Tesco has suffered the biggest loss in high street history and the sixth worst loss for any UK company as the true scale of years of mismanagement was laid bare.
Its chief executive, Dave Lewis, attempted to shock the supermarket’s heart back into a healthy rhythm by revealing a £6.4bn pre-tax loss but admitted the turnaround was far from complete.
A huge £7bn writedown on the business will be used as an attempt to draw a line in the sand, with the property portfolio’s value slashed, its international division shrunk and the costs of offloading loss-making parts and redundancy payments for 5,000 staff finally revealed. Mr Lewis said: “This patient is ok. The baseline is ok. Can it be better? Can it be healthy? Yes it can. Our job is to allow it to be healthier.
“There’s nothing critical in terms of its finances, liquidity is good. If it’s about vital signs; there are more people coming, buying more things in Tesco that previously, and that’s a pretty good vital sign. It’s the start though. We’ve got so much more to do and it’s about opportunities for us.”
The UK business made a £467m trading profit in the year to end of February, but this was all in the first half under the discredited old regime, with a £32m loss in the second half of the year, as Mr Lewis cut prices and attempted to win back customers and reshape the business.
Like-for-like sales dropped 3.6 per cent, at £44.6bn, with improvements in the final quarter. But the biggest issue was proving to the investors that the UK’s biggest supermarket still had a future and could recover from open heart surgery.
Tesco had already revealed it would scrap the planned opening of 49 sites. Now Mr Lewis has admitted the decision would involve a £925m writedown in what future profits the company had once thought the new stores could bring it.
The company’s current portfolio value has also been written down by £3.8bn, in part due to the closure of 43 stores and excessive optimism over future profits.
A joint venture in China continues to haemorrhage money for the supermarket and bosses booked a further £630m loss, meaning the 10-year project to break the world’s most promising market has cost the supermarkets more than £2bn.
Elsewhere, Mr Lewis said Tesco is struggling in Hungary and South Korea due to new regulations in those countries around trading rules. Some analysts suggested Tesco could sell some of its international businesses to fund the huge £8.5bn net debt.
Mr Lewis thanked staff for their hard work during the last few months, which saw 2,418 head office job losses and a similar number of store staff affected. The redundancies cost around £600m, although new workers in store helped create 4,062 net new jobs.
But despite the praise, many staff do not see it the same way. According to employee ratings website Glassdoor, only one in three members of staff have a positive outlook for the business. In the boardroom, Mr Lewis also drafted in Tesco’s new UK chief executive, Matt Davies, a month earlier than planned.
There was no update on the Serious Fraud Office’s investigation into the accounting scandal that landed on Mr Lewis’s desk shortly after he arrived. Buyers had been banking profits secured from suppliers before deals had been completed, only for them to unravel when pre-agreed sales targets could not be hit. Originally Tesco said £263m had been misreported but that figure has been boosted by an extra £63m due to irregularities in its Irish operation.
Due to the scandal, Mr Lewis has already called in 100 suppliers to discuss changes he wants to make. He laid out plans to reduce the number of perks Tesco uses to squeeze extra cash – such as charging for prime shelf space, or in-store advertising. He said: “We had 24 different ways to negotiate. We want to change that to five this year, then to four and eventually three.”
The market was also given an update on the plans to sell off the company’s non-core assets and the financial impact the different parts had, including an £83m writedown against its gardening business, Dobbies, a £33m writedown on its other UK businesses, and an £82m writedown on coffee chain, Harris + Hoole, and its Euphorium bakeries on its decision to slow down their rollouts. All have been mooted for the chopping block, and Tesco also revealed offloading its Blinkbox music and online video streaming service which cost them £81m. The planned sale of its Dunnhumby data business is progressing well, but no figure has been put on how much it could raise.
Finally, and perhaps a little overlooked, considering the 300,000 workers Tesco has on its books, is the complete overhaul of the pension fund from a defined benefit scheme, to a defined contribution scheme. It comes as Tesco revealed its pension deficit now sits at £3.9bn, although it will make cash contributions of £270m every year to start paying it down.
Corporate disasters: Biggest losses in UK
RBS £24bn; 2008
Vodafone £21.8bn; 2006
Vodafone £13.5bn; 2002
Lloyds Bank £8.5bn; 2009
Cable & Wireless £6.5bn; 2003
Tesco £6.4bn; 2015
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