The History Of Tesco Plc Uk And Issues Surrounding Them

In the year 1919, TESCO was founded by Jack Cohan, the former pilot of the Royal Flying Corp. After the end of the Great War, Jack Cohen started to sell the extra groceries from the stall in Eastern London. His demobilized money was the source from which he used to buy the stock to sell it further in the market. He used to believe and always tried to put affordable food on the shelves for the ease of everyone. Every day, in the end, he used to earn a profit of 1 GBP on every 4 GBP worth of food sold. (TESCO PLC, n.d.)

In the Year 1924, Jack launched the TESCO Tea, the first product of his own brand. TESCO Tea was named after the initials of the surname of Jack which is the ‘CO’ of Cohen and one of the partners of the tea supplier firm TE Stockwell, which combined made the name “TESCO”. (TESCO PLC, n.d.)

In the Year 1929, John Cohen started the first TESCO store in Burnt Oak, Erdgware, in north London. Initially, TESCO sold dry goods and the only branded product which was sold was its own Tesco Tea. (TESCO PLC, n.d.)

Jack started to earn profit and decided to buy lands to expand the business. In 1947 TESCO introduced its first self-service store. Jack traveled to America to study and research about the self-service stores. By introducing self-service stores TESCO was changing the way it used to serve its valued customers. TESCO was evolving and was creating a new trend in the UK market through the introduction of self-service stores. Self-service stores allowed customers to shop freely, gather their desired products from the shelves, for the people in the UK. In 1947 TESCO self-service store began open and the first one of them was opened in St. Albans. In the 1950s they started further expansions of the business by buying 19 stores and from 20 stores they expanded to the number of 5OO TESCO stores in the next 5 years. (TESCO PLC, n.d.)

In the early 1970s, TESCO started petrol stations at major sites with very competitive prices. In 1977 TESCO introduced a price-cutting initiative known as 'Checkout at Tesco' it improved the values offered to the customers by eliminating Green Shield stamps. Unfortunately, on 24th March 1979, the founder of the biggest store in the UK Jack Cohen passed away. But the business continued to expand. (TESCO PLC, n.d.)

In the early 1980s, first computerized checkouts were introduced by TESCO which helped TESCO to keep track of its stocks and led the way to the barcodes. In the year 1985, TESCO launched its own healthy food range. TESCO was the first retailer in the UK to do it at inexpensive and competitive prices. (TESCO PLC, n.d.)

In 1992, TESCO launched the scheme with the Computers worth 185 Million GBP for the schools around the UK. Shoppers cumulated the vouchers for the schools, which could be redeemed by the schools to get the computers. (TESCO PLC, n.d.)

Later in the year 1992, TESCO launched the first TESCO Metro in Covent Garden. The smaller version proved to be more valuable and offered a wide range of products according to the local market. Later in that decade TESCO also launched “TESCO EXPRESS” and “TESCO EXTRA”.

In 1995, for the first time ever the advertisements appeared on the television containing products with TESCO’s own branding and the tagline of ‘Every Little Helps’. The advertisements were so effective, attractive and fruitful to TESCO in terms of brand reputation, which attracted approximately a million more new customers. Later in the year 1995, The TESCO Club card launched attracting 5 million customers in the very first year, which resulted in the TESCO’s ability to overtake Sainsbury’s in market share. (TESCO PLC, n.d.)

Moreover, in the year 1997 TESCO Personal Finance was launched. TESCO’s new savings account scheme received over 300,000 applications. In 2000-2017, TESCO UK started the e-market evolving according to the technology. This happened right after TESCO purchased approximately 35% of shares in US retailer ‘Grocery Works’. TESCO was one of the initial retailers who initiated the online market and provided a flawless online shopping experience to its respected customers. 2009 was the year for TESCO in which it launched TESCO Bank which was instigated when the organization bought 50% RBS shares. (S4RB, n.d.)

In 2018 the merger between TESCO and the Wholesaler Booker Group took place. The combination of a retailer and a wholesaler brought expertise and experiences in the leading food and beverage business in the UK. (TESCO PLC, n.d.)

What is Market Value

The willingness of a buyer to pay the highest possible price for services or goods and the willingness of a seller to sell at the lowest possible price for services or goods is known as the Market Value. However, market value is the market price. The price paid in the fair market for the goods or services is the market value and not every market is a fair market. To become a fair market the market must be comprised of the following requirements:

• No distress: in this kind of requirement neither the buyer is obliged to buy nor the seller is obliged to sell. In other words, it is not a ‘no distress’ situation rather a distressed one, if a buyer buys just because he will go bankrupt or the seller who doesn’t sell goes bankrupt. This condition means a free will to the buyer and seller to take their decision to buy or sell.
• Relevant Information and Market Exposure: A seller and buyer must initiate with the research of the alternatives. They must have enough time to look for buyers and the purchasers must have enough time to look for the sellers.
• Negotiations: a buyer and a seller must have mutual understanding and agreement on the price and the terms.

If the conditions above meet during the purchase or selling of goods or services, only then would the market be called a fair market. A fair market doesn't exist always. (Grimsley, n.d.)

Market Value of TESCO UK

Tesco partakes in retail banking, retailing business and Insurance with the help of its subservient, TESCO Bank UK. TESCO provides its retailing services and confederated activities in the Czech Republic, China, India, Ireland, Hungary, Japan, Malaysia, Poland, Slovakia, South Korea, Thailand, The United Kingdom, Tukey and the U.S. TESCO’s headquarter is located in the city called Cheshunt, in the United Kingdom.

The market capital of TESCO UK is stated at $28.5 Billion as of June 5th, 2019. During the year 2000- 2019, TESCO UK was placed on 243rd Global Company in the Forbes lists. In 2018 it was 102nd Top Regarded Company with Profits stating $1.7 Billion, Revenues stating $84.3 Billion and Assets stating $65.2 Billion. As of May 15th, 2019, TESCO UK has a workforce based on 445,311 employees. (Forbes, 2019)

As of June 4th, 2019 the Enterprise value of TESCO UK was stated at $33.68 Billion. As of 5th June 2019, the Net income of TESCO UK was stated $1.710 Billion. TESCO is the market leader in the UK with approximately 27% market shares which more or less doubles the market shares of its rivals ASDA at 15% and J. Sainsbury at 15%.

Instead of just a supermarket chain, TESCO is running convenience and small scale neighborhood superstores. Moreover, it generates 11% of global revenue from petroleum.

TESCO not only has just stores but also online stores in which it leads the position with 40% digital market shares in the UK. Furthermore, TESCO procured Booker Group which is the largest wholesale organization with the groundbreaking deal of GBP 4 billion. (ycharts, 2019)

TESCO PLC’s current Board and Executive Committee

TESCO’s Board comprises of the Chairman, Group Chief Executive, Chief Financial officer and a number of non-executive Directors.

Names Designation and Date of Joining

1. John Allan Non-executive chairman Joined on 1st March 2015
2. Dave Lewis Group Chief Executive Joined on 1st September 2014
3. Alan Stewart Chief Financial Officer Joined on 23rd September 2014
4. Deanna Oppenheimer Senior Independent Director Joined on 1st March 2012
5. Mark Armour Non-executive Director Joined on 2nd September 2013
6. Melissa Bethell Non-executive Director Joined on 24th September 2018
7. Stewart Gilliland Non-executive Director Joined on 5th March 2018
8. Steve Golsby Non-executive Director Joined on 1st October 2016
9. Byron Grote Non-executive Director Joined on 1st May 2015
10. Mikael Olsson Non-executive Director Joined on 1st November 2014
11. Simon Patterson Non-executive Director Joined on 1st April 2016
12. Alison Platt Non-executive Director Joined on 1st April 2016
13. Lindsey Pownall Non-executive Director Joined on 1st April 2016
14. Robert Welch Group Company Secretary Joined on 10th August 2016

The Scandal (2014):

“It’s been a dark day for Britain’s biggest retailer, Tesco PLC UK after it shocked the City by admitting that it had overstated its forecasts for profits by a staggering £250m.” (Wearden, 2014)

Effects of Overstated Profits

The profits are normally stated under the financial instrument called Income Statement. In income statement profits are normally stated as “Net Income”. It is usually stated at the very bottom of the income statement. To determine the net income/profits the accountants accumulate all the revenues earned by the organization through its operations and subtract their expenses. If the revenues or expenses get overstated or understated, the net income also gets over/understated, which can lead an accountant to get a false estimation of how the organization is doing its business. Under/overstatement of profits can get the organization accused of fraud. (Sherman, 2018)

Role of Income Statement

Overstated and understated Income statement

Income statement is the instrument that is studied often by the investors and shareholders. It helps them by stating the profits/losses to decide whether to invest in the business or not. Investors study, interpret and predict the future profits of an organization using its previously recorded income statements and the present ones. The income statement is also important because it contains the stated amount of dividends which later can be divided by the number of shares to determine the earnings per share. If the income statement gets overstated, the earnings per share will be overstated too, which will automatically give a false idea to the investor. If the income statement is understated, the earning per share will also be understated, which will automatically show the investor that the company is not much profitable and therefore less desirable. (Sherman, 2018)

Misstated Revenues

The Revenues are normally stated on the top of the income statements for a given period of time. Income is usually comprised of cash sales and credit sales (depending on the nature of the business). Credit sales are considered as the account receivables because the company has not yet received the payment against the services provided or the goods sold. Some of the account receivables are considered to be debts because it is not necessary that every time everyone gets paid. Sometimes customers or suppliers go bankrupt or runaway. By determining the Accounts Receivable and Bad Debts, an accountant can determine an estimate of how much of the current debts could also go unpaid.

If the amount of bad debts in the income statement gets understated, the income statement and the balance sheet will be inaccurate which will make it look like a strong and healthy business to invest in. If you don’t subtract the bad debts from the accounts receivable your net income will get overstated. (Sherman, 2018)

Erroneous Inventory

Net income is normally comprised of various elements getting added or subtracted, one of them is the cost of goods sold (depending on the nature of the business) which plays a very important role to determine the gross income of the business and further in the income statement many additions and subtractions are done to turn gross income into the net income. (Sherman, 2018)

The cost of goods sold is the difference between the beginning inventories and the ending inventories. If the inventories are overstated, the income statement will understate the sales, which will understate the cost of goods sold resulting in overstated net income and vice versa.

The inventory can easily be misstated by an inventory team or can be misclassified in the records. In many cases accountants intentionally overstate inventory to bolster the net income. (Sherman, 2018)

Taxes: the companies usually understate their net income in order to pay as few taxes as possible. Sometimes they understate inventory which results in understated net income. The lesser the income is, the lesser the tax bills would be. (Sherman, 2018)

What actually happened with TESCO

There was chaos burst into public in the year 2014 due to the disclosure that the UK's biggest grocer TESCO PLC overstated its yearly profit by 250 million GBP.

TESCO PLC UK which was the biggest retailer in the UK lost 50% of the market value in a year. A share dropped by 50% may not of any value to the normal customer, until he/she gets to know that TESCO PLC UK’s profits and dividends make a very important contribution to all of the pension funds. TESCO PLC UK is also one of the UK's largest corporate taxpayer. TESCO lumbered across a 250 million GBP accounting problem in its profit predictions. For an organization predicting 1.1 billion GBP of profit for the first half of this year, a false prediction of 250 million GBP was a very significant number. The retailer's share price fell by 10%. According to a high profile seller Warren Buffet, 4.1% of his investment in shares of TESCO PLC UK was a huge mistake which cost him around 465 million GBP in a year. (Ahmed, 2014)

However, it was not all of a sudden, it had begun years earlier and PWC which was the external auditor of the company rung the bells and said that the payments were being miss booked by the suppliers which were resulting in glossed over business cost. The personnel at PWC inspected closely and found that the timing of payments from suppliers before adjourning off the accounts. The executives of the company came under pressure to meet the financial targets, lost the trail to earn money from the customers. The executives started treating suppliers as the source of profit maximization. They started looking forward to the in-store promotions from the suppliers, which neither was the main source of profit for TESCO PLC UK, nor it was the nature of TESCO PLC UK to earn profits. TESCO stacked 1.6 billion GBP of profit in the first half of the year 2013 but now was expected to make half of it in the whole year.

The situation was getting worst and it was expected that the figure could fall further. TESCO suspended many executive personals and one of the four main personals was Chris Bush, 47, the senior-most official/executive outside the TESCO board, who joined the company in 1982 and spent more than a decade has served as the managing director of TESCO UK oversees the TESCO UK’s operations which had the turnover of over 48 billion GBP last year. The senior officials of TESCO PLC UK the biggest retailer in the UK had been asked to hand in the company laptops, cell phones and emails for the inquiry. The inquiry was led by the accountancy firm Deloitte and a law firm Freshfields.

Dave Lewis, the newly appointed CEO who has been running TESCO PLC UK just for three weeks after the former CEO Phil Clarke said, the scandal had also been reported to the Financial Conduct Authority. The Controller has the authority to conduct the prosecution of those who mislead the statements to the stock exchange. (Wearden, 2014)

TESCO PLC UK was then ordered by the financial conduct authority to compensate with the investors who might have bought the shares for a higher price with as much as 85 million GBP. The regulator mentioned that the biggest retailer in the UK has committed market abuse by allowing false prediction in markets for its shares and bonds. Meanwhile, the subsidiary of TESCO PLC UK agreed with a serious fraud office to pay 129 million GBP as fine through a type of plea deal which was also known as deferred prosecution agreement.

Moreover, the biggest retailer of the UK was also facing a civil lawsuit which was filed by more than 125 institutional. Later, Manning & Napier filed a second lawsuit in London, claiming the restitution as high as 150 million GBP.

Furthermore, TESCO UK paid another $12 million in 2015 to rectify another lawsuit taken by the investors in its American depository receipts. Depository receipt is a certificate that represents the share from the foreign stock. The serious fraud office also charged three of the senior officials in TESCO PLC UK with accounting fraud. (Vandevelde, 2017)

Dave Lewis, taking over as Chief Executive Officer in September 2014, spent his initial years building trust with the suppliers in order to move forward and maximize TESCO’s profits by lowering the prices. Since 2014, TESCO PLC UK under the leadership of Dave Lewis made major changes across the leadership, structure, internal financial controls and the way TESCO buys and sells. Mr. Lewis admitted that earning maximum profits from the suppliers resulted in damaging consequences. (Vandevelde, 2017)

Moreover, TESCO PLC UK the biggest grocer in the UK refused to name the individuals involved at the center of the investigation but they are expected to be Bush, Carl Roberg who began working TESCO UK as international finance director for Asia in 2006, John Scouler TESCO PLC UK’s commercial director who joined TESCO UK in 2002 and in 2012 he was promoted to the post of UK commercial director in charge of all household, healthcare products, baby care products, cosmetics, packaged food, alcoholic beverages, petrol and tobacco products. Matt Simister, the rising star of TESCO UK for his amazing performance in the year 2012 for setting up the sourcing division. Simister had worked for TESCO UK as head of meat, fish, poultry, and DIY, household and home utilities. (Wearden, 2014)