Tesco’s Plummeting Profits – Why Did It Happen & What Does It Mean?

Apr 22, 2015

Written By Billy Sexton, Editor, AllAboutLaw.co.uk

Tesco has announced a massive pre-tax loss of £6.38bn. It makes that £20 you ‘misplaced’ (at the bar) last Saturday night seem like nothing.

It’s one of the biggest corporate losses in history for a company that isn’t a bank, but how has the once all-powerful and conquering UK supermarket, who controlled 31.2% of the market in 2007, slumped to a record loss?

If you weren’t aware, Tesco have had a tumultuous year. Profits halved after £2.4bn worth of write downs (a reduction in the value of an asset) and then they were found to be cooking their books – profits were overstated by £263m, resulting in a criminal investigation from the Serious Fraud Office.

There’s many reasons why profits are tumbling, the value of supermarket property being the most primary; this accounts for £4.7bn of Tesco’s losses. Consumers are increasingly neglecting the big, out-of-town, superstores that reigned supreme in the 00’s. Remember the days you would go with your parents to do a ‘big shop’ and spend the entire time gawking at the mobile phones you wish you had and button mashing the Xbox 360 demo? Well, the youth of today don’t enjoy the same luxuries that you once did, mainly because their parents are flocking to the likes of Tesco Express and Sainsbury’s Local for convenience. Additionally, the fall in supermarket property value is also the result of Aldi and Lidl providing a cheaper alternative to the likes of Tesco.

Tesco have also closed 43 stores and put 49 projects on hold. In these cases, land would have been bought for a significant amount more than what it will be sold at. The growth of online shopping would have had an effect too. Ten years ago, if you wanted a TV you could have picked one up from Tesco which was at a cut-down price compared to Currys. If you wanted the latest video game, Tesco may have sold it at a cheaper price than Game. Now, with the growth of Amazon and eBay, you can get these products cheaper and order them without leaving the comfort of your own home.

Tesco also lost money on stocks that had lost value, faced some £416m restructuring charges and its pension deficit rose from £2.6bn to £3.9bn. Borrowing also increased. So, is there any good news for Tesco? What does the future hold for the supermarket giant?

Things are obviously changing in the supermarket industry. Aldi and Lidl’s limited range of products means they are referred to as low-cost, low-choice supermarkets. Everything from opening for fewer hours, to not piling stock allows Aldi and Lidl to avoid paying for stock that will take a longer time to sell. Nor do they have to pay for warehouses or staff to monitor stock. Where Tesco previously stocked 90,000 products (including 228 different air fresheners), Aldi stock less than 2,000.

Tesco is looking to strike the balance between offering consumers a wide range but also streamlining its business and cutting costs in order to compete with Aldi and Lidl. It culled stock by 30% earlier this year, putting it less at risk to losing out on stock which loses value before hitting the shelves – this accounted for £570m in Tesco’s £6.38bn loss. Indeed, Tesco’s record loss may be significant in showing how the big four supermarkets have to adapt to the changing needs and buying habits of the consumer.

However, there are also suggestions that Tesco is taking a ‘big bath’ or ‘throwing everything but the kitchen at it’. A big bath is where a company takes advantage of a scandal or bad year to reduce their assets in order to lower future expenses and increase net income. Obviously there’s a lot going on at Tesco, but operating profits met projections, so it’s doing something right. The £4.7bn in property write downs is unlikely to be a regular occurrence, meaning Tesco could have a healthier year next year.

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