Annual Report and Financial Statements 2016 Serving shoppers a little better every day In this report Strategic report Page Tesco at a glance 01 Introduction 02 Chairman’s statement 03 CEO’s statement 04 Turnaround priorities 06 Business model 10 KPIs: The Big 6 12 Financial review 14 Environmental and social review 20 Principal risks and uncertainties 24 Corporate governance 28 Financial statements 74 Other information 160 Watch our videos We have produced a number of short videos that are available at www.tescoplc.com/ar2016 and are featured within our report this year, as indicated by the video screen icon Tesco at a glance As one of the world’s largest retailers with reportStrategic 476,000 colleagues, we serve millions of customers every week in our stores and online. £48.4bn1 £944m1 £1,046m1 4.97p1 £(5.1)bn2 Group sales Group operating profit Statutory operating Diluted earnings per share before Net debt (exc. VAT, exc. fuel) before exceptional profit/(loss) exceptional items and net pension (14/15: £(8.5)bn) (14/15: £49.9bn) items (14/15: £940m) (14/15: £(5,750)m) finance costs (14/15: 5.46p) 1 1,3 476,000 6,902 78m1 18m Colleagues Shops around Shopping Meals donated through our food at year-end the world trips per week surplus redistribution work and (14/15: 492,000) (14/15: 6,849) (14/15: 77m) Neighbourhood Food Collection Corporate governance 2 21 17 UK & ROI % % 54 International 29 Tesco Bank 77 Group sales Group operating profit (exc. VAT, exc. fuel) before exceptional items 1 Reported on a continuing operations basis. 2 Excludes the net debt of Tesco Bank. 3 Includes franchise stores. Financial statements Other information Visit www.tescoplc.com/ar2016 to see a short highlights video of 2015/16 Tesco PLC Annual Report and Financial Statements 2016 01 Introduction Serving shoppers a little better every day Last year we made a simple commitment. Alongside our purpose, we have We set out to get back to what Tesco has recommitted to three values: always done best: being the champion for customers; putting customers first; and • No one tries harder for customers taking small actions to make big differences. • We treat people how they want to be treated Since then, we have begun to transform • Every little help makes a big difference our business – from how we are organised to the way we work with our suppliers Whenever a customer chooses to shop and ultimately the way that we serve at Tesco, we want their experience to our customers. be better than expected and better than the last – from the quality of the offer to One of the most important changes we the thoughtfulness of the service. With have made over the past year is to set out the skills, expertise and dedication of our a new purpose for Tesco: ‘Serving shoppers 476,000 colleagues worldwide, we are well a little better every day.’ This purpose guides placed to achieve this. By delivering our all our decisions and shapes every action purpose, and staying true to our values, we take. we can continue to build on the progress we have made this year. This has been a year of real change at Tesco. Our ambition now is to go further and do even more to reduce and simplify prices, improve ranges, continue to innovate and deliver excellent customer service. Visit www.tescoplc.com/ar2016 to see how we built a temporary store in Carlisle 02 Tesco PLC Annual Report and Financial Statements 2016 Chairman’s statement Strong foundations reportStrategic John Allan Across the business, we have continued we look forward to working with them Non-executive with our wide-ranging corporate renewal to take the Company forward. Chairman plans and I’m pleased to say that these are very much on track. Through making On behalf of the Board, I would like some difficult decisions and putting the to thank Dave Lewis and his senior customer at the heart of all we do, we are management team for their continued rebuilding the business. It was a difficult hard work and dedication. Strong decision to sell our Homeplus business foundations have been laid since we in Korea, but it was an important step in began our turnaround and I believe that repositioning the finances of the Group we have focused on the right priorities It has been a very challenging year for by generating £3.3bn of funds. The sale as we continue to rebuild and strengthen Tesco, but I remain extremely positive enabled us to take a significant step forward the business. and confident about the future of this on our priority of strengthening the balance great business. Tesco is an iconic brand, sheet. In addition, replacing the UK defined A highlight of my year has been getting Corporate governance a national institution and an enormous benefit pension scheme with a defined out into the business and meeting so many employer, so I’m conscious of the huge contribution scheme means we have a plan of our colleagues, both in the UK and responsibilities, not just to our customers, that is both competitive and sustainable overseas, and seeing the passion and colleagues and shareholders, but to all for our colleagues over the long-term. enthusiasm they have for Tesco. During our other stakeholders, including our a recent visit to South East Asia, I was supplier partners. Further information on the work that delighted to see the recognition Tesco has taken place during the year can is receiving as a very attractive employer. During the past year, there has been a be found in our corporate governance I want it to be recognised how hard our renewed focus on corporate governance section on page 28. colleagues have worked during the past and the Board has spent a significant year and thank them for their commitment proportion of its time examining and The Board and I feel we have the through difficult times. strengthening our processes throughout right balance of skills, experience and the Group. Having a solid governance backgrounds to support and challenge It is important that we get Tesco framework is key to rebuilding trust the management team. The recent back to investment grade and paying and transparency. appointments of Alison Platt, Simon dividends. We are a business of scale and Patterson and Lindsey Pownall as complexity and have the resources to do additional independent Non-executive a lot. But it will be our relentless focus on Directors have further strengthened meeting customers’ needs that will help Financial statements the Board. Between them, they bring us to achieve our goals for the long-term a wealth of customer service, IT and success of the Company for the benefit supplier relationships experience and of all our stakeholders. John Allan Non-executive Chairman Other information Visit www.tescoplc.com/ar2016 to hear more from John Allan on his first full year at Tesco Tesco PLC Annual Report and Financial Statements 2016 03 CEO’s statement A year of significant progress Dave Lewis As a result, we have stabilised the business In October 2015, we became the first – Group Chief and we are on track with where we expected and still only – retailer in the UK to offer Executive to be. Of course there is still more to do customers an immediate price match – but we are on the road to recovery and at the till with Brand Guarantee, so they momentum is building across the business. never pay more for their branded shop if it’s cheaper at Asda, Morrisons or Our business has always been at its Sainsbury’s when they buy 10 or more best when we’ve made customers our different products. absolute priority. Over the past year, we have restored our total commitment And just two months ago, we launched This has been a significant year for Tesco. to giving the best possible service to our a range of exclusive new fresh food brands, We have delivered unprecedented change customers. This is reflected in the new which are available only at Tesco and at over the past 12 months as we have begun purpose we have set out for the business: great prices. These are allowing us to to transform our business. serving shoppers a little better every day. give our customers even more choice in This is guiding every action we are taking great value, fresh food all under one roof. We have taken decisive, immediate action and has been instrumental in making on the challenges we faced. In a very the UK business competitive again. International sales have also strengthened deliberate way we have made the changes despite trading in challenging markets, needed to re-energise the operation. We As well as investing in lower, more driven by improvements across our offer. have guided our efforts with the three stable pricing and improved service We have built up strong positive sales priorities we set out in October 2014: and availability, we have reviewed and momentum throughout the year in both simplified every one of our food ranges Europe and Asia. Our largest international 1. to regain competitiveness in the core and added thousands of extra colleague business, in Thailand, performed particularly UK business; hours on the shop floor to improve customer well, culminating in its highest-ever market 2. to protect and strengthen the balance service. On-shelf availability has reached share. Our transformation programme sheet; and record levels, ensuring customers can get in Europe has accelerated growth and 3. to rebuild trust and transparency. what they want, when they want it.