The Groceries Code Adjudicator (the GCA) has concluded her first ever formal investigation and yesterday published a report finding that Tesco committed widespread and serious breaches of the obligation on retailers, enshrined in the Groceries Supply Code of Practice (the Code), to pay suppliers within a reasonable period of time. Although the option of imposing a financial penalty was not available to the GCA in this case, she made recommendations to Tesco and signalled her intention to consult further. She has also contacted the Competition and Markets Authority to flag certain changes in market practices over recent years, particularly with regard to payments for category captaincy positions and for range review participation, which raises the prospect of further scrutiny of the sector.

The GCA opened her investigation in February 2015 in order to establish whether Tesco had breached obligations under the Code in relation to delays to payments made to suppliers (Code paragraph 5) and also payments made by suppliers to secure more shelf space or better shelf positioning outside of promotional periods (Code paragraph 12). Throughout 2015 the GCA gathered a large volume of evidence from Tesco and from its suppliers and the final report was published yesterday.

1. Factual findings in respect of Code paragraph 5 (delays to payments)

The GCA found that Tesco paid many of its invoices for the supply of goods promptly. However, she also found extensive evidence that Tesco deferred or deducted payments, particularly where the payments did not relate to the supply of goods, or where the sums were disputed. For example, the GCA found evidence of:

  1. Difficulties and delays in recovering:
    • Sums paid to Tesco as a result of data inputting or invoicing errors (including errors by the suppliers themselves);
    • Unilateral deductions made by Tesco in order for it to reach JBP margin aspirations or in respect of short deliveries, failure to meet agreed service level targets, customer complaints, or historic debts uncovered by forensic auditors.
  2. Deliberate deferring of payments to suppliers in order to improve margin performance in the current reporting period.

The GCA found that these issues were widespread, that the delays were sometimes very long and that the sums involved were often substantial. For example, the GCA saw evidence relating to payments of hundreds of thousands, and in some cases millions, of pounds. Some repayments were not made for nearly 24 months and other suppliers simply gave up on ever being repaid. 

2. Findings in respect of the causes of the payment delays

The GCA found the delays in payments to suppliers to be the result of poor internal administration and inadequate systems within Tesco, but also Tesco's behaviour and practices, which the GCA sometimes found to be unfair and unreasonable. For example, the GCA cited a cultural reluctance to engage with suppliers to resolve payment disputes and evidence of Tesco prioritising its own finances and margin aspirations over fairly repaying monies owed to suppliers or using acknowledged debts as a bargaining tool during negotiations. In one case, the GCA saw an internal Tesco document listing methods for meeting half-year targets, which included "not paying back money owed". 

3. Factual findings in respect of Code paragraph 12 (shelf allocation and positioning)

The GCA did not find evidence that Tesco had directly required suppliers to make payments in return for an increase in the allocation of shelf space or for better shelf positioning. The GCA also considered whether, in accordance with her previously stated views as to the correct interpretation of a "requirement" for the purposes of paragraph 12, Tesco had indirectly required suppliers to make payments of that kind, by requesting such payments where the supplier understood that its shelf positioning or allocation would deteriorate if it did not agree to the request, but she concluded that Tesco did not do so.

On the other hand, the GCA noted that Tesco sometimes asked suppliers for investment and that some suppliers would, in return for that investment, sometimes request better shelf positioning or more shelf space. The GCA will now consult on whether such arrangements amount to an indirect requirement for payment, which breaches the Code.

4. Next steps and broader implications

The GCA has made a number of recommendations to Tesco, for example suggesting that it should not make unilateral deductions, and she has required Tesco to produce a detailed implementation plan as well as quarterly updates in future. The GCA has also referred to the Competition and Markets Authority a concern that not all of the terms governing Tesco's agreements with suppliers are recorded in writing.

However, the GCA also intends to take action that will have broader implications for the sector, both retailers and suppliers alike. For example, many larger suppliers will have a keen interest in the outcome of the proposed consultation on whether a retailer breaches the Code by agreeing to shelf space or allocation commitments requested by a supplier in return for routine investment, which the GCA fears might have an anti-competitive impact by favouring larger suppliers, and some may wish to contribute to that consultation. Similarly, the GCA's decision to write to the Competition and Markets Authority regarding substantial payments being made to secure category captaincy positions, and also to consult on payments being made to retailers to secure participation in range reviews, both of which she fears may be detrimental to smaller suppliers, may also attract attention in the grocery sector, raising the prospect of further enforcement action or regulatory changes in future.