Fourth profit warning for Tesco
10 December 2014
Tesco has issued yet another profit warning this week. Shares in the world’s third-biggest retailer plunged as much as 17% to a 14-year low, after it said that group trading profit for the year ending February 2015 would not exceed £1.4 billion, which is 30% lower than forecasts of £1.8 bn to £2.2bn.
This is the fourth time that Tesco has cut profit expectations this year, blaming the cost of trying to recover from an accounting scandal and a slide in market share.
Tesco CEO Dave Lewis has responded to the new figures by vowing to focus on improved service and lower prices in the New Year. He has promised competitive pricing for the retailer’s top 1,000 lines and revealed that they are recruiting 6,000 new employees to improve service levels.
Earlier this year, Tesco revealed that it had over-estimated its first-half profits by as much as £250m, which later turned out to be as much as £263m.
On account of this, the UK financial watchdog, the Financial Conduct Authority (FCA), announced on 1 October that it was investigating the profits overstatement.
However, share price had already dived by 40% after the departure of former chief executive Sir Terry Leahy in February 2011
Tesco has been hit hard by the rise of the German discounters, Aldi and Lidl. Between them the discounters are up to 8% of the UK market and a massive 17% of the Irish market.
In both markets it has been Tesco which has been hit hardest by the rise of the discounters with its UK market share falling from a peak of over 31% to its current level of less than 29% and from over 28% to 25.2% in Ireland. Tesco has been unable to devise an effective response to the threat posed by the discounters.
After two decades of uninterrupted growth, Tesco is also suffering from costly unsuccessful international expansion in the US and Japan.