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Introduction
In 2013, food adulteration scandals in various parts of world including Europe were highlighted. These scandals proved large quantities of horse and in some cases pork meat in beef products across some major food chains including TESCO. While horse or pork meat is not considered to be harmful for health, however each is considered a taboo food item in different cultures. Additionally, though certified horse meat is often served on menu, the authorities were concerned about the health of horse meat used and the possible contamination of phenylbutazone or "bute", a drug given to horses used in sports which is harmful if enters the food chain. As soon as the Irish food safety authority confirmed the presence of horse DNA in the beef burgers sold to the supermarkets by subsidiaries of ABP Food Group, millions to burgers were called back by the company from the retailers including Tesco among others. The same month ABP food group closed down the operations of its Silvercrest Foods plant that was suspected as the origin of the adulteration. As a result of the scandal big clients like Burger King switched their burger suppliers from ABP Food group causing serious financial implications for the company. The authorities at ABP food group later suggested that the management at Silvercrest food plant bought frozen meat from unauthorized suppliers possibly outside Ireland.
The roots of the adulteration in food chain were considered to be deeper than anticipated, thus the Food Standards Agency in UK instructed all retailers to recheck the beef products in all categories and more than 2500 tests were performed. The results however confirmed that the already published products were the only ones contaminated.
This paper discusses the horse meat scandal as it happened and the financial implications faced by TESCO as a result of the scandal. The paper will also discuss how the downfall of reputation of the company resulted in financial losses.
Effects of Scandal on Tesco
During and after the scandal, TESCO faced the major loss in trust and customer satisfaction. Even though according to a customer survey regarding the scandal most people (77%) said their shopping preferences didn’t change and that was also proved from the data provided by Kantor showing year by year change in buying behavior, that the change in buying frozen beef was only 1%. This clearly reflects that the hit on Tesco reputation was more due to breech of customer trust rather than the quality of meat.
Quickly after the scandal was uncovered TESCO apologized through newspapers and tried to compensate through other means however, the retailer faced a loss of £300 million in its market value. Though TESCO and Iceland both were affected by the scandal however TESCO took the blow badly and reported a fall in post-tax profits of 96% to about £120 million from the previous year. This sort of financial loss was reported first time in 19 years by the giant retailer associated with the food contamination scandal. Some stores were closed down, expansion plans were halted and the retailer announced further price cut downs on various commodities mostly related to food, the annual capital spending was also limited to £2.5 billion that was half of the amount spent in the previous year. Despite the efforts, the profits fell to 6.9% to about £3.05 billion as well as the market position of the retailer slumped 3% from 29.7% to 28.6% within the same year.
The financial loss for the company did not limit to the UK market only, thought the scandal was associated with the local UK market. While UK market was hit hard, the retailer experienced falling sales and profit figures in almost 11 global markets. Sales figures from Turkey plunged down to 15%, while for Czech were 9%. Even in China the sales dropped by 5%, where the company had plans for expansions as the most promising global market. Once a strong chain in Thailand, the figures dropped by 3% and in the Polish market by 8%.
The management attributed the losses in the global market to relate to their local issues such as tougher competition with local vendors, bird flu crisis in China and falling demand of pork products. The retail brand also pulled back from its huge US ventured “Fresh & Easy” that cost the group about £1.5bn in order to restrict their global expansion and collaboration plans. The retailer spent strategically on improving the shopping experience for the customers by redesigning the space and product placements, opening up coffee shops, kid’s friendly restaurants and bakeries. The huge store locations were revisited and the management showed efforts in using the space intelligently. While on the one hand the management looked into improving the way people shop conveniently, on the other hand the annual profits and dividends still faced cut downs.
Tesco’s Falling Reputation & Financial downfall
The downfall of once giant and most popular retailer in Europe- TESCO is a perfect example of what’s the worth of brand reputation. The brand had earned the Britain's Most Admired ranking in top position 6 times making a record and stood at second or third position other times showing the consistency and the market position. At the time when the brand was planning aggressive expansion plans in various global market, the contamination scandal resulted in loss of customer trust. The horse meat scandal initiated a domino effect on the company’s reputation as later the profit warnings, £263m black hole and SFO investigation all contributed in the failing reputation of the retailer. From its peak in 2011, the company lost about £13.5bn of its reputational value as a result of all these crisis.
In a recent case study on the meltdown of a giant brand due to its face value, regression analysis was applied to metrics such as those considered by the investors, financial position, consensus and general survey for market position to calculate the impact of a company’s market face value on its capitalization and market share. The analysis also showed that the reputation played an important role in the financial value as well as predicts the market value and capitalization security. For example during 2011 that is considered as the peak time for TESCO, the market capitalization was £32.2bn, out of which about £16.6bn was attributed with the brand’s reputation value. However as the scandal was uncovered in 2013 and the brand’s reputation took a blow the market cap in 2014 dropped by £18.6bn out of which merely £2.6bn was observed as the value of brand’s reputation. The figures from following years also showed that reputation value or a brand once starts to decline is harder to stop. As problems grew the company’s market share, trading practices and operations all contributed to its reputation value and a steep drop in its share value for years to come. The brand reputation reports such as the most admired reports contained parameters to show not only how popular a brand is and also the factors for that popularity. These parameters provide a base for future forecast and the stapes to take in order to maintain or improve a brands reputation value. Financial experts believe that once thriving brands such as BP or TESCO to fall from top positions to bottom or the quick rise of companies like AstraZeneca that climbed 158 places is majorly associated with the brand’s reputation. The management of succeeding companies also need to stay aware of the signals shows by the reputation analysis surveys to resolve issues proactively.
Conclusion
Scandals and controversies are part of the business today, however the cost of losing a brand’s reputation value is far more threatening to the brand’s existence than a mere financial loss. Management, analysts and institutional investors need to be vigilant and proactive in identifying and mitigating any alarms or signs that could affect the brand’s reputation. In case of TESCO, the horse meat scandal affected the brand’s reputation more as the even though the majority of customers (77%) shopped for the food products in the same way hardly restricting anything from their list, however they felt betrayed by once the household name TESCO. Thus the trust breech acted as the more serious issue that later on triggered financial losses and declining sales across the globe.
References
BBC News. (2013). Horsemeat scandal. BBCNews.
Belam, M. (2014). One year on: How did the horsemeat scandal affect consumer behaviour? ampped.
ITV report. (2015). Horsemeat and accounting scandals: Tesco's setbacks since 2011. ITV.
Macleod, S. C. (2014). Tesco and the true cost of losing a good reputation. Management Today.
Neate, R. (2013). Tesco sales tumble on horsemeat scandal. The Guradian.
The Telegraph. (2013). Horse meat scandal: timeline. The Telegraph.
