Tesco’s chamber of horrors

Long-time rumours of Tesco squeezing its suppliers to bolster profits have more than a grain of truth to them.

Tesco has "begun to resemble a retail chamber of horrors", said the FT's Jonathan Guthrie. The supermarket giant announced a fourth profit warning this week, wiping another 6% off the share price, which is now down 50% since the start of the year.

Profits for the year to February 2015 will not exceed £1.4bn, a reduction of around 30% on the previous estimate and a far cry from the £3.3bn reported last year. This is partly because the group has decided to jettison accounting practices, many relating to deals with suppliers that "artificially" elevated earnings.

What the commentators said

Another tactic it used to resort to in order to inflate profits just before the end of the year was to cut staff hours after New Year and order fewer products to cut waste. Such "customer-unfriendly tactics" will now be ditched.

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But these structural changes, however laudable, imply a fall in profits, and it's not easy to gauge how bad it will be, said Robert Cole on breakingviews.com. It depends on the response of suppliers, customers and competitors. Equally murky are the possible knock-on effects.

For instance, if the group's operations become structurally less profitable, the value of the huge property portfolio will also fall. "The next slew of bad news could well centre on the already strained balance sheet."

Meanwhile, Tesco still needs a clear strategy to reverse the rapid loss of market share to Aldi and Lidl, added Thao Hua in The Wall Street Journal. "The road to recovery will be a tough slog."

Chief executive Dave Lewis does at least seem to have understood that Tesco lost sight of the importance of putting customers first, said Chris Blackhurst in the Evening Standard. If he could "rid himself of management gobbledygook" too, that would be a bonus.

When MoneyWeek's share tipster Phil Oakley looked at Tesco in September (well before the latest profit warning), he pointed out that the company's tangible net asset value is just 134p per share. So even at current levels, the stock isn't obviously cheap.

Given all the uncertainty ahead, said The Daily Telegraph's John Ficenec, "investors looking for a pre-Christmas bargain should steer well clear of Tesco shares".

Andrew Van Sickle

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.