April 24, 2015    3 minute read

Tesco in Trouble

   April 24, 2015    3 minute read

Tesco in Trouble

Not long ago,  Tesco was on course to become one of the most powerful companies in the UK and that it even had the potential to be very influential globally and eventually have the clout to take on giants such as Walmart. Such ambitions seem like a distant memory, especially since the British supermarket chain recently posted the worst economic results in British retail history at a colossal £6.4billion.

Although Tesco may have appeared to have been enormously successful in the last few years, it has actually gone through quite a tough time. One of the famous areas in which Tesco has failed in recent years, is in its attempt to enter the US market with its ‘Fresh and Easy’ chain of local grocery stores, which it had large ambitions for. Although the chain began trading extensively and had some significant presence with 200+ stores, it filed for bankruptcy in 2011, resulting in a loss of £150m financial loss for Tesco in the process. This put a swift end to what was supposed to be widely profitable venture into the US grocery market.

However, away from its failings that have been in the spotlight in the last couple of years have been problems that many were generally less aware of. Tesco’s pension scheme has a deficit of £3.89bn. One cannot also forget what happened last year when Tesco’s accountants were reported incorrectly, a £263m margin of error, causing then-chairman Sir Richard Broadbent to step down. This error made Tesco’s profits appear much better than they actually were and caused investigation by the Serious Fraud Office and Deloitte to understand the reason for such a colossal error.

To pour further fuel on the flame, Tesco is also facing tough competition from low-cost supermarkets, namely Lidl and Aldi , which are capitalising on the post-recession effect, both taking a combined nine percent of the grocery market share, up from just five percent in 2010. The majority of such market share has been taken from those unable to find a particular niche, including Tesco.

Aside from the aforementioned, the major cause of the £6.4bn loss was due to a revaluation of Tesco’s real estate, to £4.7billion, which was less than originally thought. The current Chairman Dave Lewis has said that this particular aspect of the loss is a one-off and hopes Tesco has suffered as much as it can and that it’s on the way up. However, Lewis still has his other 3,000 stores that are losing market share. He has acted in this regard; slashing prices, cutting the number of products stocked and closing a major headquarter all to save costs and improve competitiveness once more.

Some good news is that Tesco’s share price hasn’t taken that much of a hit, at the time of writing, the share price stood at 224 pence, which is down 25 pence over the last month. However, this is still a progression from the lows of December 2014, when the price stood at 165 pence, potentially demonstrating some investor confidence in the ailing supermarket.

Lewis is desperately trying to turn Tesco around, but will his cutbacks have enough of an impact to get Tesco back in the game? Only time will tell.

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