The news from supermarket giant Tesco continues to go from bad to worse, with low consumer interest and increasingly stiff competition from discounters exacerbating the problems caused by a £263 million profits misstatement issued earlier this year.
This week, the retailer has been forced to issue a profits warning for the full financial year, adjusting its profit forecast for the second time in six months.
In August, Tesco slashed its annual profit forecast from £2.8 billion to £2.4 billion, which was particularly concerning given that the accounting error had not already been picked up by economists. Now, chief executive Dave Lewis has revealed that the group does not expect profits to exceed £1.4 billion, far below even the conservative £1.8 billion to £2.2 billion range forecast by market analysts.
According to Mr Lewis, the new plunge in the profits forecast is not due to the current consumer climate but rather thanks to the investments Tesco has made for its future, namely the taking on of 6,000 new employees nationwide and alteration of the way it deals with suppliers.
He continued; “We have taken a very deliberate decision not to take short term measures that would close the profitability gap in the short term, but would not improve relations with customers and suppliers.
“It [the ‘new framework for how we expect the teams to operate’ with suppliers] does imply we are trying to make more on the front margin rather than the back margin, on how we sell rather than how we buy – it’s a much more efficient model for everybody.
“While the steps we are taking are impacting short term profitability, they are essential to restoring the health of our business.”
Following the announcement of yet another profits warning, Tesco shares plummeted by 16 per cent as shareholders demonstrated a very real concern for the future of the supermarket brand. Although these have recovered very slightly, the price remains far below the relatively strong figures seen only a year ago.
Mr Lewis has only been in charge of the business since the first of September this year, but has already made some major changes at the supermarket group designed to attract consumers away from rivals including Sainsbury’s and Asda. He also intends to continue with the price drop campaign initiated by his forerunner Philip Clarke, who was ousted from the top spot after 40 years at the company following the previous profits warning.
Unfortunately, the latest update has caused analysts to question whether Mr Lewis will be able to deliver a recovery in the next few years, if such a thing is even possible.
Mike Dennis, an analyst at Cantor Fitzgerald, says; “The CEO needs to simplify the business via UK and international asset sales, then reconnect with suppliers by changing payment terms and lowering his cost of goods and then start on the long road to rebuilding the Tesco brand with shoppers.
“All this could take several years and suppliers are not going to be disposed to Tesco, given the negative industry volumes and poor performance of Tesco over the last two years.”
Do you think a recovery for Tesco is even possible at this stage?
