Tesco's not out of the woods yet

 
Laith Khalaf
Leading UK Supermarkets Compete For Their Share Of The Market In The Run Up To Christmas
There are no blue skies at Tesco just yet (Source: Getty)

Tesco is still very much paying for the sins of the past, but it has started to turn the corner on the slow road to recovery.

The coming weeks are likely to contain some unpleasant tidings for the embattled supermarket. The slap on the wrist from the grocery watchdog for failing to treat suppliers fairly is but a warm-up act for the main event - the publication of a Serious Fraud Office investigation into the £300 million black hole which appeared in Tesco’s accounts.

Today's name-calling isn’t likely to break any bones at Tesco, but a financial penalty for accounting misconduct is another matter, particularly if it is as large as the £500 million some analysts are suggesting. To put that in some context that’s about the total annual profit the supermarket is expected to announce in its next results. The company could also face a class action by institutional investors who claim they lost out as a result of the accounting scandal.

Read more: Is Tesco saved after those surprise Christmas results?

Looking beyond the penance that might be required for that scandal, things do seem to be looking up in Tesco’s operations, with an improvement in like for like sales over the Christmas period.

Make no mistake, life for a Big Four supermarket is still tough, with Aldi and Lidl still applying competitive pressure. But as prices fall, so does the gap between the likes of Tesco and the discounters, and with it the incentive for shoppers to turn away from the mainstream supermarkets. There is undoubtedly further for this trend to run, but it is not without end.

Read more: Tesco is just the thin end of the wedge

Tesco is also focusing on improving the customer experience, both in terms of pricing and service. Right from the off the new Tesco boss, Dave Lewis, said that when progress generates additional cash, it will be ploughed back into these areas.

He seems to be making good on that promise, so although near term trading is better than expected, profit forecasts are not being guided higher. The new CEO has also started to tackle the company’s balance sheet, most notably by disposing of its Korean business, though there is still lots of work to do on this front.

All in all Tesco may not be out of the woods yet, but it is heading in the right direction.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

Related articles