Tesco risks being famous for being broken

The crisis at Tesco deepened on Monday (22 September) with the revelation that the supermarket’s already disappointing half-year profits of £1.1bn <a href="http://www.marketingweek.co.uk/sectors/retail/news/tesco-online-boss-to-temporarily-replace-md-after-it-emerges-company-overstated-profit/4011700.article">had been erroneously reported.</a> The actual figure, which came to light on Friday thanks to a whistleblower at Tesco’s HQ, is now likely to be closer to £850m.

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The news sparked several simultaneous crises at Tesco. First, there was the immediate issue of how one of Britain’s biggest companies could misreport its profits so badly. Four senior executives were suspended and now there is much discussion about whether Tesco’s chairman, Sir Richard Broadbent, should fall on his sword given the buck should, but oh so rarely does, stop with the boss. Clive Black, an analyst for stockbrokers Shore Capital, said he was “flabbergasted” by the latest turn in the ailing supermarket’s fortunes: “This is not the stuff of a well-operated FTSE-100 organisation.”

Second, there is the issue of the now-corrected profit figure and what it says about Tesco’s fortunes. Profits for the first half of 2014 are down 40 per cent on what Tesco reported only a year ago, and that was hardly a brilliant year for the supermarket giant. If profits really have fallen by almost half in the last twelve months, Tesco is in far worse shape than even its most vehement critic might have suggested.

Finally, the combination of disappointing profits and alleged malfeasance or clear incompetence at senior levels meant that the stock market took a very dim view of Tesco’s prospects. More than £2bn was wiped off the value of Britain’s biggest retailer on Monday. The news that a team of forensic accountants has been brought in to examine Tesco’s reporting structure suggests even more pain ahead.

None of this news, in and of itself, is related to marketing. Most marketers, your humble columnist included, struggle beyond the basics of simple corporate finance. The complex shenanigans that have taken place at Tesco in recent months are beyond the ken of all but the most financially astute marketer. But what makes this a clear issue for marketers is what I call the ’third turn of the wheel’ which will surely now impact on Tesco in the years to come. Let me explain.

You see it happen so often in big business. The first turn of the wheel comes when a company makes a series of bad choices. Eventually those bad choices result in a financial meltdown for the company. Then, in the third turn of the wheel, the negative coverage of the company’s financial and strategic plight enters the public consciousness and directly influences future consumer behaviour.

Take Nokia, for example. A combination of ignorance and arrogance led the Finnish telecoms company into the kind of financial meltdown that makes Tesco look like a very successful organisation. As word spread of Nokia’s decline the brand itself, among people that owned or might want to own a Nokia, began to get a hammering. Yes, the brand had problems but it was the extensive coverage of those problems that ultimately sealed the brand’s fate more than anything tangibly wrong with the company.

You can take that story and replace Nokia with Northern Rock, or Blackberry, or Woolworths or any one of a multitude of brands that first made a mistake, then received unprecedented coverage about the mistake that questioned the brand’s long term prospects, which ultimately encouraged consumers to defect from the brand and seek alternative, more “stable” competitors.

The real worry for Tesco should not be the missing quarter of a billion quid or a nose-diving share price. The big concern is that Tesco is becoming famous for being broken. That’s hugely unfair on a business that still produces hundreds of millions in profits each year and still qualifies as the biggest retailer in the country. But, fair or not, that is increasingly the message that is getting through to shoppers: Tesco is a loser.

Tesco still has millions of loyal customers. But every time they turn on a TV or open a newspaper in the past three years their experience of Tesco is one of a brand in decline. In a business as fast and competitive as British supermarkets – such negative associations can be fatal.

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