Tesco must change culture and reinvent brand, new boss tells employees

Dave Lewis writes to staff in wake of £250m accounting scandal as share lose 16.5% in week, wiping £3bn off firm’s value

The Guardian, Sarah Butler and Sean Farrell, Friday 26 September 2014

A Tesco Extra supermarket in London. Photograph: Alex Segre/Rex Features

Tesco needs to change its culture and reinvent its brand, the company’s new chief executive, Dave Lewis, has told employees after a torrid week for the supermarket chain.

In an email to thousands of staff in the wake of a £250m accounting scandal, Lewis said: “Turning our business around will require change in our culture, as well as in our processes and our brand proposition. We want to work in a business which is open, transparent, fair and honest. We all expect Tesco to act with integrity and transparency at all times.”

Shares in Tesco dived 16.5% this week, knocking £3bn off the firm’s value after it found possible errors in the handling of payments from suppliers equivalent to nearly a quarter of its anticipated profits for the first half of this financial year.

The revelation came as Tesco sales also fell, down 6.1% in the three months to mid-September according to figures released on Friday by the market analyst Nielsen. That is an even grimmer picture than the 4.5% decline analysts at Kantar Worldpanel envisaged earlier this week.

Tesco’s difficulties with supplier payments have sent shockwaves through the industry, in which retailers widely demand such transactions in return for promotions, prime shelf space or hitting certain sales targets.

On Friday one of the world’s largest credit rating agencies said supermarkets’ profits could be made up entirely from supplier kickbacks, and called on the retail industry to be more transparent about them.

Fitch Ratings suggested payments from suppliers could make up €5.6bn or 81% of Tesco’s underlying operating profits. Earlier this week the accountants Moore Stephens also estimated such payments to be worth several billions of pounds a year to the top 10 supermarkets.

“Better disclosure would make it easier to spot errors, aggressive accounting policies or misuse: red flags could include a rapid acceleration in attributable allowances, or a continued increase even as sales volumes decline,” Fitch said.

“The extent of vendor allowances in Europe is uncertain, but if they are as widespread as they are in the US they could approach, or even exceed, the entire operating profit of some supermarkets.”

While European retailers do not break out contributions from suppliers, some US retailers have revealed that they are equivalent to 8% of the cost of goods sold, or virtually all their profits, according to Fitch.

The agency’s comments come as Tesco conducts an internal investigation into its handling of supplier payments which will be closely watched by analysts and regulators. Shareholders and analysts are also preparing to quiz Sainsbury’s about its approach when the supermarket delivers its second quarter trading statement on Wednesday.

Worries about how supermarkets generate income come as the industry is experiencing major structural challenges. The rise of discounters such as Aldi and Lidl and the expansion of upmarket Waitrose have meant more competition at a time when shoppers are tightening their belts.

Nielsen indicated that shoppers spent 1.6% less at the UK’s leading supermarkets in the four weeks to 13 September, while the volume of items bought sank 1.9%. It also confirmed a poor trading period at Sainsbury’s indicating a 1.8% decline in sales, in line with Kantar’s estimate.

On Friday shares in Sainsbury’s, Morrisons and Tesco all fell in response to further evidence of difficulties in the market and bearish comments from one of the UK’s most influential fund managers.

Neil Woodford, who sold his Tesco shares after it issued its first profit warning for decades in early 2012, said it would take a long time before the company, or other UK supermarkets, are worth investing in. He told BBC Radio 4’s Today progamme that the industry may need a complete overhaul.

“The industry, in the near term, faces a long road to exit this period of depressed margins and crushed profitability, and maybe asset bases [and] balance sheets need to be rebalanced in time before the industry can re-emerge as an investable proposition from my point of view. The immediate future is going to be tough for the sector, but particularly for Tesco,” he said.

Woodford managed Britain’s biggest investment fund at Invesco Perpetual before going it alone with his £7bn fund at Woodford Investment Management.

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