read and analysis financial report, some strategy questions

BACK COVER FRONT COVER OUTSIDE FLAP Contents Tesco PLC Annual Report and Financial Statements 2014 Strategic report IFC Tesco at a glance IFC\tHighlights 01 Chairman's statement 03 Report from the Chief Executive 08 Market overview 10 Business model 12 Financial review 16 Key performance indicators 19 Other statutory disclosures 20 Principal risks and uncertainties Corporate governance 26 28 30 41 62 Tesco PLC Annual Report and Financial Statements 2014 Board of Directors Executive Committee Corporate governance report Directors' remuneration report Directors' report Financial statements 64 Statement of Directors' responsibilities 65\t\u0007 Independent auditors' report to the members of Tesco PLC 69 Group income statement 70 Group statement of comprehensive income 71 Group balance sheet 72 Group statement of changes in equity 73 Group cash flow statement 73\t\u0007 Reconciliation of net cash flow to movement in net debt note 74 Notes to the Group financial statements 122 Tesco PLC - Parent Company balance sheet 123\t\u0007 otes to the Parent Company financial statements N 131\t\u0007ndependent auditors' report to the members of I Tesco PLC (Parent Company financial statements) Other information 132 Supplementary information (unaudited) 143 Financial calendar 143\tGlossary 144 Five-year record There's a lot more content online Go online to find out more about our performance, hear from our leadership team and explore our business in more detail. You'll find PDF and Excel downloads of our financial statements too. Visit www.tescoplc.com/ar2014 Tesco PLC Tesco House Delamare Road Cheshunt Hertfordshire EN8 9SL www.tescoplc.com/ar2014 Contents Strategic report IFC Tesco at a glance IFC\tHighlights 01 Chairman's statement 03 Report from the Chief Executive 08 Market overview 10 Business model 12 Financial review 16 Key performance indicators 19 Other statutory disclosures 20 Principal risks and uncertainties Corporate governance 26 28 30 41 62 Board of Directors Executive Committee Corporate governance report Directors' remuneration report Directors' report Financial statements 64 Statement of Directors' responsibilities 65\t\u0007 Independent auditors' report to the members of Tesco PLC 69 Group income statement 70 Group statement of comprehensive income 71 Group balance sheet 72 Group statement of changes in equity 73 Group cash flow statement 73\t\u0007 Reconciliation of net cash flow to movement in net debt note 74 Notes to the Group financial statements 122 Tesco PLC - Parent Company balance sheet 123\t\u0007 otes to the Parent Company financial statements N 131\t\u0007ndependent auditors' report to the members of I Tesco PLC (Parent Company financial statements) Other information 132 Supplementary information (unaudited) 143 Financial calendar 143\tGlossary 144 Five-year record There's a lot more content online Go online to find out more about our performance, hear from our leadership team and explore our business in more detail. You'll find PDF and Excel downloads of our financial statements too. Visit www.tescoplc.com/ar2014 Tesco at a glance* Asia Europe Tesco Bank 43.6bn 2,191m 10.3bn 692m 9.3bn 238 m 0.0% (3.6)% +2.6% (5.6)% (0.6)% (27.7)% (1.8)% 66% 16% 21% 14% Revenue Revenue growth 68% Trading profit Trading profit growth Revenue Revenue growth Trading profit Trading profit growth Revenue Revenue growth Trading profit Trading profit growth 7% 1.0 bn Revenue Revenue growth 2% The future: strategic developments in retail Highlights 194m Trading profit +1.6% Trading profit growth 6% We are a team of over 500,000 people in 12 markets dedicated to providing the most compelling offer to our customers. With retail operations in the UK, Asia and Europe, we strive to bring the best value, choice and service to millions of customers each week. Group sales 70.9bn Group sales growth 313,923 1st colleagues 3,378 stores market position 16m loyalty scheme members 96,085 colleagues 2,417 stores 1st or 2nd in three markets 14m loyalty scheme members 91,788 colleagues 1,510 stores 1st or 2nd 3,748 in five markets 8m loyalty scheme members colleagues 7m customer accounts 6bn +0.3% 86% Group profit before tax savings deposits of product sales are online 2.3bn Sir Richard Broadbent Chairman Underlying profit before tax** \tRegulatory restrictions on opening hours in South Korea, combined with political disruption in Thailand, held back overall performance in Asia \tContinued with refresh programme and store opening programme focused on Thailand and South Korea. Plan to open 1.2 million square feet in Asia in 2014/15, whilst continuing to grow our convenience and grocery home shopping operations \tForming a partnership with China Resources Enterprise Ltd. giving Tesco a 20% ownership stake in the largest food retail business in China \tEntered into an agreement with Trent Limited, part of the Tata Group, to form a 50:50 joint venture with Trent Hypermarket Limited which operates the Star Bazaar retail business in India \tTrading profit reflects challenging conditions, particularly for large stores, and decision to invest in a more compelling offer for customers across the region \tSignificantly reduced new store openings and any future investment will be focused on convenience and grocery home shopping \tCompleted roll-out of grocery home shopping to all international operations, with the exception of India \tInvested in the customer offer across the region, with improved trading through the second half of the year In Ireland launched Price Promise, helping to drive improved customer trust in prices. Worked to emphasise the breadth of our offer and points of differentiation \tTrading profit grew by 19% excluding income from the legacy insurance distribution agreement and fair value release \tGood growth in core banking products with customer accounts for credit cards, loans, mortgages and savings up 14% \tDespite challenging market conditions for our insurance business, strong growth in Home Insurance following its relaunch \tIn its first full year, our mortgage product has made good progress with balances reaching 0.7 billion \tOn track to launch current accounts in the first half of 2014/15, designed to strengthen loyalty and engagement as part of our multichannel offer (6.9)% Underlying diluted earnings per share** (7.3)% Full-year dividend 14.76p * ** All figures reported on a continuing operations basis, excluding China and the United States which have been treated as discontinued. Excludes the accounting impact of IFRIC 13. Based on the number of colleagues at year end. These figures reflect a year-on-year movement. See glossary on page 143 for full accounting definitions. Calculated on a constant tax rate basis; (5.0)% at actual tax rates. \"Being a leading retailer today is not a guarantee of value creation tomorrow. We need to ensure that we are tomorrow's leading retailer.\" Our strategic priorities The challenging trading conditions of the past year have impacted profits and necessarily remain a focus of management attention. We continue to devote a lot of energy and creativity to creating products and services which customers want to buy at prices they find attractive, through whichever channel they choose and which leave them wanting to visit us again. We have continued to focus on improving the experience for customers with continued investment in colleagues, a big programme of store refurbishment, significant investment in quality and a renewal of product ranges, including the entire finest* range, and a continued emphasis on Building a Better Tesco in the widest sense of the term. 1. Continuing to invest in a strong UK business 2. Establishing multichannel leadership in all of our markets Visit www.tescoplc.com/ar2014 to hear more from Sir Richard Broadbent and other members of the leadership team Strategic change requires investment. Our task is to allocate resources to compete effectively in today's market while giving priority to ensuring that we emerge as winners in the coming multichannel, customer-centric market. Your Board is extremely focused on the need to manage this balance between current and future returns with great care, optimising both without imperilling either. The business is taking decisive steps to free up capital and operational resources, but for the time being the imperative of securing the longer-term future means that our current financial performance remains constrained. Other business priorities In my foreword last year, I said: \"Our strategic choices are defined by three parameters: the strength of the Designed and produced by Tesco brand; the internet and all the Addison Group associated developments it is driving; and the potential to leverage our skill andwww.addison-group.net scale internationally...\" This Report is the fundamental I have remarked onprinted on Revive 100 Pure White the business has been re-orientation ofSilk paper andto meet independently certified the internet. the changes being driven by on behalf of the Forest Stewardship Council (FSC). Let me say a word about brand; and about The inks used are all vegetable oil based. how we view our international businesses. Tesco PLC Annual Report and Financial Statements 2014 01 Other information More broadly, however, it has been a year when your company has moved from addressing existing business issues to driving our strategy for future growth and value. There is never a year in which a business focuses solely on one or the other. But it is fair to say that at some point in the past year the balance of where our energies and resources are focused tipped from addressing past issues to investing in the future. We remain focused on the present but we are starting to quicken our pace into the future. Our strategy has been developed to drive sustainable growth through three priorities: 3. Pursuing disciplined international growth This has been an important year for Tesco. There has been a great deal to occupy us in relation to current trading as weak markets and intense competition persist. At the same time, we continue to reshape the business to address the fundamental changes taking place in the retail market. Financial statements Strengthened the foundations of the business, in a weakening grocery market \tLaunched Price Promise, relaunched finest* range and completed around 300 store refreshes Tailored the ranges in our Express stores to local catchments and trialled the ingredients to make our destination stores worth the trip Large stores and general merchandise transformation weighed on top-line performance Extended Click & Collect to 1,750 general merchandise and 260 grocery locations, helping to build our multichannel offer Now accelerating plans to deliver the most compelling offer for customers with sharper prices, improved quality, stronger ranges and better service, in addition to accelerating growth in new channels Continuity and change Consequently, being a leading retailer today is not a guarantee of value creation tomorrow. We need to ensure that we are tomorrow's leading retailer. We had already set ourselves on the path to becoming a leading multichannel retailer to meet this challenge. The accelerating evolution of customer behaviours reinforces us in this choice of direction and has led us in the past year progressively to intensify our actions to deliver this end. This includes not only ensuring a more seamless service for customers but also a business which matches more closely what they want, for example by making our larger stores more compelling destinations in their own right as well as ensuring we offer more convenience stores. Governance The backdrop of technology-driven change in the retail sector becomes a more insistent drumbeat every day. Boundaries between the online and offline world are becoming blurred. The challenge, and opportunity, for retailers is not just to have (and be able to operate across) multiple channels. It is to meet the rapid changes in consumer behaviour that we are seeing as technology opens up new horizons for them. The capacity for consumers to communicate instantly with each other, with us and with other retailers is driving completely different expectations for service levels, choice, convenience, indeed the whole shopping experience. A level of customisation and personalisation, unthinkable a decade ago is becoming the norm. Strategic report UK Chairman's statement Chairman's statement Sir Richard Broadbent Chairman This has been an important year for Tesco. There has been a great deal to occupy us in relation to current trading as weak markets and intense competition persist. At the same time, we continue to reshape the business to address the fundamental changes taking place in the retail market. The challenging trading conditions of the past year have impacted profits and necessarily remain a focus of management attention. We continue to devote a lot of energy and creativity to creating products and services which customers want to buy at prices they find attractive, through whichever channel they choose and which leave them wanting to visit us again. We have continued to focus on improving the experience for customers with continued investment in colleagues, a big programme of store refurbishment, significant investment in quality and a renewal of product ranges, including the entire finest* range, and a continued emphasis on Building a Better Tesco in the widest sense of the term. Visit www.tescoplc.com/ar2014 to hear more from Sir Richard Broadbent and other members of the leadership team Other business priorities In my foreword last year, I said: \"\u0007 ur strategic choices are defined by O three parameters: the strength of the Tesco brand; the internet and all the associated developments it is driving; and the potential to leverage our skill and scale internationally...\" I have remarked on the fundamental re-orientation of the business to meet the changes being driven by the internet. Let me say a word about brand; and about how we view our international businesses. Tesco PLC Annual Report and Financial Statements 2014 01 Other information More broadly, however, it has been a year when your company has moved from addressing existing business issues to driving our strategy for future growth and value. There is never a year in which a business focuses solely on one or the other. But it is fair to say that at some point in the past year the balance of where our energies and resources are focused tipped from addressing past issues to investing in the future. We remain focused on the present but we are starting to quicken our pace into the future. Strategic change requires investment. Our task is to allocate resources to compete effectively in today's market while giving priority to ensuring that we emerge as winners in the coming multichannel, customer-centric market. Your Board is extremely focused on the need to manage this balance between current and future returns with great care, optimising both without imperilling either. The business is taking decisive steps to free up capital and operational resources, but for the time being the imperative of securing the longer-term future means that our current financial performance remains constrained. Financial statements \"\u0007 eing a leading retailer B today is not a guarantee of value creation tomorrow. We need to ensure that we are tomorrow's leading retailer.\" Continuity and change Consequently, being a leading retailer today is not a guarantee of value creation tomorrow. We need to ensure that we are tomorrow's leading retailer. We had already set ourselves on the path to becoming a leading multichannel retailer to meet this challenge. The accelerating evolution of customer behaviours reinforces us in this choice of direction and has led us in the past year progressively to intensify our actions to deliver this end. This includes not only ensuring a more seamless service for customers but also a business which matches more closely what they want, for example by making our larger stores more compelling destinations in their own right as well as ensuring we offer more convenience stores. Governance The backdrop of technology-driven change in the retail sector becomes a more insistent drumbeat every day. Boundaries between the online and offline world are becoming blurred. The challenge, and opportunity, for retailers is not just to have (and be able to operate across) multiple channels. It is to meet the rapid changes in consumer behaviour that we are seeing as technology opens up new horizons for them. The capacity for consumers to communicate instantly with each other, with us and with other retailers is driving completely different expectations for service levels, choice, convenience, indeed the whole shopping experience. A level of customisation and personalisation, unthinkable a decade ago is becoming the norm. Strategic report The future: strategic developments in retail Chairman's statement continued The Tesco brand Re-building the Tesco brand to become synonymous again with value, choice and quality, to be seen again as unerringly on the customers' side, is central to our future. In the multichannel world we are moving into, what you are known for will be as important as the channels through which you sell. We have and will continue therefore the patient work to strengthen trust in our brand. This is not without its cost but we believe it is as important an investment as any other part of our strategy. \"\u0007 he future is a retail world T where retailers will need to operate across multiple channels while meeting wholly different customer expectations for service levels, choice, convenience and overall experience.\" Values are central to any brand and last year we took the major step of introducing a new Value: we use our scale for good. This is evidently a long-term project but the year has seen the first steps taken to embed this sentiment as a touchstone of the business. These are reported in more detail in our separate update of \"Tesco and Society\" which is being published alongside this report. International Our priority is to deliver value to our shareholders. The last two years or so have seen us address tough decisions in relation to the international business. That said, we continue to see opportunity to create value internationally by leveraging our skills and scale in relatively rapidly growing economies with less developed modern retail sectors where the rate of economic growth coupled with switching to modern retail outlets can generate attractive returns. Such opportunities need to be taken with focus, flexibility and care. The completion in the past year of our exit from the US underpins the importance of piloting new ventures; of being open to partnership especially in new markets; to selecting rigorously those markets that meet tightly-drawn criteria for investment; and to ensure close management and control of the investments. Many of our choices this year, to enter partnerships in China and India or to invest modestly in an internet start-up in South East Asia, reflect this philosophy of establishing a position of opportunity and testing returns against our criteria as a basis for building long-term, value-enhancing positions. Governance In common with other public companies, we are meeting this year new standards of disclosure. Our Remuneration Policy is set out on pages 41 to 61 for shareholders to consider. Our accounts as a whole have been considered by the Board in the light of the new test to be \"fair, balanced and understandable.\" We have taken seriously the spirit as well as the letter of the new Regulations, which are seeking to build trust between the corporate sector and society generally 02 Tesco PLC Annual Report and Financial Statements 2014 through levels of transparency and disclosure which are undoubtedly now world-leading. We were pleased to welcome Mark Armour to the Board in September last year and the expertise, rooted in a long business career, that he brings to our discussions. We announced on 4 April that Laurie McIlwee had resigned from his position as Chief Financial Officer. I would like to thank Laurie for his contribution to Tesco over the last 14 years. Together with Philip and the wider team, Laurie has played an important role in our process to transform Tesco and position it to be a winner in the new era of retailing. I and the Board wish him every success for the future. Financial results Our task is to deliver value to our shareholders and we hold this goal in mind in all our deliberations. The trade-offs at the present time are not straightforward and we continually track the balance between future value and current return, seeking to ensure an optimum balance between the two in the context of the rapid changes which the retail sector is experiencing. This is reflected in a number of one-off write-offs associated with significant business or market developments and in our results generally which have again been held back by the factors I have described. Revenues from continuing operations were broadly flat and underlying profit fell by (6.9)%. We understand the importance of the dividend to our shareholders and our confidence in the strategic choices we are making is reflected in an unchanged dividend. Conclusion In pursuing our goals, the most important resource we have is our colleagues who are the ones who work unfailingly to anticipate and meet the needs of customers, and I and the whole Board are grateful to each and every one of them for all that they do. The future is a retail world where retailers will need to operate across multiple channels while meeting wholly different customer expectations for service levels, choice, convenience and overall experience. You may be assured that we will compete hard in the current market but the bigger prize we seek on your behalf is to utilise the unique assets and resources of Tesco to ensure we emerge as leaders in the future world of retailing. Sir Richard Broadbent Chairman Report from the Chief Executive Two years ago, I also outlined plans to deal with the more Tesco-specific issues by improving our offer for customers in the UK through a programme of investment in improved service, quality and price. It was important that we started when we did, and this programme of improvement continues and is being accelerated as competitive conditions intensify. With our strategy already in place, we know what we need to do, and we know that we have to do it even more quickly. Chief Executive Our strategic priorities 1. \u0007 ontinuing to invest in a strong C UK business 2. \u0007 stablishing multichannel E leadership in all of our markets 3. \u0007 ursuing disciplined P international growth Further discussion around each of these priorities is provided within my report on the following pages. This year marks my 40th year at Tesco. I have found every single one of those years exciting and challenging, but I have never seen such a pace of change within the industry as I have over the past year, driven by both structural and cyclical forces. Consumer behaviours are changing more quickly than ever before and that means we have to accelerate our rate of change too. Customers are increasingly using technology in all aspects of their everyday lives and the pace of transition to online shopping has been even faster than we expected. Since taking over as Chief Executive of your business in 2011, I have been clear of the need to transform Tesco to be a leader in the multichannel retail environment. The way the market has developed since then has underlined the importance of this strategic choice. So we face a mix of Tesco-specific issues and broader issues affecting the whole sector and it is important that we tackle both. This is a large agenda and has kept us fully occupied over the past year. Visit www.tescoplc.com/ar2014 to hear more from Philip Clarke and other members of the leadership team Thanks to the foresight of my predecessors, over the course of more than 17 years, we've already developed strong online and convenience businesses. This has ensured we are well-positioned to address the industry-wide changes we are We laid out our three strategic priorities for the business in April 2013: 1. \u0007 ontinuing to invest in a strong UK business C 2. Establishing multichannel leadership in all \u0007 of our markets 3. Pursuing disciplined international growth These priorities are even more relevant today than they were when I announced them and we have made progress on each of them. 1. Continuing to invest in a strong \u0007 UK business We launched the Building a Better Tesco plan in the UK two years ago and invested 1 billion in six key areas of the business: Service & Staff, Stores & Formats, Range & Quality, Price & Value, Brand & Marketing and Clicks & Bricks. As I made clear at the time, we had been running our stores 'too hot' for too long and this investment was long-overdue. I have described below some of the progress we have made under each of the areas of the plan. (i) Service & Staff Having taken on 8,000 more colleagues in our stores, this year we've focused on providing further customer service training. We have delivered training to more than 250,000 colleagues in the UK, helping them to make every moment with customers matter. We have rescheduled 300,000 hours in the last year with the aim of having the right number of colleagues in our stores, in the right departments and at times of the day that customers need them most. We are seeing improvements in customer perceptions and the proportion of customers Tesco PLC Annual Report and Financial Statements 2014 03 Other information At the same time, consumer behaviours continue to be strongly influenced by economic conditions which have continued to be tough in the markets in which we operate. Overall, consumers are spending more carefully. They are increasingly choosing to shop online or in smaller convenience stores rather than in large stores, which presents a particular challenge for Tesco given the number of large stores we have around the world. Progress in 2013/14 Financial statements Our strategy has been developed to drive sustainable growth through three priorities: Introduction Governance Philip Clarke These issues do mean that our headline numbers are not where we want or planned for them to be. We have taken decisive action to improve performance, but the issues we face cannot all be fixed overnight. We need to do more, we need to go faster. I am, however, confident that we have the right strategies and the right team to compete effectively in the current market and to ensure that we emerge a leader in the multichannel world of retailing. Strategic report experiencing and we have focused our resources on building on these strengths. Report from the Chief Executive continued rating customer service and staff helpfulness as excellent has improved by 40% since 2012. We know we need to do more in order to make service a point of difference for us and to deliver excellent customer service for every customer on every shopping trip. This will remain a key priority for the UK business in the coming year. This year, we completed the work to materially improve our 8,000 core Tesco products. (ii) Stores & Formats Over the last two years, we have refreshed over a third of our UK stores in some way. This work has involved improvements to store environments and has prioritised the departments that matter most to customers, primarily fresh food. We have applied the learnings from each phase of the refresh programme to the next, enhancing our approach as the programme has evolved. As a result, there are some newer initiatives that we will seek to introduce to some of the stores that formed the early part of the refresh programme. Following the trial stores we completed in 2012/13, our refresh programme to date has been more focused on our Express format and on our smaller Superstores. Given the change in shopping behaviours I mentioned above, our larger stores have been a drag on performance and this is one of the most important areas that we need to address. Therefore, the focus of our refresh programme will now be on reinventing our largest stores to ensure that they are worth the trip for customers. \"\u0007 t is essential that I customers can trust our prices. We want prices to be stable, we want them to be logical and, of course, we want them to be competitive.\" This year we have tested a number of ingredients for our Extra refresh programme, and begun to roll out a range of components to help make these stores relevant destinations that customers actively choose to visit. In 2014/15 we will refresh 110 of our Extra stores, aiming to make them even stronger destinations. More of the ingredients will appear in these larger stores and typically they will feature strong clothing and general merchandise as well as tailored new food experiences, such as Giraffe, Euphorium, Harris+Hoole and Decks dependent upon the local customer. We will also be working hard to put 'Food First' and create the best ranges of fresh foods. We are looking forward to accelerating the appearance of these new features in our stores over the next three years. While this refresh work causes some short-term disruption, the resulting uplifts will be long-lasting. (iii) Range & Quality This year, we completed the work to materially improve our 8,000 core Tesco products. Following the relaunch of our finest* range in October, we relaunched our Healthy Living range in January. The customer response to the improvements we have made across our Tesco products has been pleasing, and our own-label sales account for around half of our total UK sales (excluding petrol). 04 Tesco PLC Annual Report and Financial Statements 2014 Whilst the direct impact of the meat contamination issue last year was limited to just four of our products, we have made marked improvements in the supply chain, shortening its length and focusing on provenance, greater control and traceability. Through our world-class testing programme, we have tested over 5,300 products and we are the first major retailer to offer two-year direct contracts for beef and lamb farmers right back to the farm gate. More than 300 farmers have signed up already. (iv) Price & Value Customers are actively seeking the best value, and this is more important than ever in a market which has become even more competitive over recent months. It is essential that customers can trust our prices. We want prices to be stable, we want them to be logical and, of course, we want them to be competitive. Our Price Promise has now been in place for over a year and provides instant reassurance to customers that on fresh foods, on own-label and on branded products they will not lose out at Tesco. Every customer perception measure on price has improved over the last 12 months, but there is still more to do on pricing. We know how important it is to customers that they get the best possible prices on lines that matter most to them. That is why in February, we announced that we are accelerating the pace of change including an initial investment of 200 million in bringing down, and keeping down, prices of key lines, starting with milk, carrots, onions and eggs. You can be sure that we will continue to focus relentlessly on ensuring we are competitive in the marketplace and where we need to do more, we will do more. (v) Brand & Marketing Clubcard is more important now than it has ever been before. It is at the core of providing a differentiated, personalised offer and it allows customers to choose how to unlock greater value for themselves. It is at the heart of our unique relationship with our customers and we need to use the power of Clubcard to personalise how we communicate with and serve our customers, providing them with offers and services which are relevant and tailored to how they live their lives. We are using Clubcard to deliver more value for customers and have delivered almost 60 million personalised mailings this year for products that customers buy week in, week out. A good example of the power of Clubcard and of the advocacy that it can drive is the launch of Clubcard Fuel Save. It is a completely new concept for the UK retail industry. Customers can earn money off their fuel, just by doing their normal shopping. It is inclusive - every penny counts towards the level of saving whether customers are shopping online for their (vi) Clicks & Bricks As I have already referenced, the pace of the transition to online is rapid. This creates challenges for the industry but we have a market-leading, profitable grocery home shopping business that already generates 2.5 billion of sales in the UK. By any measure our service is industryleading, and it represents a world-class platform from which to build our position of leadership in the multichannel world. Our Delivery Saver subscription service, which only launched in May 2012, is used by over 200,000 customers. We offer one-hour delivery slots in over 98% of the UK and Grocery Click & Collect is available at 260 locations. Accelerating our plans for customers in the UK T 2. \u0007 stablishing multichannel E leadership in all of our markets Against the backdrop of an accelerating shift to online shopping, our priority of establishing multichannel leadership in all of our markets has never been more relevant. Customers' behaviours are changing, their expectations of retailers continue to rise and they want to be able to shop however, whenever and wherever they want. We are moving from the first curve of retailing - one of bricks and mortar - to the second curve built around a seamless blend of bricks and clicks. Establishing multichannel leadership is about putting the customer at the centre of our offer and building a seamless experience around them, whether they want to shop in store, online, in our restaurants, at the Bank or across a combination of them all. Customer journeys are becoming more complex. Customers bounce between channels and devices in whichever way they choose and they expect a seamless experience. Our goal is to provide a zero-defect, end-to-end experience however our customers want to shop. While this presents challenges, it brings lots of opportunities too. Our scale, and our existing strengths from the first curve world, mean we are uniquely placed to lead in this new world. It is clear to us that those customers who choose to shop across more channels with us spend more and are more loyal to Tesco. Identifying our most valuable customers and enabling them to shop with us however, whenever and wherever they want is our opportunity. We have some ambitious goals and bold plans for our multichannel business in Tesco PLC Annual Report and Financial Statements 2014 05 Other information Establishing multichannel leadership is about putting the customer at the centre of our offer and building a seamless experience around them, whether they want to shop in a store, online, in our restaurants, at the Bank or across a combination of them all. I am clear that we have strengthened the foundations of the UK business, but I am also clear that we need to do more. Above all else, we are focused on delivering the most compelling offer for customers and we are accelerating our plans. Consequently, over the coming months you will see a continuing focus on every day low prices on the lines that It is this combination of accelerating growth in new channels while investing in sharper prices, improved quality, stronger ranges and better service that places a strain on short-term results. But it is also this combination of actions and strategic choice that will deliver sustainable long-term value. Where we have moved - for example in ending the UK space race, in focusing on cash and capital discipline, in developing grocery home shopping - others in the sector have followed. Our aim is to continue to lead, recognising that structural change on this scale is a long game and it is in our interest - and your interest - to be a long-term winner. Financial statements Tesco has always been about making products previously seen as unattainable more accessible. So we were especially proud of the launch of Hudl - our very own tablet - which made tablet devices much more accessible to more families across the UK. It proved extremely popular with customers, exceeding our own expectations, and earned outstanding reviews from the technology press. It was recently named 'ReThink Retail Technology Initiative of the Year' at the Retail Week Awards and we plan to launch a second device later this year. Our attention to service levels will intensify and we will deliver exceptional value for customers through Clubcard, just as we are doing through the recent launch of Clubcard Fuel Save. Governance \"\u0007The pace of the transition to online is rapid. This creates challenges for the industry but we have a market-leading, profitable grocery home shopping business.\" Clubcard Fuel Save is one example of the things we are doing to improve loyalty. Loyalty has always been important to Tesco because greater loyalty delivers greater lifetime value. matter most, more product innovation and quality improvements that delight, new and improved general merchandise ranges and more Extra stores becoming destinations worth a trip in their own right, while our convenience stores will be best in class. Strategic report \"\u0007 good example of the A power of Clubcard and of the advocacy that it can drive is the launch of Clubcard Fuel Save.\" weekly shop or popping in store for a sandwich, and they are in control of when they redeem their saving too. In just the first few weeks, more than three million customers saved money on fuel. Report from the Chief Executive continued 2014/15: to provide market-leading delivery pricing, twice the number of Click & Collect locations, including alternative locations such as London tube stations, and added-value products and services, including Tesco Bank's current account and digital wallet. Our work, however, to refresh seven of our largest stores, including our stores in Dongsuwon and Yuseong, has delivered encouraging results. We also continued to grow our convenience portfolio, with the opening of 71 '365 plus' franchise stores. In the medium term, we will offer one-hour delivery slots to the whole of the UK, for non-food as well as food, and for third-party sellers as well as our own products. By doing so, we will effectively create an e-commerce infrastructure not just for Tesco but for others as well. It is because we have the potential to innovate on this scale that we believe your company will emerge a winner in the coming multichannel world of retailing. We have had a challenging year in Thailand, reflecting the impact of the recessionary conditions on consumers and the political unrest. Thailand is one of our largest international markets and we have implemented a strong plan to improve our offer. We have continued to build a strong multichannel business, growing our grocery home shopping and convenience businesses to almost 1,400 convenience stores. 3. \u0007 ursuing disciplined international P growth Last year, I described our international markets in three cohorts: South Korea, Malaysia and Thailand - markets with significant future potential Ireland, Czech Republic, Hungary, Poland and Slovakia - markets where we are focused on holding our position and improving returns China, India and Turkey - markets where we know we must refocus on a more profitable approach to growth \"\u0007Through our international businesses we have the opportunity to create value for customers and shareholders by leveraging the know-how that we have gained from nine decades of retailing.\" Through our international businesses we have the opportunity to create value for customers and shareholders by leveraging the know-how that we have gained from nine decades of retailing in addition to using our scale to better effect across the Group. As well as doing even more to improve our customer offer across all our markets, we've taken action to ensure that this value is realised across each of these three cohorts. In line with our third strategic priority, we have applied an even greater level of capital discipline. While we continue to allocate capital to markets where we see greatest potential for growth, our investment is lower than previous years and will fall even further as part of our commitment that Group-wide capital expenditure will be no more than 2.5 billion for at least the next three financial years. We are spending more on our existing space due to our accelerated refresh programme, we are maintaining our level of spend on technology and we're spending significantly less on new space. Taking our Asian businesses first, we have a strong position in South Korea and it remains a high-returning business for us, but the sales trends have not been as we would have wanted them to be in the last two years. The regulatory restrictions on store opening hours have continued to impact our sales. 06 Tesco PLC Annual Report and Financial Statements 2014 In Malaysia, our performance has been more resilient. We opened two new stores during the year and grew our grocery home shopping business in its first year of operation. In Europe, we faced weak momentum running into the start of the year and the challenges were common across our markets with larger stores under-performing. Addressing these challenges we have tailored our plans in each market to provide a more compelling fresh offer, focusing on seasonal events and leveraging our sourcing scale and supply chain capability. We have also used our strengths in Clubcard and F&F to drive further improvements in our offer for customers. Turkey in particular has faced very challenging economic and competitive conditions and our focus is on finding a profitable model for a country with excellent long-term potential. We are in early stage discussions with potential partners and, should that not prove successful, we also have a range of realistic alternative options. An excellent example of our strategy in action is our partnership with China Resources Enterprise Ltd. Subject to the usual regulatory approvals, it will give Tesco a 20% ownership stake of the largest food retail business in China. The joint venture, which will be self-funding going forward, will secure significant cost and operational synergies, and will move us more quickly to profitability in what is one of the world's most exciting retail markets alongside an expert local partner. We have entered into an agreement with Trent Limited, part of the Tata Group, to form a 50:50 joint venture with Trent Hypermarket Limited, developing our presence in the Indian market. We firmly believe that our partnerships in both China and India will allow us to capitalise on these enormously exciting markets in a way which is disciplined in our use of capital and focused on profitable growth. Measuring our progress The single most important theme running through all the developments I have discussed is that stores are no longer necessarily the central point of our relationship with customers. Consequently we are re-orientating the indicators we use to measure and judge our progress to centre them firmly on the customer. You can read more about our new key performance indicators and how we are measuring performance of the business on pages 16 to 18. Tesco Bank This insight-to-action approach holds the key to our success for the future. It's the theme of this year's Tesco and Society report, which is published alongside this report. I'm confident that if we continue down this path over the coming years, we can use our scale for good across society and make what matters better, together. Management I would like to thank Laurie McIlwee for his contribution as CFO over the last five years, in particular to the progress we have made on our strategic priorities in the last three years, and before that his very good work on UK distribution. I wish him all the best for the future. Our Executive Committee has grown stronger this year, welcoming Steve Rigby and David Hobbs, and I am confident that we have the right team to deliver our strategy. This year we have seen good growth in our core banking products with customer accounts for credit cards, loans, mortgages and savings up 14%. In its first full year of trading, our mortgage product has made good progress with balances reaching 0.7 billion. We remain on track to launch current accounts in the first half of 2014/15. Using our scale for good Philip Clarke Last year we embraced a new Value for the business, recognising that when you are a large company, there is a particular responsibility to be aware of how your actions affect others. This Value is: we use our scale for good. It is based on the recognition that if we harness the breadth of our skills and scale and work together with our partners in the supply chain, we can make a major contribution to some of the biggest challenges facing the communities in which we operate, across the world. As part of this, we chose to take a lead in addressing three challenges which are particularly relevant to us as a large global retailer and are important to our colleagues and customers: reducing food waste globally, improving health and providing opportunities for millions of young people. While we do face short-term challenges, I am excited about the future. We see many more opportunities for the medium term and beyond. As customers' expectations of retailers evolve and we move into the new era of retail, we believe we are uniquely placed to lead. Other information Tesco has always innovated for its customers. We have the building blocks which will be essential for us to lead in the future: an industry-leading online offer, unrivalled customer insight through Clubcard, a first-class portfolio of stores, and an outstanding team of over 500,000 colleagues around the world who are working harder every day to deliver for our customers. In a rapidly changing market, retaining flexibility is essential and we are confident that we have a business plan which is right for today's market, and that we are making the strategic decisions to deliver leadership in tomorrow's market. We have started the journey of tackling these issues and we are embedding this new Value For more information about our new key performance indicators and how we are measuring our progress, see pages 16 to 18. Conclusion Chief Executive Tesco PLC Annual Report and Financial Statements 2014 Financial statements Our vision is to be the bank for Tesco customers and to offer simple, transparent and convenient products which reward our customers' loyalty and strengthen their bond with our business. We want to make significant, lasting changes, not launch short-term superficial initiatives, and that's why the focus of this year has been gathering the best possible insights to set long-term direction. Governance Our customers are at the centre of all our strategic decisions. Quite simply, everything we are doing is designed to retain our loyal customers and attract more new ones who shop across our channels and brands. That is how companies build enduring like-for-like sales. We are prioritising five key performance indicators which will help us measure and communicate our progress against our strategy. These measures place customers, and how they want to shop today right at the heart of everything we do. Focusing on driving customer loyalty and improving sales will lead to sustainable profits, returns and growth over the medium term. throughout the business. One of the biggest changes we have made over the last year is in the scale of our engagement. We are joining the global conversation around each of the issues and are working hard to move to a more open, transparent conversation, sharing details of our activities, progress and challenges through our different channels. Strategic report \"\u0007 e firmly believe that W our partnerships in both China and India will allow us to capitalise on these enormously exciting markets in a way which is disciplined in our use of capital and focused on profitable growth.\" 07 Market overview As customers increasingly choose to shop across different store formats and online, they are looking to retailers to provide a truly seamless, multichannel offer. These changes to customer behaviour and shopping habits come in the context of continuing economic pressure on household budgets and competitive environments in all 12 of our markets. Macro trends T \u0007 he economic environment has continued to be challenging in all of our markets. Although there are signs of improvement beginning to appear, we don't yet see consumers spending more. In the UK, we use our unique insight from dunnhumby to track how British consumers feel about the economy in general, as well as their own individual situations. Our latest quarterly Consumer Today report shows that although some consumers are starting to feel more upbeat about an improving economy, they are yet to feel the benefit in their own pockets. That is why we remain very focused on helping customers to manage their budgets by offering them great value for money across their shop. In Central Europe, after a prolonged period of economic pressure, employment levels and consumer confidence are rising, albeit from historically low levels, and real incomes are starting to benefit from lower inflation. Nonetheless, household expenditure is yet to improve significantly. Although some economies in Asia are rapidly expanding, Thailand fell into recession during the year and consumers struggled with higher levels of debt. Thai consumer confidence was further affected by the escalation of political unrest in the second half of the year. In South Korea consumer confidence has been on a marked upward trend through the year but household debt has reached record highs. Consumer confidence in Malaysia has fallen due to concerns over inflation, low wage growth and a proposed sales tax. comprise one or two people - a trend also seen in Thailand, in part due to rapid urbanisation. This changing household composition is one factor leading to an increasing preference for convenience shopping. We believe that in the longer term rising populations, rapid urbanisation and a growing demand for agricultural products present a risk to global food security and highlight the importance of building sustainable supply chains.* More information about our work to increase the sustainability of our supply chain is available in the Tesco and Society Report. *\t\u0007 UK consumers: how do you expect the financial position of your household to change over the next few months? Will it... Get better Get worse % 50 40 30 20 10 Populations are ageing and household sizes are declining across our markets. In Asia for example, 50% of South Korean households Jan '09 Jan '10 Jan '11 Jan '12 Jan '13 Jan '14 Source: 'The Consumer Today', dunnhumby, February 2014 Consumer trends More frequent shopping The rise of technology Proportion of UK customers shopping three or more times a week for food and groceries 29% in 2009 49% in 2013 43% of UK customers use a mobile phone to compare prices or look up customer reviews while in store Technology is changing the way we consume. The role that it plays in customers' lives has changed from being a practical tool to becoming a much more fundamental and essential part of life. 08 Tesco PLC Annual Report and Financial Statements 2014 Technology is changing the way we consume. The role that it plays in customers' lives has changed as it becomes a fundamental, essential part of everyday life - a way to stay connected, to manage banking and bills, a part of education and often essential for work. While the pace of adoption of online shopping, particularly for groceries, across our markets is unclear, the transition is certainly well underway. It is not just transactional - consumers are increasingly using the internet to research purchases. In the UK, for example, over half of purchases are influenced by digital channels, 63% of shoppers use their smartphone in store and 43% of customers use a mobile phone to compare prices or look up customer reviews while shopping in store. The influence of the internet is rising across all our markets; two thirds of Malaysians have access to the internet, for example, while almost half of Czechs own a smartphone. Multichannel Customers value retailers who get it right Average annual spend with Tesco In-store only 2.04x In-store + online grocery 2.98x In-store + online grocery + general merchandise online In-store of retailers are changing too and they are looking to retailers to provide a truly multichannel offer - one that joins up all the different channels to give them a seamless experience. Value continues to be a priority for consumers across our markets and they are changing the way they shop in order to find the best value for money. They are on the look-out for the best prices, promotions and deals. The sharp rises in fuel prices across the world coupled with pressure on disposable income has amplified a shift to smaller, more frequent, convenience shopping missions. In the UK, Online grocery General merchandise online the proportion of customers shopping three or more times a week for food and groceries is up from 29% in 2009 to 49% in 2013. Health and wellbeing is also a growing trend. Over half of the UK population worry about their health and food is at the centre. Quality fresh food and provenance are priorities for customers across our regions. In Europe and the UK, interest in and awareness of provenance have intensified since the meat contamination issues last year. In Asia wet-markets continue to be a popular choice for fresh meat, fish and poultry. Governance With this rise of technology and digital capabilities, consumers are changing the way they shop. Customers want to be able to shop however, whenever and wherever they want. They want to shop across store formats, on smartphones and on tablets. They are no longer choosing just a simple trip to a store, but are making much more dynamic and complex journeys to purchase. They are bouncing between channels, placing an order online and picking it up in store, for example. They are combining fewer big shopping trips with more frequent, top-up shops at convenience stores. As their behaviour is changing their expectations Strategic report Multichannel cuts across the digital and the physical. It is transactional and non-transactional. It is not just about selling products but also about the way we interact with and engage customers. Being truly multichannel is not just about having a website - it is about putting the customer at the heart of our business and giving them one seamless, joined-up relationship, be that through media, social media or even a customer service desk in store. Industry trends Net new space In response to a consumer desire to shop more frequently and closer to home, many retailers are focusing their opening programmes on the convenience market and smaller format stores. An acceleration in openings of small format stores is something we have also observed in our European and Asian markets. 38% '000 sq ft 6,000 less new space than in 2009 5,000 4,000 3,000 2,000 1,000 2009 2010 Source: IGD Datacentre 2011 2012 2013 In the UK the online grocery market has continued to grow strongly, with all the major UK food retailers now operating a grocery home shopping service. We have also seen a rapid growth in Click & Collect over the last year, including trials of non-store collection locations. While online grocery is still in its infancy in Central Europe and Asia we expect it to continue to grow. In Poland, for example, the value of the online food market doubled in size from 2008 to 2011, and is expected to have more than doubled again by 2014. Across our markets the industry remains highly competitive. In the UK and Europe the discounters continue to grow market share and open new stores. Promotional intensity has remained elevated in the UK and couponing has been a feature in many of our markets. We have seen continued development of own-brand products by retailers across the globe as they seek to appeal to broader groups of consumers and respond to demand for better value. Tesco PLC Annual Report and Financial Statements 2014 09 Other information UK largest four grocery retailers 0 In the UK, food retail sales growth has remained subdued over the last year, reflecting the challenging economic environment and continuing pressure on consumers. Although new space has been a key driver of top-line growth for many in the industry, we have seen a reduction in large store openings. In the UK net new space among the largest four grocery retailers in 2013 was 38% lower than in 2009. In many of our markets performance of larger stores has been more challenged. Financial statements In the UK, food retail sales growth has remained subdued over the last year, reflecting the challenging economic environment and continuing pressure on consumers. Business model Our business model explains what we do and how we deliver our core purpose for customers. It is built up around four core retail activities, insight, buy, move and sell. Our key enablers make us unique and help us to continually do these things better. lop economies of scale Deve ffer our o ng omers i vat st no or cu In f l ne Establish offer fing a m or c u ust ltic om ha ers n er eth at m , er e tt atters b r ve l Le ski br an d Usin g our scale for good Drive custo er loyalty m Visit www.tescoplc.com/businessmodel to watch a short animation explaining how our business model works 10 Bu y wh a l a ging nd G sca roup le to g peo ple Developing ou r Grow sales ak e Tesco PLC Annual Report and Financial Statements 2014 in our offer for cust ome Invest rs re Purpose Co t igh m We ve Mo s Te he gt din Buil co Ins responsibly ting era Op ll Se 38 million Clubcard customers shopping in our 7,300 stores across the Group give us unrivalled insight into consumer habits, trends and preferences. Strategic report Our core activities As a retailer, our business model is based on four core activities. Using our unrivalled insight to understand what customers want, we buy products and services from suppliers, move them through our distribution network and sell them to customers. Most importantly, our core purpose is at the heart of these activities. It is by improving these activities for customers each time they shop with us that we make what matters better, together. The core activities form a cycle. To keep customers coming back, we are constantly strengthening our operation. This starts with insight. We listen to customers in a number of ways, including through our monthly Customer Viewpoint surveys in UK stores, in-depth focus groups with our Tesco Families and dedicated Customer Question Time sessions. Combining this feedback with our data, including the unique insight we gain from Clubcard, and acting on it is crucial to our success. Governance Across the Group, our customers visit us in store, online, or through a combination of different formats and channels. They come to buy their groceries, clothing, general merchandise and services such as telecoms, digital entertainment and banking. We are focused on providing customers with the most compelling offer and the best shopping trip. We work with our suppliers to offer an excellent range of products and services. We move the products through our modern and efficient supply chain into our well-located, multi-format store network, ready for customers to shop with us 24 hours a day. The key enablers Our seven key enablers are our business strengths. They help us to sustain and improve our core activities. These elements are what make us different and it's because of these that we are uniquely placed to win. 59.7% T For example, establishing multichannel leadership and building a seamless offer will enable customers to shop however, whenever and wherever they want, which will mean that we stand out for customers. Financial statements of our UK customers shop across two or more channels, including stores and online. Another example is leveraging our Group skill and scale, which is all about sharing our experiences across our operations. We trial in one area of the business and transfer the learnings to another, whether it's sharing the loyalty scheme blueprint internationally or building capital-efficient grocery home shopping businesses in new markets. Being able to leverage our Group skill and scale makes us unique and helps us to perform the core activities even better. The virtuous circle with retail operations delivering 85 million customer shopping trips each week. Developing and using economies of scale across our business all over the world, enables us to improve the customer offer by investing in areas such as price, range, quality and service. This year, for example, we completed the roll-out of grocery home shopping to all of our markets (except India). It is a service we developed in the UK and have rolled out in a capital-efficient way to our international businesses, with a great customer response. Doing the right thing for customers is central to the business model. It's why one of our Values is 'no-one tries harder for customers'; we know that if we do the right thing for customers, they will reward us with their loyalty. The more pleased customers are with the shopping trip, the more loyal they will be and the more we will grow our sales. This combination of scale and growth is the driving force of the business model. Tesco PLC Annual Report and Financial Statements 2014 11 Other information 12 markets The momentum of our business model comes from the virtuous circle. By developing economies of scale and investing in an ever-improving customer offer, we drive loyalty and grow sales. Financial review Group results 2013/14 (on a continuing operations basis) 52 weeks ended 22 February 2014 Growth (actual 2013/14 exchange rates) Growth (constant exchange rates) 70,894m 0.3% 0.9% 0.4% Group trading profit 3,315m (6.0)% (6.7)% - UK (3.6)% Group sales (inc. VAT) * Sales growth excluding petrol (0.2)% 2,191m (3.6)% - Asia 692m (5.6)% (6.8)% - Europe 238m (27.7)% (32.8)% - Tesco Bank 194m 1.6% 1.6% 3,054m (6.9)% (7.7)% Underlying profit before tax Underlying diluted earnings per share 32.05p (7.3)%** n/a ROCE (pro-forma inc. China)*** 12.1% (64)bp n/a 2.7bn 0.9% 0.6% 9.8% n/a Capex Statutory profit before tax includes: - \u0007\u0007One-off items (inc. Europe asset impairment of (734)m) Laurie Mcllwee Chief Financial Officer Statutory profit before tax (801)m 2,259m China treated as discontinued, including a charge of (540)m relating to the write-down of goodwill \u0007 Group sales (inc. VAT) exclude the accounting impact of IFRIC 13. Underlying diluted EPS growth calculated on a constant tax rate basis; (5.0)% at actual tax rates. *** \u0007 From an accounting point of view, our existing business in China has to be treated as a discontinued operation, prior to the planned completion of our partnership with CRE. The pro-forma Group ROCE of 12.1% includes our Chinese business to provide a comparable figure to the previously disclosed 2012/13 figure. It is otherwise calculated on a continuing operations basis, excluding one-off charges. Excluding our Chinese business, Group ROCE for 2013/14 was 13.6%. * **\t\u0007 Group sales Group trading profit 70.9bn 3,315m Underlying diluted earnings per share Full-year dividend per share maintained 32.05p 14.76p Group results and strategic update Group sales for the year were 70.9 billion, an increase of 0.3% at actual exchange rates. Full-year trading profit for our continuing operations declined (6.0)% to 3.3 billion. This was driven by a decline in UK profits and challenges overseas; specifically, the regulatory impact in South Korea, political disruption in Thailand and continuing challenging conditions in Central Europe. Underlying profit before tax1, which excludes the contribution from property-related items, declined (6.9)% to 3.1 billion. Underlying diluted earnings per share was 32.05 pence. During the year, we concluded our strategic review in the United States with the sale of the substantive part of Fresh & Easy's operating business to Yucaipa. We also announced our partnership with China Resources Enterprise Ltd. (CRE), which when completed will give Tesco a 20% ownership stake in the largest food retail business in China. Both of those operations are therefore shown as discontinued. Reflecting the challenging trading conditions and rapidly changing environments, we have also announced a number of one-off charges. (801) million2 of these are in continuing operations. These include: \tA non-cash impairment of (734) million to the carrying values of some stores in the Europe segment. \tAn additiona