Tesco: Where it went wrong

Tesco Image copyright EPA

Tonight on Panorama we're revealing the main findings of our investigation into Tesco. Of course, it's not possible to flesh out all of the detail in the programme itself, so I've put together the main findings here.

Here's a reminder of the key things we have discovered:

Former chief executive Sir Terry Leahy told the BBC that Tesco allowed the trust of its millions of customers to be "eroded", that it lost its reputation for having low prices and that there was a "failure" of leadership under Philip Clarke.

He also said that too many senior executives were pushed out of the business which also suffered a culture change which was "not for the better".

We also discovered:

•a major fallout between Tesco and one of its biggest suppliers, L'Oreal, which led the French cosmetics giant to threaten legal action after a disputed payment of about £1m demanded by Tesco

•that the former chief financial officer, Laurie McIlwee, sent an internal email in 2012 warning about financial controls at the retailer after a problem was discovered in its Polish business. The email told finance staff: "You should be in no doubt as to the seriousness [of] mis-declarations" and said that accounting for profits early was forbidden "where they cannot be justified". The early accounting of profits appears to be at the heart of the Serious Fraud Office investigation into Tesco's £263m mis-statement of its forecasted profits which it revealed last autumn. In 2012, the finance department caught the issue before it was reported externally, but the behaviour still appears to have continued in other parts of the business

•that the Groceries Code Adjudicator, charged with policing the relationship between retailers and suppliers, has yet to be given powers to fine supermarkets up to 1% of their UK revenue for supplier mistreatment, despite requesting the ability to do so more than a year ago. Vince Cable, the Business Secretary, said that he backed the fines and accused the Treasury of "sitting" on the issue.

And in his first public statement since leaving the retailer abruptly in June last year, Philip Clarke said that he needed to change the business when he became chief executive in 2011 because of issues "that had been building for some time".

He said his new strategy for a "multi-channel" Tesco had the full backing of the board and was the right direction for the supermarket.

Below, I've mapped out the four key areas of the investigation and in particular Sir Terry's thoughts on where Tesco's problems lie.

Sir Terry: Where Tesco went wrong

Sir Terry was the man widely credited with building Tesco into one of the world's largest and most successful retailers.

He presided over 14 years of growth in profits and sales and has largely kept his counsel on Tesco's problems.

In his interview with me, he dealt with critics who said that he ran the business "too hot" (to use Philip Clarke's phrase) and maintained profits through the recession by savings on costs and not investing in the stores.

"The acid test is, are you attracting customers?" Sir Terry said.

"Yes we were, more customers each year. Were sales growing? Yes they were.

"Customers don't wait around to pass judgement in a market like retailing. They pass judgement every day and if you're doing something wrong, they'll shop elsewhere.

"But they were coming to Tesco, so that's the best indication that the business was set up right for the recession and actually for the months and years ahead.

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Media captionSir Terry Leahy: Tesco 'saw a failure in leadership'

"It would be a mistake to look back for the reasons [for the problems at Tesco].

"Customers are sending a message today that there's something not right in the stores and the business mustn't ignore that, because actually if they listen to that message, they can put it right and the good news is, it won't take four years for customers to respond, they'll be back in the next day if they start to do the right thing."

There is already some evidence of that. The arrival of the new chief executive, Dave Lewis, last autumn has led to the arrest of some of Tesco's decline.

Sir Terry said that one of the most vital things with any retailer was gaining the trust of your customers. And that meant providing low prices.

Losing that reputation was very damaging for Tesco, he said.

Asda is now 6% cheaper than Tesco, according to research by retail analysts Sanford Bernstein published in December.

"It's very damaging," Sir Terry responded when I asked him about Tesco ceding price ground to Asda.

"Tesco is the biggest, people expect it to have the best prices and know they can trust Tesco to deliver that and not have to shop around and check that they're getting the best deal.

"I think that some of that trust has been eroded, which has meant that people have shopped around."

'Niche players'

On the growth of the discounters Aldi and Lidl, Sir Terry said they were still "niche players". He argued that the Big Four should not blindly chase them on price, but had to become used to a "new type of competition".

Sir Terry said the major retailers should provide straightforward low prices rather than short-term promotions, which many argue have left customers confused.

As profits and sales fell, Tesco has been accused of ramping up the number of promotions it ran.

The reason? Each promotion would bring a payment from suppliers - called commercial income - which would help support Tesco's balance sheet.

So the more promotions, the more commercial income there would be.

"What [customers] really needed were lower prices and they needed a price list that they could trust," Sir Terry said.

"What they got instead, not just from Tesco, but from all of the supermarkets, was too much reliance on short-term promotions."

Image copyright PA

Turning to the failure of Tesco and Mr Clarke's departure, Sir Terry said: "People tried very hard to do the right thing, it clearly has not worked.

"In the end, that's a failure of leadership, not a failure of the business, not a failure of the people who work hard every day in the business.

"When you're the CEO, if it goes well, you get credit, if it doesn't go well, you must take responsibility and Phil Clarke has taken that responsibility and paid the price with his job."

Some allege there was tension at the business as Mr Clarke attempted to reverse the decline in profits and sales.

A number of people who have left the organisation have told the BBC of shouting matches at senior levels as people argued over how to right the listing ship.

A number of senior figures did leave, leading to accusations that the management team was spread too thin and that the culture at the organisation changed.

"I think it lost too much talent," Sir Terry said.

"It's a big company, Tesco, and also very empowered - people were given responsibility and trusted to get on with their job, so there was a big team of experienced leaders.

"And too many of those were allowed to go in too short a period of time and so there was a shortage of experience, the kind of experience you need to carefully navigate a business like Tesco through this very turbulent and difficult period of this long, long recession, with these changes in structure of retailing taking place.

"I think the culture did change under Phil Clarke and not for the better.

"I think if you talked to people who knew Tesco, worked in Tesco when I was there, actually the culture was pretty positive and it has to be, because it employs half a million people and you can't make them do things, you have to motivate them to do things, they've got to want to do it."

In his statement to the BBC, Mr Clarke argued that the business had to change to face new challenges and that speaking to people who had left the business because of the changes only gave "one view".

"Although the company had enjoyed unprecedented success in the past, it was plainly the case when I took over Tesco in 2011 that it faced a number of critical challenges which had been building for some time," he said.

"During 2011 and 2012, we faced into these challenges. Our objective was to create a company that could compete in the new era of retailing - the multi-channel era.

"In bringing about business and cultural change within the company, inevitably some executives who were not considered to have a role to play in the future of the business were let go.

"There are many others who remain silent out of loyalty to the company, and who would describe Tesco under my leadership very differently."

Tesco at war with L'Oreal

As it chased commercial income, Panorama has discovered that in 2013, Tesco had a major falling out with L'Oreal, one of the world's biggest cosmetics firms, which has a market capitalisation that is actually larger than Tesco's.

L'Oreal disputed almost £1m worth of charges, fees and fines from Tesco over supplier agreements.

It threatened legal action over the disputed amounts and said it would take its products off Tesco's shelves.

Tesco told the BBC: "L'Oreal is the largest cosmetics company in the world, with a turnover of €29bn, generating profits of €3.9bn in 2013.

"As such, it is a major supplier for Tesco in all our markets and we value our relationship with them. Differences do sometimes occur in the course of commercial relationships and we always aim to resolve them amicably, as we did in this case."

The warning email

In April 2012, the then chief financial officer, Laurie McIlwee, sent an email to Tesco's senior finance team.

It warned that financial controls had to be of the highest standards.

The warning was sent after the discovery of a problem in commercial income records in the company's Polish business.

What is important about the email is that it makes a specific reference to recognising future income and profits in the wrong accounting period.

That is the same issue the Serious Fraud Office is investigating now, after Tesco announced last autumn that it had miscalculated its profits forecasts by £263m.

"You should be in no doubt as to the seriousness of such declarations and indeed mis-declarations, for all reporting periods," the email says.

"Compliance with Tesco accounting policy precludes practices such as 'accruing to budget' and recognising 'planned' future income/profits in periodic accounts where they cannot be justified at the reporting date."

In 2012, the finance department caught the problem. And dealt with it before any figures appeared in external announcements - the most damaging bit about the revelation of the miscalculation of profit forecasts last autumn.

But despite the warning, it appears that those involved in commercial departments continued to move profits into the wrong accounting period.

Fining retailers

Christine Tacon is the Groceries Code Adjudicator, the person charged with policing the relationship between supermarkets and their suppliers.

She says that through a series of meetings with both sides, relationships are improving.

But she admits to the BBC that two years after she was appointed and 18 months after she actually started the job, she has yet to launch any investigations into retailer behaviour and still does not have the power to fine supermarkets if they break the supplier's code.

In December 2013, she applied to the government for the power to fine retailers up to 1% of their UK revenues. For a business the size of Tesco's, that could mean fines of up to £400m if it was found to have broken the code.

For the power to be activated, what is called a "statutory instrument" has to be laid before Parliament. That has not yet happened.

"I had to do a recommendation which went in to the minister [in the Department of Business] and the statutory instrument has not yet been laid before Parliament and I'm very keen that they should do so," Ms Tacon told me.

I asked her whether the delay was frustrating.

"As we sit here at the moment, I can't fine a retailer, I have the legal powers to do so, but I don't have a maximum, so I therefore can't. There is no figure."

We asked the business department to respond to the fact there has been such a delay.

Vince Cable said the Groceries Code Adjudicator should be granted the powers to fine retailers if they break the rules in their relationships with suppliers.

And he laid the blame squarely at the door of the Treasury, which he claimed had been sitting on the application for the powers to fine.

"The crucial issue on powers is whether they can impose fines when the Groceries Code Adjudicator judges there has been unfair treatment," Mr Cable told the BBC.

"And the adjudicator has recommended fines of up to 1% on the UK turnover of companies that have perpetrated some abuse.

"I fully support that, I would like to see it implemented. Unfortunately my Conservative colleagues in government haven't been willing to go along with it, so it hasn't happened yet."

The Treasury responded: "We are unaware of any delay. We introduced this code and are working through details in the usual way."

More than a year on, I am sure Ms Tacon wants the issue to be resolved as quickly as possible.

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