Blog: Tesco to change the way it pays suppliers

Dean Best | 7 October 2015

Tesco, the UK retail giant, has sought to "simplify" its trade terms with suppliers.

The way Tesco deals with suppliers was brought firmly into the spotlight a year ago when the retailer admitted it over-stated profits after incorrectly booking payments from suppliers.

Yesterday, the grocer announced changes to the way it pays manufacturers. The UK's largest food retailer said it would "no longer use a combination of complex and varied terms" and introduce a "new standard approach", which, it claimed, offered "concessions" for small- and medium-sized businesses.

Tesco said "in the majority of categories" it would offering shorter payment terms to its suppliers than they in turn pass onto their own suppliers. The smallest suppliers will typically be paid 34 days quicker than before, it stated. For all suppliers, the terms refer to the day when they will receive cash and not the day the payment is sent for processing, Tesco added. All changes will be in place by the end of June 2016.

Tesco is also introducing a new "vendor payment scheme", which it claimed provides "a fair and consistent deal for all suppliers, regardless of their size".

Tesco CEO Dave Lewis said: "By introducing a new standardised policy across each category for our larger suppliers, and shorter payment terms for our small and medium suppliers, it will help us to deliver a fairer, more transparent and consistent approach across our supply-base. One of the things that made Tesco great was the little things we did to help our customers. We want to work with our suppliers to get back to innovating on behalf of our customers and these changes will make it easier for us to do that."

Tesco said it is "moving to reduce the number of ways it takes commercial income" from 24 to five. Last year, the retailer revealed it had over-stated profits by GBP263m.

This morning, Tesco reported a 55% drop in operating profit before one-off items to GBP354m for the six months to 29 August, saying it had been "investing for customers and rebuilding profitability in UK".

Like-for-like sales were up 1.1%. Lewis said: "We have delivered an unprecedented level of change in our business over the last twelve months and it is working. The first half results show sustained improvement across a broad range of key indicators."

Analyst reaction was mixed. "Tesco still needs some assistance in the bagging area, but nonetheless looks much healthier than a year ago," Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said.

However, Mike Dennis of Cantor Fitzgerald, said: "Tesco’s interim results, in our view, are disappointing on many levels: across the regions, P&L and balance sheet."

Shares in Tesco were down 1.07% at 190.1p at 09:15 BST this morning.

To see a table Tesco has published to show the number of payment days by category for SMEs, click here.