The Deloitte investigation
What we know
- The black hole was bigger than expected at £263m rather than £250m
- The inquiry was limited to UK grocery
- The investigation found discrepancies going back two years
- The Financial Conduct Authority will now investigate the how and why, after telling Tesco to focus only on how much
- Tesco is bringing in strict new rules on transparency and income recording and the reporting procedure of income from supplier deals
What we don’t know
- What exactly went on and why?
- Who was and wasn’t responsible and whether any behaviour might be considered criminal
- The role of former CEO Philip Clarke and ex-CFO Laurie Mcllwee and whether they will be hauled before the FCA
- What will happen to the Tesco eight, who remain suspended?
- Will PwC retain its auditing responsibilities for Tesco?
Tesco boss Dave Lewis is introducing emergency measures to try to save Tesco from a Christmas trading disaster.
Speaking after Tesco revealed the accounting scandal that has rocked the retailer was even worse than anticipated - with a £263m profits overstatement, a 92% decline in group post-tax profits and a 4.6% plunge in first-half sales - Lewis said measures to prevent a further slump could not wait until the results of his root and branch strategic review.
The changes will come into effect within days, said Lewis, including the launch of a new automated system tracking availability in stores and an override device to ensure Tesco’s top 1,000 products are prioritised over other lines in store.
The former Unilever boss also hinted this would be just the start of a much wider range cull as he seeks to simplify its operation to provide better customer service and free up expenditure to plough into an expected future price war.
Lewis has overhauled how Tesco monitors availability. Rather than tracking it using Tesco’s dotcom service, the retailer would in future monitor real-time availability in store using automated sales-based data.
He said stores had been left “overstretched” and unable to maintain service and availability because the retailer sold too many products.
“Over the past 18 months the number of products in the range in Tesco has increased by 31%. That’s massive.” Over the period Tesco had seen a 7.5% overall increase in stock, compared with a 2.5% increase in sales.
“I will simplify the range as we go forward,” he added.
Lewis also announced new measures to tackle the sales culture at the heart of the accounting crisis, with sweeping new rules for its commercial teams.
He confirmed Deloitte’s investigation had identified a practice going back two years of supplier deals, including rebates, being brought forward artificially across reporting periods to inflate Tesco’s performance.
“A lot of this has come down to the fact that it’s been about judgment calls from the commercial teams,” Lewis told The Grocer. “We have written down very clearly the judgments we want our commercial teams to make. The vital thing is that we are making the same call. If it’s been a grey area in the past we will be taking out the ambiguity and applying clarity from a Tesco point of view. It’s a Tesco thing, not an industry-wide thing.”
With eight of Tesco’s commercial team suspended during the probe - and remaining so as the FCA continues its investigation - Lewis said he was still confident Tesco could bounce back but warned of further staff changes to come.
He said he was considering major efficiency measures to slash the number of managers in Tesco, both in the UK and abroad. “We are set up for a company which is much bigger internationally than we are now,” he said. “We have 32 offices in the UK alone and that’s an example of the opportunities I see for simplifying the operation.”
Lewis also said while the widely expected fight-back on price by Tesco would wait until he had tackled availability and service - confirming this week that two million more staffing hours will be booked in between now and Christmas - he added: “I have three or four things I’m already testing at the moment.”
Lewis said making the UK operation more competitive and winning back trust were core priorities, along with strengthening Tesco’s balance sheet There has been speculation of a rights issue to raise funds but Lewis indicated in was more likely to look at raising funds from a disposal of non-core assets However, despite speculation that he will cut back still further on Tesco’s store programme, he said he had no plans to “mothball” more stores in the second half of the financial year.