Tesco crisis: ‘They say every little helps, but supermarket’s demands are never little’

As the grocer stuns the markets by saying it has overstated its half-year profit guidance by £250m, a supermarket supplier describes his trading experiences in the cut-throat market

To shoppers reading about Tesco’s £250m black hole with their jaws to the floor, the most extraordinary thing about it could be this: none of Tesco’s suppliers are surprised.

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.

You see, with Tesco, after you’ve agreed a price for your product, often through a tender process if it’s own label, you never know how much extra they’re going to demand back from you further down the line. They say every little helps, but when it comes to its demands of suppliers, with Tesco it’s never little.

So, for example, did you know that Tesco will try to charge us for the shortfall in their profits if they drop the price of our products halfway through our contract period? Did you know that they will try to bill us for wastage if our goods are unsold and go off?

As Aldi and Lidl eat into Tesco’s market share, this has been a growing problem. But many suppliers are starting to say: “No. If you drop your prices halfway through our contract, that’s your problem, not ours. If you can’t get enough shoppers into your stores to buy our product, that’s out of our control too. Don’t try to bill us retrospectively because you can’t run your business properly.”

Naturally, we’ve all been busy speculating what exactly Tesco has been caught doing wrong. But to come up with a shortfall in the profits of £250m, it’s got to be a lot.

It’s all guesswork, of course, but I wouldn’t be surprised to see Deloitte – who are digging through the accounts now – taking a close look at how Tesco has been accounting for what we in the trade call “stepped overriders”.

Video: Tesco investigation begins

Apologies for the jargon, but the concept is simple: say we agree a contract for Tesco to sell £10m of our product. We then offer an extra bonus to Tesco of, say 1 per cent if they hit £10m, 1.5 per cent if they hit £12m and 2 per cent for £15m.

Nothing wrong with that – we all deserve to be rewarded for growth. But wouldn’t it be tempting for the Tesco manager to book in his accounts the overrider revenues at 2 per cent before actually hitting that target?

He’d get away with it in the boom years, when Tesco always outperformed. But perhaps not now. At the end of our agreed period – usually a financial quarter – he’d find himself with a nasty hole in the accounts.

Another grey area Deloitte may want to look at is the way Tesco allows suppliers to act a little bit like a bank. So, if I agree to sell a batch of product for £3,000 a tonne, but the market price drops to £2,950, Tesco might ask me to keep hold of the £50-a-tonne until they ask for it. Likewise, they might ask us to keep hold of the money we owe them on an overrider for a rainy day.

Well, for a lot of Tesco’s buying teams, that rainy day has come and they’re asking for the money now. But what if the supplier quibbles or demands more time to pay it? How does the Tesco manager account for that?

Furthermore – and this would not surprise me – what if Tesco has been booking now the money they anticipate suppliers will owe them in future quarters?

All this trickery and jiggery-pokery irritates suppliers and, I have to say, does not help Tesco in the long run. We do what seems like a reasonable deal but dread the phone ringing because every time you pick it up, it’s Tesco demanding more money back in some way.

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.

Is Tesco the only one who pulls these tricks?

Looking at the Big Four – or, as we call them these days, The Big Three and Morrisons – I have to say Tesco is the worst by far. Asda and Sainsbury’s play with a pretty straight bat, Morrisons perhaps less so.

You might think it peculiar, given all their cuddly lefty guff about mutuality and all that, but one of the worst in our experience for squeezing suppliers? The Co-op.

Interview by Deputy Business Editor Jim Armitage