Tesco's bungle could bash suppliers

By Michael Stones contact

- Last updated on GMT

Saunders: If your main customer is Tesco, you are the subject to its fortunes
Saunders: If your main customer is Tesco, you are the subject to its fortunes

Related tags: Tesco, Supermarket, Wal-mart

Tesco’s embarrassing £250M accounting discrepancy, admitted last month, will punish shareholders not suppliers but underlines the dangers of over reliance on any one retailer, said retail analyst Conlumino.

Britain’s top retailer launched an independent probe and suspended four of its top executives, after a whistle blower reported alleged false accounting practices at the supermarket. Tesco admitted it may have overstated its 2014 half-year profit by up to £250M in an interim statement in August.

While no one had been deprived of the missing money which concerned paper-based accounting procedures Tesco shareholders had lost out in two ways, Neil Saunders, retail analyst at Conlumino told our sister title Food Manufacture.

Victims

“It is shareholders, not suppliers, who are likely to be the victims here. That’s because they made investment decisions based on incorrect information about the retailer’s financial performance and lost out due to the recent market devaluation of the company​ [after the latest crisis].”

The performance of Tesco shares has transformed in recent years from an investor’s dream into what some commentators consider little short of a nightmare. Between 2004 and 2007, the share price shot up by over 70%, accompanied by healthy dividend payments.

But the day news of the debacle was released (September 22), Tesco’s share price tumbled 12% to 203p – its lowest level for 13 years – as the retailer unveiled its third profit warning in three months.

But Tesco’s travails did underline the need for suppliers to diversify their customer portfolio, said Saunders. “Ideally suppliers want to supply a range of clients including some big and some small ones. If your main customer is Tesco, you are subject to the fortunes of Tesco. It’s not healthy to be reliant on any one customer because, in this market, there are too many losers out there.”

Julian Wild, partner at law firm Rollits, said Tesco’s recent setbacks may lead to even sharper price negotiations with its suppliers. But he added that would be true of negotiations with the other big three UK supermarkets: Sainsbury, Asda and Morrisons. All are finding their profits squeezed between the growing popularity of discount retailers, such as Aldi and Lidl, and posh retailers Waitrose and Marks & Spencer.

‘Horrendous story’

“However Tesco’s investigation into the missing millions ends up, it’s an horrendous story,”​ said Wild. “The more Tesco is under pressure, the more that will impact major suppliers. But Tesco still accounts for about 28% of the UK grocery market and is an enormous player and makes enormous profits. It’s still a fantastic business.”

Backing new chief executive Dave Lewis, Wild said Tesco now had a talented management team that would soon resolve “the temporary blip”​ caused by the recent accounting irregularities. The greater challenge would be to reverse the store’s market share losses, while setting the retailer back on the path to profits seen in its boom years.

Tesco will announce its financial results for the first half of the year on October 23.

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