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The Groceries Code Adjudicator finds Tesco in breach of the Groceries Supply Code

Supermarket shelves Print publication

01/02/2016

On 26 January 2016, the Groceries Code Adjudicator (GCA) released its report on the much anticipated outcomes of the investigation into Tesco’s alleged breaches of the Groceries Supply Code of Practice (the Code). The GCA has announced that Tesco was found to be in breach of paragraph 5 of the Code (delay in payments), but not in breach of paragraph 12 of the Code (better positioning of goods). The GCA will, however, undertake further consultation on practices which may amount to an indirect requirement for a supplier to make payments, in breach of paragraph 12.

Brief Background

The GCA’s investigation into Tesco in relation to practices that may be in breach of the Code was opened in February 2015 after Tesco announced its own enquiries in September 2014 into a profit over-statement of £250 million. As part of the investigation, the GCA reviewed evidence that focused on Tesco’s compliance with paragraphs 5 and 12 of the Code.

Findings

Findings on paragraph 5 – delay in payments

The GCA has found Tesco in breach of paragraph 5 of the Code in relation to payments which were “otherwise than for goods supplied” or where there was any dispute with the supplier over amounts due, with Tesco deducting or deferring payment of money owed to suppliers for goods supplied. The GCA found that this sometimes involved significant amounts being delayed for long periods of time, in some cases up to two years. The GCA has identified the following factors in accounting for the delay in payments:

  • data input errors – the GCA has found evidence that where Tesco has incorrectly inputted data on its own systems, suppliers were consequently being overcharged or underpaid by Tesco;
  • duplicate invoicing – there was evidence of duplicate invoices being issued to suppliers, usually in relation to promotional activities;
  • focus on meeting financial targets – the investigation revealed that a major focus for Tesco’s commercial team during the investigation period was on hitting budgeted margin targets in Joint Business Plans (JBP) negotiated with suppliers. Payments to maintain the margin target were requested regardless of whether planned growth had been achieved and regardless of whether Tesco had delivered on its own JBP commitments. In relation to this, the GCA further found that Tesco knowingly delayed paying money to suppliers in order to improve its own financial position;
  • unilateral deductions made in relation to historic claims (which are deemed unreasonable), also referred to as forensic audit claims;
  • unilateral deductions for short deliveries and service level charges; and
  • unilateral deductions made for other items or unknown items e.g. promotional fixed costs (known as gate fees) deducted for activities that were not carried out, the repayment of which was sometimes significantly delayed.

The GCA found that the breaches were mostly due to:

  • Tesco’s inadequate processes and systems for correcting data errors or incorrect deductions;
  • the apparent reluctance of some Tesco buyers to pro-actively engage in the resolution of payment disputes; and
  • buyers frequently seeking to use money owed to a supplier as leverage in negotiations for future agreements or promotions.
Findings on paragraph 12 – better positioning of goods

The GCA concluded that there was no evidence that Tesco has breached paragraph 12 of the Code by directly requiring suppliers to make payments in order to secure better positioning or increased allocation of shelf space. However, the GCA has raised concerns that the following practices may amount to an indirect requirement for a supplier to make payments that would be in breach of paragraph 12 and may have the potential to have an adverse effect on competition:

  • requests by Tesco for “investment” from suppliers in exchange for benefits to be agreed with the supplier, which may include better positioning or increased shelf space; and
  • payment by suppliers of large sums of money in exchange for category captaincy or participation in a range review.

The GCA intends to undertake a formal consultation on these issues following publication of this report.

Tesco engagement with the Code

Tesco has already indicated that it is making a number of changes to improve Code compliance, including:

  • improvements to its handling of payment disputes with suppliers;
  • the introduction of a Supplier Helpline; and
  • improved internal training and monitoring.

The GCA has indicated that since Tesco has introduced these changes there appears to have been a positive improvement in Tesco’s relationship with its suppliers compared with the period under investigation.

Recommendations

The Groceries Code Adjudicator (Permitted Maximum Financial Penalty) Order 2015, allowing the GCA to impose financial penalties, only applies to breaches of the Code on/after 6 April 2015 and therefore the GCA cannot impose a penalty for Tesco’s breaches of paragraph 5 which took place before that date. The GCA has however made the following recommendations to reduce the likelihood of repetition of Tesco’s non-compliance with paragraph 5 of the Code:

  • Money owed to suppliers for goods supplied must be paid in accordance with the terms for payment agreed between Tesco and the supplier.
  • Tesco must not make unilateral deductions.
  • Data input errors identified by suppliers must be resolved promptly.
  • Tesco must provide transparency and clarity in its dealings with suppliers.
  • Tesco finance teams and buyers must be trained in the findings from this investigation.

Tesco must provide a detailed implementation plan within 4 weeks of the publication of the report and is then required to evidence its response to the recommendations to the GCA on a quarterly basis going forward.

Comment

Whilst the GCA’s report is concerned only with Tesco, it raises relevant issues for all retailers bound by the Code, encouraging them to review and possibly refresh their Code compliance programmes to ensure compliance. This is particularly important now that the GCA has the power to issue fines up to 1% of UK turnover. Suppliers to Tesco will also be given an opportunity to comment further as part of the additional consultation proposed by the GCA.

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