Despite Tesco’s historic £6.38bn loss, there are green shoots on brand perception

Tesco has plunged to a £6.38bn pre-tax profit loss, the worst in its 96-year history and the sixth-biggest ever announced by a UK company, for the year to the end of February as it paid the price for a major writedown of its store portfolio.

However, despite the historically bad numbers, brand tracking data has shown some evidence of a turnaround, with volume sales also up at Tesco over the fourth quarter.

“We have 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’ve done so far,” said chief executive Dave Lewis in a company video.

“Over the last six months by focusing on the fundamentals of availability, service and targeted price reductions, we have seen a steady increase in footfall, transactions and, most significantly, volumes. More customers are buying more things at Tesco.”

Although annual group trading profit was down 60% to £1.4bn, the fall compares favourably to the £3.3bn loss the previous year.

And while Tesco suffered a 3.6% fall in like-for-like sales for the year, there were signs of improvement in the fourth quarter, with like-for-like sales volumes up for first time in over four years. Tesco said that this was driven by better availability, service and pricing, with like-for-like sales performance improving to (1.0)% in Q4.

Lewis’ reference to a turnaround ‘over the last six months’ also appear to have some truth in it, with Tesco dramatically improving its brand rating over that period.

Over the period, Tesco, which is 7th out of the UK’s 26 biggest supermarket brands, has significantly increased its YouGov Brandindex index score by 6.8 percentage points to 16.9. The index score is measured by looking at consumer perception of quality, value, reputation and satisfaction.

And although it remains bottom of the 26 retailers on the YouGov BrandIndex buzz rankings, which measures the amount of positive things consumers have heard about a brand, its score of -7.5 has shot drastically up by 16.2 percentage points over the last six months.

But with around £4.7bn of the losses the result of a fall in property value, Lewis today admitted that it been ‘a very difficult year’ for the UK’s biggest supermarket and said that moving forward it will rebuild the brand by ‘restabilising trust and putting the customer at the centre of everything we do.”

The £6.38bn loss included a £570m write down on stock, which is linked to how Tesco was recording income from suppliers, and over £400m in restructuring costs linked with thousands of head office redundancies and shop closures.

In his first few months at the head of Tesco, Lewis has made some dramatic decisions including closing 43 stores and pulling out of 49 planned developments as well as cutting thousands of head office positions.

John Ibbotson of Retail Vision, praised the changes heralded in by Lewis despite today’s dire numbers.

“This is the official end of the Tesco era,” said Ibbotson, “ but the irony is that Tesco is on the right path. Lewis has delivered direction, reduced prices, cut costs, closed the Cheshunt head office and put more staff into stores.

But there’s a long way to go yet before the agile new Tesco that is emerging becomes a profitable Tesco and brand once again. And even when it does recover, it will never again be the force it once was.”

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  • Savvy Marketing 22 Apr 2015 at 2:02 pm

    Tesco’s results make for pretty horrific reading, but remember that includes £7.0bn of one-off charges that, in large part, reflect a broader revaluation of assets in the context of the new world of grocery retailing in which we find ourselves. Morrisons has already written down the value of its store portfolio and we suggest no major grocery retailer will be totally immune.

    What we are more interested in today is Tesco’s underlying operating performance, particularly in the UK, and the progress being made by the retailer’s new management team.

    In terms of its underlying performance in the UK, Tesco’s trading profit fell in-line with expectations. However the retailer’s improving market share performance over recent times has fed through into growing like-for-like volume sales – the first growth in four years. While early days, this is good news and may well herald a movement towards a longer-term positive sales trend.
    Sharper pricing, better in-store execution and improving shopper perceptions of the retailer, position it favourably to build stronger defences against the discounters’ advances and Asda with its laser-like focus on EDLP. The retailer also continues to perform well in the fast-growing online and convenience markets – both areas Tesco is well placed to grow sales profitably.

    But what about the progress of the leadership team? The reality is that Dave Lewis faced an incredibly tough challenge when he took the helm in September last year. As well as having to contend with a £263m accounting error and the scandal that surrounded it, he also inherited an array of problems, often deeply rooted cultural issues that can be traced back many years, and some from before Philip Clarke’s reign. It is for that reason that Dave Lewis was an excellent appointment for the job. An outsider without the industry baggage, he was ideally placed to take learnings from the past, but able to set a strategy that looks firmly to the future – a future characterised by fundamental changes in shopper behaviours and a structural shift in the market.

    Mr Lewis was quick to make the difficult decision to close 43 loss-making stores – making Tesco the first major retailer to really start addressing the oversupply of space in a slow growing market where online continues to play an increasingly important role. In January he also made the long overdue decision to consolidate the retailer’s two head offices, as well as a sell-off of non-core assets including Blinkbox and Tesco Broadband. The subsequent appointment of Matt Davis from Halfords as the UK CEO, with his proven track record in retail, was a shrewd move, adding an alternative perspective to the senior team when he joins the business next month.

    Crucially, both Dave Lewis and Matt Davis are genuine
    leaders of people. And in a business that employs over 500,000 employees, and is the biggest private sector employer in the UK, getting the whole of the
    business behind the strategy is crucial to delivering a turnaround, and in winning back the hearts and minds of shoppers who have defected over the years.

    Despite the harsh headlines, today’s results give some reason for optimism and the leadership seem to be making good progress. But the scale of the task ahead should not be underestimated. The market remains incredibly tough and it will take a long time for Tesco to rebuild shoppers’ trust. Also, the question of what to do with all of that excess space in its largest superstores remains largely unanswered. We expect more difficult decisions will need to be made as this supertanker of a retailer continues to adjust its course – future store closures, for example, seem inevitable over the next year.

    But, for all the bad press that Tesco has attracted over recent years, it’s important to remember that it remains the world’s third largest retailer and in the UK it continues to tower above its next biggest competitor. Tesco is a retail giant. Under the right leadership and heading in a positive direction, it is bound to be of concern to any rival.

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