Supermarkets’ dealings with suppliers are a world away from the shop floor

For the retail world, yesterday could become one of those “where were you when” moments, right up there with Netto returning to the UK earlier this year.

The “overstatement” of Tesco’s earnings, the suspension of four senior UK executives, the calling in of the heavies from Deloitte to conduct a full investigation; all are astonishing.

Plaudits initially have to go to Dave Lewis (who spoke of his disappointment being an “understatement”) for acting decisively once the matter was brought to him on Friday. It’s also important that we remember that at this stage, the four who are suspended haven’t been found guilty of any wrongdoing.

However, as the old adage goes, there’s no smoke without fire and there’s (at least) a £250m-sized plume of smoke to explain away.

To discover what has occurred, we have to delve into the dark arts of supplier/retailer relationships. This is hidden from the customers, and indeed the staff on the shop floor, who merely receive goods from a depot, merchandise and sell it at the price set by head office.

A big supermarket group has many suppliers , and while some are small, regularly getting beaten up by the retail giants, there are some massive conglomerates in play too. Consider the size and scale of the likes of Coca-Cola, PepsiCo and GSK, to name but three; these companies have deep pockets and will pay retailers for advertising materials and prime shelf locations for their products.

This is considered “commercial income” by the supermarkets and is entirely separate from the usual cut-and-thrust of sales through the tills. Terms are commercially sensitive but in general the payments, often in the form of rebates or discounts on the final quarterly bill from the supplier, are made for various activities; promoting products, meeting volume targets and displaying point-of-sale materials in store emblazoned with logos and product imagery.

Why do suppliers do this? Simple. They are struggling to find profit and sales growth just as much as Tesco, Morrison and Sainsbury. Just as supermarkets are finding the discounters are making life hellishly tough, so are suppliers. Aldi and Lidl – the only mainstream outlets that are growing in popularity, tend to favour own-label goods: not much good if you’re a big brand specialist. Against that backdrop, they are fighting against rival suppliers, too: the market is fiercely competitive.

Tesco (it seems) has booked this commercial income too early – before the money, which will often come in the form of a rebate on an order, is in the bank. But that’s a risky practice: there’s no guarantee the stores will get paid the maximum of what was originally agreed. Suppliers will typically visit many stores on mystery shopping swoops, checking that they have been given the space and exposure in the stores that they have paid for, and levying “fines” on the supermarkets if they fail to deliver on their promises. Meanwhile, particularly in recent years, supermarkets may not have been hitting the sales targets agreed with the manufacturers.

So how did the UK’s number one retailer find itself in this situation? Dave Lewis said the investigation could identify further anomalies from previous years. Is it a culture issue? Poor management controls?

Sources at the Cheshunt head office tell me a huge probe is afoot. They said colleagues two levels below the board were told to hand in their laptops and mobile phones yesterday, along with office computers, as investigators get to grips with what could be a huge investigation.

Fingers now have to be pointed at the former chief executive Philip Clarke, who was ousted after a series of profit warnings and a dangerously expensive store refit programme. Sources speak of his autocratic, almost bullying management style, which saw the talented management team stripped in favour of Mr Clarke’s men.

One of the executives suspended, Chris Bush, was promoted to UK managing director under Mr Clarke, after Mr Clarke himself said Tesco needed only one captain of the ship when he ousted the long-term executive and UK managing director Richard Brasher.

Executives must have been under tremendous pressure to reach their quarterly targets. In that fearful environment, you can imagine how easy it might be to turn grey areas of accounting – such as when you book your rebates from suppliers – into black and white.

Dave Lewis has applied the brakes and he recognises the need for Tesco to change. He has already taken more decisive action in this direction in three weeks than Philip Clarke did in three years, but the latest news will clearly hurt morale.

The writer is a retail analyst at groceryinsight.com