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This article was first published in the February 2016 UK edition of Accounting and Business magazine.

When South Africa-born Alan Stewart talks about his early days as an investment banker at HSBC, he recalls learning some valuable lessons. ‘Having the experience as an investment banker from an advisory perspective has proven very useful in my corporate career in helping companies raise cash,’ he says. 

Fast forward 25-plus years and Stewart will undoubtedly be calling on those early lessons as he tackles perhaps one of the most complex challenges of his professional career. Today, as CFO of Tesco, the largest retail grocer in the UK, Stewart and CEO Dave Lewis are spearheading what, if successful, could be the most remarkable turnaround story in UK history. 

It clearly wasn’t only for his savvy as an investment banker that Tesco put Stewart in charge of its finance function. The board wanted someone at the financial helm with the experience to shake things up. Known as the ‘cost-cutting supremo CFO’, Stewart fits the bill, particularly as retail experience figures prominently on his CV. 

As far as that moniker is concerned, Stewart’s tenure at Thomas Cook was characterised by cost reduction in the face of lower sales, including halving capital expenditures and axing 2,600 jobs. 

At WHSmith, Stewart and then CEO Kate Swann were credited with turning around the performance of the high street chain, doubling pre-tax profits. At the same time, he was instrumental in developing innovative cost-saving strategies, such as putting timers on fridges and rerouting delivery vans. 

In July 2014, Tesco managed to lure Stewart away from Marks & Spencer, where as CFO he arguably had the highest-profile finance job on the high street.

The Tesco group is diversified into clothing, petrol, financial services and mobile devices. It has more than 480,000 employees in 11 countries. It has a near-28% share of the UK grocery market (as of mid-2015); Asda and Sainsbury’s, with 16.5% market share each, are distant seconds. 

The wheels come off

When Stewart joined the company, Tesco was in serious trouble on almost all fronts. The rules of the game in the retail grocery business had changed, as discount retailers such as Aldi and Lidl, as well as online shopping options, were gobbling up market share quickly. Between November 2013 and November 2015, Tesco’s market share dropped from 30.3% to 27.9%, whereas Aldi’s increased from 3.7% to 5.6% over the same period. 

Tesco’s sales were also shrinking year on year, as were profits, buckling under the company’s crushing £22bn debt burden. Sales of £69.7bn in 2014/15 were 1.4% below the preceding year’s figures, and trading profit declined by 58.1% from £3.3bn to £1.4bn over the same period. Earnings per share consequently tumbled from 32.05p in 2013/14 to 9.42p in 2014/15. By year end, Tesco would record group losses of £6.4bn. 

As if things weren’t bad enough, the Serious Fraud Office then opened a criminal investigation – which has yet to be resolved – into Tesco’s accounting practices, which produced a £263m profit overstatement in 2014. Meanwhile, a class action lawsuit was filed in the US against the company and a number of its former directors for alleged breaches of US securities law – again in connection with the overstatement of commercial income. A settlement was reached in late 2015, after Tesco agreed to pay US$12m, with no admission of liability. 

Against this backdrop, Stewart’s job is clear: help Tesco restore competitiveness in its UK business, strengthen and protect the balance sheet, and restore trust and transparency – no small feat. He says the scale and depth of the challenge was a surprise, ‘but the fact that it was a turnaround was very clearly understood’. 

Stewart began a comprehensive review in October 2015 of all the costs in the business, which ultimately led to the decision not to pay a final dividend in 2014/15. At the same time he will be capping capital expenditure at £1bn for 2016, down from £2bn the year before. 

The Tesco-defined benefit pension arrangement – which as of the end of 2015 was £3.9bn in deficit – will be replaced with a defined contribution scheme, with the company reducing its contribution from 11% of employee pay to 7.5%. 

Meanwhile, Tesco’s assets went on the chopping block. All three Blinkbox businesses (movies, music and books) and Tesco Broadband have been sold or closed, as has its Korea-based Homeplus, for £4bn. Tesco has also closed 43 unprofitable stores and will not proceed with 49 new developments. 

In terms of addressing the fallout from Tesco’s accounting misstatements, improving disclosure and transparency has been high on Stewart’s agenda. ‘In 2015 we changed the metrics we use to describe our performance, and we’ve aligned our reporting into segments to mirror the way we’re running the business.’ 

As to how the previous misstatements will affect the company’s risk profile, he says: ‘We’re still working through the implications of that from a regulatory perspective, and how that impacts our overall reputation is unknown at the moment.’ If it’s not resolved, though, it may impact Tesco’s reputational risk going forward, he adds.

With assets turned into a pile of cash, pension risk eliminated, a grip exerted on spending, and windows for investors opened into the business’s performance, does Stewart think he has pushed all the right buttons for Tesco to regain its reputational and business traction over the coming 12 months? ‘My focus for 2016 and beyond is to continue to find ways to improve our business performance,’ he says. ‘I’ll continue to look at ways to mitigate costs, whether that’s from energy or operations.’

Ramona Dzinkowski is a Canadian journalist and editor-in-chief of the Sustainable Accounting Review