UK Corporate governance, viability statement, including stress testing for Brexit, cyber attack, COVID-19 and climate change

Tesco PLC – Annual report – 27 February 2021

Industry: retail

Longer-term viability statement

Assessing the Group’s longer-term prospects and viability

The Directors have based their assessment of viability on the Group’s current long-term plan, which is updated and approved annually by the Board. The plan delivers the Group’s purpose of serving shoppers a little better every day and is underpinned by a clear strategic focus on driving sustainable and profitable growth.

The Group conducts an annual strategic planning process, comprising a comprehensive reassessment of progress against the Group’s strategic objectives, alongside an evaluation of the longer-term opportunities and risks in each market in which the Group operates. The process for identifying the principal and emerging risks in each market is an important input to this process.

The Group’s strategic planning and viability statement are both considered over a three-year period, as this time horizon most appropriately reflects the dynamic and changing retail environment in which the Group operates.

Long-term planning process

The long-term planning process builds from the Group’s current position and considers the evolution of the strategic objectives over the next three years. As part of this, a longer-term assessment of the prospects of the Group is also considered.

Current position

The priority for the Group in the past year has been responding to the COVID-19 pandemic, with a primary focus on safeguarding customers and colleagues by providing food for all, safety for everyone, supporting our colleagues and supporting the communities in which we operate. Following the successful delivery of every part of our turnaround plan in the prior year, the Group entered this period in a strong position, both financially and operationally, enabling the creation of long-term and sustainable value for our key stakeholders.

The Group continues to invest in delivering great value to help customers in increasingly challenging times, supported by:

  • A strategic focus on driving growth and continued focus on cost reduction from simplification of the operating model.
  • A clear set of financial priorities to deliver cash profit, free cash flow and earnings per share growth, underpinned by a robust capital allocation framework.
  • A diversified business portfolio covering retail, wholesale, banking and data science.

Refer to the Group Chief Executive’s review on pages 6 and 7 and the financial review on page 19 for further detail regarding the Group’s strategic and financial progress.

Longer-term prospects

The following factors are considered both in the formulation of the Group’s strategic plan, and in the longer-term assessment of the Group’s prospects:

  • The principal risks and uncertainties faced by the Group, as well as emerging risks as they are identified, and the Group’s response to these.
  • The prevailing economic climate and global economy, competitor activity, market dynamics and changing customer behaviours.
  • The ongoing challenges posed by the COVID-19 pandemic, including structural changes in how customers shop, costs incurred by the Group in safeguarding customers and colleagues and the potential macroeconomic consequences of rising unemployment.
  • The potential short and longer-term economic impact of Brexit
  • Opportunities for further cost reduction through operational simplification and leveraging technology.
  • The resilience afforded by the Group’s operational scale.

Assessing the Group’s viability

The viability of the Group has been assessed, considering the Group’s current financial position, including external funding in place over the assessment period, and after modelling the impact of certain scenarios arising from the Group’s principal risks outlined on pages 33 to 37.

Five ‘severe but plausible’ scenarios have been modelled that address the principal risks that the Group has assessed would have the most direct and material impact on the Group. None of these scenarios, either individually or in aggregate, threaten the viability of the Group.

We expect to be able to refinance external debt and renew committed facilities as they become due, which is the assumption made in the viability scenario modelling. The scenarios opposite are hypothetical and purposefully severe with the aim of creating outcomes that could threaten the viability of the Group. In the case of these scenarios arising, various options are available to the Group in order to maintain liquidity to continue in operation, such as: (i) accessing new external funding early; (ii) short-term cost reduction actions; and (iii) reducing capital expenditure. None of these mitigating actions are assumed in our current scenario modelling.

Viability statement

Based on these severe but plausible scenarios, the Directors have a reasonable expectation that the Company will continue in operation and meet its liabilities as they fall due over the three-year period considered.