In this alert we sum up various developments relating to the UK's Groceries Supply Code of Practice (GSCOP) over the last few months - including the Groceries Code adjudicator's report into Tesco.
The Groceries Code Adjudicator issued her findings on the Tesco investigation at the end of January.
Was Tesco in breach of GSCOP?
Yes. The key findings are:
- The report authoritatively lifted the lid on practices that will be familiar to many supermarket suppliers which causes delay to payments - unilateral deductions, delayed payments, invoicing errors. Examples in the report refer to multi million pound sums withheld from suppliers for more than two years. There is no surprise at those practices, but the adjudicator has authoritatively identified that they do occur. The adjudicator found that Tesco was in serious breach of GSCOP.
- The adjudicator has made it clear that a unilateral deduction by a supermarket from a supplier's invoice will, if made unreasonably, be a breach of GSCOP Paragraph 5 which prohibits delayed payments. This is important as a supermarket's purchase terms will usually allow unilateral deductions (or set off). Therefore, in this area GSCOP does have the effect of curtailing the supermarket's contractual rights.
- GSCOP prohibits payments for better positioning of goods except in relation to promotions (paragraph 12). The adjudicator found that there was no evidence of a breach by Tesco of this requirement. However, the adjudicator has identified that Tesco had engaged in other practices which might have the impact of amounting to an indirect requirement for shelf space - eg category captaincy and range review participation. The adjudicator is going to review and consult further before making a determination.
Has Tesco been fined?
No. Tesco were not at risk of a fine as the investigation covered a period when the adjudicator had not been given power to fine. There is no hint in the report as to whether Tesco would have been fined if the adjudicator had had the power.
Does that mean Tesco got away with it?
No. The adjudicator has made a series of recommendations that Tesco is required to follow:
- Tesco must pay suppliers in accordance with contractual payments terms
- Tesco must not make unilateral deductions
- Suppliers must be given at least 30 days to challenge any proposed deduction
- If a deduction is challenged Tesco cannot deduct until resolved
- Data input errors identified by suppliers must be resolved promptly
- Pricing errors must resolved within seven days
- Tesco must be transparent and clear in its dealings with suppliers
- Needs to be clear that where targets relate to factors which are beyond the supplier's control - eg Tesco's margin - then those targets are aspirational, not binding.
- Tesco finance team and buyers must be trained on the report's findings
To ensure that Tesco does take steps to address the position:
- Tesco required to provide a detailed implementation plan within four weeks
- Quarterly update from Tesco on progress including providing data to show invoices in dispute and average time to resolve
Will this make any difference?
There will be those who feel that without a big fine supermarkets will not ensure they change behaviour. After all, a series of detailed recommendations do not make headlines.
But detailed recommendations which intrude into the detail of Tesco's financial systems with a quarterly review may well have more impact. No one wants to be on report. Addressing the abuses on payment periods and unilateral deductions are probably going to have a more direct positive impact on suppliers than a fine.
Certainly the Adjudicator's findings should embolden suppliers to challenge supermarket payments and deductions.
Should the Groceries Code (GSCOP) be extended down the supply chain?
The Grocer has this week reported that the Government (Department for Business - BIS) is considering consulting on extending GSCOP down the supply chain. At the moment GSCOP only applies to the contracts between the 10 designated retailers and their direct suppliers. As shown by the recent headlines on the price of milk, there are concerns that this does not ensure that suppliers further down the supply chain are fairly treated.
Extending GSCOP down the supply chain would be an enormous step:
- There are a huge number of suppliers. An effective regulator would need substantial resource.
- The key issue for smaller producers is usually around fair price. GSCOP does not apply directly to pricing. Extending it to price would be a significant increase in intervention.
- GSCOP came about as a result of successive competition investigations into whether supermarkets in effect acted as a monopoly. There has been no such investigation into practices down the supply chain.
- Why should the food/drink sector be picked out? Small businesses in many other sectors complain about the impositions made by their larger customers.
This could be the government attempting to push a difficult issue into the long grass, but if not would see the food and drink sector becoming highly regulated.
As and when the consultation is issued it will be key for all suppliers to comment.
The Adjudicator had identified that looking at retailer forecasts was a priority. Concerns had been raised that retailers adopted sloppy forecasting causing significant costs to suppliers.
The Adjudicator has now issued a brief note on forecasting finding that all retailers' approaches appear to be compliant with GSCOP. It also goes on to comment on how forecasting can be improved. This might be useful to suppliers suffering poor forecasting practices.
ASDA joins European buying group - EMD
Not a legal issue but it is interesting to see that ASDA has joined European buying group EMD.
The rise of these multi retailer buying groups brings a new challenge to suppliers - buying groups such as EMD, Auchan, AMS etc each bring buying power (assuming they can consolidate their member's purchasing) that exceeds Tesco.
The European Commission has issued a report on Unfair Trading Practices in the Food Supply Chain.
It provides an overview of the various national arrangements across the European Union - for example 20 of the member states have or are about to introduce legislation in the food supply chain (most recently Ireland).
Groceries Code survey and conference
The annual Groceries Code Adjudicator survey has been launched. This is a key survey heavily relied upon by the Groceries Code Adjudicator. All the information provided is in strict confidence.
The results of the survey will be launched at the annual Groceries Code Adjudicator conference, which will be held on 27 June 2016 in Westminster, London. It is a useful insight into the adjudicator's priorities.
For an overview of GSCOP, please see our previous article "The Groceries Supply Code of Practice".