Tesco woes – a case of capitalism gone wrong?
When I speak to Tesco’s boss later this morning I will ask him… oh, wait. We’re not getting an interview. No reason given, but Tesco’s new CEO David Lewis has some explaining to do.
Tesco’s pre-tax profits have slumped by 91 per cent as it has admitted miscalculating them by £263m. Worse, less than half of this restatement happened in this financial year; £75m was overstated in 2013/14 and £70m before that.
So whatever has gone wrong has built up – as many Tesco watchers suspected – under the old management, as Tesco lost market share and came under pressure to deliver better performance.
As to what actually happened, the internal investigation by accountancy firm Deloitte has had to be stopped because the Financial Conduct Authority, which polices company accounting, is investigating. Eight senior managers are currently suspended from duty.
Capitalism gone wrong?
In management terms it is looking like a textbook example of what’s wrong with British capitalism.
First, the substance of the accounting errors is revealing. It looks like Tesco was “recognising” money coming in before it did, by changing the way it accounted for payments suppliers are forced to make to promote their goods.
What payments? Well that goes to the heart of it. It looks like Tesco had built its profit position by – how shall we put it – persuading suppliers to part with hundreds of millions of pounds in extraordinary payments, in return for product placement, for the privilege of being in new stores, etc.
Once suppliers are paying you, and you are also paying them, the potential for mistaking revenue for spending is there.
Tesco’s new boss will know better than most what it feels like to have to make these payments, as he is a former boss at Unilever, a Tesco supplier. A great question for anybody who does actually get to interview him is: how did it feel to be on the other side?
One way of looking at this is: Tesco has been accused of pushing down costs it paid suppliers, then using the ambiguous position of the incoming money to fool its own auditors. If that’s what happened, as has been alleged, we will all be surely outraged.
Who gains from Tesco tricks?
But let’s remember who benefited: first the shareholders – who got a share price and dividend payments that were unwarranted. Secondly, us, the customers.
In my local area I can’t move for Tesco outlets. The Tesco convenience store round the corner is run by so few staff, and so well automated that I can buy an armful of shopping without having to speak or interact with a human being other than the security guard.
The low prices I pay reflects the fact that Tesco — and indeed all supermarkets — have an unequal power relationship with both their suppliers and customers. That’s why investors have piled into this sector and urged it to get larger, destroying any vestige of independently owned retail wherever possible.
Put bluntly: the business model of mega supermarkets is the reason our high streets are full of Oxfam shops and our farmers can’t make a living, and why our food is packed and wrapped and processed by eastern Europeans living four to a room in rural British towns.
Tesco’s chairman will now step down, once he’s overseen a management purge. New people will step up to run the firm.
But this was a profit making machine run by ex-bankers on the board and ex-grocers in the management. Once the FCA tells us what the ex-grocers were actually doing we will know where to apportion blame, between the two.
Oh and the auditors, PWC. Multi-year mis-statements of profit by a massive, iconic company? That will be taught on accountancy courses for years to come. We’ll find out what the lessons are soon enough.
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