Analysis: Tesco’s rate repayment likely to trigger domino effect

As part of the announcement from Tesco this morning that it would be repaying in full the £585m in business rates relief it had received this year, new chief executive Ken Murphy was quoted as saying it was “absolutely the right thing to do”. 

Thoughts immediately turned to how Tesco’s big-four competitors and the wider grocery sector, which has traded unfettered throughout both national lockdowns, would respond. 

Research by Altus Group highlights just how much money is at stake for Tesco’s big-four rivals. Taking into account all relief up until March 31, 2021, Sainsbury’s could be faced with returning £450m, Asda £297m and Morrisons £279m.

Retail Week understands at least one of the big four will follow Tesco’s lead, which will put even more pressure on the remaining two to do the same. 

The decision will affect the whole sector, as one grocer’s chair points out, unable to hide his frustration at what he views as a ploy by Tesco to curry public favour while still paying out dividends. 

“I think what Tesco has done is quite cynical,” he says. “Despite having been quite fiercely against the idea of repaying it in the past, they’ve got a very large special dividend due to the disposal of their Asian business.

”I think they’ve looked at the opprobrium they might receive and the optics of taking the rates relief and then returning the billions to shareholders from the disposal and figured that would be too difficult to manage”.

“We didn’t ask for the rates rebate, the government proffered it to all businesses. All future plans we had put in place were taken with those in mind”

Grocery chair

Tesco has already faced criticism for returning dividends this year while accepting the relief – it returned a £635m dividend in respect of the year to February 2020 and an interim payout of more than £300m in the current year.

However, that figure will be dwarfed when Tesco is expected to return £5bn to shareholders, much of that as a result of the £10bn sale of its Malaysian and Thai businesses, which will likely take place before the rates relief period ends in March. 

At the time of writing, Tesco’s announcement has been met officially with radio silence from its competitors in the grocery sector. However, many in the industry have been left feeling blindsided. As the chair explains, grocers did not ask the government for the rates reliefs and many of them will have already budgeted for that relief moving forwards. 

“We didn’t ask for the rates rebate, the government proffered it to all businesses. All future plans we had put in place were taken with those in mind. 

“So the fact that Tesco needs to pay a whacking great dividend to shareholders because they sold the future of the business by selling Asia, it’s a shame for them, but it isn’t a reason to bugger up the entire industry,” he says.

Media and public pressure

Cynical or not, no one is arguing that Tesco’s public move isn’t a major public relations coup. 

“It’s a very clever move from them,” says one former grocery executive. “Delivered at a time when Tesco recognises its own financial strength compared to the competition.”

He believes many grocers, particularly those beneath the big four in the pecking order, will be looking to keep their heads below the parapet and hope this blows over. 

“I suspect the rest are contemplating not paying it back and hoping the news is buried in the plethora of other news going on at present,” he says.

However, as Barclays retail food analyst James Anstead notes, Tesco’s decision “will likely create significant political and media pressure for other retailers to return the business rate relief that they would otherwise have claimed”.

“Tesco is knowingly putting a lot of pressure on other companies to potentially have to return billions of pounds of cash”

Clive Black, Shore Capital

Since November, the paying of dividends by the big four while accepting rates relief has become a bête noire for The Sunday Times and some MPs, including shadow business minister Lucy Powell.

According to Shore Capital analyst Clive Black, Tesco will have made the decision well aware of the media and public scrutiny it will put on the competition. 

“This will have enormous ramifications, and ramifications that Tesco is well aware of,” he says. “I think it could be seen as predatory. Tesco is knowingly putting a lot of pressure on other companies to potentially have to return billions of pounds of cash”.

While Black says this will put the non-executive boards of Sainsbury’s, Asda and Morrisons in a bind, the real implications could be felt further down the food chain by privately owned companies. 

“What about privately owned businesses? Should they pay this back too? If so, Tesco is notably distorting the industry because Aldi, Lidl, Iceland, they need the cash. It’s suddenly become a really important issue in terms of the overall competitiveness of the market,” he says.

The Altus Group data suggests that collectively the discounters could end up handing back £217m in relief. A not insignificant amount for businesses that are far less cash-generative than Tesco. 

While the grocers’ response so far to questions on dividends and rates relief has been met with raised eyebrows in some media and political circles, the grocery chair insists the costs of Covid-19 have been huge. 

He says: “We’ve undertaken huge amounts of cost in trying to do the right thing. We’ve not just been sitting on it.”

Ultimately, as the BRC notes, the decision to repay business rates relief rests with the retailers themselves. There is no legal requirement to do so. 

But morally, customers will see it as the right thing to do and, given the year the sector has had, that in itself may be enough to force the grocers’ hands.