Monday’s trading update from Tesco revealed a fairly substantial £250 million black hole which caused the company to close 11.6% down that day equivalent to almost £2.2bn of its value. This shows how trust can have a very tangible effect on value. Whilst this ‘accounting error’ affects consumers, it is interesting to see the differing dynamic between consumer concerns and corporate concerns with regard to value. During last year’s horsemeat scandal Tesco’s share price fell only 1% the day after trading. Subsequently from January 16th when the scandal broke to April 1st Tesco shares rose by 10 per cent. This shows how minimal an impact consumer opinion can have on a share price although this is perhaps due to the widespread nature of the scandal, which also impacted most of its competitors.
Mistrust is widespread across industries with many consumers not knowing who to trust, this has led to a rise in challengers in industries which were previously stalwart oligopolies. Challengers in banking, energy and to some extent the grocery sector shows how consumers are beginning to vote with their feet and abandon the traditional in favour of relative ‘upstarts’ such as First Utility, Virgin Money, Zopa and Lidl.
The recent referendum in Scotland also showcases the value of trust. With one YouGov poll which indicated there may be a yes vote causing shares in RBS and Lloyds to fall by 2.8% and 3.3% respectively, other non-financial companies were effected with SSE’s shares losing 2.7%, this all combined to pull the FTSE down. This was the result of a lack of trust, the lack of faith that Alex Salmond and a Scottish government could bring the stability required to an independent Scotland.
The Edelman Trust barometer, an annual global survey, shows how consumers are increasingly doubting those who were once seen as the pillars of the country. Business, whilst still doubted by almost half those surveyed, is trusted more than Government with the gap seeming to widen in UK and USA. Consumers seek out their own truth with search engines becoming the most trusted form of media.
The share price falls of GSK and Tesco over the past year which are over 9% and 47% respectively show how vital trust is not just from the investment market but from consumers themselves. In part these upstarts in well-established industries are fuelled by a desire to obtain a better quality service. Complacency at the top means that companies are all too quick to forget about placing an importance on the trust of the consumer and a clear understanding of changing customer needs. The trust of consumers is central to what builds companies into the large successful market dominating companies. Once reaching that pinnacle it is all too common to see that same company shift to a market focus on profit rather than those who drive that profit. Whilst company bonuses and dividends may rise in the short term there significant vulnerability when sales start to fall as consumers look for cheaper, more innovative and customer centric alternatives. The old adage is true “people don’t buy from people they don’t trust”. Unlike the relative short-lived effects of the horsemeat issue, the loss of 47% share value in the last 12 months looks set to continue in a scandal that may herald a permanent shift in retail power.