Tesco must address an oppressive company culture that is damaging its business, a source closely connected to the grocer’s leadership team has told Retail Week.
Following the shock revelation that Tesco had overestimated its half-year profits by £250m, the source said that it is critical that a culture that contributed to the crisis is changed in order to safeguard the future of the retailer, the UK’s biggest and the third largest in the world.
Tesco, which disclosed on Monday an overstatement of profits related to the recognition of income Tesco receives from suppliers, has long had a reputation for tough dealing with suppliers harking back to the era of Sir Terry Leahy.
But the well placed source told Retail Week that the culture that has developed in recent years is different to the normal cut-and-thrust of retail and supplier relationships.
New Tesco chief executive Dave Lewis, only three weeks into the job, launched an investigation into the profit overstatement crisis over the weekend after an employee alerted the retailer’s general counsel of the issue.
Four senior directors, including UK boss Chris Bush, were suspended pending an investigation by Deloitte, assisted by lawyers Freshfields, and the interim results were pushed back to October 23.
Lewis has been praised for his decisive action after the problems emerged. He was able to parachute in his new finance chief, ex-M&S man Alan Stewart, two months early to help deal with the issue. It is understood he negotiated Stewart’s release after personally contacting M&S boss Marc Bolland.
Tesco chairman Sir Richard Broadbent has come under pressure following the crisis, but it is understood the majority of big shareholders are not calling for him to step down because they do not want further disruption from more leadership changes.
Bernstein analyst Bruno Monteyne argued that Tesco does not have a balanced board containing sufficient relevant retail experience and “that may go some way to explain why Tesco stuck so long to a bad strategy and why it wasn’t more alert to the risk of these accounting practices”.
He said: “The responsibility for the board composition ultimately lies with the chairman and investors should review their options.”
Broadbent defended his position on Monday and said that the accounting issue is “out of the ordinary”.
He said: “If you go back over the last 18 months, we have dealt with so many issues, we’ve taken decisions when we were not making progress, and ultimately we changed the management. We have not ducked any issues.”
Broadbent maintained: “Shareholders will decide if I am part of the solution or the problem.”
Lewis impresses in crisis but challenges lie ahead
Following disclosure of the profit overstatement, retailers and analysts have been impressed by how new boss Dave Lewis has handled the crisis.
A former Tesco director said Lewis is “a tough guy, very bright”. The ex-director added: “He [Lewis] deserves credit for how he has handled this in his first three weeks. It’s someone’s worst nightmare really.”
HSBC head of consumer retail, Europe, Dave McCarthy said: “Dave Lewis is a fabulous choice for Tesco, a good leader with star quality. He has acted decisively and will do what’s needed. The problem is with a major fire to put out he will be looking inwardly rather than outwardly.”
Tesco has suffered a torrid time in recent months. It has issued three profit warnings this year and in July its boss Philip Clarke was shown the door.
Kantar Retail analyst Bryan Roberts said Lewis will be hoping this crisis is “the last skeleton” to come out, adding: “Tesco’s reputation, share price and morale cannot take any more battering.”
Roberts said if Lewis can focus on the strategy despite the distraction and kick off the right turnaround plan then “Tesco could recover within three years”, but added: “If there are further revelations and distractions or the wrong strategy is taken, it will take much longer to recover.”
Lewis said on Monday that despite the investigation, he will remain focused on trading.
Tesco discloses £250m overstatement of profit forecasts
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Tesco warned it must address damaging company culture