More thoughts on the Tesco accounting reporting scandal.

This is about the accounting scandal at Tesco, a UK-based, overseas “Wal Mart” style discount supermarket.   I have been really interested to see if the 263 million pound misstatement of income is going to be a fraud of the “pull forward” variety.   This happens when a company books revenues, that it earned in the period right after the books are supposed to close, into the prior period.   It sounds like there is a second twist, where suppliers received rebates.  If so, it can also be that rebates were pushed into succeeding periods, to reduce expenses in the the period of the close.  Or both.

After the news broke that there was something wrong with the books, there were a number of executive suspensions.  None of the buyer/suppliers for Tesco seemed to talk very much online or in social media—except one, whose Twitter account has since vanished.  There are samples of the style of Tweeting out there, that haven’t been put on lockdown yet.   Certain trades are just more chatty than others, I suppose.   No indication from a fraud perspective, though, why someone would not want their fairly robust back-and-forths out there.

Here is my best guess:   the culture of Tesco, similar to Wal Mart, is to squeeze suppliers to the hilt.   If you want the shelf space, then you need to be flexible for Tesco, or else we’ll stock someone else.   And so “promotion” is less about taking someone’s good product and convincing the consumer why it’s worth the price.   Instead, it’s about commoditizing the product out of sight of the consumer, using relative monopsonistic power (one buyer or practically one buyer) to squeeze the price that the supplier will be forced to accept, and then jacking up enough margin that you, as middleman, make your money.

Although, if you can’t get the consumer to pay the price—especially in a flat-to-recessionary market which is most of Europe—you are going to have to find another way to meet the company’s ambitious profit goals . . .

This excerpt, below, came from one of the multitude of online websites that reports on the industry in the UK.  Credit:  http://www.beveragedaily.com/Markets/From-Daleks-to-Dan-Jago-from-Tesco-Wine-Vision-2013-on-Twitter

 The conference’s ‘Big Debate’ sought to answer the central question: Does the wine industry need to reinvent itself? Also, is it possible to decommoditize wine, and gain the industry a higher profile in the media and on TV?

Defending Tesco’s promotional policy on wine against industry claims that UK grocery store prices are too low, and production unprofitable, Jago said:

“Customers like things to be great value – we as an industry have great issues around trying to define what great value is. When there is an absence of clearly indicated value, or easily understood value, consumers revert to price.”

“Discounting is an incredibly important part of how consumers buy. It’s called promotions – consumer [sic] use it as a signpost to change brand shopping behaviors.”

Jago said that if people asked him whether reducing the price of wine in a retail setting was good or bad, he would counter by asking them a question.

“Are they really clear about who they want to sell too  [sic] – or have they just got some liquid that they’ve got to get rid of from their tanks? There’s been discussion over whether we’re in oversupply, under supply or in balance. And I think the answer is that we’re somewhere in the middle of all three, depending on where you go and look for it,”

Jago said.

How likely is it that, when discounting failed to achieve profit targets, something like a pull forward or a push back was instituted to report fantasy results?