Tesco has been ordered to overhaul its treatment of suppliers after a Groceries Code investigation found the supermarket intentionally delayed payments in order to meet financial targets.
The probe by Groceries Code Adjudicator (GCA) Christine Tacon found ‘serious breaches’ of the legally-binding code, including Tesco making unilateral deductions from suppliers.
Taking in evidence from June 25, 2013 to February 5, 2015, Mrs Tacon found ‘widespread’ delays to payments which affected suppliers ‘on a significant scale’.
In one case a supplier was owed a multi-million pound sum as a result of price changes being incorrectly applied to Tesco systems over a long period. This was eventually paid back by Tesco more than two years after the incorrect charging had begun.
Mrs Tacon said Tesco’s breach of the code was serious due to the varying and widespread nature of the delays in payment.
She said pressure was ’clearly being put on buyers to meet margin targets’.
"When money was not paid back it sat in the account showing as margin so they were achieving their margin targets," Mrs Tacon told a press conference this morning (January 26).
"That was the main driver for not giving it back. It was very much driven by managers trying to achieve their percentage margin targets at key reporting times."
The GCA has used her powers to order the retailer to make significant changes in the way it deals with payments to suppliers.
Her five recommendations include stopping Tesco from making unilateral deductions from money owed for goods supplied.
Suppliers will be given 30 days to challenge any proposed deduction and if challenged, Tesco will not be entitled to make the deduction.
The adjudicator has also insisted the company corrects pricing errors within seven days notification by a supplier.
Tesco has also been told to improve its invoices by providing more transparency and clarity for suppliers and to put its finance teams and buyers through training on the findings of the GCA investigation.
Mrs Tacon said: “The length of delays, their widespread nature and the range of Tesco’s unreasonable practices and behaviours towards suppliers concerned me.
“I was also troubled to see Tesco at times prioritising its own finances over treating suppliers fairly.”
The GCA has set a four week deadline for Tesco to say how it plans to implement the 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.
Mrs Tacon said suppliers had already reported improvements in their relationship with the supermarket since the period under investigation.
She said this was a demonstration of the impact her role was making.
The GCA has been criticised in the past by farmers and other suppliers for ‘not having enough teeth’.
The investigation was launched following complaints associated with an over-profit statement announced by the retailer in September 2014.
Tesco was also investigated by the Serious Fraud Office and the Financial Reporting Council over accounting irregularities that emerged in 2014, resulting in the suspension of a number of executives.
NFU president Meurig Raymond said the union would be ’closely scrutinising’ the retailer’s future behaviour.
"Like many farmers, I am concerned that the GCA’s report only uncovers the impact of Tesco’s behaviour on its direct suppliers; one can only speculate on the implications for those further down the supply chain," added Mr Raymond.
"That is why today I am reiterating our manifesto call for fair, safe and secure food chains based on sustainable business partnerships. Within the fierce competition in the retail sector, this is more important than ever."
NFU Scotland president Allan Bowie said: “The Groceries Code Adjudicator report into Tesco has exposed a culture which is all too often ignorant of the pressures faced by suppliers and producers.
"The report also highlights that the ‘fear factor’ remains and despite shoddy treatment and breaches of the Grocery code, suppliers were reluctant to engage in dispute resolution for fear of further ramifications for their business.
"Tesco will remain the most important purchaser of Scottish and British produce, but if the retailer is to regain credibility then wholesale changes to the way it builds its relationship with suppliers and producers must be on the cards."
Dave Lewis, Tesco group chief executive officer, said: “In 2014 we undertook our own review into certain historic practices, which were both unsustainable and harmful to our suppliers. We shared these practices with the adjudicator, and publicly apologised. Today, I would like to apologise again. We are sorry.
“I am grateful to the Adjudicator for the professional manner in which the investigation has been conducted. We accept the report’s findings, which are consistent with our own investigation.
“Over the last year we have worked hard to make Tesco a very different company from the one described in the GCA report. The absolute focus on operating margin had damaging consequences for the business and our relationship with suppliers. This has now been fundamentally changed.
“In January 2015, we made material changes to our business that addressed the majority of the historic practices referred to in the report. We have changed the way we work by reorganising, refocusing and retraining our teams and we will continue to work in a way which is consistent with the recommendations."