Tesco breached Groceries Code on payment delays to suppliers

Groceries Code Adjudicator Christine Tacon has told Tesco to introduce significant changes to practices and systems after finding Britain’s largest supermarket seriously breached a legally-binding Groceries Supply Code of Practice (the Code) to protect groceries suppliers.

During a thorough 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.

Adjudicator Ms 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.

Ms 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.”

Ms 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.

Tesco response to report

Dave Lewis, Group Chief Executive Officer, Tesco responded to the report: “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."

Tenant Farmers Association reaction to report

The Tenant Farmers Association has welcomed today’s report of the Groceries Code Adjudicator, Christine Tacon, which has lifted the lid on bad practice amongst retailers.

TFA Chief Executive George Dunn said “We have been saying for some time that major retailers have been failing to live up to the standards set out in the statutory code of practice for the groceries sector. Such bad practice not only impacts upon suppliers directly but threatens the sustainability of the supply chain which will have long-term implications for domestic consumers, particularly in relation to food”.

“The Adjudicator’s report scratches the surface of bad practice and underlines the need for her to have further powers to investigate the true extent of retailer malpractice. The Government has promised a review of the Adjudicator’s powers and the TFA argues this must be brought forward in the light of today’s report” said Mr Dunn.

“The Adjudicator must have the power of own initiative investigations. Currently the Adjudicator can only act on complaints. In the same way that OFSTED has the powers to investigate school performance on its own initiative on short notice, the same powers should be given to the Adjudicator to investigate code compliance amongst retailers. If retailers were aware that they could be subject to a short notice investigation it should lead to improved practice,” said Mr Dunn.

“The Adjudicator also needs to be given a role to look at the whole of the supply chain. Currently the rules allow for only direct supply contracts to be investigated. Since the vast majority of farm produce passes through processors before hitting supermarket shelves, the Adjudicator is unable to consider the indirect impact of retailer activity on farmers.

We continue to have concerns about the manner in which Tesco secures milk for its vast number of stores and the impact that this has on grassroots dairy farmers. None of this can be investigated under the current rules provided to the Adjudicator. This anomaly needs to be resolved,” said Mr Dunn.

“Finally, whilst not wanting to give the Adjudicator the power to fix prices, the Adjudicator should have powers to investigate and report on the balance of pricing throughout the supply chain to ensure that each of those involved from farmer through to processor to retailer are receiving a fair level of benefit when prices are good or sharing in a fair level of the pain when prices fall. This information will provide much needed transparency which will assist farmers and others in their negotiations with retailers”.

“Whilst low prices on supermarket shelves today might appear to be a good thing for consumers, if we lose a large part of our food production base as a result, in the long term we will all be losers,” said Mr Dunn.