EVEN before the announcement of accounting irregularities yesterday, Tesco was a company beset by problems. Once the darling of the British retail scene and the undisputed leader of the grocery pack, Tesco has faced years of falling sales and profits, combined with some high profile failures, like the disposal of its costly Fresh & Easy operation in the US. A once spotless reputation has been tarnished.
As painful as all this is, however, it is not abnormal. All retailers, especially those as large as Tesco, go through periods of crisis and change. Investors understand this and are usually prepared to provide breathing space, as long as there is a clear recovery strategy in place. Reputations damaged by weak trading are relatively easy to restore by returning to sustainable growth.
An accounting irregularity – especially one to the tune of £250m – is far more serious. It is the kind of issue that undermines investor confidence, as it suggests that the company is spinning out of control. In short, it is abnormal for such a situation to arise in a business as large as Tesco.
Three questions arise from the crisis. How did it happen? How did it go undetected? And who was supposed to detect it? We will not know the precise answers to these questions until the investigation is complete. However, in the process of coming clean, it is likely that more heads will roll at Tesco. This includes at board level, where the company has a management team that lacks retail experience but is gifted with extensive financial knowledge.
Of course, this comes at a time when the whole focus of the business should be on improving its trading prospects. As such, it is an enormous, albeit necessary, distraction for new chief executive Dave Lewis and his team. If it is to rebuild confidence, this team needs a laser-like focus on sorting out Tesco’s day-to-day problems, which must not be forgotten amid this debacle.
The first problem is the discounters, to which Tesco has been ceding spend hand over fist. The solution is to ensure that customers can do their core grocery shopping as cheaply at Tesco as they can at Lidl or Aldi. This doesn’t mean price matching every item, but it does mean at least having parity on key products. If this entails sacrificing margins, that’s a pill that Tesco will need to swallow.
The second is communicating value. Tesco must ensure that shopping cheaply is easy; currently, it is anything but. Tesco uses far too many slogans, straplines and promotional tools, most of which are meaningless to consumers. These need to be streamlined, and stores – especially larger ones – need to be easier to shop in.
The third challenge is where the selling is done. Tesco’s estate was developed for a non-internet era. It may now be necessary, in some cases, to downsize. A comprehensive review of space requirements is needed, and its portfolio will have to be streamlined.
Above all, Tesco must regain a sense of purpose and understand what role it is playing in the lives of British consumers. This understanding is what allowed Tesco to become so big, and it is ultimately what will stem the decline.
So Lewis has two tasks: to rebuild the confidence of consumers in Tesco as a brand, and to rebuild the confidence of investors in Tesco as a sound and honest business. If ever there was a baptism of fire, this has to be it.