Groceries code adjudicator reveals findings from investigation into Tesco’s treatment of suppliers
Christine Tacon, the Groceries Code Adjudicator (GCA), has today revealed the findings of her investigation into allegations that Tesco breached the Groceries Supply Code of Practice (GSCOP).
She has told Tesco to introduce significant changes to its practices and systems after finding that the company seriously breached the legally-binding code designed to protect groceries suppliers.
During the investigation covering the period from 25 June 2013 to 5 February 2015 she found that the retailer had acted unreasonably when delaying payments to suppliers, often for lengthy periods of time.
The Adjudicator was concerned about three key issues: Tesco making unilateral deductions from suppliers, the length of time taken to pay money due to suppliers and in some cases an intentional delay in paying suppliers.
She considered Tesco’s breach of the Code to be serious due to the varying and widespread nature of the delays in payment. The Adjudicator has used her powers to order the retailer to make significant changes in the way it deals with payments to suppliers.
Her five recommendations include stopping Tesco from making unilateral deductions from money owed for goods supplied. Suppliers will be given 30 days to challenge any proposed deduction and if challenged Tesco will not be entitled to make the deduction.
The Adjudicator also insists that the company corrects pricing errors within seven days of notification by a supplier.
Tesco has also been told to improve its invoices by providing more transparency and clarity for suppliers and to put its finance teams and buyers through training on the findings from the Adjudicator’s investigation.
Tacon said: “The length of the delays, their widespread nature and the range of Tesco’s unreasonable practices and behaviours towards suppliers concerned me. I was also troubled to see Tesco at times prioritising its own finances over treating suppliers fairly.
“My recommendations will deal with the weaknesses in Tesco’s practices during the period under investigation.
“I am pleased that many suppliers have reported improvements in their relationship with Tesco to me since the period under investigation. Tesco has also kept me informed of changes it is making to deal with the issues. This is a demonstration of the impact my role is making. I believe that my recommendations will lead to significant improvements at Tesco and in the sector.”
She launched the GCA’s first investigation in February following the Tesco announcement on its profit over-statement and the receipt of information from the retailer and the sector. The information available to the Adjudicator gave her a reasonable suspicion that the retailer had breached areas of the Groceries Supply Code of Practice.
During the investigation she found delay in payments arising from data input errors, duplicate invoicing, deductions to maintain Tesco margin; and unilateral deductions resulting from forensic auditing, short deliveries and service level charges.
Tacon said: “The sums were often significant and the length of time taken to repay them was too long.
“For example one supplier was owed a multi-million pound sum as a result of price changes being incorrectly applied to Tesco systems over a long period. This was eventually paid back by Tesco more than two years after the incorrect charging had begun.”
The GCA has set a four-week deadline for Tesco to say how it plans to implement her recommendations. She will then require regular reports from the company on progress, including information on the number and value of invoices in dispute as well as the length of time they remain unresolved.
The Adjudicator also investigated whether Tesco had required suppliers to make payments to secure better shelf positioning or an increased allocation of shelf space in breach of the Code. She found no evidence of this.
However, she was concerned to find practices that could amount to an indirect requirement for better positioning. These practices included large suppliers negotiating better positioning and increased shelf space in response to requests for investment from Tesco, as well as paying for category captaincy and to participate in Tesco range reviews.
She said: “I am concerned that as a result of these practices the purpose of the Code may be circumvented to the detriment of smaller suppliers who cannot compete with payments for better positioning, category captaincy or to participate in range reviews.
“I have decided to launch a formal consultation with the sector, involving both retailers and suppliers, to help me reach a firm conclusion on whether these practices are acceptable.”
Tacon has also written to the Competition and Markets Authority (CMA) asking them to consider the issue of category captaincy as well as referring evidence that Tesco may have breached CMA rules by operating without all its terms of supply agreement being in writing – a factor that may have contributed to payment disputes and delays.
Responding to the release of the GCA's report, Tesco's Cheif Executive, Dave Lewis, said: “In 2014 we undertook our own review into certain historic practices, which were both unsustainable and harmful to our suppliers. We shared these practices with the Adjudicator, and publicly apologised. Today, I would like to apologise again. We are sorry.
“I am grateful to the Adjudicator for the professional manner in which the investigation has been conducted. We accept the report’s findings, which are consistent with our own investigation.
“Over the last year we have worked hard to make Tesco a very different company from the one described in the GCA report. The absolute focus on operating margin had damaging consequences for the business and our relationship with suppliers. This has now been fundamentally changed.
“In January 2015, we made material changes to our business that addressed the majority of the historic practices referred to in the report. We have changed the way we work by reorganising, refocusing and retraining our teams and we will continue to work in a way which is consistent with the recommendations."
The findings from a separate investigation by the Serious Fraud Office (SFO) into the Tesco accounting scandal are also expected to be released in the coming days. Mike Dennis, analyst at Cantor Fitzgerald, has said the outcome of the SFO investigation could lead to Tesco being fined 1% of its UK grocery sales, or £350m on £35bn of sales, and having to repay hundreds of millions of pounds to suppliers for “arbitrary unjustified cash payments” it demanded from them. In addition, there might be individual prosecutions of executives involved in the scandal and punitive fines that could total bring the cost to £500m.
In a note entitled ‘A Question of Gross Misconduct’, Dennis said the “scope of the fraud is far greater and we believe covers more categories than first suggested”. He estimates that the amount Tesco collected from supplier payments grew by £1.7bn over five years to £2.4bn in February 2014 and accounted for 30% of the retailer’s cash profits.
The outcome of the investigations is expected to hit Tesco’s share price, although it remains unchanged this morning.