04 Nov 2014 Every little helps
Shoppers and investors were taken by surprise when Tesco announced a £250m black hole in their profits last month. Tesco’s suppliers, however, were not.
The supermarket, the second-largest retailer in the world, has been under pressure for some time. Shoppers are increasingly turning their backs on the big weekly grocery shop in favour of home delivery services, discount rivals Aldi and Lidl and local convenience stores. These trends have hit sales at Tesco’s big out-of-town supermarkets and its market share has declined significantly in the past year. Profit warnings led to the resignation of the Chief Executive, Philip Clarke, in July. The honeymoon for his replacement, Dave Lewis, didn’t last long. In the first few days he was confronted by a whistler blower who warned that Finance were incorrectly booking payments received from suppliers related to in-store promotions.
Unfortunately Dave Lewis’s misery didn’t stop there. Recently, Tesco announced that its profits had been overstated by £263m, more than have been initially estimated and not long after, the Serious Fraud Office (SFO) confirmed that it is carrying out a criminal investigation.
Every twist and turn in the story has been chartered by the press. An article by one of Tesco’s suppliers published in The Independent provides an interesting insight into Tesco’s procurement practices. The supplier complained that “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.” The supplier went on to say: “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.” Unfortunately, Tesco’s tactics did not have the desired effect as the supplier explained: “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.”
This is a clear illustration of importance of the relationship between Procurement and suppliers and the direct impact it can have on competitiveness. But what drove Tesco into becoming a bully?
Pete Loughlin has written about the challenges of the relationship between finance and procurement recently. In his article about matrix management, he states that “The biggest challenge to making P2P work is the disconnect between finance and procurement”. This disconnect appears to be at the root of Tesco’s problem.
Faced with pressure from shareholders, Finance looked for ways to boost profits. Rather than wait to see if in-store promotions were successful, Finance recorded payments received from suppliers before the end of the promotion. Finance got away with this approach while sales increased. Unfortunately, they were exposed when sales fell.
Faced with similar pressures, Procurement put aside best practice such as category management and supplier relationship management and focused on short term gains. Without the tools to do the job, Procurement resorted to old fashioned bullying tactics. This destroyed trust and led suppliers to hold back.
Faced with a changing market and increasing pressure from shareholders, Tesco have lost their way. Part of the solution is for Finance and Procurement to work together more closely to get a better appreciation of each other’s roles. One of the outcomes will be more realistic forecasts. Finance need to re-build trust with Tesco’s shareholders and Procurement needs to do the same with suppliers. Unfortunately, this will take a long time so Tesco’s problems are far from over.