Tesco accused of 'blunderbuss' approach in scrapping supplier fees

By Gemma McKenna

Published: 18 December, 2014

Tesco's move to scrap supplier fees and instead focus on getting the lowest prices upfront has been greeted with scepticism by leading consultants who describe is as "old-fashioned" and taking a "blunderbuss approach".

Tesco wine Changes to the Tesco strategy could lead to a range cull, experts warn

The retailer, which has been under fire since October over its misstated profits, faces intense scrutiny from the City, shareholders, government and the Serious Fraud Office over its accounting practices, has decided to scrap supplier "kickbacks" in an effort to make its deals more transparent. The move is part of what Tesco's chief executive, David Lewis, will be an ongoing process to "rebase the relationship with suppliers".

It will essentially shift the balance from accruing back margins through negotiated payment structures with suppliers to front margin based on the actual price of goods in-store.

Its entire trading team of up to 1,000 staff, have been "retrained" in its new approach by Lewis, chief financial officer Alan Stewart, and Tesco's new UK and global commercial boss, Jason Tarry. The supermarket is now explaining and working through its new trading strategy with key suppliers, although many are still in the dark, waiting to hear more details in January.

David Sables, chief executive of Sentinel Management Consultants, which advises suppliers, including some within the BWS sector, told Harpers.co.uk that Tesco's change in strategy would remove all of the incentives agreed through business plans and "take a blunderbuss approach to the single variable of price - that's very old-fashioned," Sables said.

The next step, according to Sables, is to cull the range, which means the people left at the end "will be paying through the nose". He said in future every single promotion would be a "bidding bunfight".

"At the end of the day, I don't buy it. If doesn't bring shoppers back in they'll be back rattling the tin in the middle of the year. This is not the end play."

Sables said the message to suppliers was "we want to stop asking you for retrospective deals and lump sums and instead take all that and build it into your price at the outset."

While it could be seen as a "genuine attempt" to be more transparent, Sables maintains the shift in strategy is primarily designed to bring them into step with discounters.

"The complexity of the retrospective deal is zero. It enables the commitment of the retailer and the supplier's investment to be fairly high." Without them, he said it is "naïve" to believe suppliers will be able to have the same level of financial commitment upfront, as they cannot commit the same money "on a wing and a prayer". It would also lead to a decline in gross margin for Tesco, which is why Sables does not believe it is a long-term strategy change.

Former supermarket head wine buyer turned consultant Angela Mount said she also felt a "certain degree of scepticism" over the move. She said it seemed like Tesco was adopting Aldi and Lidl's very successful strategy with suppliers - which has "fairly bullish but realistic volume targets to which these prices are linked".

"Fundamentally a lot of suppliers would prefer to agree a net net price, but if commercial plans are being reviewed and renegotiated, everything's a little blue sky, and there are very few tangibles for suppliers to grab. It appears quite nebulous. This is a trading partnership. It can't be we take you give any longer."

She underlined that volume agreements would need to be in place before suppliers would feel comfortable. "They need to know the structure and business scale of their relationship," before entering into lower-priced agreements, she said.

But Richard Cochrane, managing director of Felix Solis UK, felt the move is symptomatic of wider changes the industry is going through. "Businesses are on a journey to make pricing less complex," he told Harpers.co.uk.

He said it was "understood that brand owners would share in that journey, and put their faith in the strength of their brand to sell".

But he doesn't believe joint business plans will cease, saying "do you honestly believe any large business would do that? It's bonkers not to sit down and plan the year ahead".

He added that both sides would quickly be able to see if the new strategy worked, and could tailor it accordingly. "It's not new. It's another step in a direction that's been going on for a long while."

Branded grocery suppliers that have already held meetings with Tesco about its new approach have told Harpers sister title The Grocer this week, that "what they're saying is consistent with what they're saying publicly: that they want to run a simpler business, more in touch with consumers".

One added: "They also understand they're going to need the support, economic and emotional, of their large suppliers. They want to clear away the past and set the business relationship up on a basis of volume growth, based around product, and less on fighting over margin."

* Tesco has also announced a ninth senior executive has now been suspended from Tesco as the Serious Fraud Squad's inquiry in to the £263m over statement of profits continues. It is not clear at the moment who the additional person is, but it follows the suspension of eight executives, including Dan Jago, head of beers, wines and spirits in October. Tesco said: "We can confirm an individual has been asked to step aside to support the ongoing investigation."

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