The City will be demanding answers from Tesco’s chief executive, Dave Lewis, when he presides over his first set of results on Thursday, a month after revealing that profits had been overstated by £250m.
Tesco has already suspended eight senior staff, as it races to work out what went so badly wrong. With discount supermarkets eating into Tesco’s sales, and the crucial Christmas trading period looming, here are the key questions that Lewis must address:
1) How long has this been going on?
Last month, Tesco said “accelerated recognition of commercial income and accrual of costs” had created a £250m black hole in its profits for the six months to 23 August. But does the problem go back further than that, and might earlier financial results need to be restated too? Deloitte, who were called in after a whistleblower reported the issue, have been digging.
2) What actually went wrong?
The issue appears to revolve around the commercial payments that Tesco demanded from suppliers in return for hitting sales targets, or for a successful promotion. What exactly was Tesco promising, and to whom? And what were Tesco’s auditors, PricewaterhouseCoopers, told?
3) Is there a culture problem at Tesco?
Dave Lewis wrote to staff last month informing them that he wanted “a change in our culture as well as our processes”. He added: “We want to work in a business which is open, transparent, fair and honest.” Given that the scandal seems to involve senior management rather than the majority of staff on the shop floor, how is Dave Lewis going to change the culture at the top, while maintaining morale elsewhere? And how much damage has been done already?
4) How is Tesco coping with such self-inflicted damage in its top ranks?
The eight suspensions cover senior figures such as the head of the retailer’s all-important UK business, Chris Bush. Losing such leadership, if only temporarily, would hurt any organisation, let alone the market leader in one of Britain’s most relentlessly competitive sectors.
5) How is Tesco addressing its slumping UK performance?
Even without this debacle to handle, Lewis faced a major turnaround challenge at Tesco. Discount chains are wreaking havoc on Tesco’s sales performance, as shoppers conclude that its prices are simply too high. Aldi and Lidl’s prices are up to 25% cheaper, and are continuing to turn the screw as Christmas approaches. Will Tesco retaliate? Can it afford not to?
Lewis must also unpick the legacy of the Terry Leahy era, which has left him with too many huge out-of-town stores and a handful of distracting businesses, including Giraffe restaurants, and Harris + Hoole coffee.
6) Is a rights issue on the cards?
Tesco is still profitable, but the word in the City is that the company needs to raise cash. Is Lewis considering tapping shareholders through a rights issue, or hiving off some overseas operations to bolster a war chest for the fight back home?
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