This article was first published in Comp Law Blog, February 2016 

In a hard-hitting report Christine Tacon, the Groceries Code Adjudicator (the “GCA), has laid bare the extent of the commercial pressures exerted by Tesco on its suppliers.

The report found that Tesco breached the Groceries Supply Code of Practice (the “Code”) by deliberately delaying payments to suppliers and unilaterally paying less than was due in an attempt to meet its own financial targets.

Interestingly, the GCA also suggested that there may now be grounds to revisit some issues which do not currently fall within the scope of the Code such as ‘category management’.

What is the Code? – and the GCA?

The Code is intended to ensure that the UK’s largest supermarkets treat their suppliers fairly. It applies to all retailers with a UK annual turnover exceeding £1 billion; currently: Aldi, Asda, Co-operative Group, Iceland Foods, Lidl UK, Marks & Spencer, Morrison, Sainsbury, Tesco, and Waitrose.

The Code followed a series of investigations which initially started in 1999. The investigations were conducted by the Office of Fair Trading (OFT) and the Competition Commission (CC), both now subsumed into the Competition and Markets Authority, who looked into the workings of competition in the UK groceries market.  After various false starts in regulating the sector, including an earlier voluntary code, the statutory Code was introduced and the GCA was given the job of enforcing it. The Tesco report follows the first GCA investigation under the Code.

Profits pressures?

The enquiry followed a trading update by Tesco on 22 September 2012 that said it had “identified an overstatement of its expected profit for the half-year, principally due to the accelerated recognition of commercial income and delayed accrual of costs…the Board believes that the guidance issued on 29 August 2014 for the Group profits for the six months to 23 August 2014 was overstated by an estimated £250m.”

What did the GCA find?

The GCA’s findings span 25 June 2013 until 5 February 2015 and deal with delayed payments by Tesco to its suppliers and requests by Tesco to its suppliers for payments for preferential positioning of products.

Delay in payments

The Code requires a retailer to pay a supplier for products in accordance with the contractual terms agreed between them and in any event within a reasonable time after the date of the invoice.

Tesco was found to have systematically delayed payments, affecting a broad range of Tesco suppliers on a significant scale.

The GCA found extensive evidence that Tesco had deducted money owed to suppliers or deferred payments, sometimes for significant sums, for between 12 and 24 months. One supplier was owed several millions of pounds which Tesco took two years to refund. The GCA was particularly critical of internal Tesco emails which encouraged staff to defer payments to suppliers in order to help Tesco’s margins. The GCA also considered unilateral deductions for historic claims to be unreasonable.

Tesco was also found to have requested payments from suppliers, under Joint Business Plans (JBPs), to maintain target margins whether or not Tesco had achieved its own commitments under the JBPs. The GCA considered that any unilateral deductions based upon JBPs to be unacceptable.

Better positioning of goods

The Code provides that there should be no payments for better positioning of goods – unless in relation to promotions.

The GCA uncovered indirect practices which could circumvent the prohibition on paying for better, or increased, shelf space. For example, requests by Tesco for “investment” in exchange for better positioning or increased shelf space, and large payments by suppliers in exchange for category captaincy or participation in a range review.

The GCA is concerned that smaller suppliers are being “priced out” of captaincy, and range reviews, and that this may be adversely affect competition amongst suppliers. The GCA has indicated that she will write to the CMA on this issue.

Potential impact of the report

The report is likely to re-emphasise the importance of fairness in the way large retailers approach their dealings with suppliers. This has been at the heart of the Code since its adoption, and this critical report will ensure that its importance cannot be overlooked. The importance of the Code is also now further underlined by the new fining powers granted to the GCA in April 2015, which were not available in respect of the Tesco investigation.