Tesco, it would appear, really is a basket case.
The struggling UK supermarket giant has admitted that it overstated first half trading profit by £250m, nearly a quarter of the supposed figure of £1.1bn.
It blames this on “accelerated recognition of commercial income and delayed accrual of costs.” In other words booking income too soon and kicking costs into the long grass.
This is more or less what UK software company Autonomy has been accused of by purchaser Hewlett-Packard, resulting in law suits all round. At Tesco four senior executives have been suspended. Its shares fell by over ten per cent in early trading on the UK stock market, which is calamitous.
New CEO Dave Lewis (left), parachuted in from Unilever’s Personal Care division, began his new job a month early in September. He probably thought his main job was to rally the troops and then find a way of competing with German discounters Aldi and Lidl (and Walmart-owned Asda) without decimating his already reducing profits.
Now he has what may be a monumental scandal on his hands.
But Tesco, arguably, has been in worse shape than even its critics thought for ages. Prior to this latest announcement City veteran Terry Smith, now running investment firm Fundsmith (Terry is not known for his modesty) pointed out in the FT that Tesco has been massaging the mumbers for years: in effect borrowing heavily to pay its generous dividend as its return on capital plummeted from 19 per cent to ten per cent. Some (although not all) of this has been caused by its disastrous forays overseas, most notably Fresh & Easy in the US although it also has big problems in the Far Easy and Central Europe.
All of this happened on the watch of former CEO Sir Terry Leahy although his successor, recently-departed Phil Clarke, was a senior director too.
So what’s Lewis, a marketing wizard by reputation, to do?
The first thing is politely ask his chairman, former Treasury mandarin and HMRC boss (and the man who appointed him, of course) Sir Richard Broadbent to find his (Broadbent’s) successor and pronto.
Lewis is never going to be able to turn round Tesco’s dire trading performance if he’s fighting fires like accounting irregularities. His background hardly equips him for the task anyway. He needs someone who can talk the same language as the (diminishing) band of Tesco shareholders.
Then he’s got to strip down the business to a scale that Tesco’s depleted management resources can actually manage. If that means ditching everything on the other side of the Channel, everything that isn’t food and closing a thousand stores – so be it.
If he doesn’t, someone else might do it for him. Tesco’s shares have plummeted 40 per cent this year, valuing the company at ‘only’ £18.65bn. Sounds a lot but Sir Martin Sorrell’s WPP, which has been hunting the Tesco ad account for years, is valued at £17bn.
In other hands Tesco’s vast land bank and its multifarious properties might be worth more than £18.65bn without the worrisome business of selling baked beans. Aldi and Lidl would pay top dollar for some of the stores. Someone would buy the banking and insurance businesses.
Our Dave might wish he’d stayed put at Unilever.