5th Feb 2015 10:54
LONDON (Alliance News) - Tesco PLC on Thursday became the subject of another investigation related to its profit overstatement as the UK's newly-empowered Groceries Code Adjudicator said it will launch a probe after concluding it has sufficient reason to suspect the retailer has breached the Groceries Supply Code of Practice.
UK Business Secretary Vince Cable last week tabled measures in Parliament, passed by MPs, which will give the Groceries Code Adjudicator powers to fine supermarkets in the UK that breach the Groceries Code in their relationships with their suppliers.
The adjudicator, Christine Tacon, said she had made the decision to launch an investigation into Tesco after considering information submitted regarding practices associated with the FTSE 100-listed supermarket's profit overstatement in September 2014.
The move makes the adjudicator the latest in a slew of regulators to launch investigations into Tesco related to its profit overstatement. The Financial Reporting Council, the accounting watchdog, is probing Tesco's statements for the 2012, 2013 and 2014 financial years, while the Serious Fraud Office is also looking into its accounting practices.
Tacon has discussed the practices with Tesco and now needs further information from direct suppliers and others in order to decide what action to take.
"This is the first investigation I have launched and it is a significant step for the GCA. I have taken this decision after careful consideration of all the information submitted to me so far," said Tacon.
The investigation will focus on two potential breaches of the code and is set to take place over the next six to nine months and the adjudicator has called for evidence to be submitted by April 3. The probe will cover Tesco's conduct from June 25, 2013 to February 2015.
Under the first potential breach, the adjudicator will probe the existence and extent of practices at Tesco which have resulted in delays to payments made to suppliers. This will include short deliveries, consumer complaints and invoicing discrepancies. It will also cover deductions for unknown or un-agreed items, deductions on promotional fixed costs which were incorrect, and deductions related to historic promotions which had not been agreed.
Under the second breach, the investigation will focus on practices by which suppliers have been required to make payments for the better positioning of goods within Tesco stores which are not related to any promotion activity.
Shares in Tesco were up 0.1% to 229.85 pence on Thursday.
The investigation into Tesco is the first undertaken by the adjudicator since it was empowered last week. Under the plans outlined by Vince Cable, the adjudicator has the power to impose fines on the UK's largest supermarkets of up to 1% of their annual UK revenue. Along with Tesco, this includes J Sainsbury PLC, Wm Morrison Supermarkets PLC and Asda Ltd, which is owned by US retailer Wal-Mart Stores Inc.
The penalties will depend on the seriousness of the breach of the code of conduct, and the new measures will sit alongside existing powers to issue supermarkets with recommendations to improve their future conduct and to 'name and shame' companies that breach the code.
The new powers for the adjudicator came after a report published in January by insolvency specialist Begbies Traynor Group PLC found the escalating price war among big UK supermarkets and discounters has put many smaller food retailers and suppliers at risk of going under.
The Red Flag Alert report from Begbies for the fourth quarter of 2014 found the UK food retailing industry experienced one of the sharpest increases on record in instances of 'significant' financial distress in all sectors monitored. The number of businesses considered to be struggling significantly increased to 4,552 in the quarter, up 58% from the 2,878 categorised this way in the fourth quarter of 2013.
Small food retailers and suppliers have been the hardest-hit casualties of the ongoing price war among supermarkets in the UK, as Tesco, Sainsbury's, Asda and Morrisons attempt to cope with the competition from discount retailers Aldi and Lidl. The supermarkets have been cutting prices and, as a result, have been squeezing suppliers' margins and elongating payment terms.
Shore Capital, however, reckons any material fine for Tesco is unlikely to emerge from the adjudicator's investigation. It claims the investigation into Tesco looks like a case of self-justification by an organisation "that has talked much but not actually done anything of note in practical terms to our minds".
Shore says the adjudicator's fining powers were not in place when Tesco announced its profit overstatement and argues the investigations by the FCA and the Serious Fraud Office, not to mention the supermarket's attempts to revive its fortunes, are more important news for the business.
By Sam Unsted; [email protected]; @SamUAtAlliance
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