A Research Paper On Tesco 2014 Accounting Scandal
Synopsis
Within this paper I will be discussing the impact and causes of the 2014 Tesco accounting scandal and the challenges in which they faced after such huge event. In addition, this essay will describe the aftermath in which followed with an Analysis of the strategy Tesco has adopted to deal with the scandal.
Company Overview
Tesco is the number one multinational grocery and general merchandise retailer supermarket in Britain, with one of every seven pounds spent in the UK went into the tills of Tesco. Founded in 1919 by Jack Cohen in the East End of London in which employs over 460,000 people and has more than 6,000 stores in 12 different countries worldwide. Tesco sells around 40,000 types of food in its stores, which now includes clothes, electricals and personal finance products. Tesco’s statutory revenue from the past financial year was £53.9bn and their statutory profits were £202m with their group sales being £47.9bn. Tesco adopted a combination of effective target market segments in order to attract their different target groups such as geographical, psychographic and behavioural segmentation.
Overview of the Market
The UK supermarket industry is one of the most established in the UK there is clear evidence to show that this sector is oligopolistic and primarily dominated by 3 large supermarkets; Tesco, Sainsbury’s and ASDA. Tesco is currently the U. K’s largest supermarket with a market share of 27.8% with the 2nd biggest supermarket brand being Sainsbury’s with their market share being 15.8% closely followed by Asda with 15.3% of the market share. However, on the rise is the low cost supermarkets such as Aldi in which had a 17.2% sales growth in the past year and now has 7% of the U. K’s market share.
Description of Event
1. Brief Overview
The event in which I have chosen to look out refers to Tesco’s overstatement of profits which occurred in the November 2014. This scandal that emerged was brought to light by a whistleblower and in the process the stellar reputation and the great success of Tesco was damaged as a result. Tesco has revealed an overstatement of £250 million of its expected profit for the half year, primarily due to the accruing delay of expenses and acceleration of the sales revenue.
2. Rebates
Given the competitive nature of the UK grocery market and Tesco’s large market share and popularity, big brands want their brand products to be stocked on the shelves of Tesco. One of the problems that Tesco faced was due to the rebates they received from these big brands. Tesco entered into agreements with its suppliers that in exchange for purchasing and selling large volumes of products and in return Tesco would receive discounts and rebates, which it would count towards commercial income. These rebates are estimated by Tesco half way through the year in order for Tesco to correctly identify how much they will be worth at the end of the year. However, Tesco didn’t have the ability to sell sufficient quantities of the product in order to receive the discounts, although they had already booked the income. Their inability to sell the sufficient amounts was due to the pressure they had been experienced in recent years as they had been suffering from declining sales due to customers shifting their loyalties to the new, low-cost supermarket such as Aldi and Lidl. This alarmed Tesco as up until then Tesco had been considered the cheapest supermarket for customers, and sparked the fear that they would be missing out on a larger amount of volume driven rebates and this therefore exacerbated the need for the earlier takings of revenue and profits.
3. Overstatement of Profits
As a result, the Tesco management had to retool their business plan, thus choosing to inflate their figures in order to compete with their new found competition. They chose to forecast their profits at £1.1bn in its half year, however these numbers were decreased by up to £263m. This led Tesco to check over their figures which led to the realization and announcement of their over- predicted profits. I believe that the Tesco scandal highlights the dangers of being a dominant business with a fixed focus on the short term need to compete with the new threat of new discounted stores. Tesco’s desire to ensure they had an increase of commercial income and larger profit meant that they jeopardized the honesty and integrity of their brand image and reputation in which customers valued and didn’t look at the long term.
4. Porters 5 Forces
Strategic models that look at an external perspective and internal perspective are helpful for Tesco in order to define a strategic approach following the scandal. Porter’s (1998) competitive analysis can be used for strategic analysis as it identifies five fundamental forces which provide insight into the relationships and dynamics of the supermarket industry. In terms of competitive rivalry Tesco at the time of the scandal were facing hard competition from new discounted supermarkets like Aldi and Lidl in which were affecting its sales as Aldi and Lidl were able to offer lower prices on products. This led customers to turn to the cheaper alternative given the recession period, thus forcing Tesco into over-stating profits to make up for their lost custom. This perspective can also see the threat of substitution in the market and highlights changes in consumer trends as although Tesco offer well- known brands, Aldi and Lidl offer substitute brands in which are extremely similar to the well known brand but are offered at the fraction of the price making them more appealable to consumers. In terms of supplier’s power, Tesco held a strong position as could pick from thousands of different ranges and products thus suppliers having a low bargaining power, however given that Tesco was entering agreements to sell suppliers products, they however, didn’t have the ability to sell sufficient quantities of the product in order to receive the discounts promised to them thus resulting in them over- estimating their profits to subsidies the decline in sales. These factors all demanded a more responsive strategic approach in order to combat their competition, however Tesco chose to over-estimate profits in order to compensate for their inability to sell and generate the adequate profits needed.
Consequences
Reputation
This scandal caused serious damage to the reputation of Tesco and tainted their brand image. Once the scandal was brought to light of their overestimate of profits the UK’s Serious Fraud Office (SFO) announced that it was going to be launching a criminal investigation into the accounting practices of Tesco. Three of the former Tesco directors were charged with fraud by abuse and false accounting between the period of February- September 2014 and could face jail time. While Tesco earlier this year had to pay £129m in order to settle investigations between the SFO and FCA and avoid being prosecuted for the scandal.
Financial Implications
As a result of the accounting scandal Tesco lost 50% of its market value in a year with £2 billion being wiped off the supermarkets share value leading investors selling their stakes in the company as their shares fell by nearly 12%.
Competitive Implications
This scandal did not help them to remain competitive in the already highly competitive supermarket market and Tesco’s competitors were shown to have benefitted from Tesco’s misfortune. For example, if we look at the diagram their market share had dropped by 1.4% with sales down by 4.5% as a result to the exposure of their scandal. However, in comparison to Tesco, the new discounted supermarkets such as Aldi was shown to have benefitted with their sale figures from the year increasing by 1.1%.
Changes in the Different Factors
4P’s
The 4P’s were created by E. Jerome McCarthy to provide a framework for marketing decision making, we can look at them to help explain Tesco following the scandal. In regards to place, Tesco has over 6,000 stores in 12 different countries worldwide. As of 2017, Tesco UK store portfolio consisted with 7 different formats including Tesco Extra, Superstore, Express and Metro. However, after the scandal there was a restructure of the business they have closed 43 of its most un- profitable stores and have opened a further 49 of the very large stores. For product not only does Tesco have Tesco stores but it also owned other businesses such as Blinkbox and Tesco broadband. Tesco post- scandal chose to sell off these non- core businesses in order to generate more cash for Tesco following their decrease in sales. In terms of price, one of the major things Tesco struggled with was their ability to compete with the prices that Aldi and Lidl were offering for their items. However, Tesco also chose to introduce new price cuts on hundreds of items basic food products such as bacon and eggs and reduce online shopping charges in order for them to try and regain market share from Aldi and Lidl. All of these issues were contributing factors as to why Tesco’s accounting scandal occurred, Tesco had not been able to adapt their business plan and strategy in order to compete with the new emergence of the discounted supermarkets and were unable to accept that their sales were dropping, thus deciding to over- estimate the profits in order to alleviate their losses.
Changing executives
Following the news of the the accounting scandal, Sir Richard Broadbent, the chairperson of Tesco at that time, resigned from his position and Dave Lewis became the new chief executive of Tesco. Once Tesco had paid the settlement he stated this was allowing Tesco to be able to move on and apologized to all those affected stating “What happened is a huge source of regret to us all at Tesco, but we are a different business now”. In the two years since his appointment Tesco have already dramatically improved following on from the scandal. At first, I believed that merely changing the executive at the top would not have significantly impacted Tesco in order to regulate and normalize it following the scandal as the trust had gone and the brand reputation and image had been tarnished. However, I believe the change in executives was the best decision for Tesco since his arrival Tesco shares surged by 10% and £1.5bn market capitalization was added to the business. Thus highlighting the improvement that he has made to Tesco as even before the scandal broke Tesco’s sales were already in decline, and now Dave Lewis has adapted new strategies in order to compete against other supermarkets and attract customers.
Cultural changing
One of the problem in which Tesco needed to address was its current culture. Lewis (2014) stated that “Turning our business around will require change in our culture... We want to work in a business which is open, transparent, fair and honest. We all expect Tesco to act with integrity and transparency at all times.” This signifies that Tesco have identified that in order to move forward following the scandal they need to rebuild the trust of the consumers which was broken due to the incident, customers are not going to return to Tesco unless they have full confidence that another issue like that would not arise again. One of the things that have been introduced into Tesco to try and change the culture is the “Feet on the Floor” programme in which sees all head office employees working in stores on a fortnightly basis to re-engage with the core business and get to grips with the business at the frontline. I believe this iniative helps to demonstrate the importance of customer service and help the customers feel valued. It had little financial cost for the business, yet it made the most immense difference in helping to improve the brand image while also rebuilding investors and customers' confidence in the company.
Compensation Scheme
Another initiative Tesco introduced was the multi-million-pound compensation scheme, in which was created for the thousands of shareholders affected by the accounting scandal. The compensation scheme’s main goal and focus is to repay on average £400 in compensation to the 10,000 people of which who purchased stocks in the Tesco between 29 August and 19 September 2014. This scheme I believe will help Tesco to repair the reputational damage caused by the accounting scandal. However, although it will help to alleviate the damage caused by the scandal, I only believe to a certain extent. I believe the damage is irreparable as the severity and dishonesty of the situation will be impossible to rectify as consumers and shareholders will never be able to fully trust Tesco as a brand again all they can do is try and improve and attempt to re-build the relationship with their consumers. Investors will always be wary when considering investing money into the business as during the scandal Tesco lost the support from one of the worlds biggest investors Warren E. Buffet and this sort of high profile scandal will always be within investors and shareholders minds. This was however a small step in the right direction for Tesco and was met with generally positive feedback by he public as it was implied they were holding their hands up to their wrong doings in the past and attempting to put it behind them and draw a line under it and move on
Results
Following the 2014 scandal Tesco had faced and the strategies they adopted in order to combat it if we look at their market share for September 2017 we can see that despite a difficult few years they still hold they still are the number one supermarket with 27.2% of the grocery market share. This therefore shows that Tesco’s strategy that was put in place following the scandal was successful as looking at their current statistics they have had a 30% rise in group operating profit to £1.28bn in the year ending in February 2017. Within that figure, they also saw profit surge 60% to £803m. This highlights the progress Tesco has experienced since the scandal came to light and the success of the strategies implemented in order to not let the scandal lead them to close down, however to push through and maintain their top position in the UK supermarket industry.
Conclusion
In conclusion, the objective of the essay was to examine the accounting scandal in the UK in which Tesco faced. The main issues of this essay were analyzed, such as aggressive accounting and major overstated profits and evaluated the response in which Tesco conducted in the wake of the scandal. Moreover, this essay covered consequences of the scandal, especially the damage to Tesco`s reputation and loss of the company. Tesco wanted to reiterate to its customers that there was no intent to deceive and that it was just an accounting errors due to “early booked gross profit”. As a result, investors and shareholders were quick to judge, allowing shares to drop by 20%. However, Tesco were quick to react to the break of scandal and with a new director, massive restructure and new schemes introduced they were able to recover and still maintain their number one place in the supermarket industry.
