The Contract Clash With Tescos Shareholders Commerce Essay

The National Association of Pension Funds (NAPF), whose members own about one-fifth of the shares listed on the London Stock Exchange, had advised investors to abstain from voting on the re-election of three Tesco board members.

It is pushing for the supermarket group to re-draft its board members' terms of employment so that all are employed on a 12-month notice period.

Shareholders argue that such contracts maximise "rewards for failure" by guaranteeing big pay-offs for directors who are forced out because the company is performing poorly.

The Association of British Insurers, which also represents major institutional investors, joined the chorus of criticism against the supermarket's two-year contracts, saying they were "clearly in breach of our guidelines".

Tesco has said it will appoint new directors on one-year contracts, but will not renegotiate the employment terms of its existing board members.

"If they accept the principle, it would make sense for them to renegotiate the existing contracts," said Stuart Bell, research director at shareholder lobby group Pensions Investment Research Consultants.

Performance test

The relatively large number of abstentions and no votes (about 17% of the votes) will signal to Tesco that its shareholders' patience is wearing thin.

However, the vote has fallen short of last month's landmark rebellion against the pay policies of drugs giant GlaxoSmithKline (GSK).

A slender majority of GSK shareholders voted against a pay package which would have entitled chief executive Jean-Pierre Garnier to a pay-off of up to £22m.

It was the first time that shareholders in a British company had rejected its remuneration policy.

Other blue-chip British firms such as Barclays, Reuters and Royal & Sun Alliance have also faced significant levels of shareholder dissent over executive pay this year, with investor resentment fuelled by falling share prices and weak profits growth.

The reason why Tesco avoided a full-scale revolt was likely to have been its exceptional performance in recent years, making the accusation that it is rewarding its directors for failure harder to stick.

Strong growth

Meanwhile, in a trading statement issued on Friday, Tesco reported strong first quarter sales growth of 15.1% as it continues to steal customers from weaker rivals.

UK like-for-like sales, which strip out the effect of new store openings, were up 5.8%, although the impact of price cuts took 0.3% off the figure.

Analysts had forecast like-for-like growth of 4% to 5%.

The group figure was boosted by international sales which increased by 28.4% with total UK sales up 12.3%.

Investors welcomed the figures, pushing Tesco shares up 3.2% to 211.5p by the close of trade.

Tesco vs Customers/Pressure Group (Tescopoly)

Will protests hurt the Tesco brand?

By Bill Wilson

BBC News business reporter

Clouds are gathering over the Tesco success story

The UK's supermarket group Tesco has reported another set of strong financial figures, showing how its influence is growing rapidly to dominate ever more people's shopping habits.

With profits topping £2bn a year, it has nearly a third of the UK's grocery market, and it is steadily building up its share of non-food markets for CDs, clothing, fuel, and electrical goods, as well as insurance and other financial services.

Though the UK remains its main market, the group's global footprint is also growing fast.

Tesco operates more than 2,300 stores in 13 countries, including Japan, Poland, Turkey, Hungary, and a joint venture in China.

'Action needed'

But not everyone is happy at such supermarket success stories.

There is a growing coalition raising questions about how global giants, including Tesco, affect independent retailers, producers at home and abroad, and the environment.

There is weaker recycling of money into local economies when it goes to a big national or multinational chain, rather than to local traders

Andrew Simms, New Economics Foundation

Tesco, which is the fastest growing supermarket group in the UK, has become a target for campaigners.

On Thursday, an anti-Tesco website - Tescopoly - was launched by a coalition of eight campaign groups.

"People might ask 'how can such a successful company as Tesco be a bad thing?'," says Vicki Hird, supermarket campaigner for Friends of the Earth.

"But their growth and actions are damaging in many ways.

"There needs to be action to control them. There are a lot of people who feel this way."

The Small and Family Farms Alliance and the New Economics Foundation (NEF) are among the other groups that back the new website, which replaces Tesco's slogan "Every Little Helps" with the phrase "Every Little Hurts".

Tescopoly brings together eight groups

Pointing out that last year 2,000 small food retailers in the UK closed down, Andrew Simms of the NEF says he believes the independent sector "is at tipping point" and that more shops will be forced to close in the years to come.

"There is weaker recycling of money into local economies when it goes to a big national or multinational chain, rather than to local traders," he argues.

The other five groups behind Tescopoly are: Women Working Worldwide; the GMB union; the National Group on Homeworking; War on Want; and Banana Link.

Shareholder obligations

So, in the face of such broad opposition - designed to put the spotlight on Tesco's practices - has the brand been tarnished in any way?

Or indeed, is there a danger of investors revising their opinion of the grocery giant, which started life as an East End market stall.

"The coalition of people who are unhappy with Tesco seem to be using two lines of argument, " says Richard Hyman, chairman of retail analysts Verdict.

Tesco facts

Founded 1924

First store in Burnt Oak, London

2,316 stores in 13 countries

326,000 employees

World's biggest online supermarket

Check Tesco's share price

"On the one hand there are calls for its power to be reduced, and for it to be broken up.

"Their other approach is designed to attract the public at large, by highlighting various things and then trying to persuade people not to shop there.

"However, what they have to remember is that Tesco continues to deliver to its most important stakeholder - the customers. This is something the City realises."

Mr Hyman points out that supermarkets are in business not to be "philanthropic" but to "discharge obligations", among them to shareholders.

Global group Tesco has left its humble beginnings behind

Moreover, it is often forgotten that Tesco has developed from very humble origins, he adds.

"The reasons it has become very large is that it is more adept at knowing what consumers want, and delivers it consistently every day in its stores.

"What has delivered its large profits is that it is part of a success story that has actually worked. In 1980 there were many more supermarket businesses, but we had less choice.

"The big players that are left are now at each other's throats and has to come up with different offerings to attract customers."

'Fiercely competitive'

However campaigners insist this has come at the price of local shops, and the constant price squeezing of UK and international suppliers.

"The Tesco bonanza comes at a price for farmers, workers, town centres and the environment," insists Friends of the Earth.

The minute people don't like Tesco's proposition they will stop shopping there

Richard Hyman, Verdict

The pressure group says Tesco's market-leading position rests on unfair trading practices.

But Tesco says "the supermarket industry is fiercely competitive as the last three competition inquiries have found".

"There is plenty of choice for customers to go elsewhere and our experience is that they certainly do so if we let them down".

In March, an Office of Fair Trading audit into the Supermarkets Code of Practice showed the four major chains were complying with its requirements.

Mr Hyman says the overriding view in the financial community is that Tesco is "at least as good as any other retailer in the world".

"It's success is its relationship with the consumer. The minute people don't like Tesco's proposition they will stop shopping there."

Tesco vs Local Community and Local Council

Opposition to fourth Tesco plan

Tesco has three supermarkets in Inverness

Residents of an Inverness community have objected to plans for a fourth Tesco supermarket in the city.

At a public meeting chaired by Holm Community Council, all of the 130 people present said there was no need for a store in their local area.

The meeting also discussed Highland Council's draft plan for development in Holm - which includes a proposal for more than a thousand houses.

Tesco said the site has been identified for retail by Highland Council.

Inverness has three Tesco stores, earning the city the nickname Tesco Town.

Asda also have plans to build a supermarket in the Highland capital.

'Continuing commitment'

Tesco said the reason it was applying for planning permission for the site on the road between Inverness and Dores, Loch Ness-side, was because it had been earmarked for such a development.

A spokesman said the supermarket chain's relationship with the city had become confused and plans for a fourth store represented its continuing commitment to Inverness.

There is a Tesco Extra at Inverness Retail Park off the A96 and stores at Inches and Tomnahurich Street, near the city centre.

He added: "The plan is not at a particularly advanced stage.

"We are planning for what is called a format 30 on that site, which is a supermarket store about the same size as Inches but smaller than the Extra." â۬

Tesco vs Suppliers

Northern Foods to shed 900 jobs

The closure is part of a major shake-up at Northern Foods

Tesco has been blamed after one of its suppliers, Northern Foods, revealed it will close its Trafford Park Bakery in Manchester, with the loss of 690 jobs.

The site produces a range of chilled pastry products, but made a loss of £3m in 2005/06. The firm said it expected a phased closure of the site by December.

Northern will also cut 210 jobs from its Palethorpes plant in Shropshire.

The GMB union said Tesco needed to "practise corporate responsibility". The firm said it had been "supportive".

The move by Northern is part of a shake-up announced in May after poor sales triggered two profit warnings.

This is another example of Tesco throwing their buying power weight about by depressing prices and moving production at will to other plants

Jude Brimble, GMB national officer

The General Workers Union said it was "surprised and shocked" by the decision to close "the Old Trafford plant [which] is dedicated solely to supplying Tesco".

"Tesco should talk to Northern Foods about finding a viable future for this plant, which employs 690 local workers," said Jude Brimble, GMB national officer.

"This is another example of Tesco throwing their buying power weight about by depressing prices and moving production at will to other plants.

"There is such a thing as corporate social responsibility and Tesco need to start practising this.

"GMB will be asking the OFT, which is currently looking at the power of the supermarkets, to examine this specific case as an abuse of power.

"Tesco and Northern Foods owe to these loyal workers to pause and look for another way forward."

Company revamp

Northern Foods makes own-label goods for food retailers, and branded foods such as Fox's Biscuits and Goodfella's pizza.

Under the planned revamp of the company, Northern is set to sell businesses that account for 40% of its group revenues.

The company is aiming to focus on its key food categories, which include pizzas, biscuits and ready meals.

The shutdown of the Trafford Park site is part of Northern's plans to sell its pastry division.

The company said it would be carrying out consultations with workers before the closure of the plant was confirmed.

Insufficient capacity

A Tesco spokeswoman said: "It is very unfortunate that Trafford Park is closing and that Northern Foods have taken the decision to resign Tesco's pastry business at the site.

"Over time we have been as supportive as we can be to improve the performance of the site.

"When Northern Foods told us that they were closing Trafford Park we asked if we could move this business to another site or sites but have been told there is not enough capacity to do this.

"We continue to work closely with Northern Foods who still supply us with a significant number of other products across other areas of our business.

"We are working with our supply base to ensure availability of sausage rolls, pies and quiches for our customers."