Groceries Supply Code of Practice
The GCA and the Code were introduced following the Competition Commission’s 2008 report on supermarket supply chain practices, which found that some supermarket behaviours adversely affected competition and consumers. The GCA (established under the Groceries Code Adjudicator Act 2013) oversees supermarkets’ compliance with the Code. The Code obliges supermarkets to comply with a number of obligations, some of which closely track the restrictions competition law imposes on businesses with a dominant market position (e.g. paragraph 11 prohibits supermarkets from requiring a supplier to obtain goods from a third party if that third party pays the supermarket in return). The key obligations include:
- dealing fairly and lawfully with suppliers (paragraph 2);
- not varying supply agreements retrospectively (paragraph 3);
- not delaying payments (paragraph 5);
- not requiring contributions to marketing costs (paragraph 6);
- no direct or indirect paymentin exchange for being made a supplier, other than for promotions or where taking a chance on a risky new listing (paragraph 9), or for better positioning or more shelf space (paragraph 12);
- not requiring the supplier to bear the predominant cost of a promotion (paragraph 13);
- avoiding unjustified charges for consumer complaints about a product (paragraph 15); and
- only de-listing for commercial reasons, and on reasonable notice (paragraph 16).
The breach concerned a practice of unreasonably delaying payment to suppliers, with the GCA noting concerns about “the length of the delays, their widespread nature and the range of Tesco’s unreasonable practices and behaviours towards suppliers”, and about Tesco prioritising its own finances over the fair treatment of suppliers. The GCA’s report, which is summarised in her recent ‘special edition’ newsletter, identified three main issues:
- unilateral deductions from suppliers;
- the length of time taken to pay money owed to suppliers; and
- in some cases an intentional delay in payment.
The GCA noted that Tesco had already improved its practices since the period under investigation, and indeed Tesco had ‘self-reported’ to the GCA following an internal review of its supply chain practices. Tesco immediately responded to the GCA’s report to both accept its findings and outline a range of measures implemented with a view to improving supplier relationships.
The GCA also considered whether Tesco had breached the Code’s prohibition on retailers directly or indirectly requiring payment from suppliers in return for better positioning or increased shelf space. While there was no evidence that Tesco had done so directly, Ms Tacon was concerned that certain practices may have amounted to an indirect payment requirement. The GCA will therefore be consulting further on this issue, seeking input not just from Tesco but also from other retailers and from suppliers.
The bad publicity generated by the report notwithstanding, things could have been worse for Tesco had the GCA’s power to fine non-compliant retailers up to 1% of their turnover not been limited to breaches from 6 April 2015 onwards (the
investigation concerned conduct from June 2013 to February 2015). The GCA was therefore limited to making recommendations, to reduce the likelihood of repetition of non-compliance with the Code and provide greater certainty to suppliers that they will be paid on time and that disputes and errors will be resolved promptly.
The GCA’s recommendations in this case (noted below) are a clear steer to Tesco and other retailers on the sort of steps they should be taking to ensure they do not fall foul of the Code and the GCA in future. The importance now placed on compliance was highlighted in recent reports of Asda working with the GCA to ensure discussions with its suppliers about how to keep prices low did not violate any of the Code’s requirements.
Read on for our top tips on how to put in place the rigorous procedures required to mitigate the financial and reputational risks of non-compliance with the Code.
Breaches of the Code
The GCA found that Tesco’s practice of delaying payments was widespread, affecting a broad range of suppliers on a significant scale.
Tesco had breached paragraph 5 of the Code by:
- failing to rectify data input errors, or pay money owed to suppliers as a result of those errors, within a reasonable time;
- failing to reimburse suppliers within a reasonable time for duplicate invoices containing deductions for promotional activities;
- using money owed to suppliers as leverage in negotiations on future agreements or promotions;
- seeking deferral of payments to suppliers, or otherwise delaying payment, in order to maintain margin targets; and
- making unilateral deductions from money owed to suppliers, including in respect of:
- historic underpayments made by suppliers as a result of invoicing errors or omissions, which were identified by forensic audits instructed by Tesco – the GCA found that it was unreasonable to make unilateral deductions for historic claims;
- unilaterally imposing charges for alleged supplier failures to fulfil orders or achieve service level targets, and then unreasonably delaying both in resolving supplier challenges to those charges and in repaying the money;
- charging promotional fixed costs (gate fees), even though the promotion did not take place – the GCA found that any failure to promptly refund such charges was unreasonable.
It was also unfair and unreasonable not to fully engage in attempting to resolve supplier concerns before making unilateral deductions from payments owed to them.
The GCA’s decision to consult further on paragraph 12 of the Code was prompted by practices including requests for investment in exchange for benefits agreed with the supplier, and suppliers paying large sums in exchange for category captaincy or participation in range reviews. The consultation will be published in the near future, with retailers, suppliers, other organisations and individuals all having an opportunity to participate.
The GCA’s recommendations to Tesco were:
- Money owed to suppliers must be paid in accordance with the payment terms agreed with the supplier.
- No unilateral deductions from sums owed to suppliers. Suppliers must be given 30 days’ notice of any proposed deduction, including an explanation of the reason for the deduction by reference to the terms of the supply agreement. If the supplier challenges the deduction within that 30 day period, it should not be made until the challenge is resolved.
- Data input errors identified by suppliers must be resolved promptly. Internal systems and processes should facilitate prompt resolution of disputed invoices, and provide suppliers with a single point of contact for queries which have not been resolved promptly. Pricing errors should be fast-tracked for review and resolved within seven days of notification by the supplier.
- Dealings with suppliers must be transparent and clear, including on the methodology for calculating any money due from suppliers (e.g. for promotional funding, short deliveries, service level charges, customer complaints, forensic audit claims or penalties) so the supplier can better understand, predict and be in a position to challenge any charges. All invoices must use consistent language, and supporting documentation must be provided or made readily available to the supplier. The status of agreements should be clear, and there should be no doubt that targets beyond the supplier’s control, such as on retailer margin targets, are only aspirational.
- Tesco finance teams and buyers must be trained in the findings from the GCA’s investigation after the GCA found that those teams did not communicate properly with each other on issues relevant to the Code.
Tesco will need to provide the GCA with quarterly reports on its progress in implementing these recommendations, including information on the number and value of invoices in dispute as well as the length of time they remain unresolved.
While these recommendations technically only apply to Tesco, other large retailers should be on notice that they should be adopting similar practices with their suppliers. The GCA ranks retailer compliance with the Code in her annual survey (the last set of results is here, at slide 23), and retailers looking to move up the rankings will need to learn the lessons of the Tesco decision. The GCA’s current annual survey will conclude on 29 April.
The GCA also advised that she would be writing to the CMA about category captaincy (inviting it to review the Competition Commission’s previous conclusions in light of the apparently new practice of paying for captaincy), as well as her concerns that Tesco may not be recording all the terms of its supplier agreements in writing as required by paragraph 6 of the Groceries (Supply Chain Practices) Market Investigation Order 2009. Tesco and the wider market may therefore face the prospect of further intervention.
Retailers should take the following steps to ensure they comply with the Code, and mitigate the financial and reputational risks of non-compliance:
- Start at the top – all compliance efforts stand or fall based on whether they are supported (and, crucially, seen to be supported) by senior management. Regular and unequivocal reminders from senior management about both the terms of the Code, and the business’s commitment to compliance, are essential.
- Appoint a Code Compliance Officer – to raise awareness of the Code both internally and externally, and report to internal Compliance and Audit Committees. The GCA expects Code Compliance Officers to be proactive in identifying, pursuing and resolving potential Code issues across the business.
- Encourage and facilitate internal communication of Code issues – proper compliance requires engagement and a joined-up approach from all the business areas to which the Code is relevant (e.g. buyers, finance and marketing may all be affected by the rules against recharging design costs to suppliers). The GCA found that Tesco’s buyer and finance teams were not co-ordinating on Code issues, so were not fully aware of what each other were doing.
- ‘Hardwire’ the Code into supplier agreements – retailers should review their agreements, both standard Ts & Cs and bespoke supplier agreements, to ensure that they reflect the Code obligations (including by being clear and transparent) and that all the terms of each supplier’s agreement are captured in writing. Each supplier should have a copy of their agreement.
- Be clear and consistent with suppliers – if you do not already use standard wording on invoices and other communications concerning payments and charges, consider adopting that to ensure suppliers will always understand what they are being told.
- Review existing supplier payment processes – it is vital to ensure that payments to suppliers are not delayed unreasonably, whether deliberately or just due to systemic failures, inefficiencies or weaknesses.
- Avoid unilateral deductions from money owed to suppliers – give suppliers clear notice and explanations of proposed deductions, and a chance to dispute them before they are imposed.
- Consider an independent complaints procedure – ideally, this should be separate from the buyer who usually deals with the supplier. Tesco has created a Supplier Helpline with the aim of dealing with invoice queries and other supplier issues within 48 hours.
- Review performance against compliance goals – an effective compliance program needs regular reviews of the business’s performance against its key goals. Tesco committed to introduce regular audits throughout the year, and make bi-annual compliance declarations. It also committed to taking disciplinary action against employees responsible for breaching the Code, where necessary.
- Train staff – every good compliance programme requires regular, ongoing training of new and existing staff (particularly senior management, those dealing with suppliers and – as the Tesco case made clear – finance teams) to ensure familiarity with and understanding of their obligations. To be truly valuable, training must never be generic. It should be tailored to the circumstances of the retailer in question, and delivered to different internal audiences in ways that reflect their specific roles, responsibilities and practical experiences.