The groceries code adjudicator (GCA) has ordered Tesco to make “significant changes to practices and systems” after she found the supermarket “seriously breached” rules to protect suppliers.
Following an investigation, GCA Christine Tacon said between 25 June 2013 and 5 February 2015 Tesco “acted unreasonably” in delaying payments to suppliers, “often for lengthy periods of time”.
One supplier owed a multi-million pound sum as a result of incorrect pricing by Tesco had to wait more than two years to get paid back.
Tacon, pictured, also had concerns about the supermarket making “unilateral deductions from suppliers” and in some cases causing “an intentional delay in paying suppliers”.
The GCA has told Tesco to stop making unilateral deductions from cash owed for goods supplied and to give suppliers 30 days to challenge any proposed deduction. If challenged Tesco will not be able to make the reduction.
Tesco has also been ordered to:
- Correct pricing errors within seven days of notification by a supplier
- Improve its invoices by providing more transparency and clarity for suppliers
- Train buyers and finance teams on the GCA’s findings
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.”
During the investigation the GCA found delays in payments arising from data input errors, duplicate invoicing, deductions to maintain Tesco’s margins and unilateral deductions resulting from forensic auditing, short deliveries and service level charges.
“The sums were often significant and the length of time taken to repay them was too long,” she said.
Tacon has given Tesco four weeks to say how it plans to implement her recommendations and she will then require regular reports on progress, including data on the number and value of disputed invoices.
Tacon found no evidence that Tesco had required suppliers to make payments to secure better positioning for their products but she did find practices “that could amount to an indirect requirement for better positioning”, including larger suppliers negotiating better placement in response for requests for investment from Tesco and paying to participate in range reviews.
She also found instances of “category captaincy”, where a supplier took the lead in analysing consumer preferences, identifying the best means to meet these and deciding the best way for suppliers to provide the relevant products.
The GCA said she had begun a consultation with the sector as to the acceptability of these practices.
Dave Lewis, group CEO at Tesco, said the company had changed working practices since the 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."
Mark Johnson, associate professor of operations management at Warwick Business School, said: "By delaying payments, firms appear more liquid - or cash rich - and also more profitable if the manipulation is done at certain points in the financial reporting cycle. Retailers such as Tesco are among the most liquid as they can delay payments to suppliers while also receiving payment from customers almost instantaneously.
"It appears that the embattled firm has attempted to financially engineer the appearance of greater profitability by delaying payments to some suppliers. This can have a significant impact upon smaller suppliers who are often paid up to two months later and in some cases significantly longer."