ALEX BRUMMER: Did the plunging share price send them into a panic?
- Supermarket giant has admitted inflating its finance accounts by £250million
- Tesco has seen £2billion wiped off market value and shares drop 40 per cent
- 'Four senior executives' among those also suspended while probe occurs
- Multi-channel director Robin Terrell has stepped in to run the UK business
Tesco’s slide from global grocery champion to chain store chump has been so rapid it takes the breath away.
It was perhaps understandable that it would go through a difficult transition after the brilliant Terry Leahy departed in 2011.
A
more pedestrian chief executive, Phil Clarke, was fired in July after
three miserable years in the job. But the problems the company revealed
yesterday are of an entirely different order.
SIt’s deeply shocking to discover that Britain’s largest retailer has been rigging its profit figures to make them look better.
In
the context of Tesco – whose profits, before tax, last year totalled
£2.8billion – a mistake of £250million may not appear that overwhelming.
The company still dominates British grocery, with 28.2 per cent of the
total market, and has operations stretching from South Korea to Poland.
But we must remember that the missing quarter of a billion is more than many high street retail chains earn in a full year.
And Tesco is a relatively uncomplicated enterprise – one that is able to add up the cash passing through its tills every day.
It seems
astonishing that the leading accountancy firm PwC, which has audited
Tesco’s accounts for more than three decades, could have allowed an
error on this scale to happen on its watch.
Indeed,
the choice of a top ‘magic circle’ law firm Freshfields, along with new
accountants Deloitte, to conduct a probe into the affair suggests that
it goes deeper than a simple accounting mistake.
So what on earth has gone on?
It
was amid a slumping share price – and management chaos – that Tesco’s
latest chief executive Dave Lewis arrived at the company from consumer
goods giant Unilever on September 1.
He
discovered that the previous team, reporting to the office of
Ferrari-driving Phil Clarke, was under enormous pressure from investors
to buff up the company’s performance – and preserve their jobs and
bonuses.
To
this end, they allegedly manipulated the published figures by counting
profits before they had been rung up at the tills. At the same time,
they allegedly under-reported the costs of goods from suppliers.
This is the
kind of shoddy practice one might expect from struggling businesses way
down the corporate pecking order. That it should come at one of
Britain’s most respected FTSE 100 companies is astounding. Already, four
top-level executives – including UK managing director Chris Bush – have
been suspended.
And
before you think this is merely a problem for a very large and rich
company, consider that everyone in the country with a company pension
fund, or an insurance policy, or a share ISA, is a loser because some of
their money will automatically be invested in Tesco.
The
group’s shares are now down 40 per cent this year, with £2billion wiped
off in latest trading. Tesco has long represented a mass of
contradictions.
It
has been a smart innovator, moving back into small neighbourhood stores
before its competitors, exploiting online shopping, and moving into new
areas such as banking, and even upmarket coffee shops.
But
at the same time it is reviled by suppliers who accuse it of bullying
practices and slow payment of invoices. It’s also hated by the green
lobby for ‘concreting’ over swathes of Britain, and accused of hoarding
valuable land and property suitable for housing.
The
first indications of fundamental problems came in January 2012. Mr
Clarke, less than a year into the role of chief executive, warned
profits would fail to meet expectations for the first time in 19 years.
In
April of the same year he announced a £1billion revival plan directed
at improving the stores that were described by some consumers as cold,
industrial and unappealing in appearance, and offering poor customer
service.
But
Tesco was also a victim of cultural change sweeping through high
streets, shopping centres and malls. As a mid-market retailer, it found
itself caught in a vice between the no-frills retailers at the discount
end of the market, and the rising strength of Marks & Spencer and
Waitrose among the more aspirational shoppers.
At
the same time, the company’s huge investment in out-of-town Tesco Extra
superstores was undermined by the digital revolution which ushered in
Amazon and price comparison websites.
Tesco
also found itself in retreat in America, China and Eastern Europe.
These were challenges enough without a £250million gap in profits, which
will mean many people will find it hard to trust the group for some
time.
By
holding its own inquiry, the Tesco board – headed by former HMRC chief
Richard Broadbent – will hope to keep official investigators at bay and
deal with any issues internally. That may be very difficult given the
importance of the company and the threat to the reputation of British
business.
And,
while the public will continue to shop in its stores, long-suffering
suppliers, investors and regulators may be much less forgiving.
esco said
today that the overstatement of its half-year profits by £250million was
'principally due to the accelerated recognition of commercial income
and delayed accrual of costs'.
This
could mean that the reporting of any costs Tesco incurred during the
first half of the financial year was been pushed back into the second
half, and profits from the second put forward.
In
regard to supermarkets, commercial income can be the revenue the chain
receives from the companies which supply its products, who compete for
the prime spots on the supermarket's shelves.
Some of these firms will pay Tesco a listing fee in order for their products to be stocked in stores.
They
will also shell out in order to bag a prime shelf location or for any
promotions or product discounts involving their goods, which often lead
to increased sales for the supplier.
The
supplier may offer a discount on items sold through the supermarket,
and although some brands may give an incentive or payment, known as a
rebate, to the store upfront, others would only do so if it reaches a
sales target.
Halfway
through the financial year, supermarkets must predict how much they
expect rebates will be worth over the course of the year, but this
estimation requires some guess work by managers over money yet to be
received.
Warwick Business School’s Crawford Spence said the revelation should be interpreted as a 'sign of distress'.
'Tesco has essentially tried to recognise revenue too early and delay the recording of costs until a later date,' he said.
'Accounting
is not a hard science and some of this behaviour is acceptable, within
limits. What Tesco appear to have done is push the boat out a bit too
far, ending up with revenue that hadn't really been earned yet and costs
that probably should have been booked earlier.'(source:daily mail)
http://www.youtube.com/watch?v=rDRSc_J9S6I
http://www.youtube.com/watch?v=rDRSc_J9S6I
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