Why Tesco’s listing deals with suppliers may hold the key to its wider price problems

tesco_2161591bIt’s difficult to overestimate the impact the revelations about Tesco’s ‘profits’ – or lack of them – are having on wider business in the UK. The grocer’s past booking of vast profits – if its current profit warning is any guide, up to £1bn of profits – in listing payments from suppliers has opened a can of worms which will see lots of other companies in the dock of public opinion. It’s already happened to Premier Foods.

But this begs one rather important question. Namely, why did these suppliers – many of whom are very large companies in their own right – put up with it? Were they just frightened of Tesco or was there something in it for them too?

After all, companies set budgets – sometimes years in advance – and they’re hardly likely to blow these when they get a call from a buyer at Tesco – or anywhere else for that matter – saying we’d like a few more millions please (that’s if the buyer is being polite).

New Tesco CEO Dave Lewis – the man charged with cleaning the stables – joined last year from Unilever’s Personal Care division, a huge and highly profitable business in itself. Lewis was known as ‘Drastic Dave’ for his single-minded pursuit of profitable growth, some of which must have come from flogging the likes of Dove in Tesco. Be interesting to know quite what Personal Care’s relationship with Tesco was.

So what did these companies get out of Tesco’s seemingly institutionalised blackmail? Well it seems some of them were promised that, if they paid up, Tesco would guarantee to increase the prices of their products by a specified amount over a specified period of time, usually years.

Such practice, if indeed it was the case, has interesting competition implications. On the face of it, it looks like price fixing; whether or not it’s allowable under current laws and regulations is another matter.

But it may also help to explain Tesco’s problems on price. If you’ve promised your biggest suppliers – in return for extra payments – that you’ll increase their prices by a significant amount (and tiny percentages means millions in the mass grocery trade) then it’s clearly going to be hard to match the prices of your supermarket rivals, who haven’t entered into such deals or have done different deals.

None of which suggests that Lewis’s twin task of restoring Tesco’s reputation and rebuilding its market share and profit is going to get any easier in the forseeable future.

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