January 16, 2013 9:23 pm

Wrong time for Tesco to manage a crisis

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Tesco has responded in textbook fashion since becoming – unwittingly – the most famous purveyor of wrongly-designated meat to UK consumers since Sweeney Todd.

So it has cleared the shelves of all products that have been through Silvercrest Foods, not just the ranges of own-label beef burgers contaminated by horsemeat and pork. It is investigating what happened and how to prevent a recurrence. It has apologised to customers and is advertising its trustworthiness and openness in as many ways as it can.

Though the problem was discovered by an outside agency, this does not mean Tesco was being soft. It would, indeed, be a rare person who associated that quality with any supermarket. The group says it carried out announced and unannounced audits as with other suppliers. But the product specification tests seem not to have been wide-ranging enough to stipulate that the beef burgers should not contain nags. That is set to change.

Despite remedial measures, the UK’s largest grocer has taken a hit beyond the slight dip in the share price. Own-brand is a powerful differentiator for supermarkets, and Tesco’s own-label ranges account for about half its food sales. The fact that the contamination occurred in cheaper “everyday value” products could make matters worse if consumers infer that Tesco was somehow careless about its lower-spending customers when many are feeling the pinch.

This gives rivals an opportunity. It will be particularly welcome for them as Tesco was getting back on to the front foot after its 2012 profit warning. UK sales rose 1.8 per cent in the six weeks to January 5, compared with the same period the previous year, while Kantar Worldwide data suggest its market share in food and drink had risen to 29.6 per cent in the four weeks to December 23.

Wm Morrison is best-placed to benefit. Its push into fresh produce was too aspirational for classic Morrison customers, contributing to a 2.5 per cent drop in underlying sales in the last six weeks of 2012. But its emphasis on provenance – including the purchase of a meat processing plant – has given it useful bragging rights about the soundness of its burgers and, by extension, all its food. As they say at Tesco: “Every little helps.”

When Tui become one

It looks like a deal destined to happen: a majority shareholder absorbs the whole of the entity it already controls. But the prospect of a deal between Tui Travel and its German parent, Tui AG, remains almost as distant as it was before the announcement that confirmed the longstanding speculation.

The case for some form of combination is clear. TUI AG’s shares are languishing at a level that puts almost no value on its businesses apart from its 56 per cent stake in TT. A merger would realise the value of those operations. Putting the two groups together should provide some cost synergies, even if not on the scale of the €500m being bandied about.

Yet the hurdles are at least as high. Most striking is why either set of shareholders would accept a nil premium deal. The minority shareholders in TT would - presumably – want to see some value for joining the larger group. Nor would they want to risk the exit of Peter Long, the widely-admired chief executive. Tui AG shareholders, meanwhile, would not want to share the proceeds of selling shipping group Hapag-Lloyd.

There are still ideas to be discussed, and some transaction might yet take place. But the only outcome less likely than a nil premium merger is an auction.

Barratt bounces back

Housebuilders have so much in common they deserve their own collective noun: perhaps a development or a foundation. Just two days after Taylor Wimpey spotted some sunlit uplands, Barratt Developments sees a doubling of first-half pre-tax profit.

In a sector whose members share so much, including gratitude for government housing initiatives, it can be hard to distinguish the relative merits of individual stocks. Barratt’s USP is its decision to pay a dividend – albeit a “conservative” one – for the first time since 2008. When set against groups who may (Taylor Wilson) or will (Persimmon) pay special dividends, however, it looks rather less impressive.

The better news is the strength of Barratt’s operating margin. This is expected to be 8.4 per cent, a full 200 basis points ahead of the equivalent last year. The reduction in net debt from £542.2m at the end of 2011 to about £332m a year later is also encouraging, suggesting serious cash generation that can be diverted towards shareholders once the debt is further under control.


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