You can't say I haven't warned you about Tesco (OTCPK:TSCDF) (OTCPK:TSCDY). I've been saying for a good while now that its prices are too high ('Ocado woes and Tesco woe[r]s', The Top Note, 29th August). I've been saying for a good while now that there are elements of its culture that seem to an outsider to me to belong more on an old City trading floor than inside a Grocer ('The main event in retail is really a distraction', The Top Note, 7th October). And I've been saying for a while now that fixing Tesco's problems is not as simple as one person flipping a lower price switch and then watching as the customers come back.
But I'm a trusting old soul at heart, most of the time. I'd even started to wonder in the past week or so whether the time wasn't approaching when the majority of Tesco's problems would be more behind it than ahead of it. I was even willing to see positive things in Tuesday's fourth profit warning from the company. As far as the company's new Commercial approach to its suppliers, for example, "we have retrained our entire team", it said. And as far as customers were concerned, the company said "we will not engage in short term actions that compromise in any way our offer for customers".
I've written before about the analogy I see between the plight of the big UK supermarkets versus the discounters on the one hand, and Europe's flag carriers versus discount airlines on the other ('UK Supermarkets - the Budget airline analogy', The Top Note, 2nd September). If that isn't enough, there was also the piece about the analogy I see between Tesco and British Airways ('A Tesco-British Airways analogy', The Top Note, 25th September). Both of these analogies suggest further significant challenges ahead for the company. Then again, markets are supposed to be efficient, aren't they? In other words, perhaps all of my bad news was already priced in, and it was time to be more forward looking.
But then I got home last night and I opened this week's edition of The Grocer to find the following headline staring out at me on page five: "Tesco taps suppliers as commodities fall". And, in that instant, just about all of my rekindled goodwill towards the company evaporated. "As you are aware", the company wrote to at least some of its suppliers, "a significant number of commodity prices have been decreasing. Building on our relationship, we wish to inform you that we will be spending the week assessing whether we believe there are benefits which can be drawn from the commodity price movements across the products you supply us". Now, I suppose it is possible that all that was on the company's mind was seeing lower prices for us, its customers. But I doubted I would be that simple. And right enough, a couple of paragraphs further into the story, one supplier (admittedly anonymous) had the following to say, which was more or less what I was thinking by this point: "What will be interesting to see is if customers see any benefit".
Somewhat depressed that the glimmer of hope I had begun to develop for Tesco was in danger of being snuffed out, I picked up my iPad to see what the Financial Times had to say about the profit warning. One story - 'Tesco kitchen-sinking in hope of profit rebound' - had some freshly minted quotes from CEO Dave Lewis, together with a helpful translation of what he had actually said into everyday language. I looked through the quotes. 'Relationship' got a couple of mentions, as did 'Value', 'Reset', and 'Foundation'. Nothing about 'price', though, which I thought was interesting. I looked on Tesco's website at the Trading Update itself. There was another quote from Mr. Lewis: 'focus' was in there, along with 'value', 'progress' and 'offer'. But, again, nothing on price from Mr. Lewis himself. Actually, the only mention it got at all was something about Tesco having 'invested in price', and that just darkened my mood even further ('Stop investing in lower prices - just reduce them', The Top Note, 12th November).
I was almost done with the FT story in question when I noticed a link to "Watchdog warns retailers over supplier payments". Apparently, the vigilant folk at the Financial Reporting Council (FRC) had been watching BBC Newsnight on 4th December, where there was a story about supplier payments with respect to a company called Premier Foods. Anyway, in a stinging rebuke to the industry, the FRC apparently indicated that "more detail than at present" would be necessary on the part of UK retailers when it came to their dealings with suppliers. As warnings go, it didn't have the hairs on my chest standing on end. But it did when the Chairman of the FRC Review Panel starting talking about "complex supplier arrangements such as fees and discounts". I mean, what's so complicated about a discount? Thank goodness that Newsnight wasn't clashing with Britain's Got Talent that night, I thought.
If it took BBC Newsnight just last week to alert the FRC to problems in UK retail, it won't surprise you to learn that it has yet to launch a full review of UK retail practices. By the way, the FRC hasn't even announced an investigation of any formal sort in Tesco's recent profit restatement (although the Serious Fraud Office has, I believe). My point is that I can't now see how such an investigation can be avoided. And such an investigation will take time. It's just another facet of Tesco's misfortune that is going to take a long time to clean up.
In case you're still wondering, I'm not convinced that Tesco gets it yet. From my vantage point, price is the problem: it's certainly the reason that I no longer shop at Tesco. And yet CEO Dave Lewis can't even bring himself to mention the word 'price'. Does he know something about demand curves that I don't? Tesco's share price is down by 22% from the 225p that it stood at on Mr. Lewis' first day on the job at the beginning of September. For me, it's still got further to fall.
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