Analysis: Watchdog’s Tesco judgement gives hope to suppliers
It has been an embarrassing week for Tesco.
On Tuesday, supermarket watchdog the Groceries Code Adjudicator (GCA) published findings of its much-anticipated investigation into the retailer.
Many hoped if damaging practices with suppliers were uncovered, a supermarket would finally, and officially, be held to account. As the GCA’s first investigation, all eyes were also on adjudicator Christine Tacon to prove her mettle.
Analysis
Ms Tacon did not hold back, announcing Britain’s biggest retailer had “seriously breached” the legally binding Groceries Code, which sets out rules on how the UK’s biggest retailers should behave with suppliers.
See also: Tesco under fire again over dairy contract claims
In the period covered by the investigation (25 June 2013 to 5 February 2015), Tesco had delayed payments to its suppliers worth millions of pounds.
Some suppliers’ cashflows were significantly affected and they feared they might breach bank covenants or have to take out bridging loans.
The time taken to chase delayed payments had an even bigger effect on businesses, said Ms Tacon.
One supplier had to send 40 emails before Tesco paid a figure of less than £5,000.
A lucky escape for Tesco?
The supermarket is now legally obliged to make changes recommended by Ms Tacon.
So far, so good. But many suppliers will lament that Tesco could not be fined, due to a two-year government delay in handing the GCA its full powers.
Given the strain on suppliers and the sums involved, it is hard to imagine the retailer would have escaped a fine if the power was there.
See also: Tesco profit overestimate raised to £326m
The report concluded a “considerable proportion” of the retailer’s profit overstatement last year (£326m) was attributed to money associated with the supply of goods. This is under investigation by the Serious Fraud Office.
Watchdog is starting to prove its worth
According to Ms Tacon and others in the industry Tesco has since started to clean up its act and suppliers are noticing improvements.
This includes simplifying the way it buys goods and measuring its profits by what it sells rather than what it can save from suppliers.
This suggests the GCA is starting to have an effect. Add to that the ability to fine, the scrutiny Tesco is under and the damage done to its reputation and retailers may think a little harder about their buying practices.
This, farming hopes, will add weight to the importance of having a strong adjudicator when the government reviews the body in March.
What did Tesco do wrong?
The supermarket breached the Groceries Supply Code of Practice by delaying payments to suppliers through:
1. Deducting money from suppliers without their consent
2. Intentionally delaying payments and taking too long to pay suppliers
3. Duplicating invoices and incorrectly inputting data
4. Deducting money from suppliers to prop up Tesco’s margins
Although not a breach of the code, evidence was found amounting to indirect demands for better shelf positioning. The adjudicator has opened a consultation with suppliers and retailers to look into the matter.
Evidence also suggested the retailer may have breached competition rules by not including all its terms in contracts with suppliers – this has been referred to the Competition and Markets Authority (CMA).
What must Tesco do now?
Tesco is now legally obliged to:
1. Pay money owed to suppliers for goods supplied in line with terms agreed and not make deductions without their consent
2. Give transparency and clarity to suppliers on money owed
3. Train its finance teams and buyers on findings from the investigation
4. Provide a detailed plan of how it will implement the above and evidence of this every quarter
What the experts say
Ruth Mason, chief food chain adviser, NFU
“Delays in payments and unilateral deductions have had a significant effect on direct suppliers to Tesco, particularly smaller businesses.
“Although the effect on the farming supply base cannot be directly measured, we believe this pressure will have been pushed all the way back to farm.
“The GCA has played a vital role in uncovering these ill practices and we will support her to continue to make changes.
“Tesco have contacted us directly to set out how it has improved its practices with suppliers. We will scrutinise these and ensure its actions are upheld.”
Duncan Swift, head of food advisory team, Moore Stephens
“The good news is the reality of poor treatment of food suppliers by supermarket buyers is being publicly recognised. It is likely all the other supermarkets will be looking at this report to similarly clean up their acts.
“Tesco is cleaning up its act, and yes there is some evidence of improvement. However, some suppliers have reported there is an implicit delist threat from Tesco’s aim to reduce the number of suppliers it works with.”
Sian Edmunds, partner, Burges Salmon
“I am surprised the GCA found no direct evidence of suppliers forced to make payments for better positioning of goods, as my clients tell me: ‘If you want to get your brand in, you have to buy space.’
“My impression from clients is that Tesco has improved in the past year or so, but there is still a long way for all the retailers to go in their cultures and practices.
“I would like to see the training requirements in the code extended beyond the buying teams into the commercial and legal teams so that there is a wider cultural change across the businesses, including among personnel who draft and enforce contracts.”
Allan Bowie, president, NFU Scotland
“In its first major investigation, the GCA has identified abject failings by the UK’s biggest retailer in the way it treats those who supply it with goods.
This excellent work only strengthens NFU Scotland’s belief that the powers for the adjudicator and her team must be strengthened, and their ability to examine the whole supply chain – and not just the relationship between a supermarket and a processor – is necessary if we are to build trust and transparency from the farmgate to the shop shelf.