Need to know: The Groceries Code Adjudicator's investigation into Tesco

Why has the groceries code adjudicator launched this investigation into Tesco?

The Groceries Code Adjudicator (GCA) plans to scrutinise Tesco’s supplier relationships. Adjudicator Christine Tacon said she had a “reasonable suspicion” that the code had been breached. It will look into Tesco’s profits and alleged delays in payments to suppliers.

How does it differ from other investigations into Tesco?

The Financial Reporting Council (FRC) is investigating Tesco auditor PwC’s role in the overstating of Tesco’s profits for the 2012, 2013 and 2014 financial years. PricewaterhouseCooper audited the Tesco accounts for those financial years, but was not involved in the preparation and approval of the financial statements during the period.

The Serious Fraud Office is looking to get to the bottom of Tesco overstating its profits by £263m, which involved expected revenue from suppliers being reported in the wrong accounting period. This is a criminal investigation, and anyone found guilty of some forms of fraud can be sentenced to up to 10 years in prison and businesses can face unlimited fines.

The GCA investigation will look into allegations that Tesco was bullying and demanding payments from suppliers. The payments are described as commercial income and reportedly account for one third of Tesco’s profits. They are charges for stocking products and for displaying them prominently.

Warwick Business School professor of operations management Mark Johnson said of the investigation: “The GCA’s regulations should go a long way to ensuring that practices in the supply chain become more equitable.

“However, the regulation is only recent and Tesco cannot be fined, only investigated. I will be fascinated to see if Tesco can learn to deal with its supply base fairly after years of inequality and adversarial behaviour. After all, can you teach an old dog new tricks?”

What does it mean for Tesco?

Tesco has already said it is changing the way it works with suppliers. It said that following its announcement last September regarding commercial income, it has worked with the GCA to identify any relevant GSCOP [Grocery Suppliers Code of Practice] issues. Tesco said it has taken action to strengthen compliance and said it continues to co-operate fully with the GCA.

How long will it take?

The investigation will take up to nine months.

What could be the financial implication for Tesco?

None at this stage. Currently the GCA is able to issue recommendations as to their future conduct, and to name and shame those that have breached the Code.

While the GCA’s powers are being extended so that it can fine retailers up to 1% of UK revenue, such powers were not in place when Tesco’s over-statement was announced and the provisions are not retrospective.

What does it mean for the wider industry?

Shore Capital analyst Clive Black said: “The GCA probe, coming as it does after the company has made announcements to the market on overstatement of profits and the prior FCA probe that has been superseded by the SFO investigation feels very much like self-justification by an organisation that has talked much but not actually done anything of note in practical terms to our minds.”