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31 Oct 2014 08:53am

Tesco: the view from the industry

As the Tesco accounting scandal rumbles on, economia asks industry experts what went wrong. Where did it fail, who should be held accountable, and what happens next? Here’s the shopping list of areas they examined

LEADERSHIP

“This was a disaster waiting to happen. Turmoil at the top created a vacuum, with both the CEO and CFO going. In these circumstances it should not be a surprise to find managers wanting to flatter their results. The shock is the scale of the problem and the reaction of the chairman, Sir Richard Broadbent, who said: “Things are always unnoticed until they are noticed.” This is a fundamental failure of leadership by the chairman. He should notice £250m; he should be aware that top management turmoil creates problems; he should be aware that the performance culture creates tewasn’t theremptation; he should take responsibility not just for successes but also for failures.

Jo Owen, co-founder, Teach First and author, How to Manage

 

CORPORATE CULTURE

“We have to ask how the firm’s culture allowed – or possibly encouraged – senior employees to behave as they did. This is true even if it was a one-off aberration, but even more so if the pressures arising out of the firm’s culture go back many years. If people are set targets they cannot meet and if they are afraid for the personal consequences to them of failing to meet these targets, they are more likely to compromise on ethical standards. And as the dust settles round Tesco, this is where we need to look. There is a chance that all this happened as a result of a leadership vacuum because of the transition but, really, the company’s deeply-embedded values should have seen it through this. So we have to ask whether there was a deeper cultural problem – and how deep it went.”

Peter Montagnon, associate director, Institute of Business Ethics

 

Once lauded as a global success story, Tesco has fallen harder than most. An inside look at why noone saw it coming

HUBRIS

“Like many winners Tesco became arrogant. It luxuriated in unsustainable operating margins of 5% – higher than almost all rivals. Over time, low-cost competitors like Aldi, Lidl and Iceland took share, expanded their shop numbers and became a genuine threat. Tesco pursued an ill-advised project in the US, which distracted senior management, lost more than £1bn, and damaged the company’s credibility. Meanwhile consumer shopping habits changed rapidly after 2008. For the first time in history shoppers started to drive less and more chose to buy groceries online. In hindsight, Tesco’s massive investment in giant shops on retail parks looks like imperial overstretch.”

Luke Johnson, founder, Risk Capital Partners and chairman, Patisserie Valerie

 

CHANGE

“Tesco has been losing market share since about 2007 (when they peaked at 32% of the market), partly because of the competition from Aldi and Lidl, which now have an 8% market share and are growing rapidly. It’s OK to lose market share when the grocery market is still growing – and the grocery market has typically been growing between 2% and 4% a year – so for many years Tesco could get away with losing market share. But that changed over the last year and the grocery market growth rate dropped off. Now, losing share means losing revenue too; that has been the source of Tesco’s problem. And given that Tesco has always been successful in the City, this would bring about immense pressure on Tesco’s finance team.”

Fraser McKevitt, head of retail and consumer insight, Kantar World Panel

 

CORPORATE GOVERNANCE

“A large part, if not all, of Tesco’s recent profit misstatement involves problems concerning revenue recognition, particularly around so-called contributions it receives from its suppliers. It’s certainly a corporate governance failure too, but it’s too early to say whether it was also an audit failure. Arguably the auditors did pick up on the risk of overstatement – on page 66 of Tesco’s last audited accounts for the year ended 22 February 2014. This was the only time in the last six years the auditor had made such comments in Tesco’s accounts and certain elements of the recently disclosed overstatement go back beyond the period covered by those last audited accounts.”

Duncan Swift, partner and head of the food advisory group, Moore Stephens

 

COMPLACENCY

“Aldi and Lidl have been major disruptive influences in the sector over the last five years and Tesco, like its major rivals, has been too slow and complacent in seeing them overtaking. When this happens you need a strong and well-respected leader who can galvanise the team and take action. Given that Tesco has been without a CFO since the beginning of the year, can we be surprised when a weak leader fails to spot what is going on – assuming he was indeed unaware? Add to that falling market share, lower margins, plummeting share price over the last two years and you have a pretty explosive cocktail.
“What concerns me is PwC. Surely, given their 30-year relationship with Tesco, PwC would have been on red alert when it came to assessing the audit risk and ensuring that profits were not overstated. Then again, maybe the auditors had the wool pulled over their eyes because of a failure of corporate governance and what was clearly a hornet’s nest of intrigue, back-stabbing and protecting self interest.”

Martin Lloyd-Penny, founder and managing director, Mature Accountants

 

Where should Tesco go from here?

“A much better execution of Tesco’s current plan won’t cut it; the new chief executive, Dave Lewis, needs to make big changes. First he needs to fix the core grocery business, which is a huge part of revenue. But he also needs to work out what the customer wants as Tesco has a brand problem. We might not love our supermarkets but we should at least have some affection for them. Tesco is not perceived to be the cheapest in the market; it doesn’t have the highest-quality food; and it is not perceived to have the best in-store environment. So what does Tesco stand for? That needs to be addressed. And it seems the board knows that too, given they’ve hired brand man Lewis.

Tesco remains in a strong position. It has 2,600 stores, it is the market leader in online grocery and Tesco Express is still growing fast. Given that the supermarket landscape changes far slower than other sectors, we’re not going to see Tesco lose its footing as the market leader any time soon. But things can change – and they may very well do so if Lewis doesn’t make those changes fast. Just look at Co-op. Only 30 years ago it was the number one retailer in the UK – and look where it is today.”

Fraser McKevitt


What Tesco did right

“For all its faults, it does appear that one aspect of Tesco’s arrangements worked well: whistleblowing. Tesco found out what was happening because an employee had the courage to speak up and this is very positive. Effective speak-up arrangements do provide an important line of defence.”

Peter Montagnon

 

 

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