Archive: October, 2014

Tesco’s procurement practices exposed

Shoppers and investors were taken by surprise when Tesco announced a £250m black hole in their profits last month. Tesco’s suppliers, however, were not.

Tesco has been under pressure for some time. Shoppers are increasingly turning their backs on the big weekly grocery shop in favour of home delivery services, discount rivals Aldi and Lidl and local convenience stores. These trends have hit sales at Tesco’s big out-of-town supermarkets – its market share had declined from 30.1% to 28.8% in the past year – and it has recently taken the decision to mothball a number of big projects. Profit warnings led to the resignation of the Chief Executive, Philip Clarke, in July, however, it was only the arrival of his replacement, Dave Lewis, on 1 September that enabled the whistlerblower’s warnings about accounting practices to be heard. The problem relates to when the retailer books payments received from suppliers who pay the big grocery chains to run in-store promotions on their behalf.

An article by one of Tesco’s suppliers published in The Independent provides an interesting perspective on Tesco’s procurement practices. The supplier said:

“For years we have been bullied and browbeaten by Tesco’s buyers, who demand a lowball price for our goods then keep screwing us for more as the contract goes on.”

Poor forecast data coupled with poor behaviour from the dominate player led to a breakdown of trust. The supplier went on to say:

“Now compare that with Aldi. Don’t get me wrong, Aldi drives a very hard bargain, but once you’ve agreed a deal for a year, it sticks for a year. They don’t come back demanding new bonuses, discounts and every other trick.”

“As a result – and this news will not go down well at Tesco HQ – we’ll offer Aldi a better price at the outset. Yes, that’s right: for all its aggressive behaviour and demands for retrospective rebates and discounts, Tesco actually gets charged more than its bitterest rivals.”

This is a clear example of importance of the relationship between the buyer and supplier and the direct impact it can have on competitiveness. Unfortunately, it takes a long time to re-build trust so Tesco’s problems are far from over.