Stephen Jardine: Supermarkets must get back to basics

Tesco, the biggest player in the business, announced the first fall in profits in 20 years. And it wasn’t just a dip but a mammoth 51 per cent drop.

Tesco bosses explained it with the kind of arrogance that comes from someone who thinks they own the place. But then, of course, in many parts of Britain, they do.

The profit collapse was blamed on the recession and financial write-downs. In other words, they’ve cleared up the mess of the failed expansion into America, stopped expanding and lost money on sites they bought at a premium.

The avuncular chief executive, Phillip Clarke, refused to call any of that a mistake. “My job is not to look back,” he said. Who can blame him? Tesco’s business strategy over the past five years has been a shambles.

The move into the United States with the Fresh and Easy brand was a blunder of immense proportions. They opened stores in the wrong places and failed to understand American consumers. That cost Tesco £1.5 billion in just five years.

In the race for space, they also bought up land all over this country, often just to stop competitors opening stores. That expansion came to a grinding halt last year when Tesco announced it was to spend £1bn upgrading existing stores. As a result, this week’s profit fall included an £804 million write-down on the value of proposed sites.

Despite the drop, Tesco is still a hugely successful business recording profits last year of £1.69bn. But that was before it was caught in the middle of the horsemeat scandal.

This week new research suggested up to 16 per cent of Tesco customers were shopping elsewhere more often as a result of the horsemeat scandal. That comes down to lost trust and Tesco faces a huge struggle to rebuild that.

With Tesco Bank trading profits also down 15 per cent, reasserting belief in the brand is the biggest challenge at the moment. In that, it is not alone. Tesco is simply the first to report results but the other big retailers caught up in the horsemeat scandal are also likely in time to reap the whirlwind from consumers.

The answer is not expensive advertising campaigns promising change. After all, they would say that, wouldn’t they?

The solution is a fundamental change to the way it does business, paying suppliers properly and cutting and simplifying how food gets to consumers. That requires investment and means lower earnings for shareholders, but it’s the only answer.

Supermarkets also need to concentrate on what they do best and stop trying to monopolise every sector of British retailing.