Comment: Flailing Tesco brought to account again

Unexpected £250 million in the Tesco bagging area. Britain’s once-proud biggest supermarket group has now issued its third profit warning this year. One chief executive out, 
another one in, and things go from bad to worse.

Martin Flanagan

New boss Dave Lewis, brought in from Unilever to replace the hapless Phil Clarke, has had an incendiary baptism. Shares in the retailer dived as much as 11 per cent after it cut its first-half profit outlook by £250 million, admitting that even after its most recent warning at the end of August it had actually overstated expected earnings by 23 per cent.

The embarrassing error, revealed yesterday, was caused by an early booking of revenue and a delayed 
recognition of costs, and was found out during preparation for the forthcoming interim results.

Four employees have been placed on leave, believed to include Chris Bush, managing director of Tesco’s UK business. As the reputational damage at Tesco mounts up, it also revealed that accountant Deloitte has been 
appointed to conduct an independent review of how these things came to pass, alongside the company’s lawyers, Freshfields.

The conveyor belt of controversy goes on. It is astonishing. Since Tesco’s disastrous foray into the United States under then-chief executive Sir Terry Leahy, and his replacement by Clarke in 2011, the City’s disenchanted relationship with a once-market darling when Leahy was in his pomp has been a running sore.

The litany of profit warnings – Clarke issued three during his tenure that ended earlier this summer – at first looked a result of systemic market pressures, most notably the rise of the discounters Aldi and Lidl.

But this latest reputational shock to the system is self-inflicted. Slack financial management, if not something worse, is the culprit.

And, in such a basic fashion – accelerating the good things in the books and delaying the price to be paid – one wonders how far the FTSE 100 giant has lost its way both with customers and internally in recent years.

Is it just coincidence that when new finance director Alan Stewart takes up his post later this year, Lewis and the former Marks & Spencer man will be the only executive boardroom directors? It mirrors the former Tesco executive duopoly of Clarke and former finance director Laurie McIlwee. Has that lack of executive ability at the top affected efficiency and oversight at the listing supermarket tanker?

Lewis told shareholders that the group had “uncovered a serious issue and have responded accordingly” and promised to take “decisive action” when the result of the probe is clear.

If he did not know before, he certainly knows now that Tesco’s problems are not just a function of sector pressures, but internal capability and culture as well.