What has Tesco started? Until the supermarket group admitted to overstating its profits by £250m, I knew suppliers sometimes had to pay to get their products sold, of course I did.
But I had no idea as to the extent of it, and I did not know there were 52 ways a retailer could extract cash from its suppliers. For this I am grateful to the latest issue of The Grocer, which provides an invaluable A-Z guide of the tricks of the trade.
To say the range is mind-boggling is an understatement. There’s the “annual bonus” – a fee paid to the retailer based on annual invoiced turnover. Also known as an “overrider”, it’s a percentage charged when the supermarket hits sales targets. Or “category average margin” – a measure handed out to suppliers ostensibly showing the percentage profit generated by a product or a supplier. Known as Cam or Scam – supplier category average margin – it’s based on no evidence at all, and is used to lean on the supplier to cut their prices, thereby boosting the retailer’s profit.
How about the “cost of doing business allowance” – also referred to in the industry as Codba? “A completely made-up number to explain to suppliers how they need to appreciate the costs of doing business for the retailer, building new stores, refitting old fixtures, implementing new technology.”
Head office executives adore holding conferences and seminars – it gives them something to do while junior staff in their shops and warehouses are busy selling and distributing. What better way to hold such a gathering, normally on some sector-related matter (“the future of food”, “caring for babies”, “healthy eating for children”) than getting a supplier to pay for it. This is the “conference support fee” – so the mineral water, lunch, tea, coffee, and biscuits are all covered by the supplier.
Sometimes suppliers are late with their delivery or there’s a hold-up on their production line. The resulting groceries which may be closer to their “use by” date are still sent to the supermarket as usual. But the retailer slaps on a “date discount”, a discount to cover the fact it’s closer to its “best before” or “use by” date.
“Extended contract deal” is a nice one. It’s when a supermarket demands a better price up-front for extending a contract. The retailer was going to lengthen the contract anyway but that detail is somehow forgotten.
Sometimes, suppliers ask if they can install their own kit – fridges, freezers, display units – to help the sale of more of their products. They can, provided they pay an “equipment allowance” to the retailer. No matter that the more the product sells, the more the supermarket’s revenues are boosted.
The supplier can be asked to make a “facing payment”, a fee charged for the number of facings of a product on the shelf. And “listing fee”, for putting the product on sale in the first place. And “loyalty bonus” – a payment demanded by a retailer in return for placing a higher percentage of their business with a supplier. A “new store opening fee” is required every time a retailer opens, extends or refurbishes a store. “Printing fee” – a charge to suppliers to cover the cost of printing all point of sale material, often run as a profit centre.
“Rebate” is a payment paid to a retailer in return for compliance with agreed terms. “Trigger” payment is the amount paid by a supplier for every item bought on promotion.
“Zone fee” is when a supplier must pay to have their product sitting in a primary zone of the shop floor, where the flow of customers is at its highest.
My own favourite? “Just gimme” – a unilateral demand by a retailer for cash for no particular reason, “normally to fill a profit gap elsewhere”.
So numerous and prevalent are the practices, and so taken for granted are they, that I now wonder about the entire sector. For years, thanks to relentless supermarket PR, we’ve been led to believe that we had the best supermarkets in the world.
They were on the side of the consumer but also doing right by manufacturers. All the bleating from hard done-by farmers and suppliers was taken with a pinch of salt.
The line trotted out by the retailers was that they were looking after suppliers as well. Occasionally, there were chinks of light. Tesco caused a great deal of disquiet a few years ago when it renamed one of its headquarter buildings “Discounter House” and dragged in suppliers for a video extolling the virtues of Tesco, then sat them down for a friendly one-to-one chat – actually a verbal battering about how they should improve their terms, so they could pass them on to the consumer and lead the industry on price. So upset were the suppliers that Tesco’s behaviour did leak out, only to be heavily downplayed by the supermarket group.
It now transpires that our supposed world-leading food retailers are ultra-efficient alright – at beating up the suppliers and making them pay up.
These are not-to-be-sniffed-at sums. Tesco uncovered irregularities concerning £250m in one six-month period, and when Morrisons bought Safeway it found payments from suppliers was twice the value of the annual profits.
There are rules against this sort of thing. Called the Groceries Supply Code of Practice or Gscop, they can only really kick-in when a supplier blows the whistle (the retailer is unlikely to) – and that is not likely to occur unless the supplier is happy to lose the business.
Last October, it was revealed that a Tesco buyer had written to suppliers requesting they pay £30 in “eye-level” fees – £30 per product, per store, for lines to be stocked on two key shelves at eye level.
The matter went to Christine Tacon, the Groceries Code Adjudicator who administers Gscop. It was argued that because the supermarket was only asking for payment rather than requiring it, the rules had not been broken. Tesco assured her it was an error and they’d contacted suppliers to rescind the request. She decided that the “spirit” of the code had been breached and sent a warning letter to Tesco saying that a request to a supplier was the same as a demand because the inference was that they would suffer in some way if they did not comply.
There I was, naively supposing supermarkets make their money by displaying products on their shelves and selling them.