In Britain, a big grocer says sorry for bilking suppliers

But Tesco still faces fraud investigation and, maybe, millions in fines

Those who worry about ownership concentration in Canada’s retail food sector have no doubt heard of Britain’s Groceries Code Adjudicator, tasked with ensuring that country’s big supermarket chains treat suppliers fairly.

This week, after a year investigation, the groceries adjudicator came down hard on Britain’s largest grocer, Tesco.

In a report, GCA head Christine Tacon revealed that Tesco had violated the U.K’s grocery code of conduct (which sets out do’s and don’ts of retailer-supplier relations) by illegally deducting and withholding millions in payments owed to suppliers. In one instance, it took a supplier two years to get paid.

Tacon has the power to penalize grocers who violate the code of conduct by fining them up to one per cent of annual U.K. sales. However, Tesco will escape such a fine because the period during which its violations occurred–June 2013 to February 2015–was before Britain’s Parliament gave Tacon the ability to fine.

So all Tacon can do is slap Tesco on the wrist and demand the company improve its supplier practices. Something she has now done.

Still, Tesco this week admitted its wrongdoing. In a statement, CEO David Lewis apologized for practices he called “unsustainable and harmful to our suppliers.”

Lewis, who took over as CEO after most of the violations occurred, had earlier admitted Tesco made mistakes in the way it treated suppliers and laid out 14 steps to improve relations.

They include publishing the retailer’s payment terms, introducing 14-day payments for hundreds of small- and medium-sized suppliers, and setting up a helpline for suppliers to resolve disputes within 48 hours.

But Tesco is not out of hot water yet. The U.K.’s Serious Fraud Office is investigating the company over a £326-million accounting black hole that resulted in numerous Tesco executives getting sacked.

The withheld supplier payments are part of that investigation. Speculation is Tesco hung on to the money to improve results during a period when the retailer’s sales, profits and market share were getting dinged by competitors.

Mike Dennis, analyst at Cantor Fitzgerald, estimated in The Guardian that Tesco’s collections from supplier payments rose by £1.7 billion over five years to £2.4 billion in February 2014, accounting for 30% of the company’s cash profits.

If the fraud office finds wrongdoing, Tesco could be forced to pay more than £350 million in fines, plus repay hundreds of millions to suppliers for “arbitrary unjustified cash payments,” Dennis said.

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