Very little helps

By CR/RC

ONE way of trying to draw a line under a disastrous period of trading is to announce all the bad news in one go. It is called kitchen-sinking. This is what Tesco, Britain’s biggest retailer, did on April 22nd when it announced results for the year ending February 28th.

By any measure the figures were eye-popping, worse even than most analysts had expected of the struggling company. Tesco made the largest pre-tax loss, of £6.4 billion ($9.6 billion), in British retail history, eight times as much as the previous record, set by Morrisons last year. This was also the sixth-largest loss in the country’s corporate history. Most of it (about £4.7 billion) was due to a fall in the property value of Tesco’s British stores. This was not merely an accounting matter, but a sign of how its out-of-town hypermarkets have fallen out of favour with consumers who shop online or use smaller convenience stores. Underlying profits were 68% down on the previous year, at £961m, and overall sales were down by 1.8%. The stock that Tesco keeps in its warehouses is worth £570m less than previously thought, and the pension scheme is £3.89 billion in deficit. And so on.

Dave Lewis, Tesco’s chief executive, hopes that the company has now reached rock bottom. Investors, whose shares lost half their value last year, certainly hope so. They are still smarting from the misreporting of Tesco’s profits last year by £263m, an event that is being investigated by the Serious Fraud Office.

There were a few points of light. Tesco Bank is still doing well. And profits in Tesco’s Asian operations fell by only 15% year-on-year, compared with a whopping 79% for its British stores. This suggests that Tesco was right to diversify geographically. The company also emphasises that the property write-down was a one-off.

The performance of the 3,000 or so British stores remains his biggest headache. This is where Mr Lewis will win, or lose, his battle to turn the group round. Since early 2011 they have been losing market share, mainly to the much cheaper German-owned discount stores, Lidl and Aldi. Customers began to switch to them in big numbers during the recession, and the habit appears to have stuck. The two now account for nearly 9% of Britain’s grocery market, up from just 5% or so in 2010, mainly at Tesco’s expense. Aldi in particular is expanding remorselessly, promising to open stores at a much faster rate than Tesco is closing them.

To fight back, Tesco is trying to become more like Aldi, not least by investing heavily in cutting prices. Although this has eaten into its profitability, there are signs that a few customers are returning. Tesco is slashing the number of products in its shops; typically an Aldi store will sell about 2,000 items, a Tesco store 45,000. Mr Lewis has also been cutting back on Tesco’s bloated corporate culture. He has closed one of its headquarters, with the loss of thousands of jobs, and has got rid of four of its five corporate jets—symbols of the extravagance of an earlier era.

These measures will take some time to work, however, if they do at all. Mr Lewis has begged for patience. Will investors, and shoppers, spare him any?