The relationship between the large multiple retailers and suppliers has always attracted publicity in the business and academic literature. Much of the views expressed are usually negative, especially about the behaviour of the retailers.
Because of their power and dominance, they are in a position to leverage pressure on suppliers to fall in line with their demands. This can range from imposing slotting fees, the threatening to delist suppliers, demanding retrospective payments or extra discounts and later payments.
In later January the Groceries code adjudicator concluded that Tesco was guilty of a number of breaches of the code, particularly in the areas of late payment to suppliers and treating the position with regard to its own finances as being more important than the issue of being equitable in terms of its dealings with suppliers.
The report also concluded that such behaviour, particularly with respect to late payments was widespread: partially due to a deliberate policy by Tesco and also caused by unclear communications guidelines that were sent to suppliers.
In one case a supplier had to wait over two years to receive payment on price changes that were incorrectly applied to it.
The adjudicator put forward a number of conditions that Tesco is expected to meet. These include giving the supplier a week to correct any errors in pricing and giving suppliers thirty days to challenge any proposed reduction in invoices.
Tesco escaped a fine because the activities took place before the adjudicator has the power to impose such a punishment.
Tesco has apologized and there are indications that suppliers are experiencing a better relationship with this retailer since the investigation started in February 2015.
What are we to make of this? Does this mean that we are unlikely to see any sharp practices by Tesco (or indeed any other multiple retailer) in future?
Such practices have been widespread and historical and it would be a naïve person who would accept that this ruling is likely to see the end of such behaviour. Tesco’s overall behaviour in the last couple of years arguably has been deplorable. Activities such as over-stating profits led to a sizable “black hole” of over £250 million in its accounts.
The pressure to hit margin target led ultimately to the deferral payments in order to reflect a more favourable financial position.
For now, relationships with suppliers are likely to stabilize as Tesco embarks on a public relations exercise to portray itself as an organisation that has accepted the findings from the adjudicator.
However the unpalatable fact remains that multiple retailers are under constant pressure to deliver better financial performance: from shareholders and the financial press in particular.
We are likely to see more subtle manifestations of the leveraging of pressure on certain categories of suppliers – particularly the smaller and more vulnerable ones, in the quest for more profit and efficiency.
In a situation where there is an imbalance in the nature of the relationship between two parties (retailer and supplier), it is a natural expectation that the more dominant partner will seek ways to build on its “power-position”. If the weaker party suffers then so be it!
Let us monitor this situation over the coming months to see what happens.