Chief executive admits chain lost its way
Tesco reports record £6.4bn loss after ‘difficult year’
New chief executive Dave Lewis admitted it had been a “difficult year” and set out how he will he will turn around the company’s catastrophic collapse in fortunes.
An operating profit of £1.4bn was wiped out mainly by £7 billion of costs associated with shutting 43 stores and plugging a massive hole in its pension scheme.
The company has set aside £270 million a year shore up pension payments and, as previously announced, there is no dividend payment.
It is also facing inquiries by the Serious Fraud Office and the Financial Reporting Council over accounting matters.
Better news included a growth in like-for-like sales volumes for first time in over four years in the fourth quarter.
“It has been a very difficult year for Tesco.” he said in a statement. “The results we have published today reflect a deterioration in the market and, more significantly, an erosion of our competitiveness over recent years. We have faced into this reality, sought to draw a line under the past and begun to rebuild, and already we are beginning to see early encouraging signs from what we’ve done so far.
“Over the last six months we have put customers back at the centre of everything we do. By focusing on the fundamentals of availability, service and targeted price reductions, we have seen a steady increase in footfall, transactions and, most significantly, volumes. More customers are buying more things at Tesco.
“We are making deep changes to the way we organise and run our business, with a simpler, more agile office team, more colleagues serving customers and a new approach to the way we work with suppliers. I do not underestimate how difficult some of these changes have been for the team and I thank everyone for their professionalism and contribution at this time of great change.
“The market is still challenging and we are not expecting any let up in the months ahead. When you add to this the fundamental changes we are making to our business and our offer, it is likely to lead to an increased level of volatility in short-term performance.
“Our clear priority – and the one that will deliver sustainable value for our shareholders – is to improve consistently for customers. The changes we have made and will continue to make put us in a stronger position to do this.”
Warning for suppliers
As indicated in earlier statements, the company will squeeze suppliers by dedicating more space for the top 1,000 lines in each store, increasing availability, particularly in peak trading.
Daily Business reported in February that the supermarket chain had written to 5,000 suppliers demanding they cut prices or lose space on its shelves.
The instruction followed earlier warnings reported in Daily Business that the company is reducing the number of products from 90,000 to around 65,000 to focus on big brands and putting a squeeze on smaller speciality food and drink producers.
Mr Lewis said today: “The market is still challenging and we don’t expect this to change in the immediate future. Over the next 12 months we will continue to focus on our three priorities: regaining competitiveness in our UK business; protecting and strengthening the balance sheet; and rebuilding trust and transparency in the business and the brand.
“We are already making good progress on our initiatives and on the basis of actions already undertaken they will deliver significant cost savings in 2015/16. The immediate priority for these and any other savings delivered is reinvestment in the customer offer in order to further restore UK competitiveness.”
Edinburgh-based Tesco Bank’s revenue was up 2.1% to £1.024 billion driven by strong growth in lending to customers.
It has expanded its range of mortgage and loan products and, in June last year launched a personal current account. The core motor and home insurance business has seen a 3% growth in accounts.
Trading profit was £194m, in line with the prior year, with strong underlying growth offset by ongoing investment in personal current accounts.
Underlying profit before tax is 5.7% higher at £221.9m (2014: £210m). The company set aside £27m to meet compensation payments for missold payment protection insurance.
Paul Thomas of the retail consultants Retail Remedy, said:
“Dave Lewis can only hope that Tesco’s night is darkest just before dawn because results don’t get darker than this. A £6.4bn loss isn’t just one of the biggest losses in British corporate history, it’s a black hole that risks consuming a once all-powerful brand.
“To say Tesco’s CEO has a mountain to climb to reverse its decline is to underplay the scale of the task. At times the combative Mr Lewis must feel like an ant scaling the Himalayas.
“But at least progress has been made. Gone are the complacency, the hubris and the corporate jets. The brand has retrenched and jettisoned many of the peripheral businesses that were dragging it down.
“A back to basics approach in its stores has seen it introduce simple and effective offers that keep shoppers coming back. The closure of poorly performing stores – and the addition of more staff at those that remain – has improved service levels.
“Such improvements will give the fallen titan back some momentum, but the constant price war will hamper profit growth.
“Ultimately Lewis’ strategy will be judged by its success at making Tesco stores appealing to shop in again. If the brand can repair its reputation for good service, great choice and strong offers, it will have at least stopped the rot. But the journey will be long and hard.”
John Ibbotson of the retail consultants, Retail Vision, said: “If proof were needed that the retail world is changing, we just got it. This is the official end of the Tesco era.
“The irony is that Tesco is on the right path. Amid the extensive wreckage left by his predecessors, Dave Lewis has done all the right things, and made all the tough decisions, to put Tesco back on track.
“Lewis has delivered direction, reduced prices, cut costs, closed the Cheshunt head office and put more staff into stores. Most fundamentally, he has changed the retailer’s entire corporate philosophy.
“But there’s a long way to go yet before the agile new Tesco that is emerging becomes a profitable Tesco once again and even when it does recover, it will never again be the force it once was.
“With this huge loss, the decadent retail dynasty of Tesco has come to an end.”