Tuesday 28 October 2014

Tesco's cash appetite: the opportunity for suppliers

Given Tesco’s combination of £14bn debt and £3.4bn net pension deficit, vs. its latest market capitalisation of £13.6bn, it is obvious that Dave Lewis’ priority has to be a sell-off of assets.  In which case, a mixed shopping basket containing Dunnhumby, Tesco Bank and Tesco South Korea ‘should do nicely, thank you’ in helping the company in getting back to square one…

The off-limits moves
In this situation, moving the credit period from 40+ days to 90 days, a potential cashflow gain of approx. £5bn would help, but would do little for enhancement of supplier relations...  Equally, any attempts to increase supplier trade investment or escalation of deductions would not only attract the attentions of the authorities and media i.e. consumer, but would alienate suppliers, the essential collaborators in any recovery…  Given the current scrutiny by the FCA, it seems obvious that Tesco will be unlikely to rely upon increases in credit, trade investment, or deductions as cash generators.

The key options 
On balance, it could be deduced that the sell-off of assets will be a key priority, against a background of severe tightening of all expenditure and a squeeze on liquidity on an ongoing basis.

All of the above has to increase Tesco’s sensitivity to the cost and value of supplier trade investment, and their appreciation of the direct impact on Tesco’s P&L.

Opportunities for suppliers
In other words, this combination of need for financially articulate NAMs together with Tesco’s vulnerability can provide suppliers with an unprecedented opportunity to elevate their Tesco relationship to a basis for fair-share dealings, an essential requirement for those that are prepared to help their No. 1 customer out of a black hole…

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