Tesco has announced £6.4 billion losses today – that’s up there with some of the biggest losses UK corporate history and far beyond other supermarket losses in the last ten years.
Markets reacted positively to start with. Tesco shares were up ever so slightly at 0.5 per cent at the opening bell and returned to normal by press time as traders dithered about whether or not Tesco is a good investment. The bad news is out the way, but recovery is still uncertain.
These are the reasons Tesco is making such a heavy loss:
1. Tesco’s property is not worth nearly as much as it thought it was
In fact, it’s worth £4.7 billion less that originally thought. Of this, £3.8bn is due to cash flow and property values while the remaining £925m how much stall development sites have cost. Tesco’s big out-of-town branches have suffered as people stay home and order online instead. Tesco has already announced that it will close 43 stories and pull the plug on 49 development projects.
2. Last year’s accounting scandal is still smarting
Tesco overstated it profits by £263 million in October last year due to problems with a system that charged suppliers to place their brands in the best spots. In the aftermath, Tesco said it would put less focus on commercial income.
3. The 'kitchen-sinking' approach
One of the reasons they might be so big is that Dave Lewis, who joined Tesco as chief executive in October and has since been given the nickname ‘Drastic Dave’ for his part life reviving struggling Unilever brands.
Some analysts think Lewis has intentionally bundled all the bad news at these results to clear the decks for a turnaround – which would make him look good in the long run. “Tesco’s final 2014 results are chuck full of toxic impairments, write-offs and other detritus that has been held on its balance sheet, sometimes for years,” Ken Odeluga, analyst at City Index, said. “[I] see fair evidence that Tesco’s freshened management team under CEO Dave Lewis sought to bundle several further impairments and write-offs into 2014 finals beyond the property write down, in order to clear the decks for their turnaround plan proper.”
4. Profit margins have got skinnier
Tesco’s profit margin is down to just over one per cent – a drop of 3.9 per cent – as it tries to stay competitive while high-quality chains like Marks and Spencer slice from above and new budget stores bite from below.
5. The bargain hunters have left the building
Tesco’s value-conscious customers have switched to Aldi and Lidl where they get less choice, but cheaper products. Tesco has already said it will cut its 90,000 products by a third, but it will not become a discount supermarket, Lewis said today. “One of our great advantages is that depth of range,” he said.
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