Testing times for Tesco

It’s the stuff of nightmares for corporate communicators. You’re suddenly called into the chief executive’s office to find a panicky gathering of lawyers, brokers and financial advisers.

An enormous hole has appeared in the accounts and an immediate statement needs to go out to the stock market.

You know little, can say even less but nevertheless have to field hundreds of leading questions from inquisitive journalists.

‘How far back do the problems go?’ they ask. ‘Are there more disclosures to come?’ You have no idea.

This hellish scenario became reality for in-house communicators at Tesco and its financial PR company Brunswick last month when the supermarket group pushed out a shock announcement stating that its guidance on half-year profits had been overstated by about £250 million.

One quarter of a billion pounds? That’s more than a quarter of Tesco’s expected profits for the period. Even the City’s most experienced communicators sucked in their teeth.

How can this have happened? What were the management, auditors, accountants and advisers thinking? How would the City react and what would happen to the shares?

Predictably, the first two questions were much more interesting than the answers that have so far been elicited. And answers to the last two were all too obvious as Tesco’s market capitalisation dropped by £2.2 billion. By the end of the week of the news, the stock had fallen by 16 per cent. They now stand at an 11 year low.

The full details were slow to emerge. Tesco said in its initial statement that an overstatement had been identified, four executives, later extended to five, were being suspended and accountants Deloitte had been brought in to mount an investigation.

The overstatement, it said, was ‘principally due to the accelerated recognition of commercial income and delayed accrual of costs’. It said some of the error was also due to the timing of the accounting of payments between itself and suppliers.

This led to a deluge of media commentary reading between the lines. Arcane supply chain management and promotional terms such as ‘trigger payments’ were suddenly given front page treatment on newspaper business pages.

Worse still, the apparent root of the problem – Tesco booking income from deals with suppliers earlier and costs later than it should have done – was widely held up as an example of an endemic problem with the company’s once-prized culture.

John Evans, managing director of PR agency Hawthorn, says: ‘Tesco is a classic example of how things can change in business.

Ten years ago, this would have been the last British company that would have to slash £250 million off its profits projections.

‘The problem for its communicators now is how to prevent the restatement announcement becoming a metaphor for how Tesco’s fortunes have crumbled since the departure of renowned chief executive Sir Terry Leahy. All his key lieutenants have now departed and this kind of crisis makes the company look incompetent. The job of its communications team now is to come clean, find out what went wrong, make sure it is an isolated incident and begin building trust in the group back up again.’

Tesco’s already wilting reputation has undoubtedly been further damaged, with Dave Lewis, the new chief executive poached from Unilever, and Alan Stewart, the new finance director hired from Marks & Spencer, having a great deal of explaining and reassuring to do.

So do the company’s public relations advisers and communicators. But could they really have handled this crisis any differently and what should they be doing now that the damage has been done?

Andrew Hayes, chief executive of financial PR agency Hudson Sandler, feels that Tesco’s communications function has wrongly taken some of the blame. ‘The communications team could not say anything more than was in the announcement,’ he comments. ‘It would have all taken place very quickly with many unanswered questions that they simply could not answer.’

Indeed, the news of the shortfall was leaked to the board by an employee whistleblower late on the Friday before the Monday of the announcement, by which time the company had informed the Financial Conduct Authority.

‘These are extremely difficult situations where everything happens at lightning speed,’ says one financial PR adviser. ‘As soon as these issues come to light, your broker and lawyers will be advising that you have to issue an immediate statement.

‘The PR department would be called in suddenly, given maybe an hour to draw up a statement and instructed that absolutely nothing could be said on top of the announcement. Then the press office gets besieged with journalists peppering them with questions that they’re not allowed to answer and, in most cases, don’t know the answer anyway.’

In such circumstances, it is tricky to see how Tesco’s communicators could have acted much differently. But what should they do next?

‘In crisis situations, it’s the crisis that dominates,’ says James Henderson, chief executive of public relations agency Bell Pottinger. ‘You have to handle it in as managed a way as possible and ensure that you give information as practically as possible so that there are minimal margins for speculation.

‘You have to foresee the questions and the obvious reaction, accept there’s going to be criticism, be calm in the face of a storm and address the situation with best-practice handling and processes.

‘The facts are the facts. You can’t manage reaction. You can’t put lipstick on a pig. You need to be proactive, not try to hide and be as open and transparent within the situation as you can be.’

Tesco’s predicament is not unique, even in the current year, with car rental group Hertz Global Holdings announcing in June that it would correct and possibly restate its earnings for 2012 and 2013 due to accounting issues.

Profit warnings, which involve companies simply pointing out that their earnings are likely to be materially below the expectations of stockbrokers, are much more common, however.

The difference between a profit warning and a restatement, say communication experts, is that the former simply looks like a company has been caught out by an unexpected economic or business downturn.

A restatement, in contrast, asks questions about whether misleading information has been provided deliberately and raises the issue of trust.

‘Everyone who works in financial PR has worked for companies that have had profit warnings of one shape or another,’ says Patrick Donovan, managing director of financial PR firm Citigate Dewe Rogerson. ‘But to have given guidance and to be £250 million out has got to be nearly unprecedented in the UK.

‘In principle you just have to get the bad news out there as comprehensively and as early as possible because the last thing you want to do is to go back with another instalment.’

The key now is what happens to the integrity of Tesco’s previous reported numbers and current business model, points out another financial PR adviser.

‘There’s no easy way out of this,’ he says, ‘but you have to get to an explanation of what went wrong as quickly as possible and then get the market to understand what the future trajectory of earnings is going to look like. Is it a one-off? Is it going to change other historical results? Is it going to affect how you report future earnings?

‘You need to uncover all the explanations after an announcement like this because the market doesn’t know what the future profits stream is going to be. In the meantime, everyone externally plays the blame game but you need to let that go and focus on sorting out what the ongoing business model is going to look like.

‘At the moment, Tesco is virtually un-investable, because no-one knows what the real implications are.’

Tesco delayed its interim results for more than three weeks, leading to speculation about possible cash calls and disposals.

In the event, Tesco reported a larger-than-expected £263 million black hole and the departure of chairman Sir Richard Broadbent. Chief executive Lewis said he was unable to give guidance on full year results, and that nobody should expect a single over-arching strategy but rather a series of incremental changes.

Now, say communicators, the future for Tesco has to be not about rhetoric but delivery.

‘It’s about normal communications with press, and buy-side analysts and events like investor days for shareholders,’ says one.

‘Everything is up in the air. Everything has been reinvented. There is no short-term fix. Tesco just has to deliver now.’

However, while communicators can take care of media enquiries, direct steady and calm internal communications and even initiate culture rebuilding exercises through pro-bono and charity work, much of the work to be done starts at the top.

‘There’s a big job to be done by the chief executive in rebuilding trust and confidence in this business but that’s not public relations,’ says one PR executive.

‘That’s what the management has to do now in the business plan.

‘PR is the wallpaper over the cracks. It can advise on tone, tempo and how expectations can be managed. But the fundamental point in this story is that people have lost confidence in this company. Tesco has a great deal to do now.’