Commercial awareness: Tesco

Our banker, lawyer, accountant and consultant consider this ongoing supermarket scandal
Commercial awareness
Business analysis

Supermarket Tesco admitted at the end of September that, apparently due to an accounting error, it had overstated its most recent half-yearly profit guidance by £250 million, about a quarter of its original profit estimate.

The supermarket's shares fell in value by around 11 per cent shortly after the news. At the beginning of October financial regulator the Financial Conduct Authority announced that it would be conducting an enquiry into the issue, and there have also been suggestions that Tesco executives might be questioned by a parliamentary committee.

Tesco is also conducting its own internal investigation. In addition, it has announced that the supermarket's new chief financial officer, Alan Stewart, joined from old employer Marks and Spencer over two months earlier than originally planned and that a number of existing senior staff have been suspended from duties.

Tesco has announced that it will be giving a further update with the interim results of their internal investigation on 23 October.

Thinking like a...


Sporting chance

I was interested to read that retailer Sports Direct has sold a put option relating to 23 million Tesco shares to Goldman Sachs. That means that the investment bank has the right to sell these shares to Sports Direct if their price falls below a certain value, but has to pay Sports Direct a premium if their price is above it.

Why would Sport Direct enter into this trading transaction? Well, it already sells its goods in some Tesco stores and is keen to deepen the relationship, and this kind of public vote of confidence can't hurt its chances of doing so.


Crisis? What crisis?

Tesco has asked longstanding legal advisor Freshfields along with top accountants Deloitte to help out on its internal investigation. What will Freshfields, one of the City's top law firms, be doing on this kind of matter?

Lawyers on the investigation team will be primarily be looking at whether Tesco broke any accounting laws and regulations. But they'll also be advising Tesco more broadly on managing the crisis - making sure the Financial Conduct Authority and other regulators don't overstep their rights and helping Tesco minimise damage to its business and reputation.


When the accountant's away...

No clear explanation yet has emerged as to how Tesco could have made such a huge accounting mistake. Rumour has it that the error relates to how the supermarket recorded supplier rebates - payments paid by suppliers to a retailer dependent on how well a suppliers' products sell in store - and possibly to these payments being logged in the wrong accounting period.

There might be an even simpler explanation: Tesco reportedly had no chief financial officer for a few months over the summer - in accounting, as in many areas of life, if no-one if overseeing something, problems are likely to arise.


From bad to worst

Looking at Tesco's woes from a strategic perspective, you could say that the reason the supermarket is suffering so much at the moment in the markets and the media is not only down to its recent accounting error. From an unsuccessful venture in America to failing to compete with discount chains to one of its east London branches being dubbed "the worst place on Earth" on a Tumblr that went viral, Tesco has been looking shaky for a while.

It's a far cry from its 90s and 00s glory days when it was a pioneer of online shopping and launched its much-imitated Clubcard loyalty programme.

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