Tesco illegally deducted millions of pounds in payments from suppliers so its under-pressure buyers could hit profit targets as the supermarket giant went into decline, according to an investigation by Groceries Code Adjudicator Christine Tacon.
The retailer also systematically delayed payments owed to food and drink companies, in some cases by more than two years, to artificially inflate its margins.
As she published her much-anticipated report in Tesco’s buying activities, Tacon ordered the retailer to make “significant” changes to its practices and systems to stop further breaches. However, she was unable to fine the retailer – leading some experts to claim the report is “toothless”.
Tacon said she had found “widespread” evidence relating to Tesco making unilateral deductions from suppliers and delaying payment of money owed to companies, in some cases deliberately.
Her report covered the period 25 June 2013 to 5 February 2015. In her conclusion, she has ordered Tesco to stop unilateral deductions and give suppliers 30 days to challenge any proposed deductions. She has also barred Tesco from making deductions if challenged by suppliers and is calling on Tesco to correct any pricing errors within seven days of notification by a supplier and to provide more transparency in its invoices. Tesco staff will also have to be put through training on the findings.
“One supplier was owed a multimillion-pound sum as a result of price changes being incorrectly applied to Tesco systems over a long period. This was eventually paid back more than two years later.”
Crucially, powers for Tacon to fine retailers up to 1% of their turnover for such breaches of the Code came in too late (in April 2015) for Tesco to be hit, though it is facing a separate inquiry by the Serious Fraud Office into the activities that led to a £326m black hole in its accounts in 2014.
Today’s report found Tesco’s buying teams used joint business plans with companies as an excuse to deduct huge sums from suppliers. “I have received evidence that a number of suppliers made margin payments to Tesco of over £1m,” said Tacon. One supplier was billed £800,000 for one half-year period, while another was hit by a unilaterally deducted seven-figure sum.
Tacon also found Tesco “knowingly delayed paying money to suppliers in order to improve its financial position”.
Many companies were forced to wait many months for payments over £1m while “one supplier was owed a multimillion-pound sum as a result of price changes being incorrectly applied to Tesco systems over a long period.
“This was eventually paid back more than two years later.”
Tacon, who has given Tesco four weeks to explain how it will put plans in place to meet her recommendations, also found Tesco’s buying operation systems to be riddled with errors, including “numerous instances where data input errors resulted in suppliers being overcharged or underpaid”.
“(Tacon) has called on the Competition & Markets Authority to consider a sector-wide investigation into whether payments from large suppliers are ensuring they get prime space in supermarkets”
The Adjudicator said she had found “no evidence” to back up another element of the investigation, which considered if Tesco had required suppliers to make payments for better positioning on the shelf.
However, she said practices were found that amounted indirectly to the same thing, including Tesco’s biggest suppliers negotiating better positioning in response to requests from the retailer, as well as paying for “category captaincy” during range reviews.
As a result, she has called on the Competition & Markets Authority to consider a sector-wide investigation into whether payments from large suppliers are ensuring they get prime space in supermarkets.
Tesco said it accepted Tacon’s findings but stressed it was now a much changed company.
“I am grateful to the Adjudicator for the professional manner in which the investigation has been conducted,” said CEO Dave Lewis. ”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.”