The government’s Groceries Code Adjudicator (GCA), Christine Tacon, has today ordered Tesco to introduce “significant” changes to its payment systems and practices following an investigation that covered the trading period from 25 June 2013 to 5 February 2015.
Tesco said it accepts the findings of the GCA report, adding it has already undertaken a “comprehensive review” of how it works with its 3,000 UK suppliers and implemented 14 initiatives to improve the way it runs its business (see Tesco’s full response below).
Profit over-statement
The investigation – the first since the role of the Adjudicator was established - followed a trading announcement made by Tesco in September 2014 in which it reported an earlier £250m ($356) profit over-statement.
Tacon today (January 26) said areas of concern included Tesco making unilateral deductions from suppliers; the length of time taken to pay money due to suppliers; and that in some cases there was an intentional delay in paying suppliers.
During the investigation she found delay in payments as a result of data input errors; duplicate invoicing; deductions to maintain Tesco margin; and unilateral deductions resulting from short deliveries and service level charges.
Incorrectly applied price changes
“The sums were often significant and the length of time taken to repay them was too long,” Tacon said, giving the example of one supplier who was owed millions of pounds as Tesco had incorrectly applied price changes over a long period. This was paid back by Tesco more than two years after the incorrect charging had begun.
Tacon only has the power to impose a financial penalty on breaches to the Code occurring on or after April 6 2015, but has ordered the retailer to change the way it deals with payments to suppliers, giving five recommendations:
- Money owed to suppliers for goods supplied must be paid in accordance with the terms for payment agreed between Tesco and the supplier
- Tesco must not make unilateral deductions, must give suppliers at least 30 days to challenge any proposed deduction, and provide the supplier with an explanation of the proposed deduction
- Data input errors identified by suppliers must be resolved promptly
- Tesco must provide transparency and clarity in its dealings with suppliers, including clearly explaining in the supply agreement the methodology for calculating any money due from suppliers, whether for promotional funding, short deliveries, service level charges, customer complaints, forensic audit claims or penalties
- Tesco finance teams and buyers must be trained in the findings from the investigation
“The length of the delays, their widespread nature and the range of Tesco’s unreasonable practices and behaviors towards suppliers concerned me,” she said. “I was also troubled to see Tesco at times prioritizing its own finances over treating suppliers fairly.”
Improvements in relationship
She claimed her recommendations would deal with the “weaknesses” in Tesco’s practices, adding that “many suppliers” had reported improvements in their relationship with Tesco since the period under investigation.
Tacon has given Tesco four weeks to report back on how it plans to implement her recommendations. The retailer will then have to give regular reports on its progress, including information on the number and value of invoices in dispute as well as the length of time they remain unresolved.
Payments for shelf positioning
The Adjudicator also investigated whether Tesco had required suppliers to make payments to secure better shelf positioning or increased shelf space. She found no evidence of this but did find practices including 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.
“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,” she added.
Tacon today announced she had launched a formal consultation with retailers and suppliers to help her decide whether these practices are acceptable.
'We are sorry': Tesco responds to GCA report
Tesco has said it will continue to work “collaboratively with suppliers to further build trust” following the publication of the Groceries Code Adjudicator’s report today (January 26):
Tesco Group Chief Executive Officer 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 apologized. Today, I would like to apologize 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."
Publishing payment terms
Tesco said it had implemented “14 significant initiatives to improve the way it works with suppliers and how it runs its business” following a comprehensive review. New initiatives, said Tesco, included becoming the first UK retailer to publish its payment terms with its suppliers, and setting up a helpline for suppliers to solve any issues which might arise, within 48 hours.
“We have made a lot of progress, but there is still more we can do. Today our colleagues are empowered to do the right thing for our customers and for our suppliers, and I am extremely proud of the way they have responded over the past year,” Lewis added.