Tesco profit warning – the supply chain bites back

So what in the name of f***** m******* and b**** f**** b**** are Tesco playing at? As a shareholder that’s what I want to know (yes, my unerring ability to pick the very best firms strikes again, see previous posts on the late lamented Rok and Southern Cross, you might also want to consider my purchases of Wincanton and Record).

How can what appeared to be the UK’s strongest retailer manage to wipe out half of its shareholder value in three years? £16 BILLION down the Swanee.

And the latest scandal, which saw an announcement yesterday that profits may have been overstated by £250 million in the recent half year results, has a real link with procurement and supply chain matters. The over-statement appears to relate to rebates from suppliers – for hitting a certain level of sales, or in support of promotional activity (“buy one get one free” for instance).

Now Tesco must estimate halfway through the year how much these rebates will be worth at the end of the year. And as Tesco’s sales volumes have declined – mainly because of competitors’ success – then there must be a greater risk that the trigger levels for rebates will not be hit. So it may be that risk which was not reflected in the profit figures. Tesco may have been “booking” these promotional rebates based on historic precedent rather than on current volumes.

Indeed, there are hints in some quarters that this may be “the revenge of the suppliers” – firms who have been pushed too far by Tesco over the years and are now taking delight in refusing to pay up as their volumes with Tesco are declining.

And if the numbers used to calculate discounts are provided by relatively junior level managers, perhaps people whose own bonuses depend on the numbers, and if those figures are not properly verified, then there is a danger that the numbers reported are not reflecting the real situation. Apparently PwC, Tesco’s auditors, pointed out this risk in previous annual reports, so they are probably in the clear when the blame game gets into full swing.

Lombard in the Financial Times had the best headline.

“Tesco’s unexpected item in P&L area”.

A decent accountants’ joke. Amazing. So do I sell my shares now – or is this the low point? After all, this is still the market leader by some way in the huge UK grocery market. They can’t go much lower, can they? Can they? Can they??

Voices (4)

  1. David Atkinson:

    ….On second thoughts….

  2. David Atkinson:

    Peter,

    Investment opportunities aplenty in Four Pillars.

    Feel free to browse our services: http://www.fourpillars.co

    😉

  3. Andy Pestell:

    Peter,

    We could play name that tune with the following Lyrics:

    She can go lower than i ever really thought she could.

    Never would have imagined it.

    Lower than yo’ mamas ever seen it before.

    I could go low, (go low) lower than you know!!!!!!!

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