In announcing plans to voluntarily return to the taxpayer £585m in business rate relief, Tesco’s new CEO, Ken Murphy, has proven himself to be a smart cookie.
The optics were truly terrible: a giant business, paying out chunky dividends to shareholders, profiting from an emergency tax break designed to support retailers and other businesses forced to close by the pandemic. Tesco was left in the crosshairs of MPs, the press and, perhaps most seriously, the shopping public.
The excuses emanating from its controlling brains – mirrored by those in leadership positions at its peers – simply served to give the impression of a company digging deeper and deeper into a hole.
Murphy’s predecessor David Lewis said in April that “every penny of rates relief received” had gone towards “ensuring that Tesco is able to support Britain’s shoppers”. He made it sound as if a business that profits handsomely from delivering that “support” was some sort of benevolent society rather than a commercial entity whose chief purpose is the making of profit to support wealthy shareholders.
The attempt by Tesco to decouple the rates holiday from its dividend – the 3.2p a share interim payment cost the group £314m – was never going to wash with the public because the public can do basic maths and understands basic budgeting.
It works like this: subsidy goes in, dividend is paid out. ‘No, no, no,’ say the supermarkets’ defenders. ‘It’s not that simple.’ But really, it is. The extra money Tesco spent on hiring people to “support customers” and “keep the nation fed” were taken on so the grocer could process a massive sales bonanza. Yes, the extra costs it incurred crimped profits to some extent but Tesco will make the money back because sales look set to remain at an elevated level for some time and it will make a return on them, which will facilitate – ker-ching – more dividends.
In public, Murphy held to the line of characterising the business rates relief as “critical support at a time of significant uncertainty”. But behind the scenes it seems he was smart enough to recognise the danger of souring Tesco’s relationship with its customers, quite a few of whom will be suffering right now. Not to put too fine a point on it but the issue also threatened to overshadow his tenure as CEO.
He, or maybe one of the other brighter lights in the Tesco galaxy, may also have been alive to the risk of attempts to claw back the state’s support, and more, in future by either the current chancellor Rishi Sunak or one of his successors. Spell “windfall tax”. A Tesco turkey, perceived as having been fattened up by the pandemic, would be ripe for plucking. If it had kept the taxpayer’s cash, it would have found it very hard to lobby against such a move.
“Giving this money back to the public is absolutely the right thing to do by our customers, colleagues and all of our stakeholders,” said Murphy. Yes indeed, but make no mistake: it’s also the pragmatic thing to do.
Now that the sector’s big gun has taken the lead, it is going to be difficult for its rivals not to follow suit. The sector’s total support amounts to nearly £2bn. If it all flows back to the Treasury it will still represent only a drop in the ocean when set against the £385bn Sunak is borrowing this year. But as Tesco likes to say, “Every little helps”.
Speaking of the chancellor, Murphy has rather bailed him out here. It was Sunak’s decision to extend the business rate holiday to businesses that didn’t need it, rather than targeting it at those forced to close. In the cold light of day, that looks questionable.
Last week, I suggested that the government should immediately remove the rates holiday from “essential” retailers allowed to remain open and divert the savings to struggling “non essential retailers” by extending theirs. Tesco’s decision – hopefully followed by others – gives him the scope to do that and maybe more.
Yesterday, Debenhams administrators started the process of liquidating the business at a cost of 12,000 jobs, while the ailing Arcadia handed the keys over to another team of bean counters, threatening 13,000 more. The TUC appealed for government intervention to support the retail sector and prevent more job losses. Sunak should listen.