.9% decline from the previous year 2014, at £26,353 million. Profit before tax declined by 14.7% to £681million in 2015 from £798million in 2014. A comprehensive overview of the two company’s financial status can be seen in the detailed financial statements (Appendix 1).

  • Ratios  

Accounting ratios are used as tools to assess the economic conditions and performance of business enterprise. Mainly, there are three primary categories of accounting ratios namely, profitability ratios, liquidity or solvency ratios, market ratios, leverage or debt ratios and asset efficiency ratios. In order to determine the economic state of both Carrefour and Sainsbury, it is necessary to conduct a though financial analysis of the two retail enterprises. Relevant information necessary for computation of the analytic ratios will be obtained from the financial statements the most important of them being the income statement and the balance sheet. Relevant financial ratios for Sainsbury for the year 2015 are as indicated in Appendix 3. Appendix 4 shows calculation for the same ratios as explained in details in the proceeding sections.

4.1. Profitability Ratios

Profitability is probably the most important measure of a venture’s worth from a shareholder’s perspective. This is because they help determine who well a business is utilising its resources to generate income for both its operation and make profit for investors. The most prominent ratios include the gross margin, ratio, the profit margin ratio, ROCE, and the net assets turnover. According to McLaney (2013), the ROCE ratio is an important tool in measuring a company’s ability to generate income from capital invested. It is therefore computed by comparing the amount of capital invested in the venture with the amount of income generated.

Return on Capital Employed (ROCE) = Earning Before Interest and Tax (EBIT) / Capital Employed

From the income statements in Appendices 1 and 2, the values for computation of ROCE can be obtained as follows:

Carrefour’ ROCE

EBIT= €2,232

Capital Employed = €4,546 + €10,672 + €9,633 = €24,821

ROCE = €2,232 /€24,821 = 10%

Sainsbury’s ROCE is 9.7% has been calculated as shown in appendix 3.

Based on the ROCE calculations it can be observed that Carrefour has a slightly higher return on capital invested than Sainsbury. When a company records a higher value of ROCE, it is usually an indication that the company has the capacity to generate more earning from the capital employed hence higher profitability. Lower values translate to lower income generating capacity. However, it is not consistent to judge the performance of the entity based on just one ratio. In order to get a better comparison of profitability for the two companies, it is prudent to consider the gross margin and the profit margin ratios.

Gross margin ratio measures a company’s profitability capacity by comparing its gross income with the revenue collected from its operations in a particular trading period.

Gross Margin = Gross Profit / Revenue (Net Sales).

When the value of gross margin is higher, it is an indication that more is earned from the company sales and therefore funds to meet non-production costs such as administration will be available. When a company registers low gross margin, the amount of funds available for non-production costs is minimum and that might affect its operations. In the fiscal year 2015, both Carrefour and Sainsbury reported a gross profit margin of 5%. However there was a major difference when it comes to profit margin ratio whereby while Carrefour registered a positive ratio of 1%, Sainsbury reported a negative ratio of -1% which means that the company operated at a loss. Profit margin is determined by comparing net income of a company with its revenue. Based on the ratios obtained in this section, it can be concluded that despite difference sizes of the two companies, Carrefour and Sainsbury have a near similar financial strength and profitability potential. Calculation for profitability ratios is displayed in details in appendix 4.

4.2. Liquidity (Solvency) Ratios

Liquidity ratios are financial tools used by financial analysts to establish the ability of a company to honour its debt obligation from the earning generated through its operations. The most Common ratios used in measuring liquidity of a business enterprise include the current ratio, quick (acid test) ratio, times Interest earned or the Interest Coverage ratio, and debt to capital ratio (McLaney 2013). According to Koller (2011), higher values of liquidity ratios are indicative of a company’s ability to debt obligations while lower values show incapacity to pay off debts and interest payable on debt when the time is due.  One indicator of debt payment capacity is the current ratio, which compares current assets with current liabilities of an entity. Companies with current assets greater than current liabilities are able to convert their assets to cash for payment of debts at a short notice.

To get a more restrictive liquidity position of an enterprise, accounting information users might calculate the quick ratio by deducting inventories from the current assets. This procedure give a more restrictive indication of a company’s ability to convert quick assets to cash to honour a debt obligation in a short notice should the need to do so arise.

Debt to equity ratio and the interest earned ratio are sometimes classified separately as solvency ratio. They are used to measure a company’s ability to pay interest charged on its loans and long-term debts, and the efficiency with which capital raised from debt and equity fair in financing its assets acquisition. Companies with higher debt to equity ratios are considered to be unfavourable as it indicates an over reliance on borrowing to finance assets.  According to liquidity ratios presented in appendix six, one can conclude that while Carrefour have a better liquidity position than Sainsbury, the difference is not much pronounced. It is also important to not that the ratios are below industry average which could be a sign of risky investment for new or risky ventures. However these companies have been operating for many years, more than 50years for Carrefour and about 150 years for Sainsbury, meaning that the have already earned investors confidence and with their reserve can easily adjust in case of trouble. However for strategic managers, this is a sign that strategic measures should be employed to protect shareholders interests. Liquidity ratios for both companies are worked out as explained in appendix 4.

4.3. Potential

To predict the future performance of a business organisation, the most significant ratios, are earning per share, Price Earning Ratio (P/E), Dividend yield, and the Dividend Cover. A firm with a higher P/E displays a higher performance potential and therefore its market confidence is higher (McLaney 2013). According to Myers and Majluf (1984), companies can be classified in terms of the potential as either high growth potential companies or highly resourceful companies. In order to determine whether a company has growth potential or is resourceful, the P/E ratio plays an important role. Highly potential companies will show a lower value for P/E because in financial analysis terms, P/E is viewed as the number of years required to pay back the initial investment made in the venture. When company earning decline, the stock price is affected, consequently the value of P/E ratio increases it is therefore possible to tell whether company shares are overvalued or undervalued by analysing the P/E ratio. Considering the case of Carrefour and Sainsbury, the two companies present significantly different values for their P/E ratios. The P/E ratio for Carrefour is 15.99, while that of Sainsbury is 378. This indicates that the prices for Sainsbury shares are overvalued.

  • Evaluation

The final stage in Core structured financial analysis is evaluation. Based on the data obtained after working out relevant ratios, the analyst is position to make informed evaluation of the situation and probably emerge with a wiser decision. Analyses in this report reveal that Carrefour is much stronger than Sainsbury as far as profitability, liquidity, and efficiency use of available resources is concerned. However, Sainsbury has invested in an invaluable non-financial resource which is customer loyalty and goodwill. By using a customer relation centred model, a great relation between Sainsbury and its customers has been established. Carrefour can therefore benefit from such a relationship in its attempt to enter the UK Market.

 Section B

Question B1 – Whattiff plc: Why so Sensitive?

            Sensitivity analysis is a method used to determine the effect of an independent variable on a particular dependent variable. It also defines the degree of influence a given input factor or factors have on the value of the output, without taking into account the extent of the uncertainty related with the factor(s) (Fazil 2005). Sensitivity analysis provides useful information, which would help you, as the production manager, to increase the company’s performance and reduce the organization’s risks. For instance, the company can use sensitivity analysis for decision making, communication, model development, and quantification of the system.

            As the production manager, you can use the sensitivity analysis to identify the most important or sensitive variables in the production process(Fazil 2005). For instance, if the company’s output is affected by the working hours and technology, sensitivity analysis can help in the determination of the most significant variable between technology and the working hours. Therefore, you will be able to make the best decision on whether to increase the working hours or improve the technology used in production. Sensitivity analysis can also help you to test the robustness of the results of a system in the presence of uncertainty(Gotze, Northcott, & Schuster 2008). Similarly, it also plays a significant role in enhancing the communication from the modelers to the decision makers. For instance, it makes recommendations more understandable, credible, persuasive, or compelling than using estimates.

            Sensitivity analysis is also important in the quantification of the systems. It helps in the estimation of the relationships between the output and input variables in the production processes(Fazil 2005). Another importance of the sensitivity analysis is that it provides a clear understanding between the input and output variables. In addition, it helps to test a model or system for accuracy and validity. Sensitivity analysis also searches for errors in a model and provide recommendations on how to correct them. It can also be used together with different methods for appraising a single investment project. For instance, sensitivity analysis can be useful in the visualization of financial implications method or to the optimal economic life determinations of machines in the company (Gotze, Northcott, & Schuster 2008). Sensitivity analysis entails little working out effort making it a valuable mechanism for decision-making under improbability.


Cooper, I.A. and Kaplanis, E., 2000. Partially segmented international capital markets and international capital budgeting. Journal of International Money and Finance, 19(3), pp.309-329.

Kaplan, S.N. and Schoar, A., 2005. Private equity performance: Returns, persistence, and capital flows. The Journal of Finance, 60(4), pp.1791-1823.

Haka, S.F., 2006. A review of the literature on capital budgeting and investment appraisal: Past, present, and future musings. Handbooks of Management Accounting Research, 2, pp.697-728.

Kothari, S.P., Li, X. and Short, J.E., 2009. The effect of disclosures by management, analysts, and business press on cost of capital, return volatility, and analyst forecasts: A study using content analysis. The Accounting Review, 84(5), pp.1639-1670.


Appendix 1: Financial Statements for Carrefour Group Plc for Fiscal year 2015

Income Statement20152014201320122011
Gross Profit$19,685.758$20,721.844$23,191.58$22,382.246$23,116.555
Operating Income$2,319.378$2,672.884$2,692.63$1,585.8$-951.752
Net Income$1,070.65$1,518.16$1,738.646$1,629.41$480.408
Diluted EPS$1.49$2.15$2.51$2.39$0.73
Cash Flow (mil)201520142013
Cash at the beginning of the year$3,783.8516$6,548.4863$8,686.2197
Net Operating Cash$3,078.665$3,171.2395$2,305.8049
Net Investing Cash$(2,333.5801)$(4,129.0537)$(1,176.993)
Net Financing Cash$(896.9425)$(1,062.347)$(3,426.3574)
Net Change in Cash$(151.8575)$(2,020.161)$(2,297.5454)
Cash at end of the year$2,975.97$3,783.8516$6,548.4863
Capital Expenditure$(2,394.76)$(2,574.429)$(2,811.0171)
Assets (mil)201520142013
Current Assets
Net Receivables$2,935.5476$3,417.9861$3,700.3008
Other Income Assets$0$0$0
Asset Summary
Total Current Assets$18,912.2676$21,330.8086$24,978.4062
Net Fixed Assets$13,187.5674$14,916.6162$15,292.6494
Other Noncurrent Assets$420.6125$358.5725$429.4992
Total Assets$49,266.2891$55,656.5312$59,970.2031
Liabilities (mil)201520142013
Current Liabilities
Accounts Payable$14,910.4404$16,268.252$17,694.8164
Short Term Debt$4,691.1948$6,654.8623$6,646.2246
Other Current Liabilities$2,732.3425$2,841.8391$2,939.041
Liability Summary
Total Current Liabilities$24,381.3223$28,020.9219$29,614.7949
Long Term Debt$9,376.9277$10,215.0615$12,823.0293
Other Noncurrent Liabilities$3,293.8875$4,352.7056$4,980.5386
Total Liabilities$38,742.2344$44,484.8672$49,173.5273
Stakeholder’s Equity (mil)201520142013
Preferred Stock Equity$$$
Common Stock Equity$2,016.755$2,232.8735$2,491.646
Equity Summary
Total Equity$10,524.0527$11,171.6602$10,796.6738
Shares Outstanding727.48711.53701.18

Appendix 2. Financial Statements for Sainsbury Plc for Fiscal year 2015

Income Statement20162015201420132012
Gross Profit$2,065.19$1,791.947$2,308.939$1,939.635$1,936.026
Operating Income$1,002.809$120.155$1,679.682$1,347.264$1,397.264
Net Income$668.066$-246.244$1,191.925$932.605$956.023
Diluted EPS$0.32$-0.13$0.61$0.49$0.5
Cash Flow (mil)201620152014
Cash at the beginning of the year$1,906.1689$2,650.2024$785.2713
Net Operating Cash$556.0128$1,351.3774$1,563.1533
Net Investing Cash$(567.36)$(1,335.0601)$709.1622
Net Financing Cash$(181.5552)$(465.7876)$(482.763)
Net Change in Cash$(192.9024)$(449.4702)$1,789.5525
Cash at end of the year$1,621.2312$1,906.1689$2,650.2024
Capital Expenditure$(761.6808)$(1,351.3774)$(967.1907)
Assets (mil)201620152014
Current Assets
Net Receivables$720.5472$698.6814$720.8151
Other Income Assets$72.3384$102.3546$81.5703
Asset Summary
Total Current Assets$6,303.3696$6,682.7168$7,273.0742
Net Fixed Assets$13,849.2578$14,311.8428$16,447.2363
Other Noncurrent Assets$24.1128$31.1514$46.6116
Total Assets$24,074.5039$24,530.9863$27,534.1387
Liabilities (mil)201620152014
Current Liabilities
Accounts Payable$2,953.1089$3,098.8225$3,073.0361
Short Term Debt$316.3032$385.684$888.9498
Other Current Liabilities$6,267.9097$6,785.0718$7,299.7095
Liability Summary
Total Current Liabilities$9,537.3213$10,269.5781$11,261.6953
Long Term Debt$3,106.2959$3,717.4004$3,745.575
Other Noncurrent Liabilities$1,487.9016$958.2764$925.5732
Total Liabilities$15,046.3867$16,314.4336$17,540.9434
Stakeholder’s Equity (mil)201620152014
Preferred Stock Equity$$$
Common Stock Equity$780.12$812.9032$907.2615
Equity Summary
Total Equity$9,028.1162$8,216.5527$9,993.1943
Shares Outstanding1,924.081,919.43011,907.21

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