Tesco was slammed yesterday over its relationship with suppliers as the Groceries Code Adjudicator unveiled damning findings from a one-year investigation.
The grocer was said to have “acted unreasonably” by delaying payments to suppliers, with Christine Tacon admitting she was shocked at how “widespread” the practice was across the business. Here are five of the key things we learned from her 60-page report.
1. Numerous factors caused delays in payments to suppliers
The GCA’s investigation found that reasons for delays in payments made from Tesco to suppliers were of a “varying and widespread nature”. A number of factors that caused delays in payments were laid bare in Christine Tacon’s report.
“Numerous instances” of data input errors resulted in suppliers being overcharged or underpaid, but Tesco failed to correct such errors “within a reasonable time”.
Evidence was also found of Tesco issuing duplicate invoices to suppliers and the grocer would “sometimes deduct both invoiced amounts from the total sum it paid to suppliers”.
Tesco was found to make unilateral deductions over historic claims, using third party auditors to review its accounts for historic invoicing errors or omissions where suppliers had underpaid Tesco. Similar unilateral deductions were made over short deliveries and service level charges.
Tacon added that a “major focus” of the commercial team was to hit budgeted margin targets, which Tesco negotiated with suppliers on a periodic basis. She said there was a “reluctance” among some Tesco buyers to “pro-actively engage in the resolution of payment disputes” and concluded that the supermarket giant “acted unreasonably” by using the cash owed to suppliers as leverage in negotiations for future agreements or promotions.
2. Tesco could now face Competition and Markets Authority scrutiny
Although the GCA said Tesco did not breach the code by directly requiring suppliers to make payments in order to secure better shelf positioning or a greater amount of shelf space, the retailer did receive payments of this ilk.
Tacon said this could be “to the detriment of smaller suppliers who cannot offer payments for better positioning, increased shelf space, category captaincy or to participate in range reviews”.
However, she added that the views of retailers and suppliers would need to be garnered before any “firm conclusions” were made about these practices.
Tacon also saw evidence that Tesco may be operating without all of its terms of agreement with suppliers being recorded in writing.
As a result of those two findings, Tacon revealed she would be writing to the Competition and Markets Authority – meaning Tesco could now face scrutiny from yet another regulatory body.
3. Tesco’s actions threatened the financial welfare of suppliers
Decisions to delay payments and make unilateral deductions impacted Tesco’s suppliers to varying degrees.
While larger suppliers told the GCA that these practices had “minimal impact” on their day-to-day liquidity, they had much greater ramifications for smaller suppliers.
Tacon said some suppliers were concerned that they would “breach bank covenants” or be forced to obtain increased loans.
The impact of any delay in payments was amplified by “the importance of the Tesco relationship”. Some suppliers were more heavily dependent on the grocer in order to maintain their current financial position and future prospects.
Tacon said this placed Tesco in an even greater position of power when it came to negotiating deals with suppliers.
4. The investigation is over, but GCA scrutiny is not
Following the publication of her findings, Tacon will require Tesco to provide a “detailed implementation plan” setting out how it will comply with the recommendations made. This will need to be done within the next four weeks.
Going forward, the GCA will also require correspondence from Tesco on a quarterly basis, specifically including an analysis of reasons for invoice errors and evidence that such errors are being reduced, the value and number of invoices currently in dispute, and the average length of time that invoices are in dispute.
Tacon said that Tesco had “already taken steps” to address some issues.
5. Tesco has made strides in rebuilding relationships – but there is more to do
Since launching an internal investigation into its dealings with suppliers, Tesco has already rung the changes reviewing the way it works with its 3,000 UK suppliers.
It has implemented 14 initiatives, including reducing the number of ways in which it calculates commercial income, becoming the first UK retailer to publish its payment terms with suppliers and setting up a supplier helpline.
However, boss Dave Lewis highlighted the fact the grocer remained “on a journey” – and that view was backed up by Tacon’s report.
She said that the “overwhelming majority” of suppliers said that their relationship with Tesco was now “more positive” than it was prior to February 2015.
But the job is far from done. Some suppliers – albeit “a small number” – said they still “experienced difficulties” in their relationships with Tesco, with one in particular claiming the relationship remained a “transactional, conflict based” one.
While Lewis’s work to rebuild trust and transparency with Tesco’s suppliers is undoubtedly on the right track, there are a few more twists and turns still to be navigated.