LONDON (Reuters) - Britain’s biggest supermarket group Tesco propped up its finances by short-changing suppliers when it began lagging rivals, the country’s grocery watchdog ruled on Tuesday.
Tesco had an endemic culture of making unilateral deductions from suppliers’ bills and delaying payments, in one case taking more than two years to pay a multi-million pound sum owed, a probe by Groceries Code Adjudicator (GCA) Christine Tacon found.
Tacon began investigating Tesco’s relations with its suppliers last February after it admitted in 2014 to overstating its profits by 263 million pounds.
Tesco admitted that pressures within the business to meet profit targets, which intensified as the group started to lose customers, led to its buyers leaning too heavily on suppliers.
“It was clear to me the pressure on the (Tesco) buyers and the finance teams to meet their margin targets was an overriding pressure within the business and it was widespread ... it was everywhere,” Tacon told reporters.
Tesco Chief Executive Dave Lewis, who succeeded Phil Clarke as CEO weeks before the accounting scandal broke, said it had completely changed the way it dealt with suppliers.
The scandal contributed to one of the biggest annual financial losses in British corporate history, led to the departure of several top executives and prompted litigation in the United States and Britain.
A probe by Britain’s Serious Fraud Office (SFO) is ongoing.
Asked if pressure on buyers to meet targets had come from the top of the British retail giant, Tacon said:
“I did not find evidence, but that was not what I was looking for.”
“But the pressure was clearly being put on them (buyers),” she added, citing examples of buyers having to go to more senior colleagues to get approval to pay an invoice that was due.
Tacon has ordered Tesco to make significant changes in the way it deals with payments to suppliers.
“WE ARE SORRY”
Tesco said on Tuesday it accepted Tacon’s findings and would continue to work with suppliers to build trust after working hard over the past year to change the business.
“I would like to apologise again. We are sorry,” said Lewis, who has acted to strengthen compliance and change the way the firm works.
The GCA ordered Tesco to stop making unilateral deductions from money owed for goods and give suppliers 30 days to challenge any reduction. If challenged, Tesco will not be entitled to make the deduction.
Tesco was given four weeks to say how it plans to implement the recommendations and Tacon will then require regular reports.
The GCA was last year given powers to fine supermarkets, but they came too late to be applied in the Tesco case.
The firm could still be in line for a heavy fine as a result of the SFO’s criminal probe, which Cantor Fitzgerald analyst Mike Dennis said could reach up to 500 million pounds.
Earlier this month Tesco shares hit an 18-year low but rallied after its Christmas trading beat forecasts, indicating it may finally be on the mend.
Tesco shares were up 3 percent at 160.5 pence at 1624 GMT.
Additional reporting by Li-mei Hoang; editing by Mark Potter and Alexander Smith