26th Jan 2016 11:10
LONDON (Alliance News) - The UK's largest retailer Tesco PLC was found to have "seriously breached" a code between supermarkets and suppliers in a report published on Tuesday by the UK government's Groceries Code Adjudicator.
Christine Tacon, who led the report, began an investigation into the retailer last February after it was forced to admit in 2014 that it had overstated its profit by GBP263 million for the first half of its 2015 financial year. This prompted the UK's Serious Fraud Office to launch an investigation into Tesco's accounting practices while also exposing its aggressive treatment of suppliers.
In her report, Tacon found that Tesco breached a legally-binding Groceries Supply Code of Practice to protect grocery suppliers, and "acted unreasonably" when delaying payments to suppliers, often for lengthy periods of time between the period from June 25, 2013 to Febuary 5, 2015.
Tacon raised concerns over three issues: Tesco making unilateral deductions from suppliers, the length of time taken to pay money to suppliers, and in some cases an intentional delay in paying suppliers.
As a result, the supermarket needs to introduce "significant changes" to practices and systems, Tacon said.
First, Tesco must give suppliers 30 days to challenge any proposed deduction and, if challenged, will not be entitled to make the deduction.
Second, Tesco must correct pricing errors within seven days of notification by a supplier.
And third, the retailer has 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 adjudicator's findings.
"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," Tacon said.
However, Tacon did note that many suppliers have reported improvements in their relationship with Tesco since the period of investigation.
The report also found that Tesco had undertaken practices that could amount to an "indirect requirement for better positioning". This 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.
"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," Tacon said, adding that she has decided to launch a formal consultation with the sector to reach a conclusion on whether such practices are acceptable.
Tacon has written to the UK Competition and Markets Authority 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 has now been set a four-week deadline to outline how it plans to implement Tacon's recommendations.
In response Tuesday, Tesco issued a statement saying it accepts the findings and is committed to building trusted partnerships with its suppliers.
"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," Chief Executive Dave Lewis said.
"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," he added.
Lewis took the helm as CEO in 2014 after Tesco revealed its profit overstatement, and has since been working to improve the retailer's relationship with suppliers by simplifying and shortening payment terms.
Shares in Tesco were trading up 0.2% at 155.95 pence on Tuesday morning.
By Karolina Kaminska; [email protected] @KarolinaAllNews
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