Tesco Admits Likely Supplier Mistreatment

This week started off with new reports from the U.K. that its largest retailer, supermarket chain Tesco, has admitted to likely mistreating its suppliers, months after the Groceries Code Adjudicator announced an investigation into allegations of late payments and other mismanaged finances.

In its annual report, Tesco briefly noted that there have likely been instances during which the company breached the Grocery Supply Code of Practice, a 2009 document issued by industry regulators that outlines how corporate buyers in the grocery sector must treat their suppliers.

“Regrettably, we have concluded that there have been a number of instances of probable breaches of the Code which fall short of the high standards we expect to uphold in our dealings with suppliers,” Tesco’s report concluded. Reports from The Telegraph noted that these remarks were made in “fine print” at the end of the company’s announcement.

While subtle, Tesco’s own admission of possible breaches of federal code could lead to significant backlash from authorities that are already investigating the company for supplier mistreatment. Last February, the GCA announced a probe into the corporation following its September 2014 profit overstatement. Both the Serious Fraud Office and the Financial Reporting Council are also investigating the situation. In the wake of the scandal, Tesco vowed to revise its supply chain practices.

The investigation follows suspicion from authorities that this financial mismanagement is a direct result of unfair payment practices with Tesco suppliers, allegations of which first appears last September. What’s more, authorities revealed that they have evidence that these mishandlings “were not isolated incidents, each involving a number of suppliers and significant sums of money.”

The GCA’s ongoing investigation includes inquiries into evidence and allegations of invoice discrepancies, including claims of duplicate invoicing, as well as pricing and discounting discrepancies.

In a Tesco announcement this month, the corporation also revealed that it had received 18 complaints in the last year related to the Grocery Supply Code of Practice, though 17 of those complaints have reportedly been resolved with the supplier.

Not The First Time

Tesco is hardly the first major conglomerate to be accused of supplier mistreatment. Late last year, fellow U.K. grocer Premier Foods was accused by several of its suppliers for unfair business practices, with one supplier claiming that the company forces Pay and Stay tactic in which suppliers are required to pay an annual investment to fund growth plans. Premier Foods, however, defended the practice as one that yields positive benefits for both sides of the transaction.

The allegations coincided with recent findings from the Federation of Small Businesses, which found “alarming evidence” that one in five U.K. suppliers is bullied by its large corporate buyers.

But the issue is far from a U.K.-only problem. Major Australian grocery chain Coles, for example, was hit by regulatory crackdowns following claims the company misled suppliers in a “formulaic way.” Home furnishing retailer IKEA was forced on the defensive in 2012 when it was the target of similar allegations from its suppliers in China, while more recently, Target’s Canadian operations have been the subject of legal action following reports that the company failed to compensate its suppliers after going out of business in the nation.

The Power To Sanction

While these events often make headlines, some critics argue that regulators are not sufficiently cracking down on late payment problems and other supplier mismanagement issues, positioning major corporate buyers in a too-big-to-fail position. The conglomerates may have to deal with bad PR, legal issues, and possible regulatory scrutiny, but are unlikely to be forced out of business. The small suppliers, however, are stuck with the bill, and supplier mistreatment threatens their ability to survive.

Reports of Tesco’s acknowledgement of breaching supplier handling regulations come just days after the U.K.’s Association of Chartered Certified Accountants criticized government officials for their approach to combating late payments. The government should start from scratch, the ACCA argued, and combat the source of the late payments problem, but just the symptoms.

“With a new government in place, we now have the perfect opportunity to stamp out our culture of late payment by taking a fresh look at the causes,” said ACCA spokesperson Andrew Leck.

Some of this criticism is joined by others that argue the U.K.’s so-called Prompt Payment Code does little to deter buyers from paying their suppliers late, and is a mere self-regulating, empty promise to fairly treat suppliers.

The latest developments with Tesco could ease criticism and reveal how authorities are taking a proactive effort to crack down on supplier mishandling thanks to the GCA’s ongoing investigation of the case.

On the other hand, the matter could do the opposite, considering the GCA does not (yet) have the power to actually fine or sanction the company in question. Instead, the authority only has the ability to issue public recommendations.

That is slated to change, however, as the GCA will be enacted with new powers that allows the regulator to issue fines of up to 1 percent of a company’s annual turnover. For now, the GCA said it will do what it can to fight Tesco’s alleged regulatory breach.

“My sanctions are to issue legally binding recommendations on their process and how they should behave in the future,” said GCA Adjudicator Christine Tacon in a recent interview with The Guardian. “I can require them to name and shame – take out adverts in terms of what they have done. At this point I don’t have financial penalties because that part of my powers has not yet come into legislation.”

And with the backing of both the SFO and the FRC’s own Tesco cases, suppliers may soon be headed for a victory that promotes their fair financial treatment in the U.K. and abroad.