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Tesco leaves accounting scandal behind

In the summer of 2014 alarms went off in Tesco’s head office. The brand new CEO of the British supermarket chain had to announce that profit figures had been considerably polished. The books turned out to have a gap worth 250 million pound. The enormous accounting scandal looked to become a millstone round the retailer’s neck, which wasn’t doing too well to begin with, but three years later Tesco appears to be doing better.

“They started seeing suppliers as a source of income,” describes one analyst in the Financial Times as a cause of the problems. After a period of considerable growth, under the guidance of CEO Terry Leahy, turnover dropped by several per cent after he left in 2011. Despite efforts by his successor, Philip Clarke, figures continued going down. In June 2014 the company reported a decrease of 3.8 per cent on a comparable basis compared to the previous year. Clarke was then asked to give up his position. New CEO Dave Lewis had barely taken charge when one of the largest accounting scandals in history came to light.  



Fraud with profit figures
The top man could do nothing except announce that the books were too rosy, and that the profit had been overestimated by 250 million pound (318 million euro). The announcement resulted in a drop in prices of ten per cent. The value of the shares was at a low point. British authorities also started investigations into the fraud. CEO Dave Lewis could only try to change the direction of the company by taking drastic measures. In a short time he closed 43 branches that weren’t making a profit, and the plans for building 49 new shops were binned. Some subsidiaries were sold as well. Despite all these efforts, the books were closed with an enormous loss of 6.4 billion pound in April 2015. 

It wasn't just the price war and competition on the retail market that threatened the continued existence of the chain. On the purchasing side of things, a culture had come into existence in which suppliers were used to increase profits. “They started to see suppliers as a source of income,” according to the analyst. “Normally, a retailer makes a profit by buying products for 20 cents and selling it for 30 cents, but when Tesco’s profits started to get pressured, they didn’t look at increasing sales to make more money.” According to analysts, this faulty focus is the most important cause of the enormous loss, because they weren’t dedicated to making more income by making customers spend more. 

Good results
CEO Dave Lewis admitted that the company’s strategy had “dramatic consequences” for its relationships with suppliers. Tesco made a U-turn. The new management wanted a clean slate. Last month, the supermarket chain reached a settlement worth 219 million pounds with the Serious Fraud Office and investors were offered 85 million pounds in compensation.

“I’m very happy to be able to report another considerable improvement for Tesco,” said John Allen, chairman of Tesco, in the annual report. That satisfied mood is understandable. Tesco made a profit of nearly 50 million pounds. The operational profit for exceptional items amounted to 1.28 billion pounds. That was an increase of 25 per cent. Net debt amounted to 3.7 billion pounds. On the British and Northern Irish market, the company saw sales increase on a comparable basis. During the third quarter of the financial year, a growth of 1.7 per cent was recorded. Tesco also made a profit on non-financial items. For example, consumer appreciation increased from two points in 2015/16 to seven points in the past year. The mood also improved among workers and suppliers.

Their market share in the British retail sector has decreased somewhat in recent years, although Tesco is still the largest supermarket chain by far. Late April, its market share was 27.5 per cent. In early 2015 the chain had a share of 29 per cent.

Acquisition of Booker
In January, Tesco made an acquisition offer to Booker, one of the largest British wholesalers and the owner of supermarket chains Premier, Budgens and Londis. Although the deal led to a revival in Tesco’s share price, worries also arose. Several large shareholders warned Tesco to stick to the new direction and the execution of that plan. The good figures were seized on by the supermarket’s management to defend the deal. “The results should give everyone confidence that the management team is completely focused on the continuing execution of the company’s new course,” according to Dave Lewis. “Hopefully, our shareholders and interested parties have seen that the team continues to deliver.” In late May the competition authorities started an investigation into the announced acquisition to assess whether the deal can go through or not.  

Publication date: 8/29/2017


 


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