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Economics

Published on October 24th, 2014 | by Samuel Davis
Image © Tesco

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Tesco – Knocked off the Podium

Tesco PLC Chairman Richard Broadbent on Thursday said he will step down once the new management team has settled in, but he claimed he thought the board was “well governed” even though the company admitted its recent profit overstatement was worse than first thought and the issues that caused it had been going on before the first half of this year.

This comes after the recent news that the retail giant has lost 50% of its market value in a year. Britain’s biggest supermarket chain also announced that it has overstated previous profits by £263m over recent years. It doesn’t just rain for Tesco. It pours, then it hails, then there’s a bit of sleet and snow thrown in. For a business that was predicting it would make £1.1bn in profit for the first half of this year, a misstatement of £250 million is a significant number. The arrival of the discounters Aldi and Lidl,  which have both eaten into Tesco’s market share (down from 30.2% to 28.8% according to Kantar Worldpanel data) only exacerbated the push for the earlier taking of revenues and profits. In an era of rising sales and increasing amounts of money going through the tills, moving profits forward can later easily be disguised, cloaked by increasing revenues in the second half of the year. Any issues in the first six months are “traded away”. But when sales are falling as they have been for a number of quarters at Tesco then moving profits forward starts to cause problems. At the heart of all this is, of course, the fact that customers appear to have fallen out of love with Tesco.

When did it start going wrong?

When he took over, Mr Clarke said that Tesco had been “running too hot” under Sir Terry, suggesting that the retailer had lost focus on the core retailing principles best prices, highest quality and stores that people like shopping in. Under Mr Clarke, Tesco bought posh coffee shops, restaurants and digital businesses as it expanded the services it thought customers would be interested in. The launch of Tesco’s own tablet, the Hudl, proved very successful giving Tesco an automatic way of influencing how people shopped online. There were many who disagreed with Mr Clarke’s approach. Allies of Sir Terry say that Mr Clarke allowed Tesco to lose its reputation as the cheapest of the “Big Four” retailers, a crown it lost to Asda. Customers followed with their feet, deserting for competitors.

The consumer needs to feature now. Most believe Tesco will cut prices again and look to improve its widely criticised stores. Recent marketing campaigns, including a voucher for £5 off a £40 shop, appear to have arrested the sales decline to an extent. Many believe that Tesco should move away from vouchers and one-off price promotions and win back customers with lower prices across all its ranges.

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