Tesco's is in Trouble!

Who would have thought it?

When I attended a lecture given by their recently retired Chief Financial Officer Andrew Higginson  in 2004, Tesco's were known as having a highly aggressive growth strategy with phenomenal success. They were the market leaders in the UK and had just started looking overseas in USA and China. Everyone expected them to replicate their success in the UK in these overseas markets.

But since then, Tesco's has lost it's golden touch. It found the Chinese market harder to crack than expected, and lost millions trying to adopt to a different shopping culture. Then in April 2013 it pulled the plug on its US operations, costing them £1.2 billion in losses.

At the same time. Tesco's announced its first ever dip in profits. Sales had been stagnating since since 2012.   Then came the horse meat scandal,  when it was discovered their value Bolognaise contained 60% horse meat,

Tesco's has been losing out to other retailers in the UK. It's market share started to decline. Asda, owned by the world's largest supermarket chain Walmart,  generally has prices cheaper that Tescos, especially if one only buys in small quantities.  And it's facing tough competition from the likes of Aldi and Lidi, no frills stores that drive down prices. A new Aldi store is being built in Coulsdon, opposite Tesco's Express store and another bigger one is planned for South Croydon.

Yet only a month ago, Motley Fool advised its readers to buy Tesco's, saying the share price couldn't go any lower and the company had great potential for a turn around.

Now we have the accounting errors, overstated sales and understated costs. If it was one of these we may be inclined to think it was an accident. But the massaging of both figures suggest fraud. The 4 people in charge of the UK area have all been sacked. An independent inquiry by Deloittes  has been launched and the worst may yet to be revealed. Clearly Tesco's are in trouble and the UK team have tried to mask that trend.

Worse still, Tesco's are currently without a Chief Financial Officer and the Chief Executive has only been in the post for a matter of months, after Philip Clarke gave up trying to revive Tesc's fortunes.  Markets hate uncertainty and so it's no surprise that the share price has plummeted by over a third this year. It's also significant that the interim results were finalised just after the previous CFO left. Apparently an outside source spotted the error, no wonder then that key people on the UK board have now been sacked.

Tesco's will have to reinvent itself. It's done that before, but is it now too big to turn around? It's second only to Walmart as the world's largest supermarket chain.

Or are we seeing the beginning of a different way of shopping, where price is everything? Ironically Aldi & Lidi have adopted the very model that made Tesco's a success in the 1950's, pile it high and and sell it cheap. These small businesses have been growing rapidly in recent years. Costs have been cut to the bone, you can't even get a plastic bag from them without paying for it.

The new Chief Executive is going to have his work cut out to turn Tesco's around. It may take several years to find a new model that works. The new CFO is leaving Marks & Sparks early in order to get a grip on Tesco's finances. One thing that he needs to tackle is the aggressive culture within Tesco's that pushes people to take risks. I think it will take a number of years to turn Tesco's around.

For now, I wouldn't be investing in Tesco's, until we hear from Deloittes as to what's been happening.

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