Tesco, a major UK-based grocery retailer, has suffered a series of setbacks in recent years including declining market share and profits. In late 2014, it was revealed that Tesco had overstated its profits by £263 million for the previous six-month period due to prematurely recognizing income and delaying cost accruals. This accounting scandal led to a criminal investigation by the Serious Fraud Office and wiped billions off Tesco's market value. Experts say Tesco must strengthen its balance sheet, cut costs, and rebuild trust with consumers and suppliers in order to recover.

1. Christos Diafas
Martha Dragatidou
Vasiliki Kontotasiou

2.  Multinational grocery & merchandise
retailer based in England
 2nd largest retailer in profits & revenues
 UK’s largest private-sector employer
 Stores across 12 countries (Asia,
Europe, North America)
 Constituent of the FTSE 100 index
 Market capitalization of approx.
£14.3m
 Has diversified into other sectors
(Blinkbox, H&H, Giraffe)

3. Discounters (Aldi , Lidl) enjoy rapid sales growth (~9%)
First profit warning in 20 years wipes £5bn off Tesco’s market cap
Decline in profits; full year pre-tax profit halves to £1.96bn
Continuing profit loss for 5 years in US; Tesco quits Fresh & Easy
Shares lose more than half their value
- February – August 2013: pre-tax profit £1.6bn
- February – August 2014: pre-tax profit £112m
• 9/1: Out-of-town stores like-for-like sales drop by 2.4% in six weeks
• 25/2: Store refresh programme accelerates in preparation of price cuts
£200m investment into lowering prices
• 16/4: 6% group profits drop announced. Plan to open more than 100
Giraffe, Decks and H&H outlets
• 4/6: Tesco blames impact of price cuts and accelerated store revamp
programme for third successive fall in sales in its Q1 results
• 21/7: CEO Philip Clarke steps down after failing to turn around company
fortunes
• 29/8: Tesco issues shock profit warning, announces stall on store refresh
programme; “challenging trading conditions” are put to blame

4. 19/9 22/9 1/10
• Employee suggests profits
may have been overstated
• Profit hole discovered
(£250m)
• Deloitte begins
investigation
• Financial Conduct Authority
begins investigation
• Blinkbox put up for sale
29/10 23/10 16/10
• Moody’s & Fitch
downgrade Tesco’s debt to
BAA3
• Deloitte results: profit
overstatement (£263m)
• Premature income
recognition &delayed
accrual of costs
• Serious Fraud Office begins
investigation

5.  Share price decline
 Lost 12% of value in one day
 Profit declined by 47%
 Market share drop
 Lost trust of consumers & suppliers
 8 executives suspended
 Lost credibility towards investors
 Warren Buffett: “huge mistake”
 Moody’s downgrading to BAA3
 Neil Saunders:“It gives the impression
of a company that is not in full control
of its internal procedures”
 Raised alarm for other supermarket
chains

6.  Why do suppliers pay retailers?
 Listing fees
 Prime position fee
 Promotional activities increase sales
 What form do payments take?
 Commercial income
 Specific target levels
 Why is it a grey area?
 Store managers overly optimistic at profit
estimations
 Co-op deals made well in advance
 Revenue not booked until goods/services are
delivered (GAAP)
 Payments disputed later – new agreement in 2nd
half
 Shouldn’t PwC have found out?
 Rebates included in balance sheets
 “Amounts accrued at the end of the year are
judgemental” – risk of manipulation

7.  Strengthen UK business core
 Focus on internal market
 Strengthen balance sheet
 Cut costs
 Sell non-core assets (Thailand stores/Tesco
bank/Dunnhumby)
 Rights issue (up to 3bn)
 Cut jobs
 Raise product prices
 Build trust & transparency on brand
 More space to best-selling lines
 More staff on shop floor (user friendly)
 Rebuild trust with suppliers & consumers
 Display clear strategy for comeback
Neil Saunders, Conlumino:
“...today is about financial
performance and not the
time for unveiling grand
plans”
Sven Reinke, Moody’s:
“lay out strategy or face
further cuts”

8.  Retail giant suffers continuing decline
 Entry of new players
 Change of focus to shareholders
 Failed diversification
 Accounting scandal erupts
 Unprecedented consequences
 Market share – share price
 Frustration among investors – suppliers – consumers
 Analysts’ allegations
 Need to paint a flattering picture?
 Under-pressure CEO maintaining his job?
 New CEO deliberately worsening situation to engineer recovery?
 Honest mistake?
 Fake sales?
 Comeback based on 3 main pillars
 Strengthen balance sheet
 Strengthen UK core
 Build trust & transparency

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