The Grocery Code Adjudicator launched a probe into Tesco‘s supplier payments today (5 February). Given Tesco has already taken moves to address issues in its supplier dealings, this investigation could appear to be more symbolic than consequential. However, with calls for regulation of supplier payments starting to mount in the UK, the attention it is sure to draw could nevertheless prove significant, Katy Askew suggests.
Late last year a GBP263m (US$424.6m) black hole was uncovered in Tesco’s accounts after the books were allegedly manipulated by bringing forward payments from suppliers and delaying costs. The accounting scandal placed Tesco’s relationship with its suppliers centre stage, with growing concern over practices that could amount to supply chain bullying. Since then, a number of investigations into Tesco’s practices have been launched, including enquiries from the Financial Conduct Authority and the Serious Fraud Office.
This morning Christine Tacon, the UK’s Grocery Code Adjudicator, announced she too would launch an official investigation into the issue. Tacon said there was “reasonable suspicion” the retailer has breached the Grocery Supply Code of Practice by delaying payments to suppliers.
The probe will focus on delays in payments associated with: short deliveries, including penalties; consumer complaints; invoicing discrepancies; deductions for “unknown” or “un-agreed” items; incorrect gate fees for promotional costs; or deductions for historic promotions that had not been agreed. The Adjudicator will also consider instances where suppliers were required to make payments for better shelf positioning that were unrelated to a particular promotion.
As Tacon notes herself, this is the first investigation launched by the GCA – an untried arbitration mechanism. “It is a significant step for the GCA…. I have applied the GCA published prioritisation principles to each of the practices under consideration and have evidence that they were not isolated incidents, each involving a number of suppliers and significant sums of money.”
The news met with some skepticism. As Shore Capital analyst Clive Black notes: “The GCA probe, coming as it does after [Tesco] has made announcements to the market on over-statement or profits and the prior FCA probe that has been superseded by the SFO investigation, feels very much like self-justification by an organisation that has talked much but not actually done anything of note in practical terms to our minds.”
A significant question mark hangs over whether the GCA’s extended enforcement powers – including the ability to issue fines for up to 1% of sales – would be applied to this case. Tesco’s alleged misconduct occurred before the GCA’s powers were augmented, after all. The GCA did not respond to requests for clarification of the issue.
It is also worth noting that Tesco has already taken measures to adjust the way it interacts with the companies that supply it. Earlier this month, Tesco – under new CEO Dave Lewis – said that it is adopting new guidance governing so-called “commercial income” (payments required from suppliers) and associated year-end cash management. “We are reshaping the relationships with our suppliers,” Lewis explained.
As it works to build trust and transparency in its supply chain, Tesco is likely looking at how to simplify its complex system of payment calculations, currently based on various performance targets and supplier penalties, Conlumino’s George Scott told just-food at the time. “They have been well-known for operating a very complex system with regard to supplier payments,” he observed.
It would seem the GCA has launched an investigation into practices that Tesco has already changed. This seems rather akin to closing the stable door after the horse has bolted.
There are nevertheless two areas where the GCA investigation could have significant consequences.
The first is the possibility that the probe could be broadened. The GCA has issued a call for suppliers to come forward with evidence. Interestingly, the GCA said it was focused on Tesco but hinted it could possibly look at other retailers where evidence points to more widespread poor practice.
“If during the course of the investigation evidence is presented to the GCA which indicates that the same practices have been carried out by other designated retailers, consideration will be given to extending the scope of the investigation to include them,” the GCA said in something of a warning shot across the bows of other UK grocery retailers.
The second is the probability that, depending on the outcome, we could see an increase in calls for the UK government to step in and regulate supplier payment terms. As our pages highlighted last week, moves from retailers and large food manufacturers to extend payment terms to suppliers have prompted calls for more stringent oversight of how and when payments are made.
At the start of January, a UK government-backed plan requiring companies to reveal how long it takes to pay suppliers every three months was revealed. Later in the month, a cross-party parliamentary group was established to tackle the issue. MP Debbie Abrahams, who hosted the group, said poor payment practices were “as unethical as tax evasion”.
“It’s simply a case of big businesses using smaller businesses as a credit line by applying bullying tactics that are unfair and have the knock-on effect of stifling growth in the economy,” she insisted.
Speaking today in response to the GCA announcement, Tracy Ewen, managing director of UK-based financial advisory firm IGF Invoice Finance, voiced concerns over the impact of delayed payment terms. “The intense cash flow pressures that these firms face should be enough to push the government into taking a stronger regulatory stance about the abuse of power by some of the UK’s larger companies,” Ewen stressed. “If nothing changes, we may see small companies fold unnecessarily. The macroeconomic impact of this could have damaging repercussions for the economy as a whole.”
The practice of balance sheet engineering through extended payment terms is gaining more traction as an issue in the public eye. This fresh investigation gives the press more fodder to hang headlines around. Increased and widespread public outcry would mean the possibility of regulatory intervention becomes more likely.