A valuable lesson on investing from Tesco

Tesco share prices have tanked…a mirror of what the retailing giant’s profit expectations are for the period ahead. Despite the overenthusiastic accounting at the firm, Tesco has also fallen in the minds of consumers.

IFR - Retailer Meltdown
Competition in this retail sector is fierce. In the UK for example, own brand product standards have risen significantly in recent years and so, the key differentiators that set Tesco apart from the competition have largely disappeared.

The supermarket group said that profits for the year to the end of February will now be less than £1.4bn, far below the £2bn expected by analysts and the £3.3bn reported last year.

Some analysts estimate that Tesco would make “very little, if any” profit in the UK during the second half of its financial year, which includes Christmas.

While the recent accounting scandal at Tesco is a major reason, a more worrying problem for shareholders is the potential for recovery. Tesco seems to have lost its way. Shares are close to their lowest levels since the start of the millennium. The revelation that Tesco may have been looking to boost its financial figures at the end of reporting periods will cause further concern among investors.

Since the departure of Sir. Terry Leahy, new management oversaw what has turned out to be a policy of running a slightly “leaner” company which observers blame for the negative impact on quality and service. These measures included reducing the number of staff in stores and ultimately, the quality of service customers receive.

For investors, Tesco provides a good example of the importance of keeping an eye on what matters when stock prices are concerned. Numbers matter…but in the customer service market, service matters even more. This is why the departure of key staff at firms can have a major impact.

Tesco was good under Sir. Terry. He had a brilliant mind for the business and kept a keen eye on customer service. His replacement team were akin to athletes taking shortcuts to get ahead. In both sports and business, the truth always comes out.

For Tesco share owners, the recent slide in price will be a bitter pill to swallow but hopefully, an important lesson also.

Service matters in the service industry! It’s the guiding principle that drives not only Warren Buffet but also every successful investor the world over.

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