Dave Lewis, group CEO of UK retail giant Tesco, today (January 26) committed to continue working collaboratively with suppliers to further build trusted partnerships after the Groceries Code Adjudicator (GCA) found Britain’s largest supermarket seriously breached the legally-binding Groceries Supply Code of Practice (the Code or GSCOP) – put in place to protect groceries suppliers – by acting “unreasonably” when delaying payments
Read the GCA report on Tesco here.
Making a public apology, Lewis accepted the findings of the GCA’s report, explaining they are consistent with Tesco’s own review of how its works with its 3,000 UK suppliers. That investigation found certain “historic practices’ were both “unsustainable and harmful”. “We are sorry,” he said.
Watch this video of CEO Dave Lewis apologising.
However, while admitting there is still more Tesco can do, Lewis was quick to point out that over the last year the firm has worked hard to make the retailer a “very different company” from the one described in the GCA report. Compared with the period under investigation he claimed the “overwhelming majority” of Tesco’s suppliers are more positive towards the company today.
“The absolute focus on operating margin had damaging consequences for the business and our relationship with suppliers,” he explained. “This has now been fundamentally changed.”
Watch this video about how Tesco is rebuilding trust with its suppliers.
What the GCA found
During the investigation from June 25, 2013 to February 5, 2015, Christine Tacon, the GCA, found Tesco had acted “unreasonably” when delaying payments to suppliers, often for “lengthy periods of time”.
Tacon found delays in payments arising from data input errors, duplicate invoicing, deductions to maintain Tesco margin; and unilateral deductions resulting from forensic auditing, short deliveries and service level charges.
The Adjudicator was concerned about three key issues:
Tesco making unilateral deductions from suppliers.
The length of time taken to pay money due to suppliers.
An intentional delay in paying suppliers, in some cases.
Tacon considered Tesco’s breach of the Code to be serious due to the varying and widespread nature of the delays in payment.
“The length of the delays, their widespread nature and the range of Tesco’s unreasonable practices and behaviours towards suppliers concerned me,” she explained. “I was also troubled to see Tesco at times prioritising its own finances over treating suppliers fairly.”
The Adjudicator also investigated whether Tesco had required suppliers to make payments to secure better shelf positioning or an increased allocation of shelf space in breach of the Code. She found no evidence of this.
However, she was concerned to find practices that could amount to an indirect requirement for better positioning. These practices included large suppliers negotiating better positioning and increased shelf space in response to requests for investment from Tesco, as well as paying for category captaincy and to participate in Tesco range reviews.
As such, Tacon has launched a formal consultation with the sector, involving both retailers and suppliers, to help reach a firm conclusion on whether these practices are acceptable. Tacon has also written to the Competition and Markets Authority (CMA) to ask it to consider the issue of category captaincy, as well as referring evidence that Tesco may have breached CMA rules.
What the GCA requires
Following her report, the Adjudicator has used her powers to order Tesco to make significant changes to practices and systems in terms of the way the retailer deals with payments to suppliers.
Tacon has set a four-week deadline for Tesco to say how it plans to implement her recommendations. She will then require regular reports from the company on progress, including information on the number and value of invoices in dispute as well as the length of time they remain unresolved.
Her five recommendations are:
Stopping Tesco from making unilateral deductions from money owed for goods supplied.
Ensuring suppliers will be given 30 days to challenge any proposed deduction and if challenged Tesco will not be entitled to make the deduction.
Insisting the company corrects pricing errors within seven days of notification by a supplier.
Telling Tesco to improve its invoices by providing more transparency and clarity for suppliers
Requiring Tesco’s finance teams and buyers be put through training on the findings from the Adjudicator’s investigation.
Steps for retailers to avoid falling foul of GSCOP
The Code (GSCOP) is clear in its guidelines for retailer best practice when it comes to supplier payments. Provisions of the Code covered by the investigation into Tesco were:
Paragraph 2: A retailer must at all times deal with its suppliers fairly and lawfully.
Paragraph 5: A retailer must pay a supplier for groceries delivered to that retailer’s specification in accordance with the relevant supply agreement, and, in any case within a reasonable time after the date of the supplier’s invoice.
Paragraph 12: No payments for better positioning of goods unless in relation to promotions.
Download the Groceries Supply Code of Practice in full here.
Changes at Tesco to date
By reorganising, refocusing and retraining its teams, Tesco’s group CEO Lewis explained that the retailer has already changed the way it operates, and pledged to continue to work in a way that is consistent with the GCA’s recommendations.
Indeed, Tacon said she was pleased to note that many suppliers had reported improvements in their relationship with Tesco since the period under investigation.
“Tesco has also kept me informed of changes it is making to deal with the issues,” she said. “This is a demonstration of the impact my role is making. I believe that my recommendations will lead to significant improvements at Tesco and in the sector. ”
To improve the way it works with suppliers and how it runs its business, Tesco explained it has implemented 14 significant initiatives.
New initiatives include Tesco becoming the first UK retailer to publish its payment terms with its suppliers, which it said has resulted in a fair, transparent and consistent approach across its supply base. The move introduced payment terms of 14 days for hundreds of small and medium-sized businesses across the UK.
“We have made a lot of progress, but there is still more we can do,” noted Lewis. “Today our colleagues are empowered to do the right thing for our customers and for our suppliers, and I am extremely proud of the way they have responded over the past year.”
The 14 supplier-related initiatives implemented by Tesco since 2014:
Carried out a comprehensive review of how we work with all our 3,000 supplier partners across the UK.
Reorganised our Product team structure, with clearer objectives to focus on long-term relationships with suppliers and expanded responsibility for stock and ordering, technical, trade planning and space, range and merchandising management.
Built new supplier induction training programmes.
Established a Supplier Network of over 2,500 suppliers to improve communication, share ideas and address common challenges.
Created a Supplier Helpline to deal with invoice queries and other supplier issues in 48 hours.
Started an independent Supplier Protector Line to encourage a ‘speak up culture’ with Tesco’s partners.
Made building trusted partnerships with suppliers a key business performance measure.
Retrained all Product colleagues in the UK on the Groceries Supply Code of Practice.
Updated and relaunched its Code of Business Conduct to all Tesco colleagues.
Relaunched Colleague Protector Line to encourage a ‘speak up culture’ within Tesco.
Changed the way it buys and sells as a business, to focus on the cost price of products wherever possible rather than commercial income.
Reduced the number of ways it calculates commercial income – from 24 to five this year, and targeting three next year.
Changed to measuring sales and profit rather than margin rate, putting the focus on what the company sells rather than what it buys.
Improved invoice management within the business by an independent operations team.