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.
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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.

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Royal Mail major shareholders to be asked if shares were too cheap

Commons business committee plans to write to large investors as part of bid to find out if state-owned postal service was undervalued

Royal Mail investors who bought large stakes in the postal service following its £3.3bn privatisation last month are to be asked by MPs why they have staked hundreds of millions of pounds on the view that the government sold the firm on the cheap.

The news emerged after the Commons business committee investigating the Royal Mail flotation questioned the business secretary, Vince Cable, and his ministerial colleague Michael Fallon how the offer was valued, prompting an assertion from Cable that there was no need for an independent inquiry into the process.

Committee chairman Adrian Bailey said he will be writing to the The Children's Investment Fund (TCI) and GIC, Singapore's sovereign wealth fund, which have built up their Royal Mail stakes since its listing to more than 6% and 4%, respectively – having decided the shares would rise far above their 330p flotation price.

He said: "Yes, we might well want to [write to major new shareholders to ask why they value Royal Mail so highly]. We are reviewing the transcript [of evidence] to identify areas to follow up."

The committee has been investigating whether the taxpayer has been shortchanged by the Royal Mail flotation, in which 60% of the shares were sold to outside investors last month. The share price has since soared by about 70%, prompting criticisms that the government could have demanded a higher price. The Bow Group, a thinktank led by former prime minister Sir John Major, has called for an independent inquiry into the privatisation.

When asked if he thought an inquiry was required, Cable replied: "Absolutely not. We think this is a good process for the taxpayer."

He added that the valuation was only one criteria in deciding whether or not the taxpayer had received value for money, as the company could have withered – and its services put at risk – without access to private capital to invest in its future.

"Bearing in mind the set of objectives which we set at the very beginning ... the value for money is partly dependent on the offer price, it's partly dependent on the continuing value of the state's [30%] share, and it's partly dependent on what happens to the company. If the company isn't able to invest successfully [in its business], you could be left with a serious casualty. When we take all those things together, I think the conclusion will be, when people have settled down, that this has been a very professional well-managed and successful operation."

Royal Mail floated at 330p a share when the government sold 600m shares last month. Once the shares began trading on the stock exchange, they quickly soared. The shares were up 5% on Wednesday afternoon following the group's first results statement as a public company, changing hands at around 563p.

Also being questioned alongside Cable and Fallon were Mark Russell, the chief executive of Shareholder Executive which holds state stakes in businesses, and William Rucker, the chief executive of the government's main financial adviser, Lazard.

Russell said the government had been taken by surprise by the surge in the share price, telling the committee: "We did not anticipate the share price to move to the extent that it did."

He added, however, it had been anticipated that the shares would rise following privatisation, which was part of the reason why the government had retained a 30% Royal Mail stake. Typically, the City hopes the shares rise by around 10% on the first few days of trading following a flotation.

Bailey also asked the witnesses if it was predictable that Royal Mail shares would surge so strongly, with the offer was 20 times oversubscribed by investors.

Lazard's Rucker claimed not: "A lot of the orders [for shares] that go into the books ... there is a heavy element of gaming. The three biggest orders were $1bn each. That would have represented 20% of the company. Those institutions had no expectations of ever receiving anything like that quantity of the stock."

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Tesco planning same-day delivery as it battles rivals

Move would see the UK's biggest online grocer competing with Ocado and Asda

Tesco is preparing to offer same-day delivery for online groceries as it fights to shore up its struggling UK business and take on rival services by Waitrose, Morrisons and Asda.

The move would see the UK's biggest online grocer competing with Ocado, the company which delivers Waitrose groceries and is set to offer the same service for Morrisons shoppers in Warwickshire early next year. Bigger rival Asda is also planning to introduce same-day grocery deliveries next year.

Tesco is already trialling same-day deliveries of food in Mansfield, Nottinghamshire, under which shoppers can order goods by midday for delivery by 6pm. Simon Belsham, managing director of grocery home shopping, said: "The trial is working successfully and we are looking to roll that out further."

The news emerged as Tesco opened a 120,000 sq ft centre near Erith, south east London, its sixth dedicated online distribution centre for food. The supermarket uses the "dark stores" – so called because they are not open to the public – in addition to picking groceries for online shoppers from 300 stores. Belsham said Tesco, which controls 47.5% of all online grocery sales in the UK, needed to build capacity because online sales were growing faster in London than elsewhere.

Tesco continues to increase market share online, despite losing ground in its stores. A flurry of notes from City analysts earlier this week suggested the supermarket was set to reveal another set of poor underlying sales next week, putting pressure on boss Phil Clarke, who is trying to turn the business around.

The Erith centre, which will be able to process up to 4,000 orders a day when it is running at full capacity, uses hi-tech warehouse technology to enable it to offer 30,000 different items, 50% more than the average store and 16% more than the five other dark stores.

Belsham said that would allow Tesco to offer more specialist ethnic foods and upmarket lines helping it to appeal to a broader range of shoppers in London.

Meanwhile Tesco is also piloting a collection service at its small Express stores for groceries ordered online. The service is run out of a Tesco delivery van parked behind stores in Datchet and Harrow. Belsham said that combining stores and online services was an important part of Tesco's future.

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New RBS chief Ross McEwan denies 'systematic' profiteering

McEwan admits damaged reputation but says bailed-out bank did not wreck businesses to gain assets

Royal Bank of Scotland's new boss admitted on Wednesday night that the reputation of the bailed-out institution has been seriously damaged by allegations that it is deliberately wrecking small businesses in pursuit of profit.

But Ross McEwan, who started as chief executive last month, fought back against the claims made by Lawrence Tomlinson, an adviser to business secretary Vince Cable.

The allegations against the 81%-taxpayer owned bank, in a report published on Monday, have prompted the interest of City regulators and the Serious Fraud Office (SFO).

McEwan said the bank had not received any evidence of a systematic effort to make money from customers by pushing them into its turnaround division, known as the global restructuring group (GRG).

Pledging a full investigation by law firm Clifford Chance, McEwan said: "It is important to note that the most serious allegation that has been made is that RBS conducted a 'systematic' effort to profit on the back of our customers when they were in financial distress.

"We do not believe that this is the case, but it has nonetheless done serious damage to RBS's reputation. No evidence has been provided for that allegation to the bank."

Tomlinson makes allegations in his report – compiled from evidence he had received from businesses – that RBS was pushing businesses into its GRG division, which in turn was buying up properties through its specialist property arm West Register to make a profit.

Sir Philip Hampton, the chairman of RBS, called the allegations "unsubstantiated" and "anecdotal" in an interview with the BBC in which he said the bank had dealt with tens of thousands of customers in distress since the crisis. "If there are facts that show we have behaved in the wrong way then we will take appropriate action," said Hampton, who acknowledged the bank may have been "too heavy" in some instances.

RBS has not received the details of the individuals and businesses used by Tomlinson to compile his report, which Cable has already handed to City regulator the Financial Conduct Authority. The FCA is expected to conduct a detailed analysis of the allegations.

The SFO has not launched a formal investigation but said: "We are aware of the issue and monitoring developments."

The identities of individual customers are not contained in the Tomlinson report – in order to protect their relationship with RBS – but about 20 examples are thought to be attached to the report sent to regulators and the Department for Business.

In his report, Tomlinson, a Yorkshire-based entrepreneur who is also a customer of RBS, said he had "shocking examples of business owners being confronted with last minute demands for information and money" that have forced their businesses over the edge. Tomlinson also called on all banks to look at the way they handle businesses in distress and for the FCA and the government to consider if the current rules are robust enough to protect customers. Lloyds Banking Group is also named in the report but does not face the same criticism as RBS.

RBS was one of the biggest lenders before the 2008 banking crisis and at one stage was responsible for 50% of all property loans to small businesses. A report the bank commissioned into its own lending practices, also published on Monday, by former deputy Bank of England governor Sir Andrew Large, said it had contracted its lending after the crisis too quickly.

McEwan said: "RBS played a big role in the lending boom that led to the UK's economic crisis. After the crash, tens of thousands of our customers saw their asset values plummet and ended up in serious financial difficulty. This was an economic crisis for Britain, but it was also a very personal tragedy for many families and small businesses around the country."

Concerned that the allegations will undermine trust in the bank – already battered by a £390m Libor fine and a mounting bill to compensate small businesses missold interest rate swaps – McEwan insisted the Clifford Chance review would be independent. It would report back by 31 January after scrutinising the main findings of the Tomlinson report, interviewing bank staff and customers and reviewing samples of loans.

Clifford Chance would also advise RBS on whether the allegations appear to have substance and make recommendations about steps, if any, should be implemented as a result.

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Law firm Clifford Chance analyses Royal Mail's property portfolio

Evaluation comes amid criticism that property portfolio may have been undervalued and Royal Mail sold off on the cheap

Clifford Chance, the "Magic Circle" City law firm with links to some of the leading investors in Royal Mail, has been privately analysing the newly floated company's portfolio of 2,000 UK properties.

News of the evaluation comes a week after MPs on the Department for Business, Innovation & Skills select committee probed bankers on the value of the newly privatised company's property portfolio, amid criticisms that it may have been undervalued and that Royal Mail sold off on the cheap. Vince Cable and Michael Fallon, the ministers who led the controversial flotation, are set to appear in front of the committee on Wednesday.

It is not clear which client has engaged the law firm, but Clifford Chance has previously represented organisations including the Children's Investment Fund and GIC, Singapore's sovereign wealth fund, who are two of Royal Mail's largest shareholders.

The Guardian understands that Clifford Chance has received a report containing details of around 800 properties held by the Royal Mail subsidiary Royal Mail Estates which are registered with the Land Registry in England and Wales.

The portfolio includes a string of sorting offices and plots of land – such as the Mount Pleasant and Nine Elms sites in central London which are part of three property redevelopment plans already predicted to make Royal Mail around £300m. Around 95% of the portfolio is freehold property.

As a large proportion of the portfolio consists of sorting offices, investors are unlikely to be able to dispose of them for a quick profit as the business needs the sites to operate. However, analysts have estimated that there could be around £100m of Royal Mail properties that are surplus to requirements, while the fact that the group owns so many freeholds was always likely to attract certain sections of the property industry, at a time when businesses selling their properties for cash and then leasing them back appears to be coming back into fashion.

A spokesman for Royal Mail said the company had "pursued" sale and leaseback in the past, but it was not currently "a key part of our strategy".

However, the UK supermarket group Morrisons announced in September that it would review its £9bn property portfolio with a view to doing such a deal.

The Morrisons announcement came only five years after Sir Ken Morrison, the chairman who led the company for 50 years, said that sale and leaseback was anathema to the grocer.

Aside from the 800 properties registered to Royal Mail Estates, there are further sites in Scotland and Northern Ireland, while the remainder that take the total to 2,000 are largely made up of leasehold sites that Royal Mail has occupied for less than 10 years.

Royal Mail floated last month at an initial value of £3.3bn, but the shares quickly soared prompting criticisms that the taxpayer may have been shortchanged. When the stock exchange closed on Tuesday evening, the company was worth £5.3bn.

Ofgem not a 'toothless tiger' in fight against rising energy prices, insists boss

Andrew Wright tells MPs he agrees with consumers who think the retail energy market is not working well

Ofgem boss Andrew Wright says he understands public anger at rising energy prices but has denied his organisation is guilty of "feeble regulation".

Wright acknowledged "deep distrust" of the big six energy companies – British Gas, npower, SSE, Scottish Power, E.ON and EDF – as some customers face price rises of more than 10% as winter kicks in.

Addressing MPs on the Commons energy and climate change committee, Wright said rising prices, years of aggressive doorstep selling, confusing tariffs and complexity when consumers wanted to switch providers had all created negative perceptions of the industry.

"I completely understand why people feel frustrated and angry about rising energy bills. Prices have more than doubled over the last 10 years at a time when incomes have been squeezed, and consumers are not convinced that price increases that they see are either fair or justified," he said.

"Consumers have a perception that the market is not working well and that's something that we agree with. We think the retail market is not working as well as it should do."

When asked whether Ofgem was a "toothless tiger", failing to address rising prices and accusations of unfair profit taking among companies, he said it was acting within its statutory regulatory framework and rejected the idea he was supportive of the rises.

"I never said it was OK. I have not said this level of profit is right or acceptable. If companies imply we think 5% is right, we've never said that."

He said that politicians were right to debate the issue of rising energy price rises but when questioned about Labour leader Ed Miliband's promise to freeze prices he did not appear to be enthusiastic.

"The sort of things we would consider are, does it have an adverse impact on consumers and on the investment that's needed?

"It is obviously necessary to allow companies to recover the revenues that they need to be able to run their businesses effectively. They should have no guarantee of profits but an efficient business serving customers should be able to recover the costs that they incur. So any arrangement that doesn't allow them to do that potentially puts at risk investment in the industry."

His comments came a day after Ofgem published a report which found that profits per customer rose by 77% last year, from £30 to £53, driven by higher prices and increased demand for heating during last year's cold weather.

The average profit margin for supplying energy to households in 2012 was 4.3%, up from 2.8% in 2011, with total profits from supplying energy to households and businesses rising from £1.25bn to £1.6bn last year.

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