Tesco's
share price dive-bombed today after it was revealed profits have slumped
by 91.9 per cent, its chairman quit and a £250million accounting
scandal was even worse than predicted.
Sir
Richard Broadbent stood down after the business suffered the most
disastrous six months in its 95-year history, which saw millions of
customers switch to budget rivals like Aldi and Lidl.
Tesco
revealed today pre-tax profits in the six months to August plunged 91.9
per cent to £112million, compared to £1.3billion a year earlier.
Its shares opened 11p down this morning, meaning it has suffered a £4billion drop in its market value this year.
Police
are also expected to launch a criminal investigation over an accounting
scandal that saw its first half profits artificially inflated by
£263million, more than the £250million estimated last month.
Chairman
Sir Richard said this morning he was preparing to step down because
'the issues that have come to light are a matter of profound regret.'
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Quit: Tesco
chairman Richard Broadbent said today he would step down as more
pressure was piled on CEO Dave Lewis, pictured arriving at the
supermarket's London HQ this morning
Trouble: Tesco
profits have fallen by 91 per cent today after the supermarket announced
falling sales and a £250million accounting scandal
Stark: Tesco was considered untouchable but its profit fall in the past year has been unprecedented
The
latest industry data showed Tesco's sales falling at the fastest rate
in the sector. UK trading profit was down 55.9 per cent to £499million,
it was announced today.
UK
like-for-like sales are also down by 4.6 per cent for the six months to
August because Tesco has been battered by a supermarket price war,
especially with discounters Aldi and Lidl.
Tesco
has been accused of ignoring changes in how Britons shop, with
customers increasingly dumping weekly shops for little and often trips.
Many
are also shopping for basics in discount stores rivals Aldi and Lidl
and before heading to Waitrose or M&S for specialist items.
Extraordinary: Tesco's share price was at just under £4 18 months ago but now it is around £1.70
Losing the battle with rivals and the accounting scandal means it has seen £4billion wiped off its market value.
New
Chief executive Dave Lewis said: 'We know that we have got a lot of
work to do. We know what it is we need to do to turn the business
around.'
Mr
Lewis, who was parachuted into the business from Unilever in September,
has been given the seemingly impossible task of cleaning up the mess
and devising a strategy to re-build the chain's reputation and sales.
The
most recent industry figures published this week suggest annual sales
are down by around 3.6per cent as millions of customers switch to budget
rivals, chiefly Aldi and Lidl.
One
Tesco City watcher, Dave MCarthy, an analyst from HSBC, believes Tesco
needs to find £3billion to cut prices, increase staff numbers and
improve the quality of its food.
A
report by Moody’s Investors Services last week said profit margins at
the Big Four – Tesco, Sainsbury, Asda and Morrisons – are ‘likely to
shrink further over the next 12 to 18 months’.
He
estimates it would cost Tesco £1.5billion to drop prices by six per
cent, £500million to correct a 25 per cent shortage of staff in stores,
and up to £1billion improving the quality of products.
But
it is the accounting scandal that has caused the most recent damage to
Tesco, with the Serious Fraud Office admitting it is 'following
developments at Tesco with interest'.
The fact that the black hole in the accounts has gone from £250million to £263million will increase pressure further.
The
net effect was to state that Tesco's profits for the first six months
of this year were £1.1billion when the true figure was closer to
£850million.
Mr
Lewis dismissed the idea that fraud may have been involved in the
accounting blunder: 'Nobody gained financially as a consequence of the
overstatement of performance.'
Dramatic: Tesco's share price plunged this morning after more bad news for the supermarket giant
When asked if it was 'cock-up or conspiracy' he declined to use either phrase.
The
chief executive also revealed that payments due to his predecessor
Philip Clarke and former finance director Laurie McIlwee were being
withheld pending investigations.
Shore
Capital retail analyst Darren Shirley said the fact that the accounting
issue relates to more than just the first half of the year raised 'all
sorts of questions to our minds as to what has gone on in prior years'.
He
added: 'We cannot, therefore, rule out that a lot of ground will have
to be raked up with potentially time-consuming and damaging ongoing
headlines for Tesco. If there is a silver lining here then it is that Mr
Lewis has acted quickly, decisively and that he is not associated with
the practices.'
The
problems were highlighted by a Tesco whistleblower and came at a time
when the management was in turmoil because of the imminent departure of
the chief executive, Philip Clarke, and the chief financial officer,
Laurie McIlwee.
The
chairman of the Tesco board, Sir Richard Broadbent, has faced demands
to resign from some quarters for failing to ensure there was proper
oversight of the executives.
The
senior staff who have been suspended include the UK managing director,
Chris Bush, aged 48, who has been with the company for more than 30
years.
Others
removed from the business include the UK finance director Carl Rogberg,
commercial director, Kevin Grace, the food commercial director, John
Scouler, and the food sourcing director Matt Simister have also been
suspended.
Battle of the supermarkets: Tesco is
by far the largest supermarket in Britain, but it is losing market share
to its rivals, especially cheaper supermarkets like Aldi and Lidl
More
recently, Dan Jago, Tesco's UK and group wine director, Sean McCurley,
director of convenience foods, and William Linnane, director of impulse
purchases have also been suspended.
The
removal of so many senior managers has left Tesco's management in a
state of limbo with the company appearing to be rudderless.
A
number of newly built stores around the country have effectively been
mothballed, while others that were on the drawing board, including a
vast outlet in Margate, Kent, have been cancelled.
TWO YEARS OF CRISIS: HOW DID IT ALL GO WRONG FOR TESCO?
By Rachel Rickard Straus
For
a long time Britain’s biggest retailer could do no wrong: in just 13
years its profits grew from £750million to £3.4billion in 2010. It
boasted an incredible 30.5% share of the grocery market – and US
investing titan Warren Buffet was, until as recently as last year, a
huge fan.
Shopping habits: Millions of shoppers
have left Tesco for rivals, either Lidl and Aldi at the budget end or
Waitrose at the high end
Fast forward a couple of years and the company is regarded as something of a basket-case.
The
cracks started to show in 2012, when Tesco shocked the market with its
first profit warning in almost 20 years. The revelation saw shares
plunge by as much as 15 per cent as the retail giant saw its market
share under siege from budget supermarkets Aldi and Lidl. And the
situation deteriorated as the discounters went from strength to
strength.
Tesco
reported its first fall in annual profits in 19 years in April last
year, with post-tax profits tumbling almost 96 per cent in a year. It
decided to ditch its chain of US stores Fresh & Easy, which despite
more than a billion pounds of investment failed to turn a profit. It
also had to write off £804million for land bought at the height of the
property boom, which following the financial crisis it decided would not
be developed.
Tesco
threw everything it could at battling the budget supermarkets,
announcing in February this year that it would spend an extra
£200million on lower prices for basic products, such as bread and milk.
But still profits fell, and market share was squeezed again to 28.6 per
cent in March this year.
Beleaguered
chief executive failed to convince investors that his strategy to
return the retailer to glory was working. In July Tesco announced he
would step down, and he was replaced this month by Unilever executive
Dave Lewis. By August it issued another profits warning and slashed its
dividend to shareholders by 75 per cent.
Then
last month came disastrous news, and the last thing the retailer
needed: ‘accounting errors’ had led it to overstate profits by
£250million. We know today the over-estimate was even greater and the
cause murkier. Accountant Deloitte is investigating, the Financial
Conduct Authority has launched a probe, eight executives at the top have
been suspended and there is talk of a criminal investigation.
Today
Tesco revealed pre-tax profits have tumbled again by 91.9 per cent to
£112million in the first half. Chairman Sir Richard Broadbent said he is
preparing to step down, and Tesco’s biggest cheerleader Warren Buffet
has ditched his shares, calling his investment a ‘huge mistake’.
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