Britain’s biggest supermarket group Tesco revealed a worse than expected £263 million hole in its accounts yesterday and admitted an independent investigation had shown it had over-stated profits for years.
New chief executive Dave Lewis, who replaced Phil Clarke after the latest of a string of profits warnings in August, said continued tough trading had hit half-time profits, as crisis continues to engulf the group.
Tesco also said chairman Sir Richard Broadbent would be stepping down when ex-Unilever executive Mr Lewis and new finance director, former Marks & Spencer man Alan Stewart, had settled in following the conclusion of an investigation by accountants Deloittes into the artificially inflated accounts.
The investigation, which has been taken up by the Financial Conduct Authority (FCA), was called after an internal whistle-blower had originally put the accounting mis-statement at £250m. Mr Lewis and Sir Richard said they could give no more detail on the scandal on the orders of the FCA.
Eight senior members of staff, including UK managing director Chris Bush, have been suspended over the issue. The Deloitte inquiry, helped by City lawyers Freshfields, found Tesco had been booking financial returns early and pushing back the costs in dealings with suppliers on price promotions.
It came as Tesco posted a 92 per cent fall in interim pre-tax profits to £112m for the six months to 23 August, from £1.39 billion a year ago, while same-floorspace sales in its UK heartland fell 4.6 per cent amid an ongoing price war with Asda, Morrisons, Aldi and Lidl.
Tesco Bank, which employs 3,300 of its 4,000 staff in Scotland, was unaffected by the ongoing confusion around its parent, Mr Stewart said. Its profits rose 16 per cent to £102m.
Mr Lewis said he was “not naive” about the challenges facing Tesco. But he said he would try to make it the “champion of the customer” again.
“There’s absolutely nothing I would not change in the service of the customer,” he said. However, Mr Lewis refused to promise radical price cuts in stores, saying that until issues of service and product availability were addressed, such action “would not have the impact I want”.
Tesco drafted thousands of extra shopfloor workers in under Mr Clarke to try to restore the company’s fortunes, but Mr Lewis hinted at possible back office job cuts, saying he would be looking for “synergies”, and the company currently had 32 offices in the UK.
The new boss kept all his options open in an ongoing strategic review, from possible overseas asset sales to a big stock market cash-call on investors.
Big pension funds and insurer investors in Tesco are understood to be nervy about any such cash-call amid a plummeting share price. After yesterday, Tesco’s share price closed down nearly 7 per cent, or 12p, at 171p, slashing a further £1bn off the value of the business.
Tesco confirmed Mr Clarke will not receive his potential £10m pay-off until the FCA inquiry is concluded, with former finance director Lauri McIlwee’s £1m package also withheld.
Outgoing chairman Sir Richard said that, despite Tesco’s problems in recent years, he felt “the company has been well governed” and “remorselessly proactive” in facing issues.”
Stephen Jardine: Diversification made the firm vulnerable to competition
WHERE did it all go wrong for Tesco? Whole books will be written about this in years to come but it is easy to explain in just 400 words.
The simple explanation is that the business lost focus and forgot about the basic rules of grocery retail.
Back in 2007, Tesco was devoted to the simple aim of offering the best grocery quality at the keenest prices. That worked and saw the business increase market share, taking the share price to a heady £5.
Then success went to the heads of the management team and they grew to believe they could be all things to all people.
So along came Tesco opticians, pet insurance and electricals along with expansion overseas. Not content with that, Tesco then bought 80 per cent of the digital content platform Blinkbox. All of a sudden the grocery retailer was trying to take on Amazon.
A newspaper cartoon from the time shows a couple sitting in their front room with a tiny branch of Tesco in the corner. It seemed like the company was, literally, everywhere.
The unravelling began when discount stores Lidl and Aldi targeted the British grocery market.
While other established retailers focused quickly on a response, Tesco was probably wondering if it could beat Richard Branson into space.
Market share started to dip. Then came the Horsegate scandal where Tesco was shown to be selling meat that wasn’t what it said on the packet.
Customer confidence was shaken and Tesco fell into a vicious cycle of declining sales.
To try to make a bad situation look better, someone decided to move figures on the balance sheet and hope no-one would notice. They did and the result has been an unprecedented business disaster.
With profits down 92 per cent and the full extent of the £263 million accounting black hole exposed, surely the only way is up? If Tesco sells its overseas business and disposes of non-grocery retail, it has a chance of getting back to its roots and doing again what it once did well.
That will involve a humiliating retreat for a business that once accounted for £1 in every £3 spent in Britain but, with shares down again yesterday, the very survival of the business is now at stake.
• Stephen Jardine is The Scotsman’s food and drink columnist