Wow, Just Wow. It is almost beyond belief, and there may be more to come yet.
I’ve written about the trials and tribulations of Tesco before (here and here for example), but have generally taken the view that a crisis of confidence at a market share of c30% is one most retailers would love to have. But, there does come a point, or more critically a cascading series of points.
And maybe that’s where we are now. These are dangerous times for Tesco, yet these may also bring real opportunity. Hence my initial tweet about “turmoil”; a view that seems common now.
The accelerating decline of market share in the last year or so to 28% is one thing and it did cost the CEO his job. The loss of the finance director some months before now appears more significant, or certainly the lack of anyone doing that job since last April; surely gardening leave leaving no one in place needed to be disclosed? The lack of a coherent response to the discounters and other competition, let alone spotting and then responding to the strategic structural change underway in retailing (bad on the hypermarkets but ahead on the internet), were all reminiscent of trying to turn round a super-tanker. But as I wrote before, it has been thus since 2007 or so, with only profits masking the situation and distractions such as the USA attracting the attention. But then in many organisations there is a temptation to see the “new” as exciting and the “old” as boring and not worthy of attention.
But are Tesco in a different place this time? Especially as the profits (at least in the last six months) are now under question. Overstating profits by c25% at half-year seems like a biggie. The new CEO having to suspend four UK directors and plead with M&S to release his new Finance Director early, at least shows action, but is the cause the tip of the iceberg (and is Tesco the Titanic)? And how much will such distractions (as necessary as they are) eat management time and take it away from the strategic decisions and operational remedies needed?
There are many questions about the money unanswered at this point and one might expect major changes to ensue whatever the outcome of the investigation. The underlying issues, for which the new CEO was brought in, have not gone away, nor will they without action. What new issues in terms of accounting practices, and the behaviors underneath them, Deloitte et al will reveal remains to be seen. Who knew what, when, will be uncomfortable for some (in Tesco and in their auditors and others) , let alone the answers to the question of who should have known what, when? How much of this is accident or design, and who really benefited and to what extent are further questions? And whether this casts a shadow across all of the multiples will be a question nervously pondered over in many places (retailers and their shareholders as well as the SFA) in the coming weeks.
Bill Grimsey made a point that it took Wickes 5 years to get over the crisis of (at this point what seems) a similar nature a few years ago. Do Tesco have the luxury of that amount of time given the changed circumstances, the competition and their position?
But on the other hand, could this be the catalyst for more radical action to meet the underlying challenges from within? I am not sure vast numbers of consumers are really too worried by the arcane (to them) booking of revenues. They are though worried about the state of the stores, the prices they are charged and the service they receive. Meeting their needs in these respects and stopping the hemorrhaging of market share, and then restoring profit (though at what level is a further question) is the key task for (what will have to be expanded) new management.
As Dave Lewis has said, there needs to be a house cleaning, and a change in approach, but on its own these will not matter, unless what the consumer sees in the stores and online is more compelling and stops them moving to other retailers. If people continue to fall out of love with Tesco then 31% may become to be seen as a long lost golden upland. But, if the rot can be stopped then it may be a new target to (re-)achieve.
(If anyone needs to catch up on what the UK press are saying about the Tesco situation, then the twitter feed of Neil Saunders of Conlumino (@NeilRetail) is a great place to go, as he does miracles in summarising retail news every day)
Stirlingretail 
Hi Leigh,
Some thoughts on this:
To what extent was this accounting practice simply the way Tesco had been doing business for a sustained period and only now has someone internally “called them out” on it? (Cantor Fitzgerald had commented on this some time ago and presumably Dave Lewis knew all about it).
If so, why were they “called out” now?
It sure makes for softer comparatives a year from now when we review the success of Dave Lewis’ first year…
Best wishes, Steve
Steve
I think the “business as usual” vs “something different happened” point is a critical one, though could there be a cumulation aspect to this as well? Is it the case that the practice “works” if business growing or stable but that when the business is declining it builds up a growing problem of less real income than expected, which in time becomes a real issue? (a sort of Nic Leeson problem but hopefully at a smaller scale)
I am not sure that soft comparatives are going to be the most critical thing in next year’s figures !
All the best
Leigh
Yes – I suspect you are spot on. Doing what they were was probably fine until the business stopped growing. It is certainly going to be interesting over the next twelve months!
Best wishes, Steve
Another great blogpost Leigh! – and a fascinating exchange of responses to “Turmoil at Tesco ” between you and Steve Wood – IMHO two of the most prominent retail academics in the UK.
I absolutely agree with Steve Wood that the fact the new Tesco CEO Steve Lewis (by the way a Nottingham Business School Alumni) headed up one of Tesco’s major suppliers is not a coincidence – he would have known and understood everything about the supplier: Tesco relationship and from what I understand, this was far from a “marriage of equals”
It’s therefore very possible that he was committed to exposing this issue in his first few weeks at Tesco – although I agree with Leigh that any short term LFL profit performance would not be his first objective, rather to ensure that shareholders, the City and regulators and the media were fully aware and everything was now in the public domain.
Whilst I agree that this current profit overestimate is a huge current issue for a major FTSE company, and in particular Tesco Directors and shareholders, I also believe this might lead to an investigation into the wider, although closely related issue, of how major retailers work with their suppliers – and in particular the level of financial support suppliers are expected to provide for major retailers promotions and price reductions – often retrospectively.
As you have both stated, the next few months are going to be fascinating!
Nelson
Thanks for the comment. On Dave Lewis, if what you say is true, then I wonder if the people who appointed him fully appreciated this? I am not sure this was expected. As you say, more to come out in the next wee while and I suspect, as do you, not confined to Tesco.
Leigh
Good blog Leigh.
The parallel that Bill Grimsey draws with Tesco is an interesting one.
He is absolutely correct that he saved the business with the rights issue but the trading performance never really recovered. In the years post the rights issue market share and profitability never improved, a point that was made by Bill Archer when he first tried to buy the company. In fact the true value of Wickes was only realised when it was passed to Bill Archer and his team. The problem at Wickes was in the Commercial Team, the Wickes Brand and it’s bond to its customers remained strong throughout the process.
It’s one thing to have the skills to resolve a short term financial crisis (which is was Tesco may have) it’s another set of skills altogether that’s required to restore trading. Wickes was faced with a financial problem so large it would be fatal, Tesco’s, whilst large, is unlikely to be fatal. Wickes had a strong and untroubled relationship with its customers, Tesco faces a growing disconnect. It’s the latter that may ultimately prove fatal for Tesco.
The comparison to Wickes is a bit of Apples and Pears to use a Grocery phrase.
Leko
Thanks for the comment. I agree with much of it. The pure financial issue at Tesco is clearly not likely to be fatal, though there could be real damage, hence some of the moves today. The big questios are whether this is a short term financial crisis or something more substantive and whether the new team can sort its way out of stagnating and then falling market share, sales and the profit implication. We have to wait and see on that, and I agree that it is the big threat.
Leigh
A couple of thoughts on this.
On the. “If people continue to fall out of love with Tesco…”. I was struck by the observation of a retail commentator on BBC R4 with just the first glimmering this summer of how bad things were going to get. The observation was that even while Tesco was doing what it did well, its customers never really ‘loved it’ (i.e. like the affection John Lewis engenders). Tesco was, arguably, always dangling on the edge of a precipitous collapse in reputation and custom.
The other thought is how so often in the customer service domain (and especially in retail) it’s the little details in the supplier-customer interaction that tells much. Aficionados of this excellent blog may remember my relating last year of my angst and frustration over a big (for me) customer service failure of Tesco’s. That was the tale of the Easter Lamb offer that was not ion stock in any of the tried Tesco stores in Glasgow at Easter… followed by a Tesco ‘customer ‘service’ response that composed in parts of banality, unhelpfullness and even a little patronising.
I picked up from this blog at the time that the incident may well have reflected Tesco’s move into ‘lean’ stocking.
Edward
Thanks as always. I think I overstated it in my original piece – you are right, for many “love” is too strong and does not reflect what most people feel for any of the major food multiples. I am not sure this only applies to Tesco, though accept it will vary amongst them. Retailers are always going to be subject to shifting consumers for a variety of reasons. I do know quite a few people who do not like (or love!) JLP.
Leigh
Leigh
You are right to raise questions about Tesco generally and the accounting question upon which I have lectured many times at Stirling for the Retail MBA programme.
We need to recognise that Tesco actually has many qualified accountants so does not having a group finance director for a while really make a difference if they are following their accounting policies and practices. This is not a corner shop reliant on one accountant. So readers can put comments into perspective I was Retail Finance Controller at Tesco about 20 years ago and then there were over 20 qualified accountants..
We should also understand the issue is about Forecasts not audited half year figures and we will find out if the half year figures were overstated. I do agree with Steve Wood that it is convenient for a new CEO to create an issue and his point about comparatives should not be dismissed too lightly.
The operational issues facing Tesco are more important than the accounting issues and I also disagree with you about International operations that you refer to as a distraction. A distraction from UK operations perhaps but they have separate teams for the various businesses e.g. mobile, bank, international etc.
Neither am I convinced by the superficial analysis of Mr Saunders albeit a summary of press commentary which lacks proper rigor and insight.
Tarlok
Thanks for the comments.
I take the point that Tesco employs accountants, but I guess we may have to wait and see the extent to which their role has been aligned with what was needed and the extent to which individuals knew what, when. Not having a Group Finance Director I think was important, but perhaps the fact no one was saying that they did not have one may be more so. The composition of the Board is interesting generally and from April onwards.
I know what Steve and yourself are driving at, but I am trying to believe that the City (and the media) will not be so easily taken in.There may be a sector re-basing underway but I don’t think comparatives are the key in this story.
I think I wrote that the operational issues are critical to the future, so we agree on that. My point about distraction to the core UK operations stands though, as I feel that despite the separate teams for things, there is a battle at Group level for where senior attention and investment goes. I would find it hard to argue that the UK core has not been neglected or mis-directed over the last 6 or so years – though I am not close enough to be able to say to whom this can be attributed. That may be for an other piece?
Not sure I follow your point about Neil; he saves me loads of time every morning and directs me to where to look if I want to follow up the headlines. For me that does what it sets out to do, and does it well. I am not sure a Twitter feed is the place for in-depth analysis – a point I demonstrate amply every day through my tweets.
Be good to catch up some time. All the best
Leigh
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