Tesco gets more than sums wrong

Tesco, the UK's biggest retailer, has suspended four senior executives and begun an investigation. Photo / AP

Practices of UK supermarket giant under scrutiny after mis-stating profits by $516m.

'Tesco is like a wounded animal: we never know what it is going to do next," is how one battered food supplier describes its relationship with the UK's biggest retailer. The company dreads hearing from the supermarket, as its emails and letters usually contain bad tidings: invoices showing de facto deductions, demands for cash or years-old supposedly unpaid bills unearthed by its auditing teams.

Like houses, with supermarkets it's all about location, location, location. Each year food and drinks companies pay billions of pounds to secure the most prominent shelf space and promotions for their products. It's the oil that greases the wheels of the £175 billion ($361 billion) UK grocery market and - until last week - it pretty much went on under the radar.

But last Monday, Tesco's new boss Dave Lewis was forced to tell the City that its profits for the first six months of the year would be some £250 million lower than the £1.1 billion previously indicated. The hole was blamed on "accelerated recognition of commercial income" -- industry jargon that describes the various payments it receives for promotions, but also the substantial bonuses or "rebates" they collect when jointly agreed sales targets are hit. The shortfall points to executives having been too optimistic in their estimate of the amount of revenue actually earned during this period while being less enthusiastic about taking other costs into account.

"Retailers have different approaches [to commercial income] but Tesco has lost its moral compass," continues the supplier. "Across the industry you pretty much get what you pay for. Tesco is different. If there is a £50,000 fee for running a promotion it is automatically deducted: and if you don't get your money's worth the chances of getting your money back is basically zero."

A recent survey of the experiences of more than 500 suppliers in their dealings with all the big supermarkets reveals a depressing shopping list of methods being used to wring extra money out of them.

The list includes disputing or delaying payment of invoices for more than 120 days; cutting a product's price and then demanding compensation to maintain the profit margin; and demanding upfront payments for hitting sales targets that do not materialise.

"The worst thing is creating new high charges and then emailing our account manager and taking the money without prior agreement from our account," reveals one anonymous supplier in a survey commissioned by industry watchdog the Groceries Code Adjudicator.

"I believe this is being used to fill gaps in their sales performance." Lewis, acting on a tip-off, has launched an investigation into what he says is a "serious issue". In the meantime, four senior executives have been suspended. Lewis has emailed staff, informing them "a change in our culture as well as our processes" was required. "We want to work in a business which is open, transparent, fair and honest," he wrote.

At the half-year stage, Tesco's finance team has to guesstimate how much money it has earned from suppliers, sums complicated by rebates linked to full-year sales. The question everyone is asking is whether managers deliberately banked supplier payments ahead of time to flatter the company's financial position in the six months to August 23. The way Tesco bills suppliers means there is "quite a lot of leeway" to move money around, says another source. The alternative scenario is that a lack of leadership meant Tesco had lost its grip on its finances, leading to errors.

A large Tesco supplier, who knows the suspended executives well, says the company's approach had not appeared to have become more aggressive.

"What's strange about the period under scrutiny is they reported a massive profit warning and I know the trading team were encouraged to clear the decks to give the new chief executive some headroom, so they were being prudent and conservative in their guidance. I suspect there has been a monumental failure of governance," he said.

- Observer