Tesco‘s dealings with suppliers appear to be at the centre of the latest problem to emerge at the UK’s largest retailer.
And it is an issue that has left many industry watchers left shaking their heads in bewilderment today (22 September).
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This morning, Tesco admitted it had over-stated expected profits for the first half of its financial year to the tune of GBP250m (US$408m).
In a surprise statement to the stock market at 7am, Tesco said the “accelerated recognition of commercial income and delayed accrual of costs” had led to the mis-stated forecast for the six months to 23 August.
On Friday afternoon, an unnamed “informed employee” approached Tesco’s general counsel with information about accounting within the retailer’s UK business. That information (and it is, as yet, not fully clear what was found) was passed on to Dave Lewis, the new Tesco CEO, who has only been in the job three weeks.
Lewis ordered an investigation into the findings. Deloitte has been called in to carry out a review, working alongside law firm Freshfields.
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By GlobalData“We have uncovered a serious issue and have responded accordingly,” Lewis said. “The board, my colleagues, our customers and I expect Tesco to operate with integrity and transparency and we will take decisive action as the results of the investigation become clear.”
Quizzed by reporters on a conference call this morning, Lewis was asked about the nature of the information that has sparked the investigation.
The timing of the accounting of payments between Tesco and suppliers was said to be a central factor, although Lewis said he could not give a “definitive answer” until the investigation was complete.
Lewis, already facing a business seeing its market share erode in the UK amid pressure from the likes of Aldi, Lidl and a relatively robust Asda, was asked whether the accounting issue could have come, for example, from revenue from a promotion with a supplier being booked ahead of time.
He replied: “I know you would like a simple explanation of what’s happened and unfortunately I’m not able to give you one. From the investigation I’ve done over the weekend, there are a number of different mechanics that have led us to the conclusion that we have, so it would be inappropriate to just say one simple one. Just [suffice] to say it’s about the relationships we have with our suppliers.”
Last autumn, Mike Dennis, a retail analyst at Cantor Fitzgerald, questioned Tesco’s UK margins and alleged the retailer had been over-stating its domestic commercial gross profit by GBP200m a year “via deducting monies from suppliers’ trading accounts or extending payment dates without notice”, moves he said the UK Groceries Supply Code of Practice was put in place to stop.
At the time, Tesco brushed off Dennis’s claims, pointing to changes it was making within the business. “The analyst is clear it is his opinion, based only on speculation, but he doesn’t seem to have taken our previous guidance into account. In our interim results presentation last month, we set out how the general merchandise transformation programme will be a drag on our sales growth but beneficial to the overall UK margin, helping to offset some of the other investments we are making for customers.”
Today, Dennis’s claims were put again to Tesco, although Lewis refused to comment on the analyst’s allegations. “What I can tell you is that the investigation will be full and frank,” he said.
Lewis joined Tesco from FMCG giant Unilever, which prompts the obvious question as to whether he had seen similar practices in the past.
“Certainly not in my Unilever career,” he said. “If people want me to comment from a supplier base, what you need to remember is in my prior life in Unilever, my last jobs were running global divisions and categories, so not engaged directly. In my time, it’s not something I’ve seen in my relationship with key customers.”
Just an hour or so after Tesco’s announcement to the market came reports senior management at the retailer had been asked to step aside as the investigation was conducted. On the media call, Lewis confirmed four executives had been put on leave, although he insisted the move was “not in any a disciplinary decision”. He refused to name the individuals, although they were widely reported to include Chris Bush, the MD of Tesco’s UK operations. Later, Lewis confirmed Robin Terrell, the director of its multichannel business, was now “running and leading the UK leadership team”.
What happens next? The fact Freshfields has been called in suggests this “over-statement” of profits could become a legal issue. Asked if the information he had seen suggested “foul play”, again Lewis replied carefully. “I’m going to wait until I have done the investigation. I won’t speculate. My priority now is to do a full, frank and complete investigation and when I know the res of the investigation I will share them.”
Even if nothing untoward has taken place, today’s announcement will still concern investors, with one analyst suggesting it could be the first sign of a “kitchen sinking” of Tesco’s accounts, with the possibility of a further re-setting of the retailer’s profits.
Lewis said the GBP250m over-statement announced today “looks like it’s substantively a first-half year and has more to do with the timing of when income is recognised”. However, he added: “I won’t be able to confirm that until I have completed a full investigation. I will do the fullest and deepest investigation. I will follow it all the way through. It looks to be substantively in the first half of this year. That’s where the investigation will start. If the investigation takes me into another year, I will follow it there where necessary.”
After Tesco’s travails under previous CEO Philip Clarke, the change of financial director and of chief executive and now the accounting issues, questions are being asked about the chairmanship of Tesco chair Sir Richard Broadbent. He defended the board’s recent moves to shake up the business and, asked if we would step down, said: “The most important thing is to focus on the issue we have in front of us. I recognise you are bound to ask this question. When any company faces a succession of substantive and deep-rooted issues, you have to come to the conclusion whether those issues are being addressed or mis-managed. Right now, I’m going to continue dealing with issues as soon as they arise at this important company.”
What it will mean for Tesco’s dealings with suppliers is not immediately clear, although suppliers can be sure the retailer will be reviewing how it does business with manufacturers like promotional investment, joint business plans and so on.
What is clear is today’s announcement means it has been something of a baptism of fire for Lewis, whose appointment from Unilever was announced in July – alongside a profit warning from Tesco. Lewis ended up joining the retailer on 1 September, earlier than planned, after the retailer issued another profit warning just a month later.
On the one hand, one could applaud the decisive action Lewis, just a matter of days into his tenure, has taken to try to get the bottom of this accounting issue.
However, he will have to press on with the investigation at speed. Investors voted with their feet today – Tesco’s shares closed down a whopping 11.6% at the lowest level for over a decade. The retailer is set to announce its half-year results on 23 October and the market will be demanding answers.
Lewis will need to deliver – and, all the while, the retailer, in its home market, which accounts for the majority of profits, faces sustained pressure from competitors.
“For us, it’s business as usual,” Lewis told reporters today. “Whilst we have a serious issue, it has no impact on our determination as half a million people to give better service to customers and they remain our focus whilst I deal with this issue.”
Lewis’s job was problematic enough as it was.
