The Tesco profit misreporting scandal and Dan Jago’s commentary. Another interesting find.

In between several other activities this week, I have been on the hunt for things that might have pointed interested parties that there were pressures within Tesco to make margins happen (i.e. numbers happen) that were outside the realm of the reasonable.

Most of the eight suspended executives from Tesco had very little to say about pricing and margins.  What I have discovered, though, is that Dan Jago was really very talkative when it came to his bailiwick, Beer, Wine and Spirits.   The robust Twitter account was deleted, but he’s been out there making comments about pricing and “value” at Tesco.

There was a dialogue on the Tim Atkin blog about how Tesco was squeezing wine suppliers, and otherwise offering products for what sound like near cost.   What is hazy here is that Atkin is suggesting that the price discounting is being fulfilled through making the wine a lower and lower quality.   But it could just as well have been that there was no quality difference, just that the profit wasn’t added to the retail price.  Just the books, via a pull forward of the next quarter’s revenue.

This is fascinating from a beverage-control-state perspective.   People in Pennsylvania who are against the Liquor Control Board system point to these other jurisdictions where customers can buy their cheap booze.   But look what you get:  a rush to the bottom, and a certain amount of unsubstantiated not-telling-the-truth-about-actual-matters.   People may feel that it is a “scandal” to only be able to buy from the State Store.  But the supplier gets a fair margin, and the distributor also gets a margin sufficient to make stocking the alcohol worth the trouble.   The “cheap stuff” is available, but you can also buy higher quality.  There’s enough variety.   If anything, the smaller wineries and brewers are shut out, because they can’t afford the distributor costs.  But they’d be shut out in an open market state as well.   Because they’d be underbid by the big players.

What everybody who is following the Tesco accounting scandal wonders is who coordinated the misreporting.    Some people on Twitter initially remarked that the suspensions of key executives was “scapegoating” or a “witch hunt”, but, really, if you go back and read the online commentary / literature, price pressures and margins crop up time and again.  It can’t just simply be this thing that higher managements play about “unaware!”  How could you be unaware(!) that a product that you’re responsible for isn’t making the profit that the deals you’re cutting are supposed to generate for the firm?

And because of the system of supplier rebates and incentives, which obviously have to be negotiated as a buyer at the time of the deal, how could people not realize that a large figure was being moved between reporting periods?

It just sounds more like a practice that was understood within Tesco, when numbers had to be hit.   When a target had to be hit for one reporting period, you simply move revenue that came in after the date of the close into the prior period.   Push out promised incentives (give backs) into the succeeding periods.

If margins are so thin, and the amount of actual stock (bottles, cans) sold pretty easily determined, how could you be convinced that there would be this large profit in the division?   For a big overstatement like the 263 million pounds (however much this went to liquor), wouldn’t the first question be:  how did we generate that much net on a thin margin?