Tesco accused of squeezing suppliers to support its profits

Britain's biggest supermarket alleged to have written letters demanding money from suppliers' trading accounts

Tesco has been accused of squeezing suppliers to support its profits ahead of an anticipated grim trading update next week.

Mike Dennis, an analyst at stockbroker Cantor Fitzgerald, suggested that Britain's biggest supermarket had written letters demanding money from suppliers' trading accounts – where payments are deposited by Tesco – to support its short-term profit margins.

He said that such activity risked breaching the groceries supply code of practice, which governs dealing between big supermarkets and their direct suppliers.

He said: "It is our view that Tesco has again overstepped the mark and the situation is very difficult for many suppliers."

Tesco said Dennis's assertions were "based on speculation" and it had not broken the code. But it did not specifically deny the allegation that it had recently demanded or taken money from suppliers.

A spokesman said: "In our interim results presentation last month, we set out how the general merchandise transformation programme will be a drag on our sales growth but beneficial to the overall UK margin, helping to offset some of the other investments we are making for customers."

The office of the groceries code adjudicator, Christine Tacon, said she had not received any complaints about Tesco demanding cash from suppliers but would be looking into the accusations.

A spokesperson said: "Where we do hear reports about possible issues surrounding the code, we will look to follow up with the retailers concerned.

"It's obviously too early to conclude whether there has been any breach but we will want to find out more about the circumstances."

Tacon is consulting on the guidance for investigations and enforcement of the code, which may involve fines of up to £1bn for serious breaches. She is expected to publish her recommendations before Christmas and formal investigation can take place before then.

There was no suggestion that Tesco could or should face such an investigation, with probes only expected to be launched in extreme circumstances.

Several retail analysts said that Tesco could use a number of different strategies to meet its promise of maintaining UK profit margins despite an expected 1.5% or 2% fall in underlying sales during the three months to the end of November.

For example, the supermarket has been gradually reducing its sales of less profitable electrical items such as televisions and been heavily promoting more profitable lines such as its premium own-label Finest food range.

Andrew Kasoulis, an analyst at Credit Suisse, said: "Price cuts and negative sales volumes do, of course, weigh on margin, but improving fresh [food] sales, the Finest re-launch, more convenience stores, downsizing non-food, successful refits and less money-off coupons this year are all positive for margin."

He said Tesco's anticipated 5.2% UK margin target for this year could be the result of multiple factors and not necessarily the result of putting pressure on suppliers.

Tesco's management team are under pressure as its underlying sales fall around the world. In Britain it is losing business to upmarket rivals such as Waitrose and hard discounters like Aldi and Lidl.

It is also struggling with the move away from big weekly shopping trips at hypermarkets and a shift to online shopping.
Article Source : http://www.guardian.co.uk
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Hedge fund sells up after forcing Co-op to cede control of bank

Aurelius sells bonds at profit before crucial vote
Co-op bank admits it is losing current accounts

One of the US hedge funds which forced the Co-operative Group to cede control of its troubled bank has sold its investment ahead of a crucial vote on a rescue £1.5bn fundraising.

Just hours after the Co-operative Bank admitted it was losing current accounts because of concerns over its future as an ethical institution amid the intervention of hedge funds and the scandal over former chairman Paul Flowers, it emerged that the US hedge fund Aurelius had sold its position in the bank's bonds.

Aurelius – best known for forcing Argentina to pay out on its debts – had bought up Co-op bonds as they collapsed in value following the downgrade of the bank to junk status in May. Since then the bonds have risen in value and have now been sold on to another hedge fund, London-based Perry Capital. Perry pledged to continue backing the crucial restructuring of the bank just hours before Friday's deadline to vote on the deal.

The so-called LT2 group of hedge funds, which included Aurelius and has forced the changes on the Co-op Group, made no reference to the crucial change in its membership when it reiterated its support for the restructuring on Thursday morning. If bondholders vote to back the restructuring of the bank, the wider Co-op Group, which includes supermarkets and funeral homes, will end up with just a 30% stake in the bank that bears its name. The deadline for votes is 4.30pm on Friday.

The Co-op, in an unscheduled announcement outlining technical changes to the terms offered to LT2, insisted that its savers – whom it relies on to finance its business – were not moving their cash out of the bank and its deposit base remained stable.

Flowers is on bail until January after being arrested following a Mail on Sunday report that showed a video of the 63-year-old Methodist minister handing over cash to apparently buy drugs. Even before Flowers' arrest there was concern that the intervention of hedge funds in the Co-op fundraising could make it difficult for the bank to maintain its ethical stance.

"These recent events, together with the competitive landscape in which the bank operates, the introduction of seven-day account switching and the associated increased competitor marketing activity at a time when the bank has been constrained in its ability to undertake its own marketing activity, may be a contributing factor to an increase the bank has seen in the switching out of current accounts," Co-op said.

The wording is tougher than that in the prospectus sent to bondholders on 4 November to back the restructuring when it referred to a "material reduction" in the number of people moving their accounts to the bank since the seven-day switching service was introduced in September. At that time it said corporate customers had taken away £1.4bn worth of deposits since the ratings downgrade in May.

The admission by the Co-op bank came as its regulator, Andrew Bailey, chief executive of the Prudential Regulation Authority, said the regulatory approval granted to enable Flowers to become chairman in 2010 was "before his time".

Bailey, who took over the top regulation job in the summer of 2011, said he had required the Co-op bank board to be strengthened and had set out hurdles for the bank to meet if it was to be granted approval for the takeover of 631 branches from Lloyds Banking Group. That deal, called Verde, collapsed this year.

Bailey insisted he did not "know the whole story" about what had happened or about any potential intervention from politicians keen to see the Co-op take over the Lloyds' branches. He added: "The real important thing today is not to deal with Reverend Flowers's antics but to deal with stabilisation and restructuring of the bank."

Lord Myners, City minister during the 2008 banking crisis, called for institutional investors to be represented when bank directors are appointed. "We need a fundamental change in accountability and alignment within the board room. Shareholders had got off scot-free when it came to culpability for bank failures and the cost to the economy," Myners said.

Lloyds looks to lord

The Conservative peer Lord Blackwell is the leading candidate to become the next chairman of the bailed-out Lloyds Banking Group.

The former head of Sir John Major's policy unit, and a serial non-executive director, already has a seat on the bank's board and chairs its insurance arm Scottish Widows. He previously sat on the board of Standard Life and retailers Dixons and was once a partner at the management consultants McKinsey.

The bank, whose chief executive, António Horta-Osório, received a £2.3m bonus last week because of the rally in its shares, has been seeking a successor to Sir Win Bischoff who wants to retire at next year's annual meeting.

The government began to sell its stake in Lloyds in September and now owns a 32% shareholding, which is expected to fall further before the general election through a sell-off to retail investors.

Lloyds would not comment on its next chairman on Thursday.

Article Source : http://www.guardian.co.uk
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