Embattled CEO Dave Lewis to unveil his strategy in January to ‘build a new Tesco’ but warns of ‘a long journey’ for shareholders

Battered UK supermarket group Tesco has warned that profits will be substantially lower than expected, its fifth profits warning in 12 months.

Shares in the group tumbled as much as 16% in early trading to 156p – a 14–year low – and shares in other supermarket groups were also under pressure, with Morrisons falling 6% and Sainsbury’s down 4%.

The grim announcement shows the crisis at Britain’s biggest retailer is far from over and underscores what has been a disastrous year for the group. Tumbling sales and profits have coincided with a criminal investigation into accounting irregularities, and the resignation and sacking of a number of senior executives.

The group’s chief executive, Dave Lewis, who took over on 1 September, said he expected trading profit for the year ending February 2015 would be no more than £1.4bn. This is substantially below market expectations, which ranged from £1.8bn to £2.2bn, and a huge fall on the £3.3bn profits recorded last year. However, he warned investors there were no quick fixes and short-term profits would suffer.

Lewis, who marks his 100th day in the job on Tuesday, said he was building “a new Tesco” that would eventually reward shareholders. “We need to get back to core principles. We need to improve the service and availability and that is what we are doing.”

Under pressure to show the City how he will revive the UK’s No 1 supermarket, Lewis promised to present his strategy to investors on 8 January. At its peak, £1 in every £7 spent in the UK went into a Tesco till, but customers are deserting the retailer in droves for cheaper rivals.

Restoring Tesco’s fortunes would be “a long journey”, Lewis said, but “there are reasons to be quietly optimistic”. The company has cut prices on 1,000 core groceries and has seen “encouraging volume growth” as a result. He insisted his plans would pay off in the long-run, despite short-term pain for shareholders. “It is a difficult time for the business. None of us would argue with that. But there is a recognition we are doing the right thing for the business.”

In a bid to improve customer service, the retailer has taken on 6,000 more staff since mid-October, and despatched 6,000 existing head office staff to spend one day a fortnight on the shop floor to get a taste for the sharp end of the grocery business. Lewis has decided not to lay off people after Christmas, a traditionally slack time for retailers, as part of this customer service drive. “Certain activities help you manage profits, but can have a detrimental impact on how you serve customers,” he said. “What we are trying to do is deliver better for customers … I believe that is the foundation from which we can build a new Tesco, which is financially attractive to shareholders.”

All 900 Tesco staff who handle negotiations with suppliers have been retrained, in the wake of the accounting scandal that involved moving forward supplier payments to paint a more flattering picture of the store’s finances.

Tesco is being investigated by the Serious Fraud Office over the scandal after it admitted it had overstated its profits by £264m, leading to the resignation of the Tesco chairman, Sir Richard Broadbent, and the departure of a number of senior executives.

Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said Tesco’s latest trading update provided further ammunition for those sniping about the group’s strategy. “Amidst the accounting mishap, the revolving door in the boardroom and an unforgiving attack from the discount retailers, investors have simply lost interest in waiting for a recovery story which still seems some way off.”

He pointed out that even before today’s announcement, Tesco’s share price had fallen by 44% over the past year, compared to a 2% rise for the wider FTSE100. The food retailer index was down 0.6%, according to veteran analyst Nick Bubb, reflecting investor concern that Tesco’s rivals will be forced to embark on their own price-cutting campaigns.