Has Tesco been exploiting its suppliers? GCA regulator 'must have teeth' to act

- Leadership - Feb 05, 2015

The UK’s grocery watchdog is to investigate Tesco’s relationship with suppliers, the latest setback for the retailer in what has been the most disastrous period in its long history.

Christine Tacon, the The Groceries Code Adjudicator (GCA), says that there is a “reasonable suspicion” that the country’s largest supermarket chain has been breaching industry codes of practice.

She also said that such malpractice was not confined to isolated incidents and that each involved “a number of suppliers and significant sums of money”. The watchdog has the power to fine companies up to one percent of annual turnover, though it will not be able to punish Tesco for past breaches.

Delayed payments to suppliers and heightened payments from suppliers looking for prominent shelf space are among the activities to be investigated, leading one to ask whether Tesco has been exploiting partners and making them pay more for better store positioning.

This is not the first financial difficulty faced in past months, for its H1 2014 profits were overstated by some £263 million, leading to the suspension and investigation of a number of senior executives.

Tacon wants evidence to be submitted by all parties to her by April 3. Tesco said: “We will continue to cooperate fully with the GCA as she carries out her investigation and welcome the opportunity for our suppliers to provide direct feedback.”

The GCA will investigate activity from June 2013, when the watchdog was created, to February 2015, with the enquiry expected to take several months to complete.

David Noble, Group Chief Executive of the Chartered Institute of Procurement & Supply (CIPS) said: “We welcome the GCA’s investigation but firm action on late payment is long past its sell by date. Unchecked retailers have felt free to abuse their power for far too long and suppliers across the UK are owed billions of pounds in unpaid invoices.

“If there has indeed been wrong-doing by Tesco, the regulator must have the teeth to force change. But this remedial action is tantamount to closing the stable door once the horse has bolted. For too long the retail sector has felt able to operate according to its own norms and practices without regard for best practice in procurement and supply chain management. To really sort out this mess at source, there needs to be clear accountability and higher standards within the retail procurement industry as a whole.

“Regulatory action or no, if the UK’s retail supply chains are run without the right people in place and for the sole purpose of reducing costs and squeezing suppliers, it will only be a matter of time until the next scandal comes to light. We must take this opportunity to change course now.

“How many more scandals will it take for us to realise that the solution is to have qualified and competent professionals managing supply chains? At CIPS we will continue to call for increased professionalism, accountability and responsibility. Enough is enough.”

Mark Johnson, of Warwick Business School, is Associate Professor of Operations Management and researches supply chains. He added: “The GCA’s regulations should go a long way to ensuring that practices in the supply chain become more equitable. However, the regulation is only recent and Tesco cannot be fined, only investigated. I will be fascinated to see if Tesco can learn to deal with their supply base fairly after years of inequality and adversarial behaviour. After all, can you teach an old dog new tricks?

READ MORE: UK Supermarket Wars: Will Tesco Ever be the Same Again?

“With Tesco suffering in the battle with the discounters, and the cost of running a retail operation now so super-efficient, where can a firm that requires profit go? The option is - unfortunately - to the supply chain where they can seek price reductions for increased profit, receive payments for favourable shelf position or indirectly influence profit by improving their liquidity by delaying payments.

“But at the root of all of this it is not just Tesco. It’s the shareholders who require dividends and the customers who want low prices. Caught in this crossfire are the suppliers who, in many cases, are not powerful enough to fight back.”

New Tesco CEO Dave Lewis is trying to revive the company’s public image, calling on the services of revered marketers BBH to turnaround its dwindling reputation

Like what you see! Signup for our weekly newsletter