Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Every Little Hurts.

Tesco's Slide
The stock fell to the lowest since 1997 this year
Source: Bloomberg data

That's the conclusion from the report into Tesco's dealings with its suppliers by Christine Tacon, the regulator responsible for ensuring Britain's big supermarket chains don't abuse the companies that provide them with products.

Her report into Tesco -- which in October 2014 said it had overstated profit by 263 million pounds ($374 million) by overestimating the money it received from its suppliers -- is damning.

Tesco prioritized its own finances over treating suppliers fairly, a breach of a government-backed code of conduct that mediates relations between supermarkets and their suppliers, the watchdog said.

Tesco acted "unreasonably" in delaying payments to suppliers, Tacon said. The breaches to the code were "serious" due to the "varying and widespread nature of the delays in payments," the regulator said.

But Tacon's report didn't hurt as much as it could have.

For a start, she isn't fining Tesco. The groceries watchdog didn't have the power to impose penalties on companies when she began her investigation in February last year. As of April, she can fine companies as much as 1 percent of U.K. sales, or 350 million pounds in the case of Tesco -- but can't apply that power retrospectively.

That's not the case in the investigation that the Serious Fraud Office is carrying out into Tesco's profit overstatement. If charges are brought in its criminal probe, then there could be financial penalties. Mike Dennis, an analyst at Cantor Fitzgerald who tracks Tesco, estimates that these could amount to 500 million pounds.

Meanwhile, Tesco has also spent much time and money trying to improve its relations with suppliers. Measures include simplifying the way that terms are calculated and speeding up payments to smaller ones. Tacon noted many suppliers had reported improvements in their relationship with Tesco.

Dave Lewis, Tesco's CEO, accepted the report, and again apologized for the retailer's behavior (which took place before he took over). The pressure on his position was already lessening after the retailer reported holiday sales that beat estimates, a sign his turnaround is delivering. The shares, which have rebounded from the 18-year low set low earlier this month, were up 1.2 percent in London trading today.

Easing Decline
Tesco's like-for-like U.K. sales excluding VAT and fuel
Company

But still there are broader implications for Britain's supermarkets.

The watchdog found Tesco didn't require suppliers to make payments to secure more space, or a more prominent position on supermarket shelves. That's good, because doing so would have been a breach of the code.

She did, however, find practices that could amount to an indirect requirement for payment for a better position. These practices include contributions to help Tesco maintain its profit margins or payments to be the lead supplier in certain categories.

Tacon is concerned that these may breach the code and smaller suppliers, which lack the financial muscle to compete, may be losing out.

She has notified Britain's antitrust regulator of her findings and plans to open a formal consultation to see if other supermarkets are using similar tactics. That could make Tesco's run-in with its suppliers a bigger headache for the wider industry.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net