Archive for November, 2014

Tesco’s financial fiddling

November 2, 2014 Leave a comment

Eight executives suspended and the chairman resigned, whilst Tesco shares have also dropped by 10%. Moody’s, a ratings agency has also downgraded Tesco’s credit rating and now they are being investigated by the Serious Fraud Office – this is the toll so far inflicted by the over-stating of profits over the last few years by senior figures at Tesco, the UK’s largest retailer. The report released by Deloitte’s found that £263m had been overstated this financial year, with more in previous years. Executives had been fiddling its figures by paying suppliers late and taking new goods on credit.

Already facing trying to finance a plan to aim to recover retail sales, these latest revelations will put even more pressure on Tesco’s new CEO Dave Lewis. An issue of shares to raise the funding for this seems ruled out given the drop in share value and that Tesco’s market valuation is slightly less than its total outstanding debt to bondholders on £13.95bn (although this is returned over a period of time).

It’s increasingly likely that Tesco will be forced to sell some of it’s assets, including the stake in the Harris + Hoole coffee chain or Dunnhumby who created the Tesco clubcard, whilst potentially floating is Asian business or Tesco bank separately from the main company. Tesco also owns 310 sites that were purchased for out of city stores, but would be reluctant to sell that given the possibility of competitors opening on those sites, as part of a total £20bn in property assets.

Tesco profits for the last six months have dropped by 91% to £112. As one Tesco investor was quoted in an article, which had expected Tesco to post profits of £909m for the last six months, said “It is a distinct possibility that they could ‘kitchen sink’ the numbers, either now or before the full-year results, so the new team has a low base to start from.” This appears to be the direction Tesco management are going in to recover from this scandal.

Will the Big Supermarkets Survive?

The woes of all the major supermarket chains, including Tesco, are a result of a number of factors. Firstly, the saturation of the supermarket sector with increasing difficulty in obtaining planning permission, but also the sheer spread of supermarkets now means new openings increasingly cut into the sales of existing stores. Retail analysts IGD now suggest the big-box retail as a whole will see sales drop by £3bn whilst online, convenience and discount stores will increase sales by £30bn.

Tesco still has a whopping 28.8% share of the UK grocery market, still far more than its nearest rival Asda with 17.3% and Sainsbury with 16.1%. Despite Aldi & Lidl’s growth, the former still trails with 4.8% and the latter has an even smaller market share. Whilst Aldi’s pre-tax profits for last year reached £260.9m, both Lidl and Adli’s profit growth was halved compared to previous years.

Not only are Aldi & Lidl starting from a much smaller base than Tesco, but their present advantage lies in the fact that they have much reduced number of staff available in stores and also stock a limited number of products. A typical Aldi has 1,350 lines (95% of which are own brand), as opposed to the 25,000 in a typical Tesco. Rather than completely replacing the big supermarket chains, they have rather eaten into sales of some of the lines stocked by the big supermarkets with shoppers heading to Aldi/Lidl first then topping-up with items at the nearest big supermarket.

Whilst there is still room for growth of this model, there is a limit to how far this can expand – especially as Aldi and Lidl run out of completely new locations to site stores. In France, Lidl has then sought to introduce more upmarket elements, including fresh bread, to make further progress but then this cuts away their competitive advantage. Whilst Aldi has recently reported that its average number of items bought is now 16.6 compared to 16.9 at Tesco, a survey by IGD showed that only 12% use the various discount stores as their main food store compared to 51% who have used them in the last month.

The Problem is Capitalism

The problem is not that Tesco will not continue to dominate the UK grocery retail market, but that it cannot generate the continually increasing profits that investors demand. For years Tesco has given out ‘industry-leading’ dividends of 15%, based on its rapid growth and dominance of the grocery retail sector. This in all likelihood will never be the same again.

This is because despite shifting their focus to online and convenience stores, where Tesco again leads the retail chains in this sector, these generally generate less profit that the equivalent investment in superstores had. As Tesco attempts to restore its profits, it will be forced to take other measures – this could mean limiting the numbers of stores open 24-hrs a day, but also is likely to see a continuation of the attacks on staff pay, terms and conditions which have taken place over the last few years.

The partnership agreement between Tesco and USDAW allowed for share issues through the ‘Save as you earn’ scheme to staff and this obviated the unions responsibility to fight for better pay for USDAW members. Many workers use the shares as a saving scheme for a rainy day, holidays or presents for the family particularly around this time of the year, the value now being somewhat less than what Tesco workers will have expected. Share issues to staff, instead of improving basic pay, have become a further shameful episode in the reign of John Hannett (general secretary) and Jeff Broome (president) of USDAW.

All this shows the limitations of food retail under capitalism. This is why socialists argue for bringing the key sectors of the economy, including the major food retailers into public ownership under democratic workers control and management. On that basis, their resources can be used to improve pay and conditions as well as invested in improving life for workers and customers, rather than squeezing all these things to maintain the shareholders dividends.