The trade is in uproar over Tesco’s hardball tactics to secure a new fulfilment fee. Is it breaching GSCOP? And what’s the endgame?

Tesco’s bombshell request for suppliers to pay Amazon-style fulfilment fees for the use of its online and Booker wholesale arms has gone down like a lead balloon with the trade.

Since The Grocer broke the news last Thursday, suppliers and trade bodies have spoken out, and this week Groceries Code Adjudicator Mark White called for companies to come forward with evidence, amid claims the move is in breach of GSCOP.

So, what’s going on and how will this standoff play out?

Tesco says it needs to bring in the new charges to help shoulder the cost of serving customers as its operations become bigger and more complex.

The charges will be 12p per unit on branded goods and 5p per unit on own-label, although Tesco has said its “smallest suppliers” will be exempt.

Instructed to access Tesco’s supplier portal for further information, suppliers were also led to believe the charges would be brought in within 48 hours, with a start date of 13 March, though Tesco has furiously backtracked, saying the move is voluntary, with no fixed start date, and the 48 hours only applies once an agreement is reached.

Since the backlash, Tesco has also promised no suppliers will be delisted if they refuse to sign up to the new fees, but its original letter said that “without introducing a supplier contribution, we would need to take additional decisions on range optimisation, differentiated price and trade plans”.

The sums involved are unsustainable, one company MD says: “A supplier delivering a product with a 50p unit invoice price faces an online charge equivalent to 30% of the sales value. Clearly that is not viable. Even with an invoice price of £1 the cost is 15%, so for these suppliers there is actually only one choice: not to agree and if necessary accept a delist.”

Tesco HQ

Groceries Code Adjudicator Mark White called for companies to come forward with evidence

Another company boss adds: “In 27 years dealing with retailers I’ve never seen anything quite like it. You are talking vast sums of money here for nothing in return.”

An ex-supermarket CEO adds: “It’s outrageous, and needs a sustained campaign against it. The letter is beyond parody.”

David Sables, CEO of negotiations specialists Sentinel Consultants, says there’s going to be an en masse pushback. “None of our clients think it’s acceptable.”

What’s surprising the trade is “the apparent lack of thought that has gone into it,” as one company MD puts it.

Sables agrees. “My understanding is that even Tesco’s buyers didn’t know about this.”

“This is a return to the sort of hardball antics we used to see 15 years ago from the supermarkets. Personally I think it is a strategic and tactical mistake.”

Breaching GSCOP?

But is it actually a breach of GSCOP? “Despite it being handled very badly, this doesn’t break GSCOP,” Sables says.

Yet the Adjudicator himself says Tesco’s letter raises both “specific and general” areas of potential concern, namely whether it is effectively a “pay to stay” request, which is banned under GSCOP, and whether it breaks the code for not treating suppliers fairly.

A leading source says the case has parallels to former adjudicator Christine Tacon’s investigation into The Co-op, which resulted in the retailer being ordered in 2019 to introduce changes to its governance, after it was found to have failed to provide reasonable notice to suppliers of decisions to delist products, and varied supply agreements imposed unilaterally, without reasonable notice.

“When I looked at what Tesco has done and the similarities with the Co-op case I just couldn’t believe it,” says the source. “Yet Tesco has a CCO in David Ward who is a s***-hot company lawyer. They have got advisers who understand the minute detail of GSCOP and how to address it.”

John Noble, director of the British Brands Group, believes Tesco’s move runs a “coach and horses” though the principles of GSCOP.

“What we are seeing is Tesco trying to pass on costs that as a point of principle must lie with the retailer. The cost incurred in Tesco’s RDCs and Booker warehouses, that is the job of the retailer.

Tesco Delivery (1)

Row shows ‘that online grocery delivery in its current format is not commercially viable’

“The Competition Commission’s report contains lots of references to retailers passing on ‘unexpected costs’ and talks about practices against suppliers that are essentially a side-effect of competition between retailers, an aspect present in fulfilment fees,” he adds.

Shore Capital analyst Clive Black, previously hyper-critical of GSCOP’s lack of teeth, believes Tesco’s move, and the subsequent intervention of the Adjudicator, has suddenly given GSCOP more power, claiming shareholders are closely watching to see the potential harm to supplier relations.

“We do not believe this semi-public pronouncement, through GSCOP, was the desire of Tesco, far from it. However, it was pretty much inevitable.

“In doing so, Tesco has given GSCOP a relevance that it could not have dreamt about.”

The row also “lays bare the fact that online grocery delivery in its current format is not commercially viable,” says Richard Harrow, a partner at IPLC.

“IGD estimates that across Europe retailers lose £10 for every £100 order. Tesco, with a dominant share in the channel, is more exposed. Of the three parties in supplier chains, suppliers, retailers and consumers, who will ultimately pay the cost for the convenience of online shopping?

“I cannot see consumers in the current climate paying more. But suppliers, already battling with CPI increases at historically high levels, cannot absorb any more costs, either. Some own label suppliers with open book agreements with Tesco will merely pass the cost back into the model.”

And what of claims that Tesco is merely taking a page from Amazon’s playbook? Martin Heubel, founder of Consulterce and a former senior category manager at Amazon, predicts Tesco will have major problems trying that on.

“Invoicing suppliers for delivery and stocking costs is certainly something Amazon is very well known for and that already works for many brands.

“However, brands selling on Amazon do not pay trading terms and fulfilment fees at the same time.”

Tesco’s demands: parody or paradigm?

“Today we are writing to notify you of our intent to introduce a new fulfilment fee. We intend this fee to be applied across the whole Tesco Group, with initial rollout to the Tesco UK and Booker businesses…

This fee has been carefully calculated… and is essential as we work to fulfil more orders for our customers across the Group and we are asking suppliers to engage on this request and to support us.

Without introducing a supplier contribution, we would need to take additional decisions on range optimisation, differentiated price and trade plans.”

Source: Tesco email to suppliers

Ulterior motive

But he’s not alone in thinking it’s merely an opening gambit. “Tesco likely understands most suppliers will outright reject this request. I don’t expect most large multinationals to comply. But this may not be Tesco’s intention. Instead, it may be a fishing initiative to find out which suppliers are willing to agree to this fee and, in a second or third step, extend this acceptance to relationships with new suppliers and future trade negotiations with larger brands.

As Sables puts it: “If 5% of suppliers do 5% of what they ask for, that’s worth lots of millions.

“There will also be those suppliers who will see an opportunity here. Tesco will be so keen to prove it can win in this area they will be prepared to accept a lot of losses.

“That’s why I believe a smart supplier will be prepared to say we support this but you will have to justify it.”

That of course leaves suppliers with yet another, even greater fear: if Tesco succeeds in rebalancing the books this way, which other supermarkets and wholesalers will be waiting in the wings to follow suit?