28th November 2016


5th July 2019

Knives out for boss who “nearly sank” Tesco

Over the weekend Oliver Shah of “The Sunday Times” published an interview with Lord McLaurin, the former Chairman of Tesco, during which he was highly critical of Terry Leahy who is seen by many as the most successful Tesco CEO of them all.

“Terry did a very good job for the first four or five years, and I was very pleased about that, but I think towards the end things went haywire,” MacLaurin, 82, told The Sunday Times.

“The board sort of went to pieces a bit, somehow. The whole thing went pear-shaped.”

We have covered the Tesco story previously but it is always worthy of a repeat visit in order to replenish a few essential items. In this instance given Lord McLaurin’s observations, we will remind ourselves of the main points.

As always, central to our work is a financial metric called Economic Profit defined as Net Operating Profit after tax less a charge for all the capital used by the business.  We believe in this metric because it remedies the flaw inherent in traditional accounting metrics by including all of the costs of doing business.  It is a much more demanding and informative measure of performance particularly when viewed over time.

Our version of the Tesco story goes along these lines:

  • Tesco under Leahy was hugely successful in creating value from the core UK retail business. Around £9bn in cumulative Economic Profit was generated in 1995 – 2014.
  • But they felt they were under great pressure to grow the business.
  • Their UK market share in food sales – but not in non-food – was already high. Apparently, it was hard to see how that would offer the required opportunities for growth.
  • So, they invested very significant amounts of shareholders money – often over a number of years – in a number of “new” businesses. These included: Asia; Europe; the USA; and the Bank.
  • The problem was that all these businesses were and remained economically unprofitable – they could not deliver an acceptable return on the capital that had been invested.
  • When we include a very large loss called – rather vaguely – “discontinued” which on its own accounts for over £3bn in cumulative Economic losses in 1995 – 2014 we find that the cumulative Economic Loss from the “new” businesses was £6.5bn
  • So, a £9bn success in the UK has been reduced to £2.5bn by the “new” businesses over a 20 year analysis period
  • How were these “new” businesses evaluated and justified?
  • Who thought they were feasible and acceptable?
  • What made them believe that they could eventually be taken into economic profit?
  • Why did they hang on for so long before they were jettisoned?
  • Leahy leaves in 2010 and the Economic Profit delivered by the Group nosedives as the UK business struggles; the share price goes with it as investor expectations are adjusted.
All data can be reconciled to the company’s annual reports.

So how should we view the Leahy era from a shareholder perspective? We think the answer needs to be “successful but ultimately deeply flawed”. He and his team fell into the common trap of focussing far too much on driving the growth of revenue without paying anything like enough attention to the capital needed to fuel that growth. This obsession with growth is spelled out in the Annual Reports of the time.

Suffice to say that the share price on his departure was around 390p. It is now 235p. Some of that drop will be due to the impact of the discounters; although in our view their impact is often exaggerated. But most of it is due to the poor state of the business that his successors inherited.

Can the current Tesco business be fixed? In our experience that will need the Board and the management team to:

  • Re-focus the objective of the business to be more on driving returns to shareholders; as well as considering a broader range of stakeholders
  •  Understand more clearly what drives their share price on the capital markets
  • Have better visibility of the where’s and why’s of value creation and destruction in and across their businesses
  • Adopt a strategy process that works effectively
  • Align management reward more closely with driving returns to shareholders
  • Make large investments in developing the “skill and will” to manage the value of the business in their more senior managers

Will this happen? – a “five-year recovery plan” was set out by Dave Lewis in January 2015 when the share price was 209p. It is now 235p. It is not working.  The share price on the date of Mr Clarke’s departure back in 2014 was 288p so the current share price is around 20% lower than a level deemed unacceptable 5 years ago.

Interesting times indeed. In the most recent annual results for the year ended Feb 2019, we calculate an economic deficit of £846m.  In other words the strategies and tactics of the business have taken £0.85bn of the shareholder’s wealth and given it to other stakeholders.  

To be fair, the 2019 result is £112m better than the number for 2018 which achieved an economic loss of £958m.  Furthermore, the economic deficit in 2017 was £1,973m bringing the total economic loss for the last three years to £3.8bn.

So, whilst the trend over the last three years is encouraging, without a dramatic improvement in performance we worry that it could be another 5 years (at least) before the business breaks even from an economic perspective.

vysyble and The Barbour Partnership

25th May 2019

A series of recent articles and presentations suggest that the world is increasingly waking up to the serious financial problem permeating through the world of football, which we first warned about back in 2016 with our first release of ‘We’re So Rich It’s Unbelievable! The Illusion of Wealth Within Football’.

Earlier in the week, Javier Tebas, head of Spanish football’s La Liga for the past six years, stated:

“There are clubs who could not care less what their real incomes are when they want to sign a player because they receive incomes from a state. It forces other clubs into an economic situation which is really living on the edge. It skews the balance of the entire European football structure. This is no longer sport. This is no longer an industry. It becomes more like a toy, the plaything of a state. And when it’s a plaything, kids start playing with other kids. You end up ruining the entire system.”

Central to our consulting work is establishing whether a given industry is attractive or not from an economic perspective.  In other words, does the “average participant” within said industry cover all of the costs of doing business or not?  In this, we often try to understand why value destruction in, for example, airlines is so different to value creation in, say, real estate development or supermarket retailing.  Core to this endeavour is the economic profit metric – an approach rooted in the work of Adam Smith and Alfred Marshall and one that includes ALL of the costs of doing business. 

Partly out of curiosity but also because we are fans of the game, we applied the metric (net operating profit after tax less a charge for ALL the capital used by the club) to several leading Premier League clubs in late 2016.  Almost immediately we were stuck by four things:

  1. The challenged profile of value creation over time – the clubs had a 1-in-5 chance of covering all of the costs of doing business over an 8-year analysis period
  2. Revenue increases (mainly from TV rights income) were inflating on a scale that other industrial sectors could only dream of
  3. A European League, despite our inherent reservations, looked inevitable due to the poor economic performance of the leading clubs
  4. That the economic performance of one of the key broadcasters had deteriorated significantly

Subsequently, and largely as a result of supporter feedback and enthusiasm, we expanded our analysis to include all Premier League clubs that had participated in the division from 2009 onwards. Our work revealed a very difficult economic profile for the other 14 Premier League participants and a very serious outlook for clubs competing in the lower divisions.  

The report generated extensive media coverage and some very welcome feedback, including that from the Finance Director of one famous South of England football club who contacted us and said, “At last somebody has finally understood how ridiculous and challenging the world of football finance actually is.” 

Of course, as we have found in our consulting work, when presented with an alternative perspective to the more established narrative there is frequently an understandable but an almost expected hostile reaction. In fact, one nationally-recognised sports journalist wrote to us in 2017 in a somewhat distressed state…and we quote;

….my view is your report is in the main, scaremongering nonsense using a metric not especially applicable to football. From Talksport it was clear you had little to no understanding on the dynamics or history of the European breakaway situation or its (lack of) chances of happening. Yet your press release is still chock full or statements about six or seven clubs breaking away and financial doom…

My issue is not really that you are selling – or trying to sell, literally – something with no real-world application, for £325 a pop. if people are credulous enough to swallow, more fool them. It’s that aside from a farcical misunderstanding about how clubs are run, supposed to be run, and operate in their role as actual clubs (ie not for profit), you’re saying absolutely nothing new citing City and Chelsea as effectively subsidised by rich owners.

This is a story now 14 years old …. I could go on. We’ll have to agree to disagree. I simply don’t buy your analysis, or your credibility to put it forward in respect to football. I could go on … but I’m even boring myself now!

And yet we find the 24th May 2019 edition of The Times reporting on football’s cash crisis (Football League clubs lost £388m last season as cash crisis is revealed) as well as the increasing threat of a European Super League (The European Super League is an existential threat to domestic football). 

Furthermore, in November 2018, Der Spiegel reported on 62 million e-mails whereby the top 5 English clubs (Tottenham Hotspur was not involved) had been actively discussing a breakaway league going back as far as the beginning of 2016.

As for our reports, they have been purchased by some of the world’s leading consultancy companies and investment banks along with high-net worth individuals and their family offices, particularly those located in the USA.

Indeed, our media list continues to grow as the world continues to learn about the core themes in play. Consequently, we are encouraged that there is a healthy and growing appetite for our work.

Unfortunately, the threats to the game that we first highlighted in 2016 are now sadly becoming increasingly evident. Our ‘scaremongering nonsense’ will sadly have plenty of resonance in Bolton, Bury, Sunderland and numerous other locations where the local football club has found itself struggling for survival.

Unless the relevant authorities take appropriate action, we believe the misery will continue. Our next edition of ‘We’re So Rich It’s Unbelievable! The Illusion of Wealth Within Football’ will be released in June. It will reveal some further and highly disturbing trends concerning the economic performance of the Premier League clubs and their potential effects on football as a whole. It does not make for happy reading.

With the domestic TV revenue trend in negative territory and an increasing emphasis on international rights with a bigger share for the larger clubs (yes, we also got both elements right in that we said the domestic TV deal increases were unsustainable but also that the top clubs needed to find new and increasing revenue streams because their economic profit performance trends were so poor), the so-called ‘Big 6’ are starting to turn the screw on the others with very damaging effects.

But, as some keep trying to remind us (see above), clubs are not meant to be run for profit. To our mind such a view confuses or conflates two things – the governing objective of the business (or club) and the mode of measurement (economic profit).  We accept that football clubs have a wider social dimension, but they can only sustain their community function over the longer term if they are covering ALL of the costs of doing business.

Furthermore, to those who don’t accept our view and believe that the clubs should be run “at a loss”, then by implication what is an acceptable degree of value destruction? In almost three years, nobody has come forward with a vaguely credible answer.  

So, it gives us no pleasure to say ‘we told you so’ nor does it fill us with joy to say that there is more pain to come but it is evident that the economic profit metric has revealed significantly more detail and insight than the commonly-used financial measures of pre-tax or EBITDA and will continue to do so.

The economic profit data clearly points towards an impending financial crunch.

You have been warned…. again.


19th March 2019Stuff and ‘Nonsense’ – Why the Economic Profit metric is the most transparent measure of business performance

13th March 2019Financial Fair Play – Guilty as Charged? – Our thoughts on FFP schemes and their key weakness

18th December 2018Long Division – The Post-Ferguson years at Old Trafford have come at the expense of declining economic and on-pitch performance

20th November 2018The Relegation Game – Tales of woe and economic performance at the wrong end of the Premier League table

9th October 2018A Different View – Why fans ought to be acutely aware of football’s financial dynamics

17th August 2018The End of the Beginning – La Liga heads west to conquer new worlds

9th August 2018Reaching for Sky – the sequel – Latest offer price for satellite TV company is good for shareholders, less so for prospective owners.

8th August 2018American Dreams – English Premier League economic dynamics and American money – is a Euro Super League the next step?

3rd August 2018Mall Administration – Retail Property Co. bonus payouts at odds with increasing shareholder value.

20th April 2018Goonernomics Part Deux – The departure of Arsene Wenger…

18th April 2018The Price of Everything – Tesco’s latest numbers offer little in value.

12th April 2018Say What? – WPP’s very mixed message.

14th February 2018In Case of Emergency – Premier League’s UK TV rights auction comes up short.

7th February 2018 – Lost in Transmission – Top Premier League clubs look beyond domestic TV rights.

4th December 2017A Billion here, a Billion there… – The Premier League reaches a major milestone, quietly…

25th November 2017Getting out of Toon. – Is Mike Ashley pitching the sale price of Newcastle United at the right level?

16th October 2017 – Goonernomics. How the ‘Bank of England’ club falls short of its North London neighbour.

25th September 2017 – Highlights. More record-breaking numbers from the biggest football club in the land, but no economic profit…

23rd September 2017Football’s Economic Back Pass. A guest blog for the Soccernomics website.

12th September 2017 – Crystal Balls-up. Changing strategic direction is not a good idea when you haven’t looked at the economics.

27th July 2017Football’s Summer of Money and the £65 pint of beer. The sport that just can’t spend enough.

11th July 2017Football Special. Observations following the launch of ‘We’re So Rich…’

9th May 2017Illuminating, non? Political energy lacks vision and power.

2nd March 2017Claudio’s Burden. The price of failure outweighs the price of success.

12th January 2017Shopping for Godot.A never-ending quest for value in Retail.

27th December 2016Reaching for Sky. Is Rupert Murdoch’s £10.75 per share a fair price?

6th December 2016Auld Lang Syne. A reminder from history of the damage that poor financial planning can cause.

1st December 2016Fork Handles? Four Candles? Tesco’s blurred strategic vision.

27th November 2016Football’s Instant Replay. Financial warning signals for the top English Premier League clubs.