We had better get some help – Tesco and their profit black-hole.
23 October 2014 by Tony Fisher
Tesco, the once undisputed grand bastion of supermarkets, has long been regarded as a safe pair of hands for investors since the release of its slogan ‘every little helps’ back in 1992 captured the nation’s attention. However, there had been a nervous wait leading to today’s announcement for those with a vested interest in Tesco stock.
Delivered by the departing chairman, Sir Richard Broadbent, the news was bleak. The already reported profit ‘black-hole’ of £250 million had in fact been underestimated; it is believed to stand at £263 million. The supermarket throne is wobbling and Sir Richard Broadbent will have many questions to answer for in his role in this destabilising regicide. It seems uncertainty is swiftly becoming panic for Tesco and their mantra ‘every little helps’ may need to be updated to “we had better get some help.”
Now this may seem very dramatic, but allow yourself some time to take in this next statistic;
In the past year Tesco has lost 50% of its market value. Ouch.
But what is going wrong for the supermarket retailer which became the nation’s largest grocery provider after taking the title from Sainsbury in 1995? At the height of Tesco’s dominance in 2007 it wasn’t profit-black holes which were causing the chain a headache but instead wrangles with competition bodies about their potential of becoming a monopoly power.
Some observers believe that Tesco have been too slow to react to the recession which opened the doors to those thrifty German retailers ALDI and LIDL, whose own brand of low thrills and low prices has seen year on year success in the same time period. As opposed to dropping their prices, Tesco squeezed what they had, ‘not investing in stores…diverting resources to support its international endeavours’.
Perhaps what is more telling is how the Chairman and CEO found out about this black-hole. According to the BBC, the information was passed on through a myriad of exchanges whereby the financial department passed a message to a legal advisor, who then passed this to a general counsel before reaching those at the top. The fact that such an important message had to be passed to a lawyer before the board of directors shows there may have been a breakdown in trust. It also shows how Tesco may have fallen foul to diseconomies of scale, the enormity of the firm allowing for its hierarchy to become disconnected.
Here at FJG we have a number of specialists in restructuring companies and groups of companies, whether as a result of investment, succession, or more heinous environment factors. Whilst we don’t expect Tesco to knock on our door, if you are in business and thinking about re-organising, why not give our commercial team a ring or contact Tony Fisher at TFisher@fjg.co.uk
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