Tesco’s latest profit blows chill wind ahead of Christmas

The Nightmare before Christmas or 100 Days from Hell – however you describe it, rarely can a chief executive have endured a more catastrophic start to a new job than Tesco's Dave Lewis.

Exactly 100 days after joining the embattled supermarkets group, Lewis stunned investors on Tuesday by issuing yet another profits warning – Tesco’s fifth this year.

It’s no secret in the City that trading is not going well at Britain’s biggest supermarkets group, but it was the sheer scale of this latest profits alert that sent shock waves rippling.

Last year, Tesco made trading profits of £3.3 billion. This financial year, which ends in February, the group will make no more than £1.4 billion, a fall of almost 60 per cent. The forecast is way below analysts' already-reduced expectations of £1.8 to £2.2 billion.

This means the group’s core domestic operations will barely make a profit in the second half; indeed, some analysts fear the UK chain could actually crash into the red this year, an extraordinary outcome for a company that still controls almost a third of the British grocery market.

Although Tesco described its unscheduled announcement as a “trading update”, there was precious little detail on current trading, with Lewis concentrating instead on the changes he has brought in during his first 100 days as chief executive.

Management speak

Employing the management-speak one imagines was quite popular at his previous employer, Unilever, Lewis spoke of "a new commercial approach that will underpin stronger long-term relationships with our suppliers, benefitting customers, whilst at the same time ensuring that revenue recognition is transparent and appropriate. We have retrained our entire team and begun the cascade with suppliers."

That’s a tough one to translate into English but it appears to mean there will not be a repetition of the dodgy accounting practices that blew a £263 million hole in profits, a scandal that is the subject of a criminal investigation and has seen the suspension or departure of key executives in recent weeks.

Some 6,000 extra store staff have also been hired, as Tesco beefs up its customer service. Lewis made clear many of the additional staff taken on for Christmas will be kept on after the festive rush is over.

All of this costs money but it can't quite explain the huge drop in profits the group is forecasting. In August, Tesco cut its forecast from £2.8 billion to £2.4 billion, and it has now slashed a further £1 billion from that figure. There was no detail on sales trends from Lewis yesterday, and the City fears the worst, as Britain's once pre-eminent supermarkets group continues to lose out to discounting rivals Aldi and Lidl.

Lewis once again declined to put a timetable on the recovery, insisting the short-term pain would be outweighed by longer-term gain.

Shares in Tesco plunged by 16 per cent at one stage, to 156p, dragging them to a 14-year low and slashing £2.5 billion from the group’s stock market value, although they later closed about 175p, a fall of 7 per cent. The shares have lost more than 50 per cent of their value this year.

Rivals Sainsbury’s and Morrison’s were also dragged lower, as analysts predicted Tesco will be forced to wage an even fiercer price war to restore sales.

Lewis promised further detail about moves to improve competitiveness on January 8th, when the group will release its third-quarter trading figures. After his 100 days from hell, the Tesco boss will no doubt be hoping that until then he will be able to maintain radio silence with the City and concentrate on Christmas trading.

January 8th will be a big day for the walking wounded of retail. As well as Tesco, Marks & Spencer will be updating the City on its performance over the festive season on that day.

The omens are not looking good for M&S, which has been offering large discounts in its stores in the peak pre-Christmas period and has also been hit by continued problems with its revamped website.

Black Friday backlog

M&S, headed by Marc Bolland, has warned customers that standard delivery will take up to 10 days, double the normal period, as it struggles to clear the Black Friday backlog. Tesco has also suffered delays with its click-and-collect service in the wake of the Black Friday shopping frenzy.

All in all, January 8th should probably be marked in next year’s diary under the heading “Nightmare After Christmas”.

Fiona Walsh is business editor of theguardian.com