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Fresh & Easy Vendors Uneasy

In revamping its Fresh & Easy chain in America, Tesco’s room to maneuver may be constrained as a confluence of decisions has led to a decline in corporate credibility. For Fresh & Easy, that is no small matter.

Tesco’s efforts to make Fresh & Easy a success will be much easier if it can operate with at least two things: Support from the vendor community and support from the investment community. Support from the vendor community translates in Tesco’s capability to change, and support from the investment community translates into time to change.

We put a tongue-in-cheek title of Memo to Sir Terry Leahy: King George III Lost the War; America Is Independent Now on a piece highlighting Tesco’s decision to include Fresh & Easy in UK results and to back away from its commitment to publish the results of the US venture as a fourth “reporting segment” alongside UK, Europe and Asia.

Beyond the specific consequences of these decisions that were made without disclosure to the financial community, the impact on the perceived credibility of Tesco and its top executives is clear. Just read a few key quotes from the report by the European food retail team at Citi in London:

“..this is a 180-degree turn from what Tesco had previously suggested…”

“We would argue that the decision to account for the US within the UK over the Christmas period was somewhat disingenuous.”

“It will also do nothing for Tesco’s reputation for openness, which is unfortunate.”

When the investment community starts to think a company is obscuring things, it assumes a negative:

“…the point is that their position seems to have changed since this time last year and the only explanation in our minds is that Tesco is disappointed with the sales figures achieved so far.”

Tesco has other problems besides Fresh & Easy. Its market share is under attack in the UK, the Telegraphof London ran a piece, Morrisons Gains as Tesco loses Ground, which focused on the latest TNS Worldpanel results showing Morrisons and Wal-Mart’s ASDA subsidiary ascendant, as Tesco and Sainsbury both lost market share.

It won’t take many more quarters of declining market share to combine with the investment community’s perception that Tesco is looking to obscure the Fresh & Easy results before the investment community starts demanding an end to management’s “distraction” and a focus on “core markets.” Put another way, the investment community will soon begin demanding a withdrawal from the U.S. market.

Yet the U.S. vendor community may prove even harder to handle. Since the announcement of a “pause” and the publication of Tesco’s claim that this was planned from the start, our phone here at Pundit Central hasn’t stopped ringing. Vendors from all areas, many of whom we have never known, have called to ask what the story really is all about.

Every one of them has said the same thing: that they have worked with Tesco for a long time — in most cases over a year — and nobody mentioned a word to them about any pause.

In the minds of a vendor, responsible for setting up intricate production schedules, planting crops, hiring employees, doing other things to meet Tesco’s anticipated volume requirements, the situation boils down to this:

Either Tesco is not telling the truth, which means it is prepared to lie to protect its interests, which, to a vendor, simply raises the question of what other things it has been told that may not be true.

Or, perhaps worse, Tesco did always intend to “pause” and yet never told the supplier base, which means it acted in a spirit of utter contempt for the costs it imposed on the supplier community.

Vendors are smart and they see these two options as well as anyone and some get nervous.

The most common question we were asked today: How can I get a corporate guarantee on my money?

Yes, vendors are realizing that whatever Tesco’s might in the UK, the vendors are selling a US subsidiary. Most have no idea how it has been capitalized, but it is not uncommon for a subsidiary to have little capital and to be funded by loans from the parent company or guaranteed by the parent company.

With capital frittered away on a distribution center and stores that might have to be sold for pennies on the dollar and working capital eaten up by operating losses. Who is to say that Tesco couldn’t take its US subsidiary into a Chapter 7 bankruptcy proceeding, liquidate the assets, pay itself or loans its guaranteed backing with available cash and leave vendors high and dry?

It seems highly unlikely, inconceivable in fact, that Tesco wouldn’t pay the subsidiary’s bills in full and sail back to Britain with head held high. Of course, that being the case, there is no reason it shouldn’t act now and extend a full corporate guarantee to all the vendor and employee obligations.

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