Unfair purchasing practices and the Groceries Code of Conduct: the Tesco investigation

By Ignacio Herrera Anchustegui (University of Bergen). On 26 January 2016 the Groceries Code Adjudicator made public its investigation into Tesco plc concerning the possible breaches of the UK Groceries Code of Conduct. After an almost yearlong investigation the Adjudicator determined that Tesco had engaged in unfair purchasing practices prohibited by the Groceries Code of Conduct (“the Code”) by delaying payments that were due to its suppliers. Although the Adjudicator did not impose any financial fine on Tesco, it did issue five recommendations to be followed by the supermarket retail chain in order to prevent payment delays in the future. This blog discusses the Tesco case and its implications for future investigations.The Groceries Code of Conduct and Unfair Purchasing Practices

Unfair purchasing practices are well known and widely discussed negative aspects of buyer power. This conduct takes place whenever a buyer with substantial market power abuses its bargaining position to impose on its dependent suppliers an “unfair” transfer of profits or risks without adequate compensation. These practices are particularly common in the food retailing industry, leading to disputes about contractual fairness and giving rise to possible sources of concern for the economic wellbeing of suppliers, as recently assessed by the EU Commission. Sometimes, however, what might be perceived as an unfair purchasing practice is nothing but “hard bargaining” that benefits end consumers through lower prices. Most unfair purchasing practices, however, tend to escape the application of competition laws because buying firms are not dominant enough or because they are a bilateral problem (buyer-supplier) without market wide consequences.

As a response to unfair purchasing practices in food retailing, the UK implemented the Code in 2009 with the aim of preventing and sanctioning the imposition of unfair purchasing practices by large retailing supermarket companies vis-à-vis the suppliers. The Code applies to particularly large supermarkets (with turnovers exceeding £1 billion) and forbids a set of abusive commercial practices when dealing with suppliers.

The Tesco investigation

The Tesco case constitutes the first investigation carried out by the Groceries Code Adjudicator concerning breaches of the Code since its creation. Interestingly, the investigation was initiated after Tesco had voluntarily reported to the Adjudicator that an internal report showed that there was strong evidence indicating that Tesco might have entered into practices that were forbidden by the Code.

The Adjudicator initiated an investigation covering purchasing practices from 2013 to 2015 and found that Tesco had unjustifiably delayed payments to its suppliers – forbidden by Paragraph 5 of the Code – in two instances: whenever these payments were for other than the goods supplied (i.e. service fees, charges for failing to deliver goods, payment for promotions), or when there was a dispute about the amounts due. The Adjudicator held that even though Tesco by and large paid its suppliers on time, the cases of payment delays constituted a widespread issue affecting a broad range of suppliers and constituted a grave breach of Paragraphs 5 and 2 of the Code.

Payments were delayed for long periods of time; sometimes the money was not repaid for 12 months and on occasions up to 24 months. The origin of the payment delays were sometimes errors when inserting data in Tesco’s purchasing systems (for example forgetting to update prices or reflect discounts), or because of invoice duplication. The delayed payments also varied in amounts and repercussions. In some instances the amounts owed were several million pounds and affected the economic viability of the suppliers, whereas in other occasions the delay was only of a few thousand pounds and had no major effect on the suppliers.

Additionally, the Adjudicator investigated whether Tesco had required its suppliers to make payments in order to secure a better position or more shelf space, a practice known as “slotting allowances”, and prohibited by Paragraph 12 of the Code.

Based on the evidence found, it was concluded that Tesco had not made any direct requirement to its suppliers to make payments for slotting allocation. However, there were indicia that Tesco could have made indirect requirements to suppliers to secure better positioning on shelves. This happened for instance, because Tesco made “investment” requests in exchange for giving suppliers a more favourable deal or because Tesco received sums of money in exchange for category captaincy  (i.e.: the right to manage a category of goods for the supermarket chain) or participation in a range review. These indirect requirements, however, were not made to Tesco’s private labels suppliers.

The adjudicator found that these indirect requirements may circumvent the Code and have a negative effect on competition among suppliers. Despite this finding, the Adjudicator decided to continue with further investigation to determine whether such indirect requirements could have the same effect as “naked slotting allowances” and, thus, be in breach of Paragraph 12.

Enforcing the decision

Despite finding that Tesco had engaged in a “serious breach” of Paragraphs 5 and 2 of the Code, the Adjudicator did not impose a financial sanction. This was because the Permitted Maximum Financial Penalty Order that granted powers to imposed fines was issued following the initiation of the investigation and after the relevant period.

Instead, the Adjudicator made five recommendations to Tesco to address payment delays and to prevent future repetitions of non-compliance with the prohibition. These recommendations are:

  • Money owed to suppliers for goods supplied must be paid in accordance with the terms for payment agreed between Tesco and the supplier.
  • Tesco must not make unilateral deductions.
  • Data input errors identified by suppliers must be resolved promptly.
  • Tesco must provide transparency and clarity in its dealings with suppliers.
  • Tesco finance teams and buyers must be trained in the findings from this investigation.

What’s to come?

This first case by the Code Adjudicator certainly will not be the last one. This thorough investigation, in my view, goes beyond a reprimand to Tesco; it sends a “last warning” to other supermarket chains to take the Code seriously and the consequences pursuant to its breach. Perhaps, the next investigation will impose financial sanctions and court cases are likely to follow.

Furthermore, by issuing these recommendations the Adjudicator also sends a signal to all other supermarket retailers to adjust their payment patterns accordingly – even if they have not entered into cases of payment delays – to avoid future denounces by displeased suppliers. Hence, these “recommendations” by the Adjudicator will have a strong impact in shaping and regulating purchasing practices in the food retailing markets in the future.

However, two other issues remain. Firstly, how realistic is it to expect complaints from suppliers if they are dependent on the powerful buyers? Practice shows (in and outside the UK) that even if Codes of Conduct are implemented, suppliers do not regularly submit complains before the competent authorities. A reasonable explanation for this is that they might be unwilling to report abusive purchasing practices for fear of retaliation by a powerful customer that may decide not to purchase from them any longer. If this is indeed the case, then the Adjudicator would need to take a more proactive approach by initiating investigations ex-officio and not waiting for self-reports by large firms.

Secondly, and in particular for self-reporting cases, is the imposition of fines the correct approach? In my view, a soft enforcement approach imposing behavioral remedies and sufficient publicity of the decision will be deterrent enough for the retailer in question and other market players. I prefer this softer approach for several reasons: the lack of fines will incentivize retailers to self-report possible breaches to the Code; making the decision public will have an impact in the retailer’s goodwill and, thus, customers’ preferences when shopping food; and the imposition of fines may backfire as food retailers might be tempted to recoup their losses by either tightening their purchasing practices or increasing end consumer’s prices. However, for very serious cases, or if the soft approach proves to be insufficient, then fines might be required.

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