Tesco Rapped by Regulator Over Treatment of Suppliers

  • Retailer apologizes and says it will work to rebuild trust
  • Serious Fraud Office criminal probe still hangs over grocer

Tesco Plc received a rap on the knuckles from the U.K. grocery regulator, which said Britain’s largest supermarket chain prioritized its own finances over treating suppliers fairly in breach of an industry code.

Tesco delayed significant payments on a widespread basis and made unilateral deductions to the money it owed for goods already received, the Groceries Code Adjudicator said in a report Tuesday. The retailer apologized, saying that it accepts the rebuke and will work to rebuild trust with manufacturers.

The findings conclude an 11-month investigation prompted by Tesco’s admission that it overstated profit by 326 million pounds ($465 million.) The GCA investigated whether Tesco’s delaying of payments to suppliers violated industry rules and if the retailer demanded suppliers pay to receive preferential product placement in stores.

The regulator asked that Tesco cease making unilateral deductions in supplier payments, correct pricing errors within seven days of being notified by a supplier and make invoices more transparent. It gave the retailer four weeks to say how it will do so.

Faster Payments

“The most shocking thing in the investigation was how widespread the company’s behavior was,” regulator Christine Tacon said at a press conference in London. “Practically every supplier I spoke with had evidence of delays in payment.”

The situation has improved in the past year, with suppliers noting “a sea change in behavior,” Tacon said.

Tesco has already pre-empted some of the GCA’s recommendations. In October, the company established a new policy that guarantees suppliers are paid faster.

An “absolute focus” on operating margin in the past “has now been fundamentally changed,” Tesco Chief Executive Officer Dave Lewis said in a statement. Certain past practices were “both unsustainable and harmful to our suppliers,” according to the CEO, who has sought to turn around the grocer since joining from Unilever in September 2014.

An “overwhelming majority” of Tesco’s suppliers are more positive toward the company today, compared with the period that was the subject of the GCA investigation, Tesco said.

Tesco shares were little moved by the report, gaining 0.6 percent to 156.55 pence at 11:40 a.m. in London.

While the GCA doesn’t have the ability to fine Tesco, more serious punishment could be handed down by the Serious Fraud Office, which is investigating Tesco’s accounting at a criminal level. Mike Dennis, an analyst with Cantor Fitzgerald, estimates that the SFO could fine Tesco more than 350 million pounds and also demand the company repays hundreds of millions of pounds to suppliers.

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