Tesco late payments: a case of old-fashioned bargaining power?
Tesco recently made headlines after being found to have deliberately delayed payments to its suppliers. From the corporate treasury perspective, payment delays are typically attributable to more complex reasons than a buyer simply wielding its bargaining power over suppliers. In any case, new technology is helping to reduce buyer-supplier friction.
UK supermarket group Tesco came under scrutiny earlier this year for its procedures in paying suppliers. An investigation by the Grocery Code Adjudicator, the supermarket industry’s ombudsman, into Tesco plc found that the company had taken “unreasonable” amounts of time to pay suppliers.
The adjudicator, Christine Tacon, stated that Tesco had delayed payments to its suppliers to improve its financial position during the period June 25 2013 to February 5 2015.
In a statement released in response to the findings, Tesco chief executive Dave Lewis said the company had undertaken a review of its practices and made changes, stating that they had been “unsustainable” and “harmful” to suppliers.
The changes included creating a dedicated supplier helpline to address issues within 48 hours, and introducing 14-day payment terms for UK-based SMEs.
Enrico Camerinelli, senior analyst, Aite Group, says Tesco has already taken steps to recover, and reacted to the severity of the accusations. He notes that it has taken a stronger approach to its client relationship management, but this is only getting up to speed to match what is already seen in other sectors, such as electronics and the automotive industry.
Camerinelli adds: “The buyer-supplier tug-of-war will always exist, but sustainability of this rapport is what has changed the business scenario. Tesco instead (by their own admission) have until recent remained entrenched with the old-fashioned “me big, you small: you do what I say or you’re out. New solutions like reverse factoring and dynamic discounting – both elements of the supply-chain finance family – have been in place for years, with numerous examples of use cases and best practices that cannot be ignored. I think Tesco wanted to do it the old way and has been caught in the trap.”
Stephen Baseby, associate policy and technical director, Association of Corporate Treasurers, says that the buyer/supplier relationship is more complicated than paying for product by a specified date.
Late payments are not as simple as the buyer refusing to hand over the money on time. There are multiple potential reasons for a payment to be delayed that are not instances of deliberate withholding of funds.
Baseby says not all late payments are examples of a deliberate attempt to avoid paying: “From the corporate treasurer's point of view it is just a matter of improving their working capital. What we are not aware of is the agreements Tesco had with its different suppliers. These agreements they have will vary, and possibly point to why the suppliers didn’t do anything about late payments at the time.”
He points out that there are complex relationships in place between the supplier and the buyer, which go beyond simple buying and selling: “Keep in mind that the nature of the contracts the adjudicator analyses, including those which did not lead to timely payment, may be those in which both supplier and buyer are trying to bind together in long-term arrangements to their mutual benefit. Both the buyer wants optimal price and quality, and the supplier wants the high-volume customer.”
Baseby suggests that, more generally, problems of late payment can be for multiple reasons, including issues on the supplier’s side: “It is common in a contract with multiple deliveries that there is a problem with one or more of them, and because of that the payments get held up. The procurement contract will always have lots of workable points inside to try to make it as flexible as can be. It just seems Tesco's may have been a bit too flexible.”
Since 2008, hundreds of UK companies have signed up to the Prompt Payment Code (PPC). This is a voluntary code, whereby signatories state they will ensure they pay their suppliers within 60 days, with 30 days stated as the ideal maximum. They also agree to provide information to their clients should there be any delay to payments. Tesco is a signatory, along with other large companies, including BT and Sainsbury’s.
Baseby believes that rather than following a code of conduct like the PPC, updated technology will ensure more payments are made on time: “We know that some companies have signed up to the PPC, but now many major companies have a SAP accounts-payable system installed anyway. The payments are made automatically once approved, so the money always goes on time.”
He notes that the report highlights inadequate processes for correcting data errors inputted for a payment. The adjudicator also refers to the benefits of better software: “The common use of standardized AP systems helps both payments and credit but only once the right data is entered.”
Ultimately, the large retailers have to keep their suppliers on side. Baseby concludes: “Retailers need to make sure the suppliers keep on supplying them. Whatever is happening for the company or in the market they cannot push it too far or it will create problems for the supplier and the buyer alike.”