Tesco scandal

1. Christos Diafas
Martha Dragatidou
Vasiliki Kontotasiou

2.  Multinational grocery & merchandise
retailer based in England
 2nd largest retailer in profits & revenues
 UK’s largest private-sector employer
 Stores across 12 countries (Asia,
Europe, North America)
 Constituent of the FTSE 100 index
 Market capitalization of approx.
£14.3m
 Has diversified into other sectors
(Blinkbox, H&H, Giraffe)

3. Discounters (Aldi , Lidl) enjoy rapid sales growth (~9%)
First profit warning in 20 years wipes £5bn off Tesco’s market cap
Decline in profits; full year pre-tax profit halves to £1.96bn
Continuing profit loss for 5 years in US; Tesco quits Fresh & Easy
Shares lose more than half their value
- February – August 2013: pre-tax profit £1.6bn
- February – August 2014: pre-tax profit £112m
• 9/1: Out-of-town stores like-for-like sales drop by 2.4% in six weeks
• 25/2: Store refresh programme accelerates in preparation of price cuts
£200m investment into lowering prices
• 16/4: 6% group profits drop announced. Plan to open more than 100
Giraffe, Decks and H&H outlets
• 4/6: Tesco blames impact of price cuts and accelerated store revamp
programme for third successive fall in sales in its Q1 results
• 21/7: CEO Philip Clarke steps down after failing to turn around company
fortunes
• 29/8: Tesco issues shock profit warning, announces stall on store refresh
programme; “challenging trading conditions” are put to blame

4. 19/9 22/9 1/10
• Employee suggests profits
may have been overstated
• Profit hole discovered
(£250m)
• Deloitte begins
investigation
• Financial Conduct Authority
begins investigation
• Blinkbox put up for sale
29/10 23/10 16/10
• Moody’s & Fitch
downgrade Tesco’s debt to
BAA3
• Deloitte results: profit
overstatement (£263m)
• Premature income
recognition &delayed
accrual of costs
• Serious Fraud Office begins
investigation

5.  Share price decline
 Lost 12% of value in one day
 Profit declined by 47%
 Market share drop
 Lost trust of consumers & suppliers
 8 executives suspended
 Lost credibility towards investors
 Warren Buffett: “huge mistake”
 Moody’s downgrading to BAA3
 Neil Saunders:“It gives the impression
of a company that is not in full control
of its internal procedures”
 Raised alarm for other supermarket
chains

6.  Why do suppliers pay retailers?
 Listing fees
 Prime position fee
 Promotional activities increase sales
 What form do payments take?
 Commercial income
 Specific target levels
 Why is it a grey area?
 Store managers overly optimistic at profit
estimations
 Co-op deals made well in advance
 Revenue not booked until goods/services are
delivered (GAAP)
 Payments disputed later – new agreement in 2nd
half
 Shouldn’t PwC have found out?
 Rebates included in balance sheets
 “Amounts accrued at the end of the year are
judgemental” – risk of manipulation

7.  Strengthen UK business core
 Focus on internal market
 Strengthen balance sheet
 Cut costs
 Sell non-core assets (Thailand stores/Tesco
bank/Dunnhumby)
 Rights issue (up to 3bn)
 Cut jobs
 Raise product prices
 Build trust & transparency on brand
 More space to best-selling lines
 More staff on shop floor (user friendly)
 Rebuild trust with suppliers & consumers
 Display clear strategy for comeback
Neil Saunders, Conlumino:
“...today is about financial
performance and not the
time for unveiling grand
plans”
Sven Reinke, Moody’s:
“lay out strategy or face
further cuts”

8.  Retail giant suffers continuing decline
 Entry of new players
 Change of focus to shareholders
 Failed diversification
 Accounting scandal erupts
 Unprecedented consequences
 Market share – share price
 Frustration among investors – suppliers – consumers
 Analysts’ allegations
 Need to paint a flattering picture?
 Under-pressure CEO maintaining his job?
 New CEO deliberately worsening situation to engineer recovery?
 Honest mistake?
 Fake sales?
 Comeback based on 3 main pillars
 Strengthen balance sheet
 Strengthen UK core
 Build trust & transparency

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