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The Groceries Code Adjudicator (the GCA) has concluded her first ever formal investigation, finding that Tesco seriously breached the Groceries Supply Code of Practice by failing to pay suppliers within a reasonable time. The report on her investigation has been published this week.
Helen Hart, solicitor in the Lexis®PSL Commercial team, provides a useful overview of the investigation below:
What was the background to the investigation?
On 22 September 2014, Tesco released the following trading update statement confirming that it had:
identified an over-statement of its expected profit for the half-year, principally due to the accelerated recognition of commercial income and delayed accrual of costs...the Board believes that the guidance issued on 29 August 2014 for the Group profits for the six months to 23 August 2014 was overstated by an estimated £250m.
As a result, the GCA launched an investigation in early 2015 into some of the practices associated with the profit over-statement.
After considering information submitted, the GCA held a reasonable suspicion that Tesco had breached the Groceries Supply Code of Practice regarding delayed payments and requests for payments for better positioning of goods. The investigation covered the period from 25 June 2013 to 5 February 2015.
What has the GCA found?
The GCA issued her report on 26 January 2016, finding that Tesco had seriously breached the Code.
She considered Tesco’s breaches of the Code to be serious due to the varying and widespread nature of the delays in payment. During the investigation she found that the retailer had acted unreasonably when delaying payments to suppliers, often for lengthy periods of time. She also found delay in payments arising from data input errors, duplicate invoicing, deductions to maintain Tesco margin and unilateral deductions resulting from forensic auditing, short deliveries and service level charges.
The GCA was particularly concerned about three key issues:
What are the GCA's recommendations?
The 5 recommendations in the report are:
The GCA has set a four week deadline for Tesco to say how it plans to implement the recommendations. She will then require regular reports from the company on progress.
The GCA has also flagged certain changes in market practices over recent years, particularly with regard to payments for category captaincy positions. She found no evidence that Tesco had required suppliers to make payments to secure better shelf positioning or an increased allocation of shelf space in breach of the Code. However, she was concerned to find practices that could amount to an indirect requirement for better positioning. These practices included large suppliers negotiating better positioning and increased shelf space in response to requests for investment from Tesco, as well as paying for category captaincy and to participate in Tesco range reviews.
The GCA is therefore launching a formal consultation with the sector, involving both retailers and suppliers, to decide if those practices are acceptable.
Ms Tacon has also written to the Competition and Markets Authority (CMA) asking them to consider the issue of category captaincy as well as referring evidence that Tesco may have breached CMA rules by operating without all its terms of supply agreement being in writing—a factor that may have contributed to payment disputes and delays.
What does this mean for commercial lawyers?
It is advisable for retailers to review their compliance procedures and reporting structures to avoid similar reputational damage to Tesco. The 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.
If a retailer is investigated in relation to activities that have occurred since April 2015, they will risk being fined. The GCA had no power to impose a financial penalty on Tesco because the Groceries Code Adjudicator (Permitted Maximum Financial Penalty) Order 2015, SI 2015/722 granting the GCA the power to fine only applies to breaches of the Code occurring on or after 6 April 2015. Fines are not retrospective. It is expected that any fines that will be handed down by the GCA in the future will be substantial.
If you'd like to know more, subscribers to the Lexis®PSL Commercial module have access to a wealth of information on this topic and others, including practice notes, precedents, up-to-date news reports and much more.
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