Tesco: five reasons it went so wrong
The UK’s biggest supermarket released its results yesterday, showing a record £6.4bn loss, and the business media had a field day. Insights analyses Tesco’s major failings
Tesco’s decline seems to be continuing as it announced annual losses totalling £6.4bn, one of the biggest deficits in British corporate history. With the company’s value sinking by a whopping £7bn pounds and the 2014/15 trading profit dropping by almost 60%, the Big Four supermarket continues its sharp fall since its halcyon decade of growth in the 2000s. Current boss Dave Lewis, dubbed "Drastic Dave" for his radical overhaul of Unilever, says the disappointing results stem from a series of mistakes made in previous years: "What these numbers represent is the crystallisation of the relatively poor trading position of the business over a little while, not just in the last months of the year.”
Five milestone moments that led to the decline of Britain’s leading supermarket:
Failed US expansion
Controlling nearly a third of the domestic grocery market, taking one out of every seven pounds spent in the UK, Tesco management decided to ride their own wave of success and attempt an international expansion, most notably across the pond. Despite spending over a billion pounds on stores, personnel and customer research, the retailer failed to gain traction or make a profit in six years under its ‘Fresh & Easy’ moniker. Tesco hurriedly sold more than 150 of its stores to billionaire Ron Burkle's Yucaipa Cos in 2013. So desperate was Tesco to cut its losses that it reportedly lent millions of dollars to the buyer to take the business off its hands. Was it simply a case of bad timing – with American expansion starting as the recession hit, or reckless and arrogant leadership? Tell us what you think @InsightsCMI
Tesco’s reputation as a wholesome and trustworthy food provider took a major hit when traces of horsemeat were found in four of its own-brand meat products. The scandal attracted derisions from disgusted customers and animal welfare campaigners. Even prime minister David Cameron condemned the issue.
Failed out-of-town stores
The latest financial reports show Tesco has had to write down the value of its property by £4.7bn, reflecting the declining popularity of its large out-of-town stores, a central part of Tesco’s store portfolio. Whether a hangover of the economic crash or a response to the wide variety of food and grocery outlets on most British high streets, shoppers are more willing to buy their goods from different places to get the best value for money. Shoppers seem content buying small amounts but more often, the opposite of what would be expected from out-of-town store consumers.
Mike Watkins, Nielsen's UK head of retailer and business insight, said: "The economic factor driving behaviour from "big and occasional" to "little and often" is saving money – its easier to manage weekly than monthly budgets and reduce wasted food. This is compounded by a key lifestyle factor, shopping online, which reduces the need to go out-of-town."
Onlookers were stunned when Lewis admitted company profits for the six months to the end of August 2014 had been overstated by £263m. Currently being investigated by Britain's Serious Fraud Office, the large sum suggests widespread faults occurring from the very top of the corporation. Unsurprisingly, the scandal forced chairman Richard Broadbent to resign and dented first half trading profits last year by more £650m.
Rise of the discounters
More than half of British households reported shopping at a discount supermarket at least once during the last festive period, which saw Aldi and Lidl’s market share increase to 4.8% and 3.5% respectively. Compared to the 40,000 products offered by Tesco, the discounters offer only around 2,000 stock and most of which is under their own brands, allowing them to keep prices extremely low. Moreover, with Waitrose and M&S holding their own in the pricier grocery bracket, Tesco is left in a crowded middle alongside Asda, Sainsbury’s and Morrisons.
Image courtesy of Chris Warham – from Shutterstock