TESCO “seriously” breached an industry code by delaying payments to suppliers, an investigation has found.
A long-awaited report on the supermarket giant’s practices revealed it had “intentionally delayed” paying suppliers.
The Groceries Code Adjudicator (GCA) said Tesco had also made “unilateral “ deductions.
GCA Christine Tacon made a series of recommendations to stop the practices, saying the retailer should be more transparent in its dealings with suppliers.
No financial penalty was imposed because this power was only given to the Adjudicator after she launched her investigation.
Her 84-page report said Tesco had breached the legally binding code aimed at protecting groceries suppliers.
“I found that Tesco knowingly delayed paying money to suppliers in order to improve its own financial position,” she said.
“The length of delays, their widespread nature and the range of Tesco’s unreasonable practices and behaviours towards suppliers concerned me.
“I was also troubled to see Tesco at times prioritising its own finances over treating suppliers fairly.”
One supplier was owed a multimillion-pound sum because of price changes being incorrectly applied to Tesco systems.
The money was eventually paid back by Tesco more than two years after the incorrect charging had started, said the Adjudicator.
Ms Tacon launched the investigation - her first - last February following Tesco’s announcement about its profit overstatement.
She said she found delay in payments arising from data input errors, duplicate invoicing, deductions to maintain Tesco’s margins and unilateral deductions.
“The sums were often significant and the length of time taken to repay them was too long,” she said.
A four-week deadline has been set for Tesco to say how it plans to implement the recommendations.
The Adjudicator said she found no evidence that Tesco asked suppliers for money to secure better positioning of goods on shelves, which would have breached the code.
But she expressed concern about practices that could amount to an indirect requirement for better positioning by large suppliers.
“I am concerned that, as a result of these practices, the purpose of the code may be circumvented to the detriment of smaller suppliers who cannot compete with payments for better positioning or to participate in range reviews.”
The Adjudicator said in her report: “I saw numerous instances when data input errors by Tesco into its systems resulted in suppliers being overcharged or underpaid.
“Tesco failed to rectify data input errors within a reasonable time and also failed to pay money owed to suppliers as a result of these errors within a reasonable time.
“The frequency and scale of the issues resulted in business practices which were unfair.”
A “major focus “of Tesco’s commercial team was on hitting budget targets, said the report.
The investigation uncovered reluctance of some Tesco buyers to engage into disputes to resolve payment issues.
“There were times when Tesco did not appear to even attempt to resolve supplier concerns before unilaterally deducting money from suppliers.
“I found the delay that resulted from a failure by Tesco to fully engage in resolving difficulties to be unfair and unreasonable.”
Business Minister Anna Soubry said: “Christine Tacon has done a thorough and fearless investigation into a scandalous situation.
“Tesco say they have changed their practices and I very much hope they have. Paying smaller suppliers on time and treating them fairly is good and proper business. Late payment can hinder the growth and productivity of these suppliers and can threaten their existence.”
In a statement, Tesco’s group chief executive, Dave Lewis, apologised and said he accepted the GCA’s findings.
He said: “In 2014 we undertook our own review into certain historic practices, which were both unsustainable and harmful to our suppliers. We shared these practices with the Adjudicator, and publicly apologised. Today, I would like to apologise again. We are sorry.
“I am grateful to the Adjudicator for the professional manner in which the investigation has been conducted. We accept the report’s findings, which are consistent with our own investigation.
“Over the last year we have worked hard to make Tesco a very different company from the one described in the GCA report. The absolute focus on operating margin had damaging consequences for the business and our relationship with suppliers. This has now been fundamentally changed.
“In January 2015, we made material changes to our business that addressed the majority of the historic practices referred to in the report. We have changed the way we work by reorganising, refocusing and retraining our teams and we will continue to work in a way which is consistent with the recommendations.”
He added that, according to Ms Tacon’s report, the overwhelming majority of Tesco’s suppliers were more positive towards the company now compared with the period under investigation.
The GCA’s report is separate to the Serious Fraud Office investigation into a £326 million accounting black hole at the supermarket.
The SFO launched a probe in October 2014 after the discovery of a £263 million hole in profit expectations at Britain’s biggest supermarket. It was later found to be £63 million bigger than this.
Details of the scandal - which involved rebates from suppliers being moved around to different periods on the company’s balance sheet - emerged just weeks into the tenure of Mr Lewis.
The SFO said its investigation was “ongoing”.
Ms Tacon said the most shocking thing she discovered was how widespread the practice of delayed payments was.
“It was in every sector. Practically every supplier I spoke to had evidence of delays in payments,” she told a press conference.
She found widespread pressure within the company to meet targets which she described as “over-riding”.
Asked whether she considered Tesco had bullied suppliers, she replied: “I found lots of behaviour that breached paragraph 2 of the code, which is to treat people fairly and reasonably.”
On the issue of fines, she said: “Had I the power to impose a financial penalty for the behaviour identified in this report, I would have considered whether it was appropriate in all the circumstances, and, if it was, what level of penalty should be imposed.”
Duncan Swift, partner and head of the food advisory group at accountancy firm Moore Stephens, said the GCA’s report “at last makes a statement that doesn’t pull its punches to say that Tesco’s behaviour was unreasonable”.
But he said: “Does it go any further than that? No. Can suppliers expect any redress? No. Also, the review only covers the second half of Tesco’s mis-statement period and is silent on the probability that these bad behaviours went on much earlier.”
Mr Swift added: “There is no penalty power available to the Adjudicator and the likelihood of a supplier taking their own civil action against Tesco is low. If a supplier was to raise these sorts of difficulties in the form of legal action seeking redress that would be seen as hostile by the supermarket and the relationship would be ended.
“And this could be seen as the case by other supermarket buyers too. It’s a small world. Consequently even staff in those food supplier businesses that have had to close as a consequence of bad supermarket buying behaviour do not want to go on the record because they want to develop their careers elsewhere in the food chain.”
Federation of Small Businesses policy director Mike Cherry said: “Today’s damning GCA report into Tesco’s past treatment of its small suppliers goes some way to removing the veil of fear that has allowed companies to bully their small suppliers, and in some cases put them out of business.
“For too long, larger firms have been free to abuse their relationship with smaller suppliers. Tesco has since apologised, and improved its terms. We need to see more company boards taking responsibility for their payment terms, and choosing to back their small suppliers.
“Today’s report underlines the important role the proposed Small Business Commissioner must play in redressing the power imbalance that led to the disgraceful tactics outlined in this report. We need to see wholesale culture change, which can only come about through a full public inquiry which examines at how to strengthen the prompt payment code.”