London: The chairman of Tesco, the world's second-biggest retailer behind Walmart, announced his resignation Thursday amid an accounting scandal in which the company admitted it had overstated its projected profits.
Richard Broadbent said he will step down once a successor is found while the company confirmed its financial troubles continued, with a 99 percent drop in first-half net income to 6 million pounds ($9.6 million).
"Three immediate priorities are clear: to recover our competitiveness in the U.K., to protect and strengthen our balance sheet and to begin the long journey back to building trust and transparency into our business and brand," Chief Executive Dave Lewis said.
Tesco launched an investigation last month after discovering its first-half earnings estimate had been inflated by about 250 million pounds due to alleged accounting errors that booked some income too early while delaying the recognition of some costs.
It said Thursday that the estimated profits had been overstated by 263 million pounds, slightly more than initially flagged. The question is whether this was an accident or there was a deliberate effort to massage the results as Tesco struggled to meet profit forecasts in the face of increased competition.
Lewis, who previously worked for Unilever, started cleaning house almost as soon as he walked in the door in August. A whistleblower alerted him about the accounting issues a month after he took over the job.
Eight executives have been suspended while the investigation takes place, and Tesco was forced to delay its first-half earnings report by three weeks so the company could sort out its books.
Once the undisputed king of the British grocery scene, Tesco is trying to shore up falling sales and profits as lower cost competitors eat away at its market share. The company's overseas expansion has also foundered, most notably with the closure of its "Fresh & Easy" operation in the United States.
Warren Buffett's Berkshire Hathaway reduced its stake to less than 3 percent this month - from 5.1 percent last year - a sign of weakening support from investors. Buffett went so far as to tell CNBC that his investment in Tesco had been "a huge mistake."
Tesco needs to reconnect with its customers and simplify promotions, as well as adjusting to an evolving marketplace where more shopping is done online, analysts say. More importantly, it needs to become a company that's kinder to its suppliers and more innovative with its products, said Neil Saunders, a retail analyst at Conlumino.
"Tesco needs friends," Saunders said. "But unfortunately, Tesco has alienated a lot of people. It needs to become a bit more humble."
Growing competition from discounters such as Aldi and Lidl is forcing Tesco to change. Tesco's U.K. market share fell to 28.8 percent in the 12 weeks ended Oct. 12 from 30.1 percent a year earlier, according to market researcher Kantar WorldPanel.
For years, Tesco and Britain's other big supermarket chains expanded by simply opening new outlets, taking sales from small independent shops that couldn't compete with their economies of scale, said Louise Cooper, a former Goldman Sachs stock broker who writes the financial blog CooperCity.
"The easy strategy for growing for this sector was just to open new stores and it worked for decades, but no longer," Cooper said. "As Roxette sang, 'It must have been love, but it's over now.'
