Tesco paid suppliers late to improve own financial position
Supermarket giant Tesco deliberately paid its suppliers late, many of them significantly smaller companies that can easily fold because of cash flow problems, the supermarket Ombudsman has revealed. It also made several invoicing errors which favoured its financial position, and dragged its feet on paying the supplier money owed because of those errors, sometimes by up to 24 months.
An ombudsman is an official who represents the interests of the public.
While Tesco was making mega-sales of £64 billion, it deliberately deferred paying money it owed to suppliers – many of these suppliers were making barely more than £100,000. The supermarket bully’s business practices have been laid bare following the publication of a report by the Grocery Code Adjudicator.
According to Christine Tacon, the Grocery Code Adjudicator, the UK’s biggest supermarket chain seriously broke the industry’s code of conduct to protect supermarket suppliers.
How many small companies went to the wall because they became Tesco suppliers?
Some Tesco payments 24 months late
In her report – Groceries Code Adjudicator: Investigation into Tesco plc – Ms. Tacon wrote:
“I also found extensive evidence that where payments were otherwise than for goods supplied or there was any disagreement over amounts due, this resulted in Tesco deducting or deferring payment of money owed to suppliers for goods supplied.”
“Sometimes this involved significant amounts that were delayed for long periods of time. Even in circumstances where a debt had been acknowledged by Tesco, on occasions the money was not repaid until over 12 months later with some amounts taking up to 24 months to be repaid.”
Tesco Plc, which is already being investigated by the Serious Fraud Office (SFO) regarding alleged accounting irregularities to the tune of £250 million, has apologized for deliberately paying suppliers late, and admitted that its actions harmed them.
Numerous cases of data input errors
Ms. Tacon said she saw several instances when data input errors by the supermarket giant into its system resulted in suppliers either being overcharged or underpaid.
These data input errors were not rectified within a reasonable time and Tesco also failed to pay money it owed to suppliers as a result of these errors within a reasonable time.
The Adjudicator found that the frequency and scale of these issues resulted in business practices which she described as ‘unfair’.
Christine Tacon, the UK’s Groceries Code Adjudicator was surprised at how widespread Tesco’s practice of deferring payment to suppliers was. (Image: assets.digital.cabinet-office.gov.uk)
The investigation also found evidence of duplicate invoices being sent to suppliers, often relating to promotional activities.
Tesco used to sometimes deduct the two invoiced amounts from the total sum it had paid to suppliers.
On some occasions, the supermarket giant even failed to rectify these errors and the supplier was not repaid for Tesco’s mistake within a reasonable time.
Tesco obsessed with meeting financial targets
Ms. Tacon said it was clear from the evidence she looked at that Tesco’s commercial team was ultra-focussed on meeting budgeted margin targets.
A percentage margin target was a major element of several of the JBPs (Joint Business Plans) which Tesco negotiated with suppliers on a periodic basis.
Ms. Tacon wrote:
“Payments to maintain the margin target were requested from suppliers by Tesco regardless of whether the planned growth had been achieved and regardless of whether Tesco had delivered on its own JBP commitments.”
“I found that the direction being given to Tesco’s buying team as to the status and enforceability of JBP targets was contradictory and unclear.”
Ms. Tacon saw internal Tesco emails where staff were told to get agreements with suppliers so that the supermarket could defer payment in order to temporarily help the retail giant improve its margins.
She also saw internal Tesco emails suggesting that no payment should be made before a specific date so that a forecasted margin could be met.
Ms. Tacon wrote:
“I found that Tesco knowingly delayed paying money to suppliers in order to improve its own financial position.”
Unilateral deductions made regarding historic claims
Ms. Tacon said she received evidence of unilateral deductions (deductions made without consulting the other party) for historic claims, also referred to as forensic audit claims.
The supermarket giant used third-party auditors to review its accounts for historic invoicing omissions or errors that would provide evidence that suppliers had previously underpaid Tesco.
These were then claimed even when suppliers thought they had made payments to ‘close’ previous financial periods.
Ms. Tacon wrote:
“I found that unilateral deductions from suppliers were made based on historic claims and these resulted in delay in payments to suppliers. Unilateral deductions for historic claims are unreasonable.”
Cultural factors contributing to payment delays
Ms. Tacon found that one of the major cultural factors contributing to payment delays was the apparent reluctance of a number of Tesco suppliers to pro-actively engage in resolution of payment disputes.
On several occasions, Tesco did not even try to resolve supplier concerns before unilaterally deducting money from them.
Ms. Tacon wrote:
“I found the delay that resulted from a failure by Tesco to fully engage in resolving difficulties to be unfair and unreasonable.”
“Buyers frequently sought to use money owed to a supplier as leverage in negotiations for future agreements or promotions. I found that Tesco acted unreasonably when seeking to bring the resolution of debts into other commercial negotiations and delaying payment of monies owed until other negotiated terms were agreed.”
A Tesco contract a dream come true or the kiss of death?
Writing in the Telegraph, Ashley Amstrong explains what happened to Mike Jessop and his wife. They had already re-mortgaged their house twice in order to launch their Moo Free chocolate company.
When they got a call from a Tesco buyer enquiring about supplying Easter eggs and chocolates for advent calendars, they thought at last the stars had lined up in their favour.
However, it soon became clear that rather than stars from the sky, Tesco’s business was more like the kiss of death.
After receiving no payment from the retailer for six months, they had to take out a personal loan to pay staff wages.
At first, the Jessops though the Tesco lot were just a bunch of incompetent idiots, until they began to find out that this was how many suppliers were treated.
Report damaging for Tesco’s prospects
The details of this latest report are bound to have damaging consequences for the retailer, with stockbrokers talking about a mega-fine by the SFO of at least £500 million.
In a public statement, Dave Lewis, who has been Tesco’s Group Chief Executive Officer since September 2014, 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.”
Video – Tesco deferred payments to suppliers ‘widespread’