Corporate Finance - Bad News about Annual Loss Reported for Tesco Plc in 2015 - Case Study Example

rроrаtе Finаnсе Name Institution Course Tutor Date Bad news that was reported for Tesco Plc in 2015: BBC News: Tesco Post record £6.4bn annual loss. http://www.bbc.com/news/business-32408661 Introduction When companies tend to experience some financial problems, the bad news is reported to the public. Because of such bad news, the affected company is expected to receive some serious impact on its market share and the value of its share prices based on the bad reputation from the public and the general target customers. Tesco Plc happened to report an annual loss of £6.4bn for the 2014 financial year as per the BBC news (Butle, & Farrell, 2015, 1). Consequently, the company experienced some hardships in the market associated with its share prices. This paper seeks to explore the effects of the specific news about Tesco Plc to its share prices and its market value in general (Burke, and Eaton, 2016, 82). There are reasons why such response from the public is expected to such a company. The paper refers to some literature concerning the same subject of discussion. Although companies might be performing well in the market, in the case of spreading of some bad news regarding the specific companies, their businesses are greatly affected especially in the form of share prices. The bad news about Tesco Plc For the financial year 2014-15, Tesco reported its worst outcomes in its history about having a statutory pre-tax loss amounting to £6.4bn (Butle, & Farrell, 2015, 1). This demonstrated that the company was in business trouble because of its retail operations whereby some of the retail spaces were underused while some of its stores were to be closed and others which were planned be cancelled, as per the statement from Bernstein in Tesco (Imrie, and Dolton, 2014, 181). The amount of loss could not be compared with its earlier annual profit of £2.26bn in year 2012-13 (Butle, & Farrell, 2015, 1). Moreover, this was a big hit to the UK corporate history since it was the major loss suffered in the country. While reporting to the BBC, Tesco asserts that the losses were suspected to have been caused by the decline of the property value in the company’s UK stores, which were expected to close (Dacosta, and Adusei, 2016, 23). Additionally, there was the declining footfall in various Tesco’s out of town superstores. This means that customers would no longer trust the supermarket as it was there before (Mollah, 2014, 32). Therefore, Tesco was experiencing hardships in its business during that year as per the statement of the chief executive Dave Lewis (Butle, & Farrell, 2015, 1). Things that went wrong in the company Tesco was working towards growing as the world’s largest and efficient retailer. The company, for many years reported rise in the sales and profits (Roy, 2016, 7). However, the company was not investing in opening of more stores, buy concentrated on the maintenance of profits by saving on its costs (Grant, 2016, 14). The company was also attracting many customers, therefore, the growth of its sales (Wyld, Pugh, and Tyrrall, 2012, 328). From the fact that customers continued going to shop from Tesco, this is an indicator that the company was responding efficiently for the recession (Cushman, and Burke, 2014, 16). Nevertheless, customers started reporting of there being some problems in the stores based on their management and the rise in the prices of the retail products (Grant, 2016, 14). Consequently, Tesco responded to them by arresting some of its decline. The conducted promotions did not result to the expected reduction of prices (Butle, & Farrell, 2015, 1). This meant some confusion to the customers because the short-term promotions were not straightforward to enhance them remaining in the business (Alam, and Hossain, 2012, 61). Moreover, the company failed to offer a list of prices that could be trusted by its customers, hence lack of customer satisfaction. The former chief executive said; "What [customers] really needed were lower prices and they needed a price list that they could trust (Butle, & Farrell, 2015, 1)." It is clear that Tesco had opened too many big stores that it could not handle as per its expectations, therefore having issues in the effort to manage and run those stores (Adewuyi, 2016, 45). Tesco had invested approximately £200m with its effort to cut the prices and advance its services. This was expected to help Tesco remain competitive in the market (Butle, & Farrell, 2015, 1). In the entire UK market, only the convenience stores were able to enable growth in the sale, but all the metro outlets experienced the reduction in the sales. The losses were also contributed by the disappointment from the strong competition that Tesco was facing from its direct rivals (Filipová, Mokrejšová, and Zeman, 2014, 5). Consequently, this would hold back the sales performance in the affected stores (Adewuyi, 2016, 45). Being a big company, the management team comprised of a big team of leaders who were experienced and given responsibilities that were based on the trust they had from the company (Wood, and McCarthy, 2014, 134). There were major changes in the business whereby staff started facing challenges as the business was conducted in a single view. In addition, Tesco was in a war with L’Oreal a global cosmetic firm in relation to their agreements (Butle, & Farrell, 2015, 1). Therefore the value of the relationship between the two companies was majorly affected and the two could not do their commercial transactions efficiently as they used to do. This means that the relationship between the supermarket and the suppliers was affected (Imrie, and Dolton, 2014, 182). This made Tesco not to continue receiving its supplies as per the plan and the expectation because of the condition of its relationship with the suppliers (Filipová, Mokrejšová, and Zeman, 2014, 5). Therefore the trading position of Tesco went on deteriorating and its actions were becoming extremely desperate (Cushman, and Burke, 2014, 16). There were some suppliers who wanted to do business with Tesco, but the supermarket requested them to take their things back, thus the effect on the business integrity (Roy, 2016, 7). It is evident that Tesco was not operating with transparency and integrity, which is necessary for such a big retailer (Bowman, Froud, Johal, Leaver, and Williams, 2013, 307). Therefore, the customers lost the interest of shopping in the supermarket because of lack of enough supply in the stores. Besides, the expansion of the stores was not well planned because Tesco did not focus on offering the digital bent to its customers, which was necessary but focused much on improving its sales (Zhu, and Geng, 2016, 6). It is evident that Tesco was not consulting its customers when making its decisions to open other businesses such as restaurants and coffee shops, therefore losing the customer interest. Impact of the bad news to Tesco plc share prices and its general retail business The reported loss made Tesco Plc loose the trust of its customers. In order to continue making some significant sales, Tesco had to offer low prices (Lukic, 2016, 24). However, its reputation was continuing to be damages based on the fact that it had reported high profit in an earlier year and within a short period such a great loss is realized (Ho, and Temperley, 2013, 112). The reduction of prices was questionable to the company’s customers because they expected Tesco, being the biggest company to offer the best prices for the delivery of quality products and the provision of the best deal to its customers (Sogn-Grundvåg, Larsen, and Young, 2013, 43). The public also started accusing Tesco and stating that its fall in sales and profits was because of the aspect of ramping up some of the ran promotions (Bowman, Froud, Johal, Leaver, and Williams, 2013, 307). Besides, Tesco lost about 50% of its market value in that year. This mean that its share price reduced by 50% (Butle, & Farrell, 2015, 1). The issue of losses also affected the company’s savings and the tax income of the government because Tesco was one of the main corporate tax payers (Yoder, Visich, and Rustambekov, 2016, 238). Furthermore, Tesco was expected to report lower figures in the following financial year because of the loss of the trust of its business accounts (Wood, Wrigley, and Coe, 2016, 43). Therefore, the losses led to some detrimental impact on its profits and its sales went down by around 3% (Yoder, Visich, and Rustambekov, 2016, 238). Tesco suffered from the loss of its workers from the closed stores. Moreover, Tesco shares fell at around 5%. Besides, the relationship between Tesco and its business partners or other market players was affected because of the fear that the business might continue falling down even in the future. Reasons for the particular response The response in the market was expected because of the level of trust that customers had on the supermarket (Wood, Wrigley, and Coe, 2016, 45). Besides, majority of the UK customers felt being disappointed by Tesco because it had previously reported an increased profit and then all of a sudden they hear such news (Sogn-Grundvåg, Larsen, and Young, 2013, 43). Moreover, the rise of the prices and the increased sales that Tesco continued making was expected to offer great support to its business, but this was not the case (Butle, & Farrell, 2015, 1). After the public reported to Tesco concerning the identified problems in the store, it means that the supermarket did not take the most appropriate actions or steps to deal with the issue, therefore the continued loss of trust for customers (Dacosta, and Adusei, 2016, 24). From the conducted promotions, customers expected the supermarket to slash its prices, but that was not the case (Burke, and Eaton, 2016, 83). Therefore, this made majority of the customers to feel disappointed and discouraged to continue shopping in Tesco (Mollah, 2014, 33). Majority of its customers expected that Tesco would work towards improving its criticized stores and cut down its prices, although this did not happen before the company reported its huge losses (Alam, and Hossain, 2012, 61). This would help Tesco win as many customers as possible, but because of the rise in its prices and the issue of charging high prices for its retail products, it was not possible for customers to flock to the supermarket (Butle, & Farrell, 2015, 1). Therefore, the reduction in sales results to the reduced profits and the realization of the huge amount of loss to the company (Sogn-Grundvåg, Larsen, and Young, 2013, 43). Conclusion Tesco Plc’s bad news about the reporting of £6.4bn losses in the year 2014-15 was a great hit to its business. The losses were resulting from the falling value of its property and the poor management of some of its UK stores. The company experienced fall in the sales and significant reduction in the expected profit. Besides, the tendency of growing number of customers was not experienced in the business during that year. In addition, the relationship between Tesco and its suppliers started having some problems, therefore making the suppliers shift to the competitors. As a result of the report of the great loss, Tesco lost its trust from customers. Its reputation was highly affected from the fact that some of its regular customers stopped flocking to the business for their shopping activities. Irrespective of the major promotions of Tesco retail products, the company was not reducing its prices. It continued charging high prices something that resulted to the discouragement to its customers. This is what led to the shifting of its customers. In addition, after customers raised an alarm of having issues in the stores, Tesco was not able to respond efficiently, thus the loss. References Adewuyi, A.W.A.W., 2016. Ratio Analysis of Tesco Plc Financial Performance between 2010 and 2014 in Comparison to Both Sainsbury and Morrisons. Open Journal of Accounting, 5(03), p.45. Alam, M.Z. and Hossain, M.E., 2012. Dividend policy: a comparative study of UK and Bangladesh based companies. IOSR Journal of Business and Management, 1(1), pp.57-67. Bowman, A., Froud, J., Johal, S., Leaver, A. and Williams, K., 2013, December. Opportunist dealing in the UK pig meat supply chain: Trader mentalities and alternatives. In Accounting Forum (Vol. 37, No. 4, pp. 300-314). Elsevier. Burke, Q.L. and Eaton, T.V., 2016. Alibaba Group Initial Public Offering: A Case Study of Financial Reporting Issues. Issues in Accounting Education Teaching Notes, 31(4), pp.75-90. Butle, S & Farrell, S 2015. BBC News: Tesco Post record £6.4bn annual loss. Retrieved from; http://www.bbc.com/news/business-32408661 Cushman, D. and Burke, J., 2014. Introduction: Tesco PLC—an Open Business. In The 10 Principles of Open Business (pp. 10-23). Palgrave Macmillan UK. Dacosta, L. and Adusei, C., 2016. Five Year Retrospective Study of the Financial Situation of Northern Foods Plc., United Kingdom. Expert Journal of Finance, 4, pp.19-30. Filipová, A., Mokrejšová, V. and Zeman, J., 2014. Social Responsibility and Food Waste in the Czech Republic. E-Leader International Journal, 9(2). Grant, W., 2016. The challenges facing UK farmers from Brexit. EuroChoices, 15(2), pp.11-16. Ho, C. and Temperley, J., 2013. Consumers’ Reactions to Tesco’s Market Entry in Taiwan: A Comparison with the UK Experience. Marketing Management in Asia, Routledge, pp.101-119. Imrie, R. and Dolton, M., 2014. From supermarkets to community building: Tesco plc, sustainable place making and urban regeneration. Sustainable London, pp.173-194. Lukic, R., 2016. Energy efficiency in the food retail. Business Excellence and Management, 6(1), pp.16-35. Mollah, A.S., 2014. The Impact of Relationship Marketing On Customer Loyalty At Tesco Plc, UK. European Journal of Business and Management, 6(3), pp.21-55. Roy, S.G., 2016. Financial Reporting-An Overview. Global Journal For Research Analysis, 5(7). Sogn-Grundvåg, G., Larsen, T.A. and Young, J.A., 2013. The value of line-caught and other attributes: An exploration of price premiums for chilled fish in UK supermarkets. Marine Policy, 38, pp.41-44. Wood, S. and McCarthy, D., 2014. The UK food retail ‘race for space’and market saturation: A contemporary review. The International Review of Retail, Distribution and Consumer Research, 24(2), pp.121-144. Wood, S., Wrigley, N. and Coe, N.M., 2016. Capital discipline and financial market relations in retail globalization: insights from the case of Tesco plc. Journal of Economic Geography, p.lbv045. Wyld, J., Pugh, G. and Tyrrall, D., 2012. Can powerful buyers “exploit” SME suppliers?. Journal of Small Business and Enterprise Development, 19(2), pp.322-334. Yoder, S., Visich, J.K. and Rustambekov, E., 2016. Lessons learned from international expansion failures and successes. Business Horizons, 59(2), pp.233-243. Zhu, X. and Geng, X., 2016, July. Study on the agricultural product distribution route under agricultural super docking mode. In Logistics, Informatics and Service Sciences (LISS), 2016 International Conference on (pp. 1-6). IEEE. Read More