The lack of documentation and effective regulation makes the food supply chain an easy target for fraud and rogue trading.
That's the view of Duncan Swift, Grant Thornton's head of Food and Agribusiness Recovery Group.
Swift, an outspoken critic of supermarket buyer power, was speaking in the wake of an alleged £3m bribery scandal involving John Maylam, a potato buyer at Sainsbury's, and Greenvale operations director David Baxter. The pair were bailed by City of London Police last week on suspicion of corruption and money laundering.
Although fraud was not commonplace, Swift said he had seen several examples of retrospective discounting and payments for listings.
The incident is "further evidence of the degree of buyer power", said Swift. Rogue trading, be it complicitly or illegally, "is happening in the food supply chain, and particularly on commodity and own-label products", he added.
The most common example of buyers abusing their power was retrospective demands for payments after contracts have been signed, a practice due to be outlawed under the Competition Commission's new Supermarkets Code of Practice. These may include contributions for shelf space, product listings or marketing and promotion.
He said supermarkets needed to place tighter compliance control over their buyers, as well as make their bonus criteria more sophisticated. "Many buyer bonuses are partly calculated according to the total 'supplier contributions' the supermarket receives in that buyer's category, with retrospective rebates being one of the many contribution sources," he said. Frauds involving a collusion between buyer and supplier are particularly difficult to spot in any supply chain, but especially so in food where there is little supply documentation, a poor audit trail and little effective independent regulation, Swift added.
Another source said fresh food and other commodities were the most easily targeted sectors, as intense competition at supplier level would give rogue buyers more opportunity to find a supplier prepared to make illegal payments.
Sainsbury's said the supermarket was an "innocent victim" . Nobody else at the retailer is thought to be under suspicion. It contacted police after being informed of the situation by Greenvale holding company Produce Investments, a spokeswoman added.
Greenvale said it had uncovered financial irregularities during auditing. A source close to the company added that a number of payments were being investigated, rather than a one-off payment.
The case was an example of "money being extorted by the buyer to retain the status quo", rather than a company bung to win the contract, the source added. Investigations were ongoing at Greenvale, with a number of staff suspended and then reinstated, the source added.
Maylam, who has been suspended, is a middle management potato buyer, and gained public recognition from commenting on the positive impact of celebrity chef Jamie Oliver on vegetable sales.Retrospective rebates and buyer bonuses
What's the significance of retrospective rebates? The supermarket buys at an artificially inflated price. The retrospective rebate is then given by the supplier before any payment of the inflated price. This has been made easier with some supermarkets pushing payment terms to 60-90 days.
Does the supermarket lose out in all of this? At the trading level it is no worse off as the inflated price is reduced to the normal price level before payment is made. But depending on when buyer bonuses are made the chain ends up worse off as it pays higher bonuses than it should.
Why would the buyer get a bigger bonus if he hasn't made his chain any more money? It is difficult for net category profitability to be addressed in isolation, so broader, more readily available KPIs are used.