Tesco posts record loss but aims to draw line under previous regime

Tesco has today reported an annual loss before tax of £6.4 billion – the largest loss in its almost 100-year history and one of the biggest deficits ever reported by a British business.

In a statement for the full financial year to 28 February 2015, the UK's largest retailer effectively drew a line under the company's previous regimes by providing details of a £4.7 billion writedown on its property portfolio, which includes the recent scrapping of 49 planned new sites.

Among other writedowns and impairments, £81 million was lost on the disposal and associated costs relating to its Blinkbox entertainment services, which was acquired by TalkTalk at the start of 2015 as the supermarket group continued on a new strategy to focus on its fundamental grocery offering, as opposed to what some analysts have described as the "vanity projects" of previous senior management teams.

CEO Dave Lewis spoke of "the erosion of our competitiveness" and a "deterioration in the market" when explaining why it had been a "very difficult year" for Tesco, which has also seen investigations by the Serious Fraud Office into the company's accounting practices before the new boss arrived. Group sales of £69.7 billion were down 3% on 2013/14, with UK like-for-like trading dropping 3.6% – despite an improvement in the second half of the year.

It is clear that Lewis, who joined the business from Unilever at the end of last year following the departure of Philip Clarke, is undertaking a transparent approach as he looks to build a fresh strategy alongside a new management team that includes financial director Alan Stewart and soon-to-start UK CEO Matt Davies. The latter has overseen growth stories at Pets at Home and Halfords in recent years.

David Gray, retail analyst at industry intelligence group Planet Retail, commented: "The simple fact is the value of out-of-town sites has fallen as openings have been mothballed.

"Although it's been a disastrous year, Tesco is in effect cleaning out the closet – enabling management to start with a clean slate in 2015/16 upon which to rebuild the business. But, the picture isn't all negative. Rarely have a new management team had such a rapid impact on UK trading, which reported its smallest like-for-like decline in some time in Q4."

He also suggested that range, availability, service and price perception are understood to have improved under Lewis and Stewart, as the new Tesco leaders have switched the organisation's focus back to the customer service and value proposition which is arguably the base on which the business built its previous reputation.

In a further nod to concentrating on the fundamental Tesco supermarket offering, the roll-out of the Harris & Hoole coffee chain and its Euphorium bakery café sites have also been slowed.

Talking to Essential Retail this morning, Steve Dresser, director at supermarket industry analysis firm Grocery Insight, said Lewis has "made great progress in eight months".

He added that the huge annual loss "is as much about the former regime chasing vanity projects whilst the core business lost its competitive edge".

"The improvement in sales in Q4 will give heart that the initial plans (although expensive with staffing, etc) are working," Dresser explained.

"But there is a long road ahead, there can be no more huge losses or writedowns as the business has limped along for too long. Losing £81 million on Blinkbox highlights what a disaster that particular project was."

The journey to improve Tesco's performance will not be straightforward, especially with the company experiencing challenging trading environments in many of its European and Asian markets, but today effectively marks the beginning of a new era for the UK's largest grocer. Early movement on the stockmarket this morning saw Tesco's share price edge upwards, which may indicate a favourable response from The City to the retailer's transparent approach.

Providing convenient services and shops for customers, as well as the continued integration of its burgeoning online business with stores through new fulfilment options such as click & collect, are set to play a key role in the 'new' Tesco, as they will in the wider grocery market.

Explaining Tesco's position today, CEO Lewis said: "We are making deep changes to the way we organise and run our business, with a simpler, more agile office team, more colleagues serving customers and a new approach to the way we work with suppliers. 

"I do not underestimate how difficult some of these changes have been for the team and I thank everyone for their professionalism and contribution at this time of great change. The market is still challenging and we are not expecting any let-up in the months ahead.  When you add to this the fundamental changes we are making to our business and our offer, it is likely to lead to an increased level of volatility in short-term performance. 

"Our clear priority – and the one that will deliver sustainable value for our shareholders – is to improve consistently for customers. The changes we have made and will continue to make put us in a stronger position to do this."