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this paper I will be discussing the impact and causes of the 2014 Tesco

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and the challenges in which they faced after such huge event. In addition, this
essay will describe the aftermath in which followed with an Analysis of
the strategy Tesco has adopted to deal with the scandal.


1.1 Company Overview

Tesco is the number one multinational
grocery and general merchandise retailer supermarket in Britain,
with one of every seven pounds spent in the UK went into the tills of Tesco (BBC News, 2013). Founded in 1919 by Jack
Cohen in the East End of London in which employs over 460,000 people and has
more than 6,000 stores in 12 different countries worldwide (Tesco, 2017). Tesco sells around 40,000
types of food in its stores, which now includes clothes, electricals and personal finance
products (Telegraph, 2014). Tesco’s statutory revenue from the past financial year was £53.9bn and
their statutory profits were £202m with their group sales being £47.9bn (Tesco, 2017). Tesco adopted a
combination of effective target market segments in order to attract their
different target groups such as geographical, psychographic and behavioural


1.2 Overview of the


The UK supermarket industry is one of the
most established in the UK there is clear evidence to show that this sector is oligopolistic
and primarily dominated by 3 large supermarkets; Tesco, Sainsbury’s and ASDA.
Tesco is currently the U. K’s largest supermarket with a market share of 27.8%
with the 2nd biggest supermarket brand being Sainsbury’s with their
market share being 15.8% closely followed by Asda with 15.3% of the market
share. However, on the rise is the low cost supermarkets such as Aldi in which
had a 17.2% sales growth in the past year and now has 7% of the U. K’s market
share (Kantar, 2017).


2. Description of Event


2.1 Brief Overview


event in which I have chosen to look out refers to Tesco’s overstatement of
profits which occurred in the November 2014. This scandal that emerged was
brought to light by a whistleblower and in the process the stellar
reputation and the great success of Tesco was damaged as a result. Tesco has revealed
an overstatement of £250 million of its expected profit for the half year,
primarily due to the
accruing delay of expenses and acceleration of the sales revenue (Lewis, 2014).


2.2 Rebates

Given the competitive nature of the UK grocery market and Tesco’s
large market share and popularity, big brands want their brand products to be
stocked on the shelves of Tesco. One of the problems that Tesco faced was due
to the rebates they received from these big brands. Tesco entered into agreements with its suppliers that in exchange for
purchasing and selling large volumes of products and in return Tesco would
receive discounts and rebates, which it would count towards commercial income.  These rebates are estimated by Tesco half way through the
year in order for Tesco to correctly identify how much they will be worth at
the end of the year (Telegraph, 2014).
However, Tesco didn’t have the ability to sell sufficient quantities of the
product in order to receive the discounts, although they had already booked the
income. Their inability to sell the sufficient amounts was due to the pressure
they had been experienced in recent years as they had been suffering from declining
sales due to customers shifting their loyalties to the new, low-cost
supermarket such as Aldi and Lidl. This alarmed Tesco as up until then Tesco
had been considered the cheapest supermarket for customers, and sparked the
fear that they would be missing out on a larger amount of volume driven rebates
and this therefore exacerbated the need for the earlier takings of revenue and
profits (Ruddick, 2014).

2.3 Overstatement of Profits


 As a result, the Tesco management had to
retool their business plan, thus choosing to inflate their figures in order to
compete with their new found competition. They chose to forecast their profits
at £1.1bn in its half year, however these numbers were decreased by up to £263m
(BBC, 2014). This led Tesco to check over their figures which led to the
realization and announcement of their over- predicted profits.

believe that the Tesco scandal highlights the dangers of being a dominant business
with a ?xed focus on the short term need to compete with the new threat of new
discounted stores. Tesco’s desire to ensure they had an increase of commercial income
and larger profit meant that they jeopardized the honesty and integrity of
their brand image and reputation in which customers valued and didn’t look at
the long term.


2.4 Porters 5

models that look at an external perspective and internal perspective are
helpful for Tesco in order to define a strategic approach following the scandal.
Porter’s (1998) competitive analysis can be used for strategic analysis as it
identifies five fundamental forces which provide insight into the relationships
and dynamics of the supermarket industry. In terms of competitive rivalry Tesco
at the time of the scandal were facing hard competition from new discounted
supermarkets like Aldi and Lidl in which were affecting its sales as Aldi and
Lidl were able to offer lower prices on products. This led customers to turn to
the cheaper alternative given the recession period, thus forcing Tesco into
over-stating profits to make up for their lost custom. This perspective can
also see the threat of substitution in the market and highlights changes in
consumer trends as although Tesco offer well- known brands, Aldi and Lidl offer
substitute brands in which are extremely similar to the well known brand but
are offered at the fraction of the price making them more appealable to
consumers. In terms of supplier’s power, Tesco held a strong position as could
pick from thousands of different ranges and products thus suppliers having a
low bargaining power, however given that Tesco was entering agreements to sell suppliers products, they
however, didn’t have the ability to sell sufficient quantities of the
product in order to receive the discounts promised to them thus resulting in
them over- estimating their profits to subsidies the decline in sales. These factors all demanded
a more responsive strategic approach in order to combat their competition,
however Tesco chose to over-estimate profits in order to compensate for their inability
to sell and generate the adequate profits needed.

3.0 Consequences




scandal caused serious damage to the reputation of Tesco and tainted their brand
Once the scandal
was brought to light of their overestimate of profits the UK’s Serious
Fraud Office (SFO) announced that it was going to be launching a criminal
investigation into the accounting practices of Tesco.  Three of the former Tesco directors were
charged with fraud by abuse and false accounting between the period of February-
September 2014 and could face jail time. While Tesco earlier this year had to
pay £129m in order to settle investigations between the SFO and FCA and avoid
being prosecuted for the scandal.


Financial Implications


As a result of the accounting scandal Tesco lost
50% of its
market value in a year (BBC News, 2014)
with £2 billion being wiped off the supermarkets share
value leading investors selling their stakes in the company (Telegraph, 2014) as their shares fell by
nearly 12% (Independent, 2017).


Competitive Implications


This scandal did not help them to remain
competitive in the already highly competitive supermarket market and Tesco’s
competitors were shown to have benefitted from Tesco’s misfortune. For example,
if we look at the diagram (appendix 1) their market share had dropped by 1.4%
with sales down by 4.5% as a result to the exposure of their scandal. However,
in comparison to Tesco, the new discounted supermarkets such as Aldi was shown to
have benefitted with their sale figures from the year increasing by 1.1% (Kantar, 2014).


4.0 Similar Scandals




In 2015, Toshiba announced that it has overstated profits by
151.8 billion yen (US$1.2 billion) over a seven-year period (Harvard Business Review, 2016). This
case is extremely similar to Tesco’s as it relates they too over stated their
sales and profit and understated their losses. The approach in which they took
in order to overcome their scandal was to establish a new corporate culture under new
management and governance structures as their top management had all been
involved with the scandal. The way they have overcame their scandal is similar
to the strategies that Tesco adopted as the culture and management change. They
chose to restructure its
workforce by selling off two major branches; medical and home appliances and
also cutting jobs from 217,000 to 183,000 (DW, 2016).


5.0 Changes in
the different factors

5.1 4P’s


4P’s were created by E. Jerome McCarthy to provide a framework for marketing
decision making, we can look at them to help explain Tesco following the

regards to place, Tesco has over 6,000 stores in 12 different countries
worldwide. As
of 2017, Tesco UK store portfolio consisted with 7 different formats including
Tesco Extra, Superstore, Express and Metro. However, after the scandal there
was a restructure of the business they have closed 43 of its
most un- profitable stores and have opened a further 49 of the very large
stores. For product not only does Tesco have Tesco stores but it
also owned other businesses such as Blinkbox and Tesco broadband. Tesco post-
scandal chose to sell off these non- core businesses in order to generate more
cash for Tesco following their decrease in sales. In terms of price, one of the
major things Tesco struggled with was their ability to compete with the prices
that Aldi and Lidl were offering for their items. However, Tesco also chose to
introduce new price cuts on hundreds of items basic food
products such as bacon and eggs and reduce online shopping charges in order for
them to try and regain market share from Aldi and Lidl.

All of these issues were contributing factors as to why Tesco’s
accounting scandal occurred, Tesco had not been able to adapt their business
plan and strategy in order to compete with the new emergence of the discounted
supermarkets and were unable to accept that their sales were dropping, thus
deciding to over- estimate the profits in order to alleviate their losses.


5.2 Changing executives

Following the news of the the accounting scandal, Sir Richard Broadbent,
the chairperson of Tesco at that time, resigned from his position and Dave
Lewis became the new chief executive of Tesco. Once Tesco had paid the
settlement he stated this was allowing Tesco to be able to move on and
apologized to all those affected stating “What happened is a huge source of
regret to us all at Tesco, but we are a different business now”.

In the two years since his appointment Tesco have already dramatically improved
following on from the scandal. At first, I believed that merely changing the
executive at the top would not have significantly impacted Tesco in order to
regulate and normalize it following the scandal as the trust had gone and the
brand reputation and image had been tarnished.  However, I believe the change in executives
was the best decision for Tesco since his arrival Tesco shares surged by 10%
and £1.5bn market capitalization was added to the business. Thus highlighting
the improvement that he has made to Tesco as even before the scandal broke
Tesco’s sales were already in decline, and now Dave Lewis has adapted new strategies
in order to compete against other supermarkets and attract customers.

5.3 Cultural

One of
the problem in which Tesco needed to address was its current culture. Lewis (2014) stated that “Turning our business around will require change in our culture… We
want to work in a business which is open, transparent, fair and honest. We all
expect Tesco to act with integrity and transparency at all times.” This
signifies that Tesco have identified that in order to move forward following
the scandal they need to rebuild the trust of the consumers which was broken
due to the incident, customers are not going to return to Tesco unless they
have full confidence that another issue like that would not arise again. One of
the things that have been introduced into Tesco to try and change the culture
is the “Feet on the Floor” programme in which sees all head office employees working
in stores on a fortnightly basis to re-engage with the core business and get to
grips with the business at the frontline (The
Guardian, 2014). I believe this iniative
helps to demonstrate the importance of customer service and help the customers
feel valued. It had little financial cost for the business, yet it made the
most immense difference in helping to improve the brand image while also rebuilding investors and
customers’ confidence in the company.

Compensation Scheme


Another iniative Tesco introduced was the multi-million-pound compensation
scheme, in which was created for the thousands of shareholders affected by the
accounting scandal

(Telegraph, 2017).

The compensation scheme’s main goal and focus is to repay on
average £400 in compensation to the 10,000 people of which who purchased stocks
in the Tesco between 29 August and 19 September 2014 (Economia, 2017) This scheme I believe will help Tesco to repair the
reputational damage caused by the accounting scandal.

However, although it will help to alleviate the damage caused by
the scandal, I only believe to a certain extent. I believe the damage is irreparable
as the severity and dishonesty of the situation will be impossible to rectify
as consumers and shareholders will never be able to fully trust Tesco as a
brand again all they can do is try and improve and attempt to re-build the
relationship with their consumers. Investors will always be wary when
considering investing money into the business as during the scandal Tesco lost
the support from one of the worlds biggest investors Warren E. Buffet and this
sort of high profile scandal will always be within investors and shareholders
minds. This was however a small step in the right direction for Tesco and was
met with generally positive feedback by he public as it was implied they were
holding their hands up to their wrong doings in the past and attempting to put
it behind them and draw a line under it and move on.


6.0 Results


Following the 2014 scandal Tesco had faced and the strategies
they adopted in order to combat it if we look at their market share for September
2017 (appendix 2) we can see that
despite a difficult few years they still hold they still are the number one
supermarket with 27.2% of the grocery market share. This therefore shows that
Tesco’s strategy that was put in place following the scandal was successful as
looking at their current statistics they have had a 30% rise in group
operating profit to £1.28bn in the year ending in February 2017. Within that
figure, they also saw profit surge 60% to £803m (Telegraph, 2017). This highlights the progress Tesco has experienced
since the scandal came to light and the success of the strategies implemented
in order to not let the scandal lead them to close down, however to push
through and maintain their top position in the UK supermarket industry.


7. Conclusion

In conclusion, the objective of the essay was to examine the
accounting scandal in the UK in which Tesco faced. The main issues of this
essay were analyzed, such as aggressive accounting and major overstated profits
and evaluated the response in which Tesco conducted in the wake of the scandal.
Moreover, this essay covered consequences of the scandal, especially the damage
to Tesco`s reputation and loss of the company.

Tesco wanted to reiterate to its customers that there was no
intent to deceive and that it was just an accounting errors due to “early
booked gross profit”. As a result, investors and shareholders were quick to judge,
allowing shares to drop by 20%. However, Tesco were quick to react to the break
of scandal and with a new director, massive restructure and new schemes
introduced they were able to recover and still maintain their number one place
in the supermarket industry. 

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