Record loss for Tesco in abysmal fiscal year

Lower real estate value pulls Tesco into red

The once-so-proud British market leader suffered a 1 % turnover drop compared to the same quarter last year, when looking at identical retail floor space. Its full fiscal year (up until 28 February 2015) showed a like-for-like turnover drop of 3.6 % in Great Britain. At group level, the like-for-like turnover dropped 3.3 % as a growing number of Asian (- 4.4 %) and European (- 0.8 % in Ireland, Turkey and Central Europe) consumers have walked away from the company.

All across the board, Tesco has lost its consumer appeal which has also impacted its commercial real estate: Tesco has had to write off 4.7 billion pounds (6.5 billion euro) in British real estate value. Alongside several other huge costs (including 416 million pounds or 578 million euro in restructuring costs), this has forced Tesco to publish a record pre-tax 6.4 billion pound loss (8.9 billion euro).

It is the biggest yearly loss Tesco suffered in its 96 years of existence, but it does show that “Drastic Dave” (chairman of the board Dave Lewis) is willing to take hard and unpopular measures to get the company back on track. If that means the numbers will have to dip deep in red, then so be it. Keeping the recent accounting scandal in mind, Tesco’s management will do anything to show the world the hard facts, without embellishment. 

Asia more profitable than Great Britain

Regardless of write-offs and one-time costs, Tesco still managed an operational profit at group level of 961 million pounds (1.3 billion euro, a 68.4 % drop), on the back of a 69.65 billion pound (96.8 billion euro, a 3 % drop) turnover in its full fiscal year. Particularly Tesco’s awful British performance is to blame, as profit dropped nearly 80 % in this market, down to 467 million pounds (650 million euro).

Asian operational profit also dropped 18.4 % to 565 million pounds (785 million euro), but its profitability has made it more important to Tesco’s bottom line than Great Britain, something which will also never have happened in the British market leader’s nearly 100-year history.

Tesco’s position is eroding

“It has been a very difficult year for Tesco. The results we have published today reflect a deterioration in the market and, more significantly, an erosion of our competitiveness over recent years. We have faced into this reality, sought to draw a line under the past and begun to rebuild, and already we are beginning to see early encouraging signs from what we have done so far”, CEO Dave Lewis said in an accompanying press release.

Better product availability, service and pricing have helped increase the like-for-like volume for the first time in 4 years, Tesco believes. It remains to be seen whether Tesco can maintain that positive result in the upcoming quarters, but it is one of the things Tesco’s management is clinging onto. The company will also not be paying dividends to its shareholders.

Tesco will however cut costs even more in the next fiscal year: “The immediate priority for these and any other savings delivered is reinvestment in the customer offer in order to further restore UK competitiveness”, Tesco says. That means the British consumer will be first on its list of parties to please and shareholders will just have to accept that. 

Obviously, that is how it should always be, because if the consumer smiles, the shareholders will smile as well. Unfortunately for Tesco, that seems quite a way off, which means the shareholders will have to bite the bullet a few more times.